Earlier this week I read an article that mentioned the new rules issued by the U.S. Securities and Exchange Commission in respect of commercial paper that may be held by money market funds. Essentially from today they may now only hold commercial paper with an average maturity of 60 days, rather than 90. This is forcing issuers to refinance their positions more frequently and inevitably funding rates have been increasing. This , I feel, raises some important questions on how companies finance their working capital requirements and the impact that securities lending cash flows can have upon the so called real economy.
We have known for some time that during the market turmoil associated with the Lehman Brothers default many securities lending programmes were either suspended or greatly reduced. To support these recalls many short dated cash reinvestments were liquidated or not ‘rolled’ to provide the necessary liquidity to allow an orderly wind down of positions. What that this also meant was that as securities lending reinvestment desks scaled back some of their operations a key source of liquidity to the commercial paper markets disappeared.
The interdependence between the so called shadow economy and the real economy is clear. Companies need access to the commercial paper markets to pay bills during the normal business cycle. With less liquidity and activity in this sector funding rates will inevitably increase and companies will also have to access alternative and more expensive funding sources such as bank overdraft and backstop facilities. This in turn will force banks to hold bank more ‘credit’ lines in anticipation of having to support their corporate clients in this way, thereby probably impacting on their ability and capacity to trade with each other.
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