Financial markets have an almost hyperactive reputation — just look at footage of the NYSE trading floor on any given day, and you know what I mean.
But there is a curious paradox when it comes to the cash in corporate treasuries: it literally just sits around: ALL DAY! Granted, it earns interest after hours when the overnight rate kicks in, but otherwise, it does not see much action.
So why is that? What stops the stewards of those large cash reserves to have that money working for them during the day, as well as overnight?
For one thing, there currently is no asset class that allows them to invest that cash during the day and sweep it back by close of business.
According to research from Moody’s Investor Service, US corporate cash holdings were sitting at nearly $1.7 trillion in 2018. Imagine the annual returns on that sum of money if companies could lend it out for just a small window (hours, or even minutes) during the day.
And there is definitely a market for it. At 9th Gear, we are shifting the current foreign exchange (FX) trading model from “trade, then fund” to “fund, then trade.” An intraday lending product makes this paradigm a reality.
Risks and Rewards
Obviously, there are important factors to consider for an intraday asset like the one proposed. Risk is one of them. If corporate funds are leveraged in this way, they might only be lent to borrowers with the highest credit ratings.
An intraday asset class could also represent a lower-risk investment option. By definition, the funds are loaned out for extremely short periods of time, and the likelihood of a borrower defaulting during that small window is low — especially if the borrower is a highly regulated bank.
Then there is the overhead. Instead of requiring corporate treasurers to evaluate and administer such loans, funds are pooled and managed by a reputable asset manager. Any company or bank interested in investing would merely need to be satisfied with the fund liquidity and the risk profile used to make lending decisions.
Time For A New Approach
“Make your money work for you” is an oft-repeated axiom in the personal finance world. It is time we took our own advice in the financial services world.
A new intraday asset class gives corporations a place to put their idle money to work and provide short-term liquidity for borrowers who need it. That sounds like a win-win to me.