|KEY COUNTRY FACTS|
|System of government:||federal republic|
|Currency:||US dollar (USD)|
|FX regime:||free float|
|GDP:||$17.4 trillion (estimated nominal 2014)|
Association for Financial Professionals (AFP)National Association of Corporate Treasurers
|Other professional financial/banking associations:||Financial Executives International|
- 1 Financial regulatory framework
- 2 Taxation framework
- 3 Accounting framework
- 4 Banking service provision
- 5 Clearing and payment systems
- 6 Cash and bank account management
- 6.1 Account conditions
- 6.2 Bank connectivity for information reporting
- 6.3 Collection services
- 6.4 Cash concentration services
- 6.5 Controlled disbursement services
- 6.6 Repeal of Regulation Q
- 6.7 Liquidity management
- 6.8 Benchmark rates
- 6.9 Short-term borrowing
- 6.10 Short-term investments
- 6.11 Investment portals
- 6.12 Capital markets issuance
- 7 Risk management
- 8 Websites
Financial regulatory framework
The Federal Reserve System, also known as the Fed, is the central bank of the US. The Federal Reserve System was chartered in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its roles have evolved and expanded. Today, the Federal Reserve's duties include: conducting the nation's monetary policy; promoting the stability of the financial system; providing banking services to depository institutions and to the federal government; and ensuring that consumers receive adequate information and fair treatment in their interactions with the banking system. The Federal Reserve System is composed of a central governmental agency, the board of governors, located in Washington, DC, and 12 regional Federal Reserve Banks located in major cities throughout the US.
Federal Deposit Insurance Corporation (FDIC)
The US Congress established the FDIC in June 1933 as part of a programme of measures to restore confidence in the banking system following the Great Depression. The intent was to provide a federal government guarantee of deposits so that customers' funds, within certain limits, would be safe and available on demand. Since the start of FDIC insurance on 1 January 1934, no US depositor has lost insured funds as a result of a failure. The heart of the FDIC's mission is to maintain stability and public confidence in the nation's financial system. Historically, it insured deposits up to $100,000 in virtually all US banks and savings associations (also called savings and loan associations or S&Ls). In response to the economic and banking crises of late 2008 and 2009, the FDIC increased the standard insurance amount to $250,000 per depositor. This amount is now a permanent increase with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also arranges a resolution for failing institutions, which is the most cost effective for the insurance fund and the least disruptive for customers. The FDIC promotes the safety and soundness of insured depository institutions and the US financial system by identifying, monitoring and addressing risks to the deposit insurance funds. The FDIC is also the primary federal regulator of about 4,084 state-chartered “non-member” banks (commercial and savings banks that are not members of the Federal Reserve System). FDIC monitors all internet banking providers, whether these are depository institutions offering transaction services on the internet, or providers operating exclusively through the internet.
Office of the Comptroller of the Currency (OCC)
The OCC is responsible for the regulation of nationally chartered banks, including internet-based banks. It issues the national charters and monitors bank performance as well as loan credit quality ratings.
US Securities and Exchange Commission (SEC)
The primary mission of the US Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the securities markets. The laws that govern the securities industry in the US derive from a simple concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it. To achieve this, the SEC requires public companies to disclose meaningful financial (and other) information to the public. This information provides a common pool of knowledge for all investors, which enables them to make sound investment decisions. The SEC also oversees other key participants in the securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds, and public utility holding companies. Here again, the SEC is concerned primarily with promoting disclosure of pertinent information, enforcing the securities laws, and protecting investors who interact with these various organisations and individuals. Though it is the primary overseer and regulator of the US securities markets, the SEC works closely with many other institutions and authoritative bodies, including: Congress; other federal departments and agencies; the self-regulatory organisations (eg the stock exchanges); state securities regulators; and various private sector organisations. The SEC comprises five presidential appointed commissioners, five divisions and 23 offices. Headquartered in Washington, DC, the SEC has 11 regional offices throughout the country. The president of the United States, with the advice and consent of the Senate, appoints the five commissioners of the SEC. Their role is to:
- interpret federal securities laws;
- amend existing rules;
- propose new rules to address changing market conditions; and
- enforce rules and laws.
Following a number of significant corporate financial scandals, Congress moved to address corporate governance issues. The Sarbanes-Oxley Act of 2002 introduced a comprehensive programme of measures designed to curb accounting and control irregularities and to make executives accountable for discrepancies. Key provisions include:
- enhanced chief executive officer (CEO) and chief financial officer (CFO) certified disclosures of quarterly reports, internal controls, off balance sheet transactions and material changes affecting business performance – if these officers fail to certify, or certify documents known to be false, they risk fines of up to $5m and 20 years in prison;
- incremental requirements for audit committee independence and expertise, introduction of mechanisms for internal whistle-blowing and for direct reporting of auditors to the audit committee and restrictions on the use of audit firms for non-audit services; and
- prohibition of loans to executives and directors, stricter penalties for corporate malfeasance, and federal oversight of public accounting firms.
The increased emphasis on risk and regulatory pressures are evident in the percentage of companies that have documented their investment policies. The 2008 financial crisis led to further regulation (for example, Dodd-Frank in the US) and amendments to codes of conduct, which are aimed at improving the transparency with which risk is identified, managed and reported.
More information on the contents of the Act is provided in various editions of The Treasurer and at www.treasurers.org. Detailed web resources on the Act are provided at www.sec.gov and on the websites of a number of the US professional associations listed at the end of this country guide.
Internal Revenue Service (IRS): The US imposes different tax regimes on US and foreign corporations. US residents, including all companies incorporated under US domestic law, are subject to US federal tax on their worldwide income from both domestic and foreign sources. US taxation of non-resident foreign corporations, on the other hand, is generally limited to certain income from sources within the US. If a non-resident foreign company is engaged in a trade or business within the US, however, it is subject to US tax on the entire amount of its net US source income attributable to such trade or business, as well as certain income from foreign sources. The main legislative source governing federal taxation is the Internal Revenue Code (IRC) of 1986, as amended. The IRC is amplified and interpreted by Treasury Regulations (TR), Revenue Rulings (RR), Revenue Procedures (RP), Private Letter Rulings (PLR) and other types of administrative, as well as judicial, pronouncements.
In addition to federal taxes, state and local governments have the power to impose taxes on income and property. Although state and local taxes are ordinarily imposed at rates significantly lower than those of the federal income tax, they are becoming increasingly important and must be taken into consideration in planning business transactions. US taxation is highly complex and treasurers are reminded to take appropriate professional advice on a timely basis. For extensive resources, including downloadable publications, visit the website of the Internal Revenue Service (IRS).
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub L No 111-203) was signed into law on 21 July 2010. It is a legislative response to the financial crisis that gripped the United States during 2008 and 2009, and represents the most comprehensive financial regulatory reform measures taken since the Great Depression of the 1930s. The Act's objectives are to restore public confidence in the financial system, prevent future crises, and act as an early detection system for potential financial shocks that could undermine the stability of the economy.
Major regulatory changes
Dodd-Frank is far reaching and will cause significant changes in the American financial regulatory environment. The Act has been designed to become effective in stages. Consolidation of current regulatory agencies, as well as the creation of new agencies will occur. The Office of Thrift Supervision (OTS), established by Congress in 1989, has been eliminated. All OTS functions, powers, authorities and rights have been transferred to the Federal Reserve, the OCC, and the FDIC. A new regulatory arm with broad responsibilities – the Financial Stability Oversight Council (FSOC) – has been created. The purpose of the FSOC is to identify risks to US financial stability arising from ongoing activities of large, interconnected financial companies, as well as companies outside the financial services marketplace. It is also charged with promoting market discipline by eliminating expectations of government bailouts.
In an effort to provide more transparency to the types and sizes of derivative instruments, the Act mandates that OTC derivatives will now be recorded in a national repository whether they are cleared or not. The Treasury Secretary has exempted certain foreign exchange forwards and swaps from the definition of a derivative. However, options, non-deliverable forwards and cross-currency swaps remain part of the derivative definition. Exempt foreign exchange forwards and swaps are still subject to reporting requirements and business conduct standards. Entities deemed to be major participants in the derivatives markets must register as such, and must adhere to new clearing and trading requirements. Additionally, minimum capital requirements and initial and variation margin requirements have been established as a means to lessen default risk. The SEC sets the rules for security based swaps and the CFTC sets the rules for derivatives.
Another major agency oversight change includes the requirement by the SEC that hedge funds that manage over $100m register as investment advisors. The threshold for investment advisors subject to federal regulation has been raised from $25m to $100m.
Dodd-Frank imposes significant new regulations on banking and financial institutions. The Act extends the regulatory powers of the Federal Reserve beyond banks. Insurance companies, non bank financial companies and investment firms could fall under new regulations – if they predominately engage in financial activities and are selected by the FSOC based on an evaluation of their balance sheets, funding sources and other risk-based criteria, they will be designated as systemically important companies.
Risk committees are now a mandatory requirement in management boards for systemically important publicly traded non-bank financial companies. The risk committees must include a number of independent directors as determined by the Federal Reserve, while at large complex companies at least one risk management expert with experience in risk management must be included. Prudential Standards were also enhanced and now cover systemically important non-bank financial companies and interconnected bank holding companies. The main purpose of these standards is to discourage excessive growth and complexity of large financial institutions that might jeopardise the financial stability of the economy.
The Volcker Rule provisions within the Act impose a prohibition on most proprietary trading by US banks and their affiliates, subject to limited exceptions. It also restricts covered institutions from owning, sponsoring or investing in hedge funds or private equity funds. The act requires more SEC scrutiny and corporate governance of US and Foreign Financial Institutions. On the governance side, the Act encourages whistleblowers to report any kind of securities violations by offering rewards of between 10% and 30% of funds recovered that exceed $1m. There is a greater role for shareholders with two important provisions relating to the act: the “say on pay” and “say on golden parachutes” rules. The “say on pay” is offered to shareholders once every three years at the annual meeting. It is a non-binding vote offered to shareholders in order to approve executive compensation as disclosed in agreement with the SEC rules. The “say on golden parachutes” is the shareholders' rights to a nonbinding vote to approve payments made to any executive in connection with a M&A transaction that needs to be approved in a shareholder meeting. This rule covers both financial institutions and public companies.
All the agencies have been given additional responsibilities. The Federal Reserve conducts stress tests of the financial institutions, the FDIC establishes rules for margin and capital requirements, deposit insurance, credit retention for securitisations compensation arrangements and orderly liquidation, ending too big to fail. Large complex institutions are required to periodically submit plans for unwinding the company. Another key provision of the Act is the elimination of Regulation Q – a Federal Reserve Board regulation that prohibited banks from paying interest on corporate deposits. The repeal of Regulation Q could significantly alter cash management and investment practices, making cash concentration and sweep accounts less attractive.
On the consumer side, provisions for an independent watchdog – the Consumer Financial Protection Bureau (CFPB) – have been established. The CFPB has the authority to ensure that consumers have access to clear and accurate information for credit card, mortgages and a host of other financial products. The bureau is also tasked with protecting consumers from hidden fees, abusive terms and deceptive practices related to financial products.
FDIC insurance charged to banks was originally based on deposits, but since April 2011 it has been based on assets. For the large banks this has resulted in an increase to fees paid to the FDIC. The Dodd-Frank Act permanently increases the deposit amount insured by FDIC for balances held at banks to $250,000.
Amendments to Report of Foreign Bank and Financial Accounts (FBAR) responsibilities
On 24 February 2011, the Financial Crimes Enforcement Network (FinCEN) – an agency of the treasury department – published its final rule amending the FBAR regulations contained in the Bank Secrecy Act. The rule addresses the scope of the persons that are required to file reports of foreign asset accounts. It further specifies the types of accounts that are reportable and provides filing relief in the form of exemptions for certain persons with signature or other authority over foreign financial accounts. Additionally, the rule adopts provisions intended to prevent persons from avoiding reporting requirements.
The rule became effective on 28 March 2011, and applies to FBARs required to be filed for foreign financial accounts maintained in calendar year 2010 and for FBARs required to be filed with respect to all subsequent calendar years. FBARs are filed with the IRS and are required to be filed on or before 30 June of the year following the calendar year being reported. FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. FBAR helps the United States government identify persons who may be using foreign financial accounts to avoid United States law. FBARs are used to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad. United States persons are required to file an FBAR if:
- the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.
United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organised in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
The type of accounts for which a filing has to be completed include:
- checking, savings and time deposit accounts;
- brokerage and security accounts;
- commodity, future or option accounts;
- insurance policies with cash surrender value;
- annuities with cash value;
- mutual funds or similar pooled funds.
Employees that have only signature authority over foreign financial accounts owned by employers will have to file FBARs, duplicating their employer filing on these accounts. There are filing exceptions for the following United States persons or foreign financial accounts:
- certain foreign financial accounts jointly owned by spouses;
- United States persons included in a consolidated FBAR;
- correspondent/nostro accounts;
- foreign financial accounts owned by a governmental entity;
- foreign financial accounts owned by an international financial institution;
- IRA owners and beneficiaries;
- participants in and beneficiaries of tax-qualified retirement plans;
- certain individuals with signature authority over, but no financial interest in, a foreign financial account;
- trust beneficiaries;
- foreign financial accounts maintained on a United States military banking facility.
Proposed changes to Money Market fund regulations
Money Market funds are a major investment class for US corporations. The money market industry in the US is valued at approximately $2.9 trillion. These funds offer investors safety, short-term liquidity and diversification. In recent years money market fund regulations have been under scrutiny by the Security and Exchange Commission. One of the major topics debated by regulators is whether to mandate a variable net asset valuation for money market funds to reflect the risk associated with a fund's portfolio (money market funds are current valued at a constant $1 per share in the US) and to reduce the risk of runs like the ones that occurred during the 2008 financial crisis, when the $62.5 billion Reserve Primary Fund collapsed and money funds temporarily required a US government guarantee. In July 2014, the SEC issued new rules for further regulation of the money market fund industry.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board is an independent, self-governing organisation formed in 1973. The Board establishes the General Accepted Accounting Principles (GAAP) in the US. The FASB Accounting Standards Codification (ASC or the “Codification) is the single source of authoritative accounting and reporting standards applicable for all non-governmental entities other than SEC issued rules and regulations. Changes to the ASC are communicated by the FASB through Accounting Standards Updates (ASUs). US GAAP standards govern the preparation of financial reports and are officially recognised as authoritative by the SEC and the American Institute of Certified Public Accountants. Summaries of all current US GAAP standards are available at www.fasb.org.
FASB has expressed its willingness to participate in building a global accounting framework, and in 2002 agreed to a Memorandum of Understanding with the International Accounting Standards Board (IASB). There has been considerable progress in the last 10 years towards US GAAP-IFRS convergence. Ongoing FASB and IASB joint projects include leases and insurance.
Banking service provision
Commercial banks offer a wide range of services including accepting and holding deposits, consumer and commercial lending, transaction processing and investment products. Commercial banks range in size from community banks with a few million in assets to national firms with billions in assets. The larger firms have national networks that enable them to offer clients a depository account with a broad geographic reach. According to the FDIC, 5,570 FDIC insured US commercial banks were operating as of 31 March 2015. For a list of the top 10 US bank holding companies by assets, see Table 1. Commercial banks can transact foreign business in the US and in other countries through Edge Act corporations. These subsidiaries are prohibited from taking deposits but enable US banks to provide services related to international trade.
Savings institutions are banking organisations that formed primarily as a depository for consumer savings. Deposits were traditionally used to fund home mortgages, although legislative changes in the 1980s expanded the range of services thrifts can now provide. There are 949 FDIC insured savings institutions as of 31 March 2015, including savings banks, savings and loan associations, and cooperative and industrial banks, as well as 6,685 credit unions (as of 31 December 2013).
Investment banks and brokerage firms provide a variety of services to a broad range of the market. However, not all firms provide all services. Some specialise in retail customers while others deal only with institutional clients. Certain firms offer only investment banking services and others are more brokerage oriented. Services offered included stock and bond underwriting, commercial paper, institutional and retail brokerage, risk management and portfolio management.
| Table 1: Top 10 US holding
companies by assets, March 2015
|Rank||Company||Assets in USD|
|1||JPMorgan Chase & Co||2,577,148,000|
|2||Bank of America Corp||2,145,027,000|
|4||Wells Fargo & Company||1,737,737,000|
|5||The Goldman Sachs Group, Inc||865,52,000|
|7||General Electric Capital Corp||481,614,979|
|9||Bank of New York Mellon Corp||399,088,000|
|10||PNC Financial Services||351,162,105|
|Source: Federal Reserve data as of 31 March 2015|
Other financial institutions
Financial services are also provided by a variety of other institutions. These include insurance companies, mutual fund companies, factors and consumer credit companies.
Clearing and payment systems
Almost all funds in the US payment system are transferred by one or more of the following means: cash; paper cheques; or electronic funds transfer. The Federal Reserve is actively involved in all of these payment types. Federal Reserve banks, acting as the operating arm of the nation's central bank, provide a variety of services to depository institutions and to the US government and its agencies. Most of these services relate to the nation's payment system (such as supplying currency and coin, cheque processing and electronic funds transfer), while others involve the safekeeping of securities and fiscal agency functions. Many of these services have private sector counterparts. For example, armoured carriers operate their own coin and currency sorting facilities and transport cash to and from major users; correspondent banks and service bureaus process cheques and perform related accounting services for their corporate and financial institution customers; groups of large and medium-sized banks have established jointly owned facilities to process domestic and international large-dollar wire transfers.
There are several means of transferring value in the US: cash (currency and coin), cheque and electronic funds transfer. There is an obvious hierarchy in the use of payments instruments, which is related to the average value per transaction for each payment method. As the average value per transaction rises, the method of payment moves from cash to cheques to electronic funds transfers. The various methods of transferring value are:
- Cash – cash is used for most small dollar consumer transactions, since the costs and risks to the consumer are relatively low. Only a very small percentage of legitimate commercial transactions in the US are settled with currency and coin. Corporations do not wish to hold idle cash balances, or face the increased risk of transacting business with cash.
- Cheques – the cheque is no longer the most frequently used form of non-cash payment, and, in terms of volume, has been superseded by the payment card. Cheque volumes declined by about 33% CAGR (compound annual growth rate) between 2009 and 2013. In 2013, approximately 13% of payments were made by cheque versus 15% in 2012 and 33% in 2006 (Bank for International Settlements). About 13% of cheques written in the US were converted to ACH transactions in 2012, compared with 12% in 2009. Less than 25% of cheques written in the US are deposited in the bank on which they were drawn. The remaining cheques must be cleared and settled among the banks involved. This can be accomplished by direct presentment or indirectly through a local clearing house, a correspondent bank or the Federal Reserve. Deposited cheques can take one to five days or more to clear. Availability of funds from cheques directly presented and cleared through correspondent banks requires negotiation with the clearing bank. Local cheques drawn on another institution clear the following day. The Federal Reserve maintains standard availability schedules based on the time it will normally take to present a cheque to the paying bank.
- Electronic funds transfer (EFT) – an estimated 67% of the dollar value (and 85% of the volume) of non-cash payments in the US is settled via electronic funds transfer (source: 2013 Federal Reserve Payments Study). This is a faster, more secure, means of transferring value and can be initiated through computers, telex, magnetic tape, plastic cards or telephones. Three forms of electronic funds transfer dominate the dollar value of payments: automated clearing house (ACH), wire transfers (FedWire) and the Clearing House Interbank Payments System (CHIPS).
- - Automated Clearing House (ACH): the automated clearing house (ACH) network provides nationwide clearing and settlement for pre-authorised electronically originated credits and debits on a next-day settlement basis. ACH entries behave similarly to paperless cheques and the European Giro accounts. ACH transactions are typically for smaller dollar amounts and are repetitive in nature (various types of direct deposit and automated cash concentration services). ACH transfers have a future value date, often the next day. The Federal Reserve operates a number of ACHs, while others are privately operated, but linked nationally by the Federal Reserve. In an ACH operation, banks, acting on customers' instructions, transmit debits and credits via telecommunications links to the local ACH facility.
- - FedWire: wire transfers of funds may be executed through the FedWire, which connects Federal Reserve offices, depository institutions, the US Treasury and other government and quasi-government agencies. FedWire is typically used to transfer large dollar payments. These are completed on the same day, usually in a matter of minutes, and are guaranteed to be final when the receiving institution is notified of the credit to its account.
- - Clearing House Interbank Payment System (CHIPS): the primary private telegraphic EFT system is CHIPS, which is offered as a service of the New York clearing house, a private sector organisation owned and operated by its member banks. CHIPS handles large dollar payments among approximately 49 banks with offices in New York. On an average day, CHIPS clears 440,360 transactions in excess of $1.5 trillion. Unlike FedWire, which provides for immediate final settlement, net settlement among CHIPS participants occurs at the end of the day via the Federal Reserve. FedWire and CHIPS provide same-day value. Therefore, banks typically select the form of clearing, not the corporate client.
It should be noted that the use of purchasing cards to make payments has grown dramatically in recent years. According to the 2013 Federal Reserve Payments Study, the number of payment card transactions increased by 46.9% between 2003 and 2012 . The cards, offered by banks or credit card companies, provide a unified purchasing vehicle to control and manage purchases and payments. Purchases are aggregated, allowing for a single payment for multiple purchases. Purchasing cards can be either credit or charge cards, however they are typically charge cards. Key characteristics of purchasing cards include financial incentives (in the form of rebates); reduction of labour-intensive, paper-based request processes through pre-approved spending limits and restricted usage to pre-authorised vendors. Access to high level data and reporting is also available to card users.
|Table 2: Payment methods|
|Payment services||Funds availability||Finality of payment||Security||Bank price||Applicable regulations|
|FedWire CHIPS||Same day||Same day||High||USD $5 to $20 (de-pending on format and initiation meth-od)||Federal Reserve and CHIPS rules; UCC* Article 4A|
|Automated clearing house||Settlement day (1-2 days)||Settlement day; subject to return item procedures||Low to moderate||USD .03–.15 + flat charges||NACHA rules; Feder-al Reserve Regula-tion E; UCC*Article 4A|
|Cheques||2–5 days||Day after receipt by drawee bank; subject to return item procedures||Low||Less than USD.15 per item (Regulation J and CC); UCC*||Federal Reserve Regulations|
|* UCC: Uniform Commercial Code|
Recent developments in electronic payments
The share of electronic payments in the US economy continues to grow. While cheque volumes between 2009 and 2013 declined 33%, automated clearing house volumes increased by 23% over the same period, according to the Bank for International Settlements. This trend is expected to strengthen with the implementation of new operating rules from NACHA and the Check Clearing for the 21st Century Act (Check 21). These changes in the regulatory environment promise to transform the paper cheque from a formal legal document into a mere written payment instruction.
- Check Clearing for the 21st Century Act (Check 21) – United States President George W Bush signed Check 21 into law on 28 October 2003. The new law became effective on 28 October 2004. The enactment of Check 21 removed legal barriers to cheque truncation. Banks are not permitted to replace original cheques with “substitute cheques” and guarantee legal equivalence between original cheques and “substitute cheques”. Banks are required to physically present and return original cheques unless they have a formal agreement to do so electronically. Check 21 enables banks to agree to send cheque images or information to each other electronically rather than in paper form. A formal electronic exchange agreement is no longer required, thereby streamlining the clearing process. The act does not mandate the receipt of cheques in electronic form but eases the requirements for banks that do elect to send electronic images.
- In May 2006, NACHA approved an amendment to the NACHA Operating Rules that enables retailers and those who bill customers and who accept cheques at the point-of-sale or at manned bill payment locations to convert eligible cheques to ACH debits in the back office. The rules known as back-office conversion (BOC) became effective in March 2007. BOC represents an opportunity for financial institutions to provide value-added electronic payment services to facilitate cheque processing. NACHA reported that there were 163.7 million BOC payments in 2014, a decrease of 8.2% from the previous year.
- IAT (International ACH Transaction) is a new SEC code, introduced by NACHA in September 2009 to identify international transactions processed through the ACH network. The new IAT rules were developed to align NACHA rules with OFAC (Office of Foreign Asset Control) compliance obligations, as required by the Bank Secrecy Act of 1970. In 2014 NACHA processed 59 million IAT transactions, an increase of 21.3%.
Cash and bank account management
US commercial banks require corporations to provide a specific list of documents in order to open a bank account. Also, under federal law, it is mandatory that cheques (and other payments) made payable to a company be deposited in a bank account bearing the same name as the company. Typically, the following documents are required for US corporations, with at least equivalent documentation needed by non-residents:
- certificate of incorporation (or formation) issued by the secretary of state;
- federal EIN number;
- customised corporate seal (included in the corporate book);
- photo identification (typically a driver's license or passport);
- corporate resolution and Certificate of Incumbency that specifically designates the individual(s) authorised to act on behalf of the company.
Following the events of 11 September 2001, the US launched new initiatives to counter money laundering and the transfer of terrorist funds, which has resulted in increased scrutiny of new account applications.
Bank connectivity for information reporting
Most companies receive balance and detailed transaction information from their major banks electronically, sometimes several times daily. This information can be collected directly from each bank's electronic reporting system or can be consolidated by either a major bank or a third party. Information from various accounts can be reported on an intraday basis so that a cash manager is informed prior to final postings of the day's deposits and payment obligations. The use of the internet and treasury workstations has made this process more efficient and user friendly. Another development enhancing bank connectivity for companies has been the recent roll out of corporate access by SWIFT (Society for Worldwide Interbank Financial Telecommunication) to its global financial messaging network, SWIFTNet. For over thirty years, SWIFT has been a frontrunner in streamlining and standardising inter-bank communication with its messaging services and software interfaces. The organisation has now opened its doors to corporations with three different access models. The most recent, introduced in early 2007, allows corporations to communicate with all of their banks through one platform. Through this platform, corporations will be able to perform confirmations and reconciliations, collect daily cash balance data to build cash positions and send payment instructions through SWIFT FileAct. In the payments arena, companies that have already implemented access to SWIFT have enjoyed enhanced automation and a dramatic increase in straight through processing.
Due to the historical predominance of paper-based cheque payments, lockbox services are widely available in the US. Through these services, banks collect mailed cheques and the accompanying documents, process them and deposit the funds to the customer's account. Many providers now offer imaging services that enable timely retrieval of documents for research and inquiry resolution. Accounts receivable interfaces are created and transmitted to the customer on a daily basis. To some extent, the automation and efficiencies in the lockbox processes have slowed the conversion from cheque to electronic payment options. The Check 21 Act mentioned above will significantly improve this process and reduce the number of paper-based payments.
Depending on the type of business, receipts may be collected over the counter at field locations (eg retail stores). Some banks provide for the collection and/or safekeeping of cash collected over the counter through money-centre vault services.
Cash concentration services
Companies invest a greater portion of their liquidity portfolio with their cash concentration banks than with other financial providers. Cash concentration services provide for the movement of funds from subsidiary or local depository accounts to a central bank account, the concentration account, so that funds can be managed most efficiently. Idle balances in local deposit accounts are reduced, and in a well-designed concentration system, transfer costs between the local depositories and the concentration account are reduced. Cash concentration can be established through several means:
- ACH transfers – typically used for transfer of funds from local depository or lockbox banks to the concentration bank, ACH transfers are initiated as a low cost method for settlement on a next-day basis.
- Wire transfer – concentration by wire transfer is more expensive than ACH but is sometimes used to concentrate high dollar receipts from lockbox banks on a same day basis.
- Zero balance arrangements – when the local deposit or lockbox accounts are housed at the same bank as the concentration account, an automatic zero balance arrangement may be established. In this case, all funds are automatically moved to the concentration account at the end of the day without any intervention on the part of the cash manager.
Through a cash concentration system, cash managers can focus on fewer accounts in the management of day-to-day liquidity. By having funds available in an aggregated form, debt levels can be minimised and investments can be made to take advantage of typically higher interest rates on larger blocks of short-term securities.
Controlled disbursement services
Controlled disbursement services provide same-day notification of the cheques that will clear against an account that day. Cash managers are notified of the clearing totals early in the morning, thereby enabling them to minimise idle balances and take advantage of better rates typically offered early in the day for short-term investments. If the controlled disbursement account is housed at the same bank as the concentration account, the disbursement account is automatically funded. If the concentration account is housed at another bank, the controlled disbursement account is typically funded by wire transfer.
Banks offer a variety of ancillary services in conjunction with controlled disbursement and other cheque disbursement accounts. One such service is Positive Pay, which is designed primarily as a cheque fraud prevention measure. Through Positive Pay, a company transmits a file of issued cheques to the bank. When cheques are presented for payment, they are matched to the issue file and the bank pays only those cheques that match. In recent years, many banks have expanded the validation process to include a verification of the payee. Companies are notified of any mismatches and cheques may be returned if they are deemed fraudulent. Banks also offer account reconciliation services that provide for the sorting of cheques based on company criteria, imaging of the cheques, and matching of paid items against an issue file. Reporting from the reconciliation process may be provided in paper or electronic format.
Repeal of Regulation Q
Regulation Q, a Federal Reserve Board regulation that prohibits banks from paying interest on corporate deposits, had a significant impact on the way in which US based companies conduct cash management. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 includes a provision that repeals Regulation Q as of July 2011, which now allows banks to pay interest on corporate demand deposits.
Corporate cash and short-term investments in the US rose in the first quarter of 2015 to $1.99 trillion. This large amount of cash is accumulating due to corporate treasurers' economic uncertainties (Treasury Strategies' Quarterly Corporate Cash Briefing for 2Q 2015).
Short-term money market instruments can be referenced to one of a number of different benchmark rates. For example a bank's prime rate, the Federal Reserve's discount rate, or a three-month, six-month or one-year Treasury bill. The Federal Reserve's discount rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. The rate may vary from one depository institution to another and from day-to-day.
Short-term borrowing facilities include:
- Bank lines of credit – most commercial banks offer lines of credit to their corporate customers to finance working capital requirements. Committed facilities are established and drawn upon as needed. Credit lines may be secured or unsecured. Fees are paid for the unused commitment as well as interest on the borrowed portion of the line. Overdraft credit facilities fund overnight deficits on transaction accounts.
- US commercial paper (CP) – this is a short-term, unsecured promissory note with a fixed maturity. Companies issue commercial paper to raise working capital via the (3(a)3) programme and acquisition funds via the private placement (4(2)) programme. Although commercial paper may be interest bearing or discounted, it is typically discounted. A company promises to pay the buyer of its commercial paper its face amount at maturity. Standard & Poor's and Moody's assign ratings to issuing corporations and financial institutions based on an ongoing review of their financial condition, management, back-up lines of credit, pledged assets and financial guarantees. Major investors in commercial paper include institutions such as money market funds, insurance companies, corporations, bank trust departments and state pension funds. Maturities range from one to 270 days. Commercial paper is typically denominated in amounts of $100,000 or more. Book entry issuance is becoming more common and is expected to predominate over certificate form. Rates are quoted on an actual/360-day discount basis. The US domestic commercial paper market dwarfs other commercial paper markets worldwide, although recent market conditions have led to a sharp decline in the size of the market. Total CP outstanding rose by 7.7% in 2012 to $1 trillion following a fall of 9.6% in 2011. As of July 2015, there was $1 trillion CP outstanding.
- Bankers' acceptances (BAs) – BAs are time drafts (bills of exchange) with a maturity of six months or less. The bank on which the instrument is drawn stamps the word “accepted” on the face of the draft. In doing so, the bank accepts primary responsibility for paying the draft upon its maturity, whether or not the customer has repaid the bank. The bank's credit typically enhances the marketability of the instrument. Most BAs are trade-related and are backed by invoices, bills of lading, or warehouse receipts. BAs may be created to finance foreign or domestic shipment and storage of goods. They may also be used to finance payments originating from letter of credit negotiations, collection or dollar exchanges. Foreign banks with agencies in the US are permitted to issue dollar-denominated BAs. Maturities range from one to 180 days. BAs are issued in bearer form and are typically traded in round lots of $5 million, but odd lots as small as $25,000 are usually available. Rates are quoted on an actual/360-day discount basis.
As previously mentioned, corporate deposits at US commercial banks typically do not earn interest, and so it is rare simply to deposit funds in the money market as is the case in other centres. In order to optimally invest excess cash or borrow to cover shortfalls, it is usually necessary to concentrate funds in one location in order to maximise investible balances. Non-US investors may find that their investment choices are often driven by minimum investment criteria, rather than by yield or liquidity considerations. Investment options include:
- Repurchase agreement (repo or reverse repo) – a repurchase agreement involves the sale of a security with an agreement by the seller to repurchase the security at a later date at the same price plus interest at an agreed rate. While a repo is legally the sale and subsequent repurchase of a security, its economic effect is that of a secured loan. Economically, the party purchasing the security makes funds available to the seller and holds the security as collateral.
- Negotiable certificates of deposit (NCD) – these are money market instruments issued by a bank. They specify that a sum of money has been deposited, payable with interest to the bearer of the certificates on a return date. Technically, a NCD is a deposit but it is similar to a short-term note, which earns the depositor a competitive rate of return. NCDs were developed so that large deposits could be made at a competitive interest rate with some liquidity. Banks sell NCDs to a wide range of investors, including individuals, corporations, financial institutions, trust departments, pension funds, mutual funds and public agencies. NCDs are typically issued at face value in amounts of $1m or more. Interest on US domestic NCDs with maturities of more than one year is typically paid semi-annually while Eurodollar NCDs are paid interest annually.
- Overnight sweep accounts – through overnight sweep accounts, funds are automatically moved from a depository account and invested overnight in an instrument or fund managed by the financial institution. Funds may be invested in a variety of instruments including repurchase agreements, commercial paper, money market mutual funds and offshore investments.
- US treasury services:
- - Treasury bills: US treasury bills (T-bills) are short-term obligations of the US government. The Federal Reserve Bank auctions T-bills to investors and dealers, selling the bills to the highest bidders. Bills that mature in 4 weeks, 13 weeks and 26 weeks are auctioned weekly. Bills with the maximum 52 weeks maturity are auctioned every four weeks. T-bills are issued only in book-entry form and are sold at a discount, paying the face amount at maturity. Rates are quoted on an actual/360-day basis. T-bills are traded in round lots of $5m. T-bills can be bought or sold for an initial minimum of $100 and in increments of $100 thereafter. The secondary market for T-bills is the broadest of all short-term money market investments because of the low credit risk, the variety of maturities and the large volume of issues offered. Constant trading at very low spreads provides excellent liquidity.
- - Treasury notes and bonds: US treasury notes and bonds are medium- and longer-term interest-bearing obligations of the US government. Notes have original maturities of two to 10 years, while bonds have maturities of 30 years.
- - Treasury Inflation-Protected Securities (TIPS): TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. TIPS have maturities of five, 10 and 30 years. They are issued in electronic form and can be bought or sold for an initial minimum of $100 and in increments of $100 thereafter.
- - Treasury STRIPS: certain US treasury notes and bonds issued since 1984 are eligible for the “separate trading of registered interest and principal of securities” (STRIPS) programme. STRIPS are sold at a deep discount from their face value, representing interest income that will be received at maturity. Their high yield, liquidity, safety and the wide range of maturities make STRIPS attractive to many investment strategies. As is true of all zero-coupon securities, the market price of STRIPS can be more sensitive to interest rate changes than interest-bearing instruments of a similar maturity. Interest income on STRIPS is subject to federal income taxes on an actual basis.
- Federal agency securities – generally, federal agency debt is incurred in order to make loans to borrowers under various federal credit programmes. Federal agency issues are obligations of US government agencies or departments. Some of these agencies are owned and directed by the federal government; others are federally sponsored but privately owned. In most cases, Congress has established these agencies to borrow funds in the market and then re-loan the proceeds to support public policy goals. These securities offer many of the advantages of treasury securities (book entry, tax advantages, acceptable collateral for public accounts, etc) and usually provide a slightly higher yield than US treasury securities. Some of the federal agencies issuing securities are the Federal National Mortgage Association (FNMA or Fannie Mae), the Government National Mortgage Association (GNMA or Ginnie Mae), the Federal Home Loan Bank System, the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and the Federal Farm Credit Administration. Only GNMAs are guaranteed by the full faith and credit of the US government.
- Municipal securities – these are issued by state and local governments and their agencies to raise capital for public projects or general obligations. Municipal securities are generally issued in two forms: short-term notes (1 day to 1 year) and bonds (1 to 30 years). Their income is exempt from US taxes and usually from state and local taxes in the state where they were issued. Moody's and Standard & Poor's rate municipal issues according to their perception of the credit quality of the issuer. Tax-exempt notes differ from each other in the pledge that backs the payment of interest and principal. Tax and revenue anticipation notes are sold in anticipation of future tax receipts or funds from other revenue sources. Bond anticipation notes are sold in anticipation of the receipt of proceeds from a future bond sale. Tax-exempt municipal bonds fall under several categories including general obligations, special tax bonds, revenue bonds and refunding bonds. It should be noted that many municipal bond issues contain early redemption features, which could alter the length of investment and return.
For further details of money market instruments, treasury securities, agency securities and municipal securities, see Tables 3 to 6.
Investment and technology vendors provide investment portals through the Internet, which allow corporations access to multiple investment products through a single sign-on point. The portal allows investors to compare multiple investment options and then make the investment directly through the portal. The portal provider will then have a fee or revenue-sharing agreement with the other investment providers it carries on its portal. The Treasury Strategies and IDC Financial Insight's 2011 Preliminary Findings From Technology Trends Survey found that 39% of respondents reported use of an investment portal. Of the portals used by respondents, those offered by banks were the most popular.
Capital markets issuance
- New York Stock Exchange listing – The New York Stock Exchange (NYSE) is owned by Intercontinental Exchange (ICE), a network of regulated exchanges and clearinghouses for financial and commodity markets. With over 12,000 listed issues from more than 55 countries, ICE's equities markets – the New York Stock Exchange, NYSE MKT, NYSE Arca, NYSE Amex Options and NYSE Arca Options – represent one-third of the world's equities trading and the most liquidity of any global exchange group. Domestic listing requirements for a listing on the NYSE call for a minimum distribution of a company's shares within the US. Distribution of shares can be attained through US public offerings, acquisitions made in the US or by other similar means. Non-US corporations may elect to qualify for listing under either the alternate listing standards for non-US corporations or the NYSE's domestic listing criteria. However, an applicant company must meet all of the criteria within the standards under which it seeks to qualify for listing. The full details of the minimum numerical listing standards are contained in the Listed Company Manual available for download at www.nyse.com. Other SEC regulated stock exchanges are also available including the Chicago Stock Exchange and the National Stock Exchange-Chicago.
- NASDAQ – the National Association of Securities Dealers' Automated Quotation (NASDAQ) is owned by the NASDAQ OMX Group, which currently lists approximately 3,600 companies. As of July 2015 the companies had a combined market capitalisation of over $8.5 trillion. Listing requirements for the NASDAQ are available for download at www.nasdaq.com. A useful introductory overview of the main securities regulation governing US listed companies is provided by the SEC.
The major US derivative exchanges are the Chicago Board of Trade, Chicago Mercantile Exchange and Chicago Board Options Exchange. All three provide comprehensive data on US derivatives contracts and market conditions via their websites.
|Table 3: Money market instruments|
|Instrument||Maturity||Guarantee or support||Liquidity||Tax status||Interest||Quoted price||Current turn|
|Commercial paper||1-270 days||Obligation of issues; some are credit enhanced by a letter of credit or guarantee||None||Interest subject to federal, and state||Sold at a discount or interest bearing, with face value paid at maturity||Discount rate||Mostly book entry|
|Bankers’ acceptances||1-180 days||Obligation of accepting bank||Liquidity varies with type and quality of accepting bank||Interest subject to federal, and state||Sold at a discount with face value paid at maturity||Discount rate||Evidenced by written confirmation|
|Repurchase agreements||1-90 days||Securities held as collateral||None||Interest subject to federal, and state||At maturity||Yield to maturity||Evidenced by written confirmation|
|Negotiable certificates of deposit||Usually 7 days to 5 years||Obligation of issuing bank plus 100,000 deposit insurance per depositer when FDIC insured||Liquidity varies with quality of issuer||Interest subject to federal, and state||Paid at maturity or semi-annually if maturity exceeds 1 year||Yield to maturity||Bearer of registered form|
|Table 4: US treasury securities|
|Instrument||Maturity||Guarantee or support||Liquidity||Tax status||Interest||Quoted price||Current turn|
|Treasury bills||1 month to 1 year||Principal and interest guaranteed by US government||International market; very liquid||Interest subject to federal income tax paid at maturity||Sold at a discount paying face value at maturity||Discount rate||Book entry|
|Treasury notes and bonds||Notes: 2-10 years Bonds: 30 years||Principal and interest guaranteed by US government||International market; very liquid||Interest subject to federal income tax; exempt from state and local taxes||Semi-annually||In 32nds of USD; 1 per $100 (eg 102 3/32)||Book entry and registered or bearer if dated prior to 1983|
|Treasury strips||3 months to 30 years||Principal and interest guaranteed by US government||International market; very liquid||Interest subject to federal income tax; exempt from state and local taxes||Sold at a discount with face value paid at maturity||Bond equivalent yield||Book entry|
|Treasury TIPS||5, 10 and 30 years||Principal and interest guaranteed by US government||Less liquid than other US treasury securities||Interest subject to federal income tax; exempt from state and local taxes||Semi-annually||Bond equivalent yield||Book entry|
|Table 5: Federal agency securities|
|Instrument||Maturity||Guarantee or support||Liquidity||Tax status||Interest||Quoted price||Current turn|
|Federal agency discount notes||1-365 days||Obligation of issuing agency||Varies with quality of issue; some have large national markets||Interest subject to federal income tax; some exempt from state and local taxes||Sold at a discount with face value paid at maturity||Discount rate||Book entry|
|Federal agency debentures||3 months to 30 years||Obligation of issuing agency||Varies with quality of issue; some have large national markets||Interest subject to federal income tax; some exempt from state and local taxes||Semi-annually||In 32nds of USD; 1 per $100 (eg 103 7/32)||Book entry|
|GNMA mortgage backed securities||Usually 30 year final maturity; assumed average life of 12 years||Principal and interest guaranteed by US government||Large national market||Interest subject to federal and state taxes paid monthly||Interest and a portion of principal (eg 104 5/32)||In 32nds of USD; 1 per $100 depository||Master certificate in depository|
|Table 6: Tax exempt municipal securities|
|Instrument||Maturity||Guarantee or support||Liquidity||Tax status||Interest||Quoted price||Current turn|
|Tax exempt municipal notes||Usually 7 days to 1 year||Obligation of issuer; some are credit enhanced have national or regional secondary market||Liquidity varies with quality of issue; most taxes in state of issue; may be subject to alternative minimum tax||Usually exempt from federal and state income||Usually at maturity||Yield to maturity (eg 7.5%) or dollars per 100 (eg 102 1/2)||Mostly book entry|
|Tax exempt municipal bonds||1-40 years||Obligation of issuer; some are credit enhanced||Liquidity varies with quality of issue; most have national or regional secondary market||Usually exempt from federal and state income taxes in state of issue; may be subject to alternative minimum tax||Semi-annually||Yield to maturity (e.g. 7.5%) or USD per 100 (e.g. 102 1/2)||New issue: registered or book entry; secondary issues bearer registered or book entry|
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