Greg Fayvilevich, Senior Director: Fitch Ratings

Tony Carfang, Managing Director: Treasury Strategies, A Division of Novantas

May 2017

Cash Management Tune-Up: Investment Products and Strategies

1

Regulation Has Impacted Every Money Market and Deposit Instrument Available to Treasurers

Massive Intrusive Global

2

Corporate Cash Levels – Higher Than Ever

160

180

200

220

240

260

280

Co

rpo

rate

Cash

(¥T

)

Japan Corporate Cash

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

Co

rpo

rate

Cash

(€T

)

Eurozone Corporate Cash

0.2

0.3

0.4

0.5

0.6

0.7

Co

rpo

rate

Cash

(£T

)

UK Corporate Cash

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Co

rpo

rate

Cash

($T

) US Corporate Cash

Source: European Central Bank, Treasury Strategies

£0.66T

Source: Bank of Japan, Treasury Strategies

Source: Federal Reserve, Treasury Strategies

$2.1T

Source: UK Office for National Statistics, Treasury Strategies

€2.3T ¥257T

3

Value Proposition of Money Market Instruments

High relative yield

Daily liquidity

Ultra-low risk

Low minimum transaction size

Low fees

Diversification

Convenience

TMS connectivity

Portfolio accounting

Professional management

Imagine the perfect liquidity management instrument. Let’s call that 100 on a 0-100 scale:

4

Instrument Attributes – Today

Source: Treasury Strategies

Prime

MMF

Treasury

MMF

T-Bills/

Repo Bank DDA

Ultra-Short

Bond

Funds

Direct CP SMAs In-House

Mgt

High relative yield x x x x x

Daily liquidity ? x x x x x

Ultra-low risk x x x x

Low minimum

transaction size x x x x x

Low fees x x x x x x x

Diversification x x x x

Convenience ? x x

TMS connectivity x x x x

Portfolio accounting x x x x x

Professional

management x x x x x

5

Value Proposition of Money Market Instruments

Ranking of each instrument prior to the post-crisis regulations (Dodd-Frank, Basel III, MMF):

Instrument Utility before regulation

Prime money funds 95

Treasury/government MMFs 92

Treasury bills – direct 90

Bank demand deposits 85

Ultra-short bond funds 80

Commercial paper – direct 75

SMAs 60–80

Internally-managed portfolios 40–80

Treasury Strategies’ estimate

6

Value Proposition of Money Market Instruments

Investor utility of each instrument before and after the post-crisis regulations (Dodd-Frank, Basel III, MMF):

Instrument Before After

Prime money funds 95 ?

Treasury/government MMFs 92 88

Treasury bills – direct 90 85

Bank demand deposits 90 85

Ultra-short bond funds 80 80

Commercial paper – direct 75 70

SMAs 60–80 55–75

Internally-managed portfolios 40–80 35–75

Source: Treasury Strategies’ corporate clients’ experience

7

The Market Already Imposes VNAV, Fees and Gates on All Other Instruments

VNAV Fees Gates

Treasuries

Agencies

CP

Bank deposits

CP and other

money market

instruments

Banks –

suspension of

convertibility

FDIC resolution

Liquidity gaps

Auction rate

securities

8

How US Money Fund Regulations Impact Corporate Investment Policies

Final regulations address many of the concerns raised by Treasury Strategies and others during

the consultation process with the SEC.

Significant recordkeeping relief under new U.S. Treasury/IRS guidance

Relief from the “wash sale” rule

Preservation of amortized cost accounting for securities maturing in 60 days or less

Enhanced tools for fund boards to act in the best interests of fund shareholders

These four items go a long way toward preserving the investor utility provided by MMFs.

This requires careful evaluation of the language in the current investment policy.

A stated objective of “preservation of principal” does not necessarily rule out VNAV funds

More restrictive language such as “a constant net asset value” requirement would necessitate a policy

change to permit continued investment

A stated objective of “daily liquidity” does not necessarily rule out funds subject to fees or gates

Email info@TreasuryStrategies.com for brochure on investment policies with specific suggested

language.

9

What Our Clients Are Doing

Examining investment policies

Considering redesigning operating bank structure

Assessing opportunities to relocate their balances

Some basic corporate treasury activities will have more utility; our clients are:

Thinking about operating vs. reserve cash levels

Improving cash forecasting

Improving visibility of all cash balances

Watching the money fund industry’s new products

Monitoring bank prices and rates

Being alert for new deposit products

Considering consolidating vs. fragmenting bank services

Talking with their banks about their Basel III impacts/plans

10

CHALLENGE IMPACT

BASEL III: Regulations penalize banks for relying on less-stable wholesale

short-term funding.

Banks to turn away certain corporate deposits.

Reduced bank issuance of short-term debt, limiting the supply of high-

quality, short-term investments.

ALTERNATIVE CASH MANAGEMENT PRODUCTS: Money fund

regulation is leading asset managers to develop ‘alternative’ cash

management products such as private unregistered funds and short-term

bond funds.

Treasurers and cash managers will need to evaluate the new products and

update investment guidelines to incorporate these new strategies.

Emerging products are not as tightly regulated as traditional money funds,

allowing for greater flexibility, but also the potential for greater risk and less

transparency.

CHANGING INTEREST RATE ENVIRONMENT: Rate in the U.S. began

rising, but remain extremely low or negative in Europe and Japan.

Treasury professionals will need to re-think their cash management

strategies and policies. Cash forecasting is valuable to better structure cash

to meet changing market dynamics.

SUPPLY OF SAFE, LIQUID INVESTMENTS: Supply of high-quality, short-

term securities continues to shrink.

Flexible investment guidelines increasingly to ensure access to desired

investments. For example, outdated investment guidelines that fail to include

all of the ‘big three’ rating agencies (Fitch, S&P and Moody’s) unnecessarily

decrease investment opportunities. Rating criteria for money funds not the

same across all three agencies, creating new risks.

REGULATION AND LEGISLATIVE UNCERTAINTY: European Money Fund

Reform, cash repatriation.

Funding business operations, especially for global corporations, is more

complex.

A New Landscape for Cash Management

11

Cash Management Options Increasing

PRODUCT TREND VALUATION REDEMPTION

RESTRICTIONS REGULATED

RESTRICTED

ACCESSIBILITY

Bank demand deposit Bank – Basel III Constraints Stable No Yes No

Time/certificates of deposit Bank – Basel III Constraints Stable Yes Yes No

Private money funds Newer for treasurers, low utilization Stable (generally) By contract No Yes (large clients)

Ultra-short bond funds More utilization Floating NAV Some Yes No

Short-duration ETFs Low utilization by treasurers, differing

investment standards Floating NAV No Yes No

Separately managed accounts Traditional option, increased usage for

corporates segmenting cash Book/Market value

No, investor may

bear gain or loss No No

Retail prime MMFs MMF reg constraints, declines. Natural person =

retail investor Stable NAV Yes, fees & gates Yes Yes (retail only)

Inst. prime MMFs Most MMF reg constraints, declines Floating NAV Yes, fees & gates Yes No

“Short maturity” prime MMFs Manager – prime fund designed to mitigate

MMF reg concerns. Increasing utilization Potentially stable

Yes, but potentially

less likely Yes No

Government MMFs Primary option as treasurers re-allocate cash Stable NAV No Yes No

Structured bank deposits FDIC insured bank deposits above $250,000 Stable NAV Yes (T+1) No Yes (Max $100mm

per Tax ID)

Direct investments in money market

instruments

Increasing importance in CP market, for

investors that have measurable cash flows Book/Market value

No, but investor

bears losses on sale No Some

12

Re-allocation to Government Funds: Treasurers along with other investors moved more than $1 trillion out of prime funds as a result of money

fund reform. Most utilized government funds as a safe default option. In 2017, a rising interest rate environment could create shifts from government

funds as spreads widen and investors decide on options.

Funding Difficulties: Flows from prime funds increasing costs of borrowing in the short-term market, particularly foreign banks.

MMF Reform Created Significant Change in Short-term Markets

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

3/16 5/16 7/16 9/16 11/16 1/17 3/17

($ Bil.)

Th

ou

sand

s

Govt Institutional Prime Institutional

Source: iMoneyNet.

13

Spreads Rise, Likely Farther After Rate Hike: Prime funds normalizing portfolios post-reform, coupled with additional Fed

rate hike have propelled spreads higher.

Prime and Government Fund Yield Spread Widening

0.0

0.2

0.4

0.6

0.8

1.0

8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17

(%)

Government Institutional Prime Institutional

Source: iMoneyNet.

Money Market Funds 7-Day Gross Yields

0.0

0.2

0.4

0.6

0.8

1.0

8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17

(%)

Government Institutional Prime Institutional

Source: iMoneyNet.

Money Market Funds 7-Day Net Yields

14

Regulation drove liquidity to highest levels: To prepare for outflows anticipated due to regulation effective date managers increase liquidity to

far higher than regulatory thresholds or historical averages.

Weekly Liquidity Down From Peak for 28 Prime Institutional Funds: But managers continue to maintain conservative buffers to 30%

Range in weekly liquidity is large: No market standard for weekly liquid assets, with funds ranging from 30s% to 100%. Investor composition can

be a key factor influencing this decision.

Prime Institutional Money Fund Liquidity Declines for Most Funds

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

(%)

Individual Prime Institutional Funds

Weekly Liquidity Down from Peak for 28 Prime Institutional Funds

As of 10/7/16 As of 3/20/17

Source: Fitch, Crane Data.

15

NAVs Near $1, Consistent and Stable: NAVs are very close to $1 and changes are very small even as market reacts to

increases in the Fed Funds Rate.

Fitch’s Rating Criteria for Prime MMFs Focuses on Portfolio Risks: Primary rating factors for money funds and other

liquidity products is to evaluate liquidity, credit, and market value risks in portfolios.

Review Institutional Prime Funds NAV Performance: Meet Investment Objectives?

0

2

4

6

8

10

12

14

16

18

0.9998 0.9998 0.9999 1.0000 1.0001 1.0002 1.0002

(No. of Funds) 2/20/17 3/6/17 3/20/17

Source: Fitch, Crane Data.

16

0.995

0.996

0.997

0.998

0.999

1

1.001

1.002

1.003

1.004

1.005

8/1/2016 9/27/2016 11/25/2016 1/26/2017 3/27/2017

Review Institutional Prime Funds NAV Performance: Meet Investment Objectives?

NAV Volatility Minor Post-Reform: NAVs for the four largest institutional prime MMFs show minor volatility.

0.995

0.996

0.997

0.998

0.999

1

1.001

1.002

1.003

1.004

1.005

8/1/2016 10/1/2016 12/1/2016 2/1/2017 4/1/20170.995

0.996

0.997

0.998

0.999

1.000

1.001

1.002

1.003

1.004

1.005

4/5/20172/4/201711/30/20169/2/2016

0.995

0.996

0.997

0.998

0.999

1

1.001

1.002

1.003

1.004

1.005

8/1/2016 10/1/2016 12/1/2016 2/1/2017 4/1/2017

MMF

Reform

MMF

Reform

Fed

Rate

Hike

Fed

Rate

Hike

Fed

Rate

Hike

Fed

Rate

Hike

MMF

Reform

MMF

Reform

Fed

Rate

Hike

Fed

Rate

Hike

Fed

Rate

Hike

Fed

Rate

Hike

17

Review Alternative Products: Understand Varying Degrees of Risk Across New Investments

Structuring cash between strategic and operating is increasingly important when considering differing risk profiles

of prime MMFs and short-term bonds.

18

Review Investment Guidelines: The Markets Changed Dramatically, Keep Flexibility

Investment flexibility and diverse credit views important. Perform a review of investment guidelines to ensure flexibility.

$2 trillion of global structured finance and $1.6 trillion of global banks and corporate finance bonds issued with Fitch and one other

rating (Fitch +1) since 2009. Investment guidelines that do not include Fitch ratings are a competitive disadvantage compared to peers

due to less flexibility, less supply, less opportunities.

Sample investment guidelines language: “Investments must be rated A/A/A2 or higher on the long-term scale and/or F-1/A-1/P-

1 or higher on the short-term scale by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody’s). Money market

funds must be rated equivalent of ‘AAA’ by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody’s).”

Global Bank & Corporate F + 1 Global Structured Finance F + 1

209 221

264

238 229

252

280

256

0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2014 2015 2016

($ bn)

192

158

252

216

288

199

259

0

50

100

150

200

250

300

350

2010 2011 2012 2013 2014 2015 2016

($ bn)

19

Fitch AAAmmf Rating

Liquidity Risk is Essential Component of Criteria

S&P AAAm Rating

Does Not Address Liquidity Fees and Redemption Gates

Money Market Fund Ratings (assigned to money

market funds and other cash management

products) are an opinion on a fund’s capacity to

fulfil its investment objectives of providing ready

liquidity and preserving principal.

“A money market fund rating is a forward-looking opinion

about a fixed-income fund’s ability to maintain principal

value (i.e. stable net asset value and to limit exposure to

principal losses due to credit risk. We generally do not

lower ratings to ‘Dm’ when the manager of any fund

suspends redemptions for up to five business days.”

Additionally, if a fund elects to impose a 2%

redemption fee this is a “credit positive.”

Case study: Investors are focused on money fund liquidity but not all MMF AAA ratings are the same at assessing this risk.

Review Investment Tools: Assess Portfolio Risks are In line with Investment Goals

Which Approach is More Aligned with Your Concerns?

20

What’s Next?

Will the crisis era regulations be modified?

21

Contact Us

Tony Carfang

Managing Director

Treasury Strategies, A Division of Novantas

312-443-0840

Tony_Carfang@TreasuryStrategies.com

Greg Fayvilevich

Senior Director

Fitch Ratings

212-908-9151

gregory.fayvilevich@fitchratings.com

22

Treasury Strategies, A Division of Novantas, is the leading treasury consulting firm. Armed with decades of experience, we’ve developed

solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies

around the globe.

We serve corporate treasurers, their financial services providers and technology providers for the complete 360°view of of treasury.

About Treasury Strategies

Solutions: Assessment / Optimization / Selection / Implementation

• Payments Strategy

• Bank Relationship Management

• Technology Business Requirements and Gap

Analysis

• Technology Selection, Implementation and

Optimization

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Support

• Global Cash and Liquidity Management

• Cash Forecasting

• Financial Risk Management

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• Leading Practices Review and Benchmarking

www.youtube.com/c/treasurystrategiesincconsulting

Connect With Us

www.Treasurystrategies.com +1 312.443-0840

http://www.treasurystrategies.com/networking-communities

23

Industry Leading Research

• Money fund trends: monthly update dashboard

• Special reports highlighting key themes

• Commercial paper dashboard

• Distribution dedicated to corporate treasurers

Active Media Engagement

Prime Money Funds Getting More Liquid Ahead of Reform. Shift toward on liquid

assets suggests they are readying for a growing wave of redemptions over the next few

weeks, according to Fitch Ratings. –CFO Journal 9-14-2016

Fed: Banks Cut Use of Short-Term Debt Ahead of New Money-Fund Rules In

recent months, investors have moved more than $800 billion out of such funds and into

government funds, according to Fitch Ratings. –The Wall Street Journal 10-6-2016

Cash is No Longer Trash. Money-market funds have sharply increased payouts.

Municipal-bond money funds, yielding more than 1%, are an especially good deal. –

Barron’s 10-8-2016

A $1 Trillion Paradigm Shift Boosts Demand for U.S. Bills “This was a structural

change,” said Gregory Fayvilevich, an analyst in the fund and asset management

group at Fitch Ratings. “Prime money funds traditionally made up a very big portion of

holders of CP. That is why you are seeing a very big impact.” –Bloom 10-10-2016

Fitch Ratings: Strong Commitment to Short-term Market and Cash Management

www.fitchratings.com/shortterm Research portal for treasurers.

24

Fitch Ratings’ credit ratings rely on factual information received from issuers and other

sources.

Fitch Ratings cannot ensure that all such information will be accurate and complete.

Further, ratings are inherently forward-looking, embody assumptions and predictions

that by their nature cannot be verified as facts, and can be affected by future events or

conditions that were not anticipated at the time a rating was issued or affirmed.

The information in this presentation is provided “as is” without any representation or

warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a

security and does not address the risk of loss due to risks other than credit risk, unless

such risk is specifically mentioned. A Fitch Ratings report is not a substitute for

information provided to investors by the issuer and its agents in connection with a sale

of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion

of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings

are not a recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND

DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS

OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

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