Information Security Identification: Confidential NAVIGATING THE NEW TREASURY INVESTING ENVIRONMENT...

Information Security Identification: Confidential

NAVIGATING THE NEW TREASURY INVESTING ENVIRONMENT

Presented by Kirk Black, CTP, CPA, FINRA Licensed Representative

Senior Relationship Manager

IMG - Cash Solutions

BNY Mellon

April 2013


Audience

• Corporate or government treasury professionals or other short-term investors

• Banks

• Others in the financial services industry

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Contents

1. Introduction

2. The liquidity crisis

3. New regulations

– Revised 2a-7

– Dodd-Frank

4. In search of yield – new investment strategies

5. Investment portals help manage risk

6. Case study: Technology efficiently improves diversification

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Introduction

• Short-term investing is a key Treasury function

• Preserve principal and maintain liquidity

• Maximize return as a secondary objective

• Money fund favorite w/ treasury investors

• Tools for investing (i.e. - web sites and portals)

• Liquidity crisis changes the investing landscape

Low yields, new regulations, risk management concerns

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THE LIQUIDITY CRISIS


Evolution of the Liquidity Crisis

• August 2007 – First signs of trouble developed when several extendible liquidity note programs exercised extensions

• Around same time auctions failed with several auction rate issuers

• Asset backed commercial paper market in turmoil resulting from sub prime fallout

• Overall deterioration in market conditions then caused liquidity troubles with some Structured Investment Vehicles (SIVs)

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• Certain enhanced cash funds begin to see fluctuations in NAV

• Mass exodus from enhanced cash funds as short-term investment

• Q1 2008 Auction failures widespread/ARS market gone

• Bear Stearns – JP Morgan deal


Evolution of the Liquidity Crisis

• September 2008 trouble escalates

• Collapse of Lehman has widespread impacts

• Markets freeze

• Reserve Primary Fund breaks the buck

• Investors panic and place heavy redemption pressure on funds

• Putnam and American Beacon freeze redemptions

• Federated deal

• Elevated market concern over money fund liquidity

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Fed, Treasury, and Congress Take Action

IMMEDIATE ACTION• Treasury money fund guarantee program• Fed brings liquidity to prime money funds• Fed lowers short-term rate to near zero• Unlimited FDIC• Bank bailouts and stimulus package

MORE RECENT DEVELOPMENTS• Dodd-Frank• New SEC 2-a7 rules

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The New Environment—Investor Sentiment

MORE CONSERVATIVE POSTURE• ARS and enhanced cash gone as treasury investments

• Back into money funds after initial panic but switch to government and treasury

• More due diligence on holdings

• Diversification

• Looking for strong parent sponsor

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REVISED 2a-7DODD-FRANK

NEW REGULATIONS


Historical Perspective of Money Market Mutual Funds

• Money Market Mutual funds governed by SEC 2a-7

• Independent rating agencies/ AAA rating

• Goal is safety and liquidity first and yield is secondary

• These funds managed to dollar in dollar out NAV

• Historically prime money funds viewed as safe havens with little due diligence by investors outside of looking to 2a-7, AAA and yield

• Only once in prior history did money fund ‘break the buck’…Community Bankers gov’t. fund in 1994

• Explosive growth in money funds over last decade to as high a 4 trillion at one point

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The New Environment Enhanced SEC Regs for Money Funds

• SEC responds and proposes significant changes to money fund regulations

• Investment Company Institute (ICI) works with industry leaders and white house working group

• Changes proposed to address liquidity and credit risk and create better transparency

• SEC adopts first round of new regs Feb. 2010

• Implementation throughout 2010 and 2011

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New SEC Regs for Money Funds

LIQUIDITY PROVISIONS• Formerly no minimum liquidity mandates • 10% overnight, 30% weekly• Weighted average maturity (WAM) to 60 days from 90 days

CREDIT PROVISIONS• 3% in second tier securities vs. 5%• Second tier maturing 45 days vs. 297• Stress tests – formerly no requirement

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What does the future hold for money funds?

• Industry generally supported the SEC regulations

• Liquidity provisions successfully tested

• SEC proposes another round of regulations (floating NAV, holdback)

Industry pushes back

SEC vote cancelled late August

Will FSOC take on?

Fund families proactively release NAV

• Rationalization of money fund providers – fee waivers

• Return to prime funds

• Importance to capital markets

• Money funds expected to remain viable

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The New Environment—Dodd-Frank

REG Q PROHIBITED PAYMENT OF INTEREST ON COMMERCIAL DOMESTIC DEPOSITS DATING BACK TO GREAT DEPRESSION

DODD-FRANK BILL CONTAINED A PROVISION REPEALING REG Q, EFFECTIVELY ALLOWING INTEREST

LAW TOOK EFFECT IN JULY 2011

WHAT DOES THIS MEAN FOR… • Banks’ technology around DDA platform• ECR as a product• Other short-term investments – money funds,

treasuries, etc.

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FDIC Transaction Account Guarantee (TAG) Program

• Provided unlimited FDIC coverage for non-interest bearing transaction accounts for consumers and businesses

• Original FDIC tag program was mandatory, later optional

• Dodd-Frank returned FDIC tag program

• Tag program expired December 31, 2012 after lobby for extension failed in congress

• What happens now? Will cash: – Leave smaller, less stable institutions – Move to money funds – Move to large, more stable institutions

• So far have not observed major shift from DDA

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NEW INVESTMENT STRATEGIES

IN SEARCH OF YIELD & INVESTMENT PORTALS


The New Environment—Searching for Yield

• Sustained low rate environment

• Deposit products – banks have too much cash, driving down deposit yields and ECR

• Investors evaluating liquidity needs

• Individual securities – commercial paper, govt. paper

Yield available in the CP market

Split CP market

• Structured (laddered) portfolios used to boost yield

Combination of security types and maturities tailored to cash flow needs

Recent fund yields 10bps; one year structured portfolios 50bps or more

• Limited application to extend maturities in treasury world

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The New Environment—Searching for Yield

• Brokered CDs

Some smaller banks aggressively in market for cash

Dozens of CD issuers offered via Capital Markets

Increments of 250k; FDIC insured

CD ladders yielding 70bps or more

• Prime money funds

Large number of investors in treasury or govt funds

Yield on these funds 0 to client and most of fees waived

Still yield available in prime space with minimal waivers

Safety of prime funds enhanced with new regulations

Seeing some clients take advantage

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The Use of Investment Portals Increases

• Dozens of money funds available on single Web-based platform

• Investment portal provides prospectuses, fund fact sheets and statements by fund families Information on all families consolidated Facilitates quick research on funds

• Investment portal provides mechanism to easily move to funds investor is comfortable with and facilitates diversification

• Compliance features help investors comply with policies and control risk Pre-trade compliance, segregation of duties, custom inventory Exposure reporting

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Audience Question

THE FOLLOWING BEST DESCRIBES MY INVESTMENT STRATEGY:• I typically invest with a money fund or broker over the phone

• Individual fund web-site

• I use a bank sweep as my primary investment vehicle

• I currently invest using an investment portal offering multiple fund families

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Modern Investment Portals — Investment Options

• Wide variety of 2a-7 funds

• Relationship requirements could dictate fund choice-portal reports to funds

• Other fixed income securities—commercial paper and other discount notes

• New portals offer more extensive options—may enhance returns

• No fees to use portal

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Modern Investment Portals — Information & Reporting

• Important given heightened focus on reporting and controls

• Consolidation of information on one convenient report

• Customize to unique fiscal periods

• Not only accounting but performance analysis with benchmarking, compliance, maturity schedule, etc.

• Employee time efficiencies realized

• Compatibility with treasury workstations

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Straight Through Processing

• Investment portal promotes straight through processing (STP) from client entry to provider systems

• Client enters trade via secure Web-based portal

• Transaction flows through portal to provider back office where completed seamlessly in automated fashion

• Subsequently trade information flows to client accounting platform or treasury workstation via several automated methods

– Client initiated export from portal then upload to target platform

– Daily FTP transmission from portal provider received by target platform

– Software bridge connecting portal to target platform real-time

• STP achieved by portal promotes efficiency, reduces the risk of errors and enhances Sarbanes-Oxley compliance

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Modern Investment Portals — International Capabilities

• Multinational organizations often have need to invest in several currencies

• Investment portal offers funds denominated in USD, Euro, Sterling, CAD

• Internet based software facilitates access for those abroad

• Customized reporting shows respective individual currencies or all currencies

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The Role of the Investment Professional

• Online investing most powerful when combined with off-line expertise of investment professional

• One on one proactive account coverage, notifying clients with market opportunities

• Devising the appropriate strategy given your investment policy and time horizons

• Helping provide info and research

• Market commentary

• Enhanced internal control over process

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TECHNOLOGY EFFICIENTLY IMPROVES DIVERSIFICATION

CASE STUDY


Case Study – Fortune 100 Corporation

• Multi-billion dollar corporate client • Operating cash recently expanded from $500MM to approx. $2 billion through recessionary

environment• Formerly investing with 5 fund families directly

Relationship considerations Multiple calls daily Information reporting a challenge

• Considerable staff time invested in process and some reporting errors noted• Cash buildup creates need for diversification

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Case Study – Fortune 100 Corporation

• Modern treasury portal the solution

• Company now invests in the same 5 fund families on one integrated platform along with an additional 5 new families

Confirmation and reporting consolidated

Value-added broker-dealer consultation

Relationship reporting

Diversification requirements met

THE RESULTCLIENT STREAMLINES PROCESS REALIZING EFFICIENCIES EQUIVALENT TO ONE FTE, ACHIEVES PROPER DIVERSIFICATION AND IMPROVES ACCURACY OF REPORTING WITH CONSOLIDATION

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Sample Trade Screen

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Sample Report Page

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Sample Account Detail

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Sample Transaction History

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Sample Fund Research Report

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Conclusion

• Liquidity crisis changes investing function

• Money funds bolstered and remain as viable investment

• Portal technology has facilitated great strides in efficiency

Manage risk through liquidity crisis

Save time

Improve internal controls/ enhance compliance

Achieve competitive returns when rates recover

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Kirk Black, CTP, CPA, FINRA Licensed Representative

Senior Relationship Manager IMG – Cash Solutions

412 234 [email protected]

Contact Information

Disclaimers

Money market mutual funds are offered by The Bank of New York Mellon. The Bank of New York Mellon, DFIC Branch is communicating matters relating to offshore funds on behalf of The Bank of New York Mellon, which is registered in the UK by the Financial Services Authority.

Securities products and services other than money market securities are offered by BNY Mellon Capital Markets, LLC.

The instruments available through Liquidity DIRECT are not suitable for all investors. Liquidity DIRECT does not provide individually tailored investment advice , tax, regulatory, accounting or legal advice. Not everyone is entitled to open an account. Investors should read all offering materials, including prospectuses, for any investment product and consider the economic risks, merits, investment objectives and expenses carefully before investing, as well as the legal, tax, regulatory and accounting consequences. Any discussion of risks herein should not be considered to be a disclosure of all risks or complete discussion of the risks which are mentioned. Money market securities are not the equivalent of cash, they involve certain risks, including loss of principal, and are not deposits or obligations of, or guaranteed by, any bank and are not insured by the FDIC. Money market fund yields may fluctuate even though they seek to preserve the value of your investment at $1.00 per share. Accordingly, it is possible to lose money by investing in these securities . Certain fund shares are offered only to pre-qualified investors in certain jurisdictions; secondary markets may not exist in all jurisdictions for any particular instrument or investment. Additional risks exist with foreign investments. This is not an offer or solicitation in any jurisdiction where such an offer would be illegal. The value of fixed income instruments will fluctuate, and when sold, may be worth more or less than original cost. Fixed income securities, including US Treasuries and agency securities, are subject to various risks, including changes in interest rates and credit quality, credit ratings, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Not all U.S. government agency or instrumentality instruments are backed by the full faith and credit of the U.S. Although Treasuries have historically been considered free from credit risk, certain long-term U.S. debt instruments were recently downgraded by Standard & Poor’s; such instruments, and others may be subject to possible further downgrading by one or more credit rating agencies, which may affect their price and may signify credit risk and principal risk. Commercial paper is not usually backed by any form of collateral, although there may be back up lines of credit or back up liquidity. Past performance of any investment is not indicative of nor a guarantee of future performance, and a loss of original capital may occur.

BNY Mellon Capital Markets, LLC (“BNYMCM”) is a full service broker-dealer and a wholly owned non-bank subsidiary of The Bank of New York Mellon Corporation. The Bank of New York Mellon Corporation and its affiliates lend and provide other products and services to issuers and others, and provide and receive related fees and compensation. BNYMCM is a registered broker-dealer and member of FINRA and of SIPC. SIPC protects securities in customer accounts of its members up to $500,000 in securities (including $250,000 for claims for cash). Explanatory brochure available upon request or at www.sipc.org. SIPC does not protect against loss due to market fluctuation. SIPC protection is not the same as, and should not be confused with, FDIC insurance

Securities Products: Not FDIC-Insured — Subject to Loss in Value — Not a Deposit of or Guaranteed by a Bank or any Bank Affiliate

© 2013. The Bank of New York Corporation. All rights reserved.

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Information Security Identification: Confidential NAVIGATING THE NEW TREASURY INVESTING ENVIRONMENT...

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