big d financial conference 2014
Post on 24-Jan-2017
94 Views
Preview:
TRANSCRIPT
Managing Liquidity : Be Prepared for the New Reality
September 2014
Not FDIC insured. May lose value. No bank guarantee.
Not NCUA or NCUSIF insured. May lose value. No
credit union guarantee.
For Institutional Investor Use Only
1
1. Overview of Regulatory Changes
2. Investment Implications & Potential Solutions
3. Investment Policy Implications
4. Path to Higher Interest Rates
Information provided is as of the date listed and may be subject to change. Fidelity is not responsible for any direct on incidental
loss resulting from any investment decision based upon information provided herein. Moreover, Fidelity is not engaged in
rendering any legal, tax, accounting or investment advice, nor should any of the information be construed as an recommendation
or solicitation to buy, sell or hold any investment product.
Agenda
For Institutional Investor Use Only
SEC Final Rule on Money Market Mutual Funds Floating NAV and Gates and Fees are Effective October 14, 2016
Fund Type Net Asset Value (NAV) Liquidity Fee Redemption Gate
U.S. Treasury Stable No No
Government Stable No No
Retail Municipal/Tax-Exempt Stable Yes Yes
Retail Prime/General Purpose Stable Yes Yes
Institutional Municipal/Tax-Exempt Floating Yes Yes
Institutional Prime/General Purpose Floating Yes Yes
MMF Reform Final Rule Implementation Date
Floating NAV Institutional Prime and Muni Funds will price and transact at a
net asset value out to four decimal places ($1.0000) October 14, 2016
Liquidity Fee Fund’s board may impose a 2% fee of redemptions if liquidity
falls below 30% October 14, 2016
Redemption Gate Fund’s board may suspend redemptions for up to 10 days if
liquidity falls below 30% October 14, 2016
Retail Fund Definition Shareholders limited to “natural persons” (individuals) October 14, 2016
For Institutional Use Only 2
SEC Final Rule on Money Market Mutual Funds Implementation for floating NAV and gates & fees due by October 2016
Floating NAV – Institutional Prime (General Purpose) and Institutional Municipal (Tax-Exempt) Funds 1
Required to price and transact at a floating NAV:
• Pricing shares out to four digits ($1.0000)
• No longer able to use amortized cost method of pricing
• Tax Reporting – The Treasury and the IRS issued guidance that shareholders will be able to
report a single net number for the gains and losses experienced over the course of a year, rather
than reporting individual transactions
• Wash-Sale Rule2 – The Treasury and IRS also provided guidance that sales of money market
mutual funds will not be subject to the wash-sale rule
• Cash Equivalent – The SEC stated its position that floating NAV money market mutual funds will
be considered a “cash equivalent”
• Same Day Settlement – The SEC provided clarity that a floating NAV money market mutual fund
could be eligible for same-day settlement by pricing fund shares multiple times within a single day
1. Government funds may continue to utilize a Stable NAV and amortized cost method of pricing
2. A wash sale occurs when a security is sold at a loss and within 30 days prior to or after that sale, a substantially identical stock or security, or a contract or
option is purchased by the same individual, the individual’s spouse, or a company controlled by the individual .
3. Retail funds limits investors to natural persons
For Institutional Investor Use Only 3
For Institutional Investor Use Only
Liquidity Fees and Gates – Institutional & Retail3 Prime and Municipal Funds 1
Fund’s weekly liquid assets fall below 30%
• Fund’s board may impose a redemption fee of up to 2%
• Fund’s board may suspend redemptions for up to 10 business days
Fund’s weekly liquid assets fall below 10%
• Redemptions will be subject to a 1% fee unless the fund’s board determines otherwise
• Fund’s board may charge a lower or higher fee up to 2%, or may determine not to impose any
fee
4
SEC Final Rule on Money Market Mutual Funds Implementation for floating NAV and gates & fees due by October 2016
1. Government funds are not required to impose fees or gates but may only after shareholders receive at least 60 days advance written notice
SEC Final Rule on Money Market Mutual Funds Disclosures, diversification and stress testing due in 9-18 month
Fidelity Confidential Information
Enhanced Diversification & Stress Testing
• Demand and Guarantee Diversification – Exposure to a single institution is reduced from 25% to
15% for municipal money market mutual funds and from 25% to 10% for all other MMFs
• Stronger Diversification Requirements – Aggregation of affiliates and sponsors of ABS
• Enhanced Stress Testing – Additional stress testing required
New Disclosures
New Form N-CR
• Prompt disclosure of certain events such as the imposition of a fee or gate and security defaults
Website Disclosure
• Daily disclosure of market value NAV, daily liquidity and weekly liquidity, net shareholder flows
Form N-MFP
• Additional information required and the 60-day delay on public availability is eliminated
5
Additional Rule Proposals
For Institutional Investor Use Only
Proposes Changes to Credit Ratings
• A security would be eligible for purchase only if the fund’s board of directors determines that it
presents minimal credit risks
• Re-proposed amendments to Form N-MFP would require that a money market mutual fund
disclose any credit rating that the fund’s board considered in determining that a portfolio
security presents minimal credit risks
Proposes Changes to Issuer Diversification
• Proposed amendment to issuer diversification provisions to eliminate an exclusion from these
provisions that is currently available for securities subject to a guarantee issued by a non-
controlled person
Proposes Changes to Exemptive Relief
• Exempt broker-dealers from the written notification requirement under Rule 10b-10(a) of the
Exchange Act for transactions effected in shares of floating NAV money market mutual funds
6
Regulatory Influences on Liquidity Markets Considerations for managing liquidity in a changing world
Leverage
New Regulations:
•Less leverage
•Lower funding requirements
Demand
Demand for investments:
•Regulation promotes
increased investments
•Corporations build liquidity
Supply
Liquidity
Increased Regulation :
•Decrease supply in market
•Less need for funding
Liquidity Coverage:
•Increase demand for high
quality liquid assets (HQLA)
Regulation is changing the face of the cash
management industry
7 For Institutional Investor Use Only
Are You Asking the Right Questions? Anticipate change and build for the future
Does you IPS need to be changed & are you prepared to make the changes?
$1.00 NAV AAA Rated Gates & Fees
Do you intend to retain the ability to invest in prime funds?
What is your IPS language that allows money market funds?
Prime Government
What is your initial thoughts on the new rules for money market funds?
8 For Institutional Client Use Only
Investment Implications : Potential Solutions
New Liquidity Rules – New Investment Considerations
For Institutional Use Only
Segmenting Liquidity Categories Knowledge of cash flows helps to enhance returns and lower risks
10
Operating Cash S-T Strategic Liquidity L-T Strategic Liquidity
Investment Horizon 0 to 6 months 6 to 12 months 12 to 24 months
Cash Flow Volatility High Moderate Very Low
Objective Preservation of capital and
immediate liquidity
Enhanced return and
preservation of capital
Greater emphasis on
maximizing return potential
Daily C
ash
Bala
nce
Long-Term Strategic Liquidity
Short-Term Strategic Liquidity
Operating Cash
For Institutional Investor Use Only
Time
Investment Priorities Priorities differ between strategies – balancing safety, liquidity and returns
For Institutional Use Only 11
Capital
Preservation Liquidity
Return
Capital
Preservation Return
Liquidity
Capital
Preservation
Return
Liquidity
Different Objectives – Different Investment Priorities
Primary Secondary Tertiary
Operating Cash: Safety Liquidity Return
Short-Term Strategic Liquidity: Safety Return Liquidity
Long-Term Strategic Liquidity: Return Safety Liquidity
Linking Constraints to Investment Objectives Sample guardrails to assist in establishing policy constraints
For Institutional Investor Use Only 12
Op S
Operating Cash S-T Strategic Liquidity L-T Strategic Liquidity
Investment Horizon 0 - 6 months 6 -12 months Indefinite
Duration 1 - 60 days 3 -12 months 12 - 24 months
Final Maturity 365 days Fixed 2Y/Float 3Y Fixed 3Y/Float 5Y
Credit Rating Top Tier Investment Grade Investment Grade
Concentration Limit 5% 5% 3%
Cash Flow Volatility High Moderate Very Low
Liquidity Target Daily/Weekly Quarterly Annual
Objective Preservation of capital
and immediate liquidity
Enhanced return and
preservation of capital
Greater emphasis on
maximizing return
potential
add disclosure to
clarify that this
slide is speaking
from a broad
investment
perspective not
mutual fund. for
example of
possible wording "
This illustration is
meant to be
presented from a
broad investment
perspective and is
not limited to
mutual fund
investing options" This illustration is meant to be presented from a broad investment perspective and is not limited to mutual fund investing options
Investment Considerations Features vary considerably and are subject to change
For Institutional Investor Use Only 13
INSTRUMENTS STABILITY QUALITY LIQUIDITY YIELD
Bank Instruments
Direct Investments
Managed Solutions
Treasury/Gov’t MMF
Prime MMFs
Ultra-Short Bond Funds
Private Placements
Separately Managed Account
Table Legend: Green – High | Yellow – Medium | Red – Low
Investment Considerations Aligning instruments with strategy
For Institutional Investor Use Only 14
Operating Cash
Bank Instruments
Direct Investments
Money Market Funds
Private Placements
SMAs
S-T Strategic Liquidity
Direct Investments
Money Market Funds
Private Placements
SMAs
Conservative Ultra-Short Bond Funds
L-T Strategic Liquidity
Direct Investments
Private Placements
SMAs
Ultra-Short Bond Funds
Short-Term Bond Funds
Duration Horizon
Yie
ld
Historical Returns & Volatility The more credit and duration – the more volatility of returns
Source: iMoneyNet, Barclays as of 6/30/14 15
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Qu
art
erl
y R
etu
rn (
%)
iMoneyNet Prime Institutional Money Market Funds
iMoneyNet Government Institutional Money Market Funds
Barclays 3-6 Mo Tsy
Barclays 1-3 Gov/Cred
For Institutional Use Only
The Outsourcing Decision Managed versus direct investments
Self Assessment
• What are your capabilities? • Investments
• Credit
• Operational
• Compliance
Scope of Capabilities
• What is the best means to achieve your investment strategy? • Bank Instruments
• Direct Investments
• Managed Solutions
Selecting a Manager
• How do you select a manager? • Reputation/Experience
• Performance/Fees
• Scale
• Relationship
16 For Institutional Client Use Only
Identifying Potential Investment Solution Anticipate change and build for the future
What are views on strategic solutions?
Private Placements SMAs Ultra-Short Bond Funds
Are you considering changing your investment allocation?
Bank Instruments Direct Investments Managed Solutions
How do you balance your investment objectives?
Capital Preservation Liquidity Returns
Have you or will you segment your liquidity?
Operating Cash S-T Strategic Liquidity L-T Strategic Liquidity
17 For Institutional Client Use Only
Policy Implications : Potential Solutions
New Liquidity Rules – New Policy Considerations
For Institutional Use Only
Investment Policy Considerations
Investment Guideline
Criteria
Current Future
Investment Objective Safety, Liquidity, Yield Safety & Liquidity, Yield
Safety, Yield, Liquidity
Yield, Safety, Liquidity
Permissible Investments 2a-7 registered fund with $1.00 NAV
and AAA-rated
2a-7 Money Market Funds
Private Placements
Ultra-short Bond Funds
Prohibited Investments
Derivatives, Auction Rate Securities,
Inverse Floating Rate Notes,
MBS/CMBS, Structured Products
Liquidity Fees & Redemption
Gates
Credit Quality (Avg./Min.) AA/A A/Investment Grade
Duration/Maturity Duration or Average Maturity
Individual Security Maturity Limits
Option Adjusted Duration
Duration
Spread Duration
Are You Asking the Right Questions? Anticipate change and build for the future
Does your IPS match your needs and best practices?
How will you account for the alternative solutions?
Private Placements SMAs Ultra Short Bond Funds
Is safety, liquidity, and returns sufficient?
Operating Cash Short Term Strategic Long Term Strategic
Will You Review Your IPS as a Result of the New Rules?
Floating NAV Gates & Fees
20 For Institutional Client Use Only
- Taper QE - Assessment of QE - Cease Reinvestment Of Proceeds from SOMA Holdings
- Normalize the Size of Balance Sheet Over Time
- Modify Forward Guidance on the Federal Fund’s Rate
- Drain Excess Reserves - Raise the Federal Fund’s Target Rate, IOER, RRP
Path To Higher Interest Rates
For Institutional Use Only 22
Traditional
Monetary Policy
Quantitative
Easing
Consensus Builds for a 2015 Rate Hike
23
Source: Federal Reserve as of 06/18/2014
Federal Reserve Board Rate Expectations
Appropriate Pace of Policy Firming
(June 2014)
Fed Meeting Date 2015 2016 Longer Run
Jun-2014 1.13 2.50 3.75
Mar-2014 1.00 2.25 4.00
Median Target Fed Funds Rate at Year End 2
12
3
1
13
2
1
12
3
2014 2015 2016
Nu
mb
er
of
Part
icip
an
ts
Appropriate Timing of Policy Firming
Dec-2013 Mar-2014 Jun-2014
For Institutional Use Only
Federal Reserve’s Economic Projections
Source: Bloomberg and Federal Reserve
FOMC Forecast as of 06/18/2014
6.2
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Un
em
plo
ym
en
t R
ate
(%
)
1.5
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75P
CE
Yo
Y (
%)
2.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Rea
l G
DP
Yo
Y (
%)
Actual Inflation
Inflation Forecast
Unemployment Rate Forecast Actual Unemployment Rate
Actual GDP GDP Forecast
Inflation Threshold
24 For Institutional Use Only
Market Expectations for First Rate Hike
25
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
%
Forward Fed Funds Futures
Source: Bloomberg as of 7/31/14
Apr-14
Jul-13
For Institutional Use Only
Jul-14
For Institutional Use Only
Important Information
Read this important information carefully before making any investment. Speak with your relationship manager if you have any
questions.
Risks
Hypothetical returns have many inherent limitations. Unlike actual performance, it does not represent actual trading. Since trades have not
actually been executed, results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of
liquidity, and may not reflect the impact that certain economic or market factors may have had on the decision-making process.
Hypothetical performance also is developed with the benefit of hindsight. Actual performance may differ substantially from the hypothetical
performance presented. There can be no assurance that this strategy will achieve profits or avoid incurring substantial losses.
Past performance is no guarantee of future results. An investment may be risky and may not be suitable for an investor's goals, objectives
and risk tolerance. Investors should be aware that an investment's value may be volatile and any investment involves the risk that you may
lose money. Performance results for individual accounts will differ from performance results for composites and representative accounts
due to factors such as portfolio size, account objectives and restrictions, and factors specific to a particular investment structure.
The value of a strategy's investments will vary day to day in response to many factors, including in response to adverse issuer, political,
regulatory, market or economic developments. The value of an individual security or a particular type of security can be more volatile than
the market as a whole and can perform differently from the value of the market as a whole.
The performance of fixed income strategies will change daily based on changes in interest rates and market conditions and in response to
other economic, political or financial developments. Debt securities are sensitive to changes in interest rates depending on their maturity,
and may involve the risk that their prices may decline if interest rates rise or, conversely, if interest rates decline, their prices may increase.
Debt securities carry the risk of default, prepayment risk and inflation risk. Changes specific to an issuer, which may involve its financial
condition or economic environment, can affect the credit quality or value of an issuer's securities. Lower-quality debt securities (those of
less than investment grade quality, also referred to as high yield debt securities) and certain types of other securities are more volatile and
are often considered to be speculative and involve greater risk due to increased sensitivity to adverse issuer, political, regulatory and
market developments, especially in periods of general economic difficulty. The value of mortgage securities may change due to shifts in
the market's perception of issuers and changes in interest rates, regulatory or tax changes.
Derivatives may be volatile and involve significant risk, such as credit risk, currency risk, leverage risk, counterparty risk and liquidity risk.
Using derivatives can disproportionately increase losses and reduce opportunities for gains in certain circumstances. Investments in
derivatives may have limited liquidity and may be harder to value, especially in declining markets. Derivatives involve leverage because
they can provide investment exposure in an amount exceeding the initial investment. Leverage can magnify investment risks and cause
losses to be realized more quickly. A small change in the underlying asset, instrument, or index can lead to a significant loss. Assets
segregated to cover these transactions may decline in value and are not available to meet redemptions. Government legislation or
regulation could affect the use of these transactions and could limit the ability to pursue such investment strategies.
26
Important Information
Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.
Lipper Analytical Services, Inc., is a nationally recognized organization that ranks the performance of mutual funds.
The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the
cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to
change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may
not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be
relied on as an indication of trading intent on behalf of any Fidelity fund.
Past performance is no guarantee of future results. Investment return will fluctuate, therefore you may have a gain or loss when you sell
shares.
Diversification does not ensure a profit or guarantee against a loss.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other government agency. Although the fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the fund. Interest rate increases
can cause the price of money market securities to decrease.
Before investing, have your client consider the funds’ investment objectives, risks, charges, and expenses.
Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Have
your client read it carefully.
Fidelity Investments & Pyramid Design is a registered service mark of FMR LLC.
Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI 02917
27
Not FDIC insured. May lose value. No bank guarantee.
For Institutional Use Only
698632.1.0
top related