navigating the new treasury investing environment
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Navigating the New Treasury Investing Environment
Presented by:Kirk Black, CTP, CPA, FINRA Licensed RepresentativeSenior Relationship Manager, Investment Management Group BNY Mellon
Dirk Racine, CTP, CPA
Director, Treasury Operations
Telephone and Data Systems, Inc.
Treasury Services
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential2
Audience
•Corporate or government treasury professionals or other short-term investors?
•Banks?
•Others in the financial services industry?
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential3
Agenda• Introduction
• The liquidity crisis
•New regulations
Revised 2a-7
Dodd-Frank
• In search of yield—new investment strategies
• Investment portals help manage risk
•Case study: Dirk Racine, Telephone and Data Systems, Inc
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential4
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 ie-web sites and portals
•Liquidity crisis changes the investing landscape
Low yields, new regulations, risk management concerns
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential5
Evolution of the Liquidity Crisis
• Aug 2007 first signs of trouble develop 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
• 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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential6
Evolution of the Liquidity Crisis
•September 2008 trouble escalates
•Collapse of Lehman had 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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential7
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential8
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 govt and treasury
•More due diligence on holdings
•Diversification
•Looking for strong parent sponsor
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential9
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 govt. fund in 1994
•Explosive growth in money funds over last decade to as high a 4 trillion at one point
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential10
The New Environment Enhanced SEC Regs for Money Funds
SEC responds and proposes significant changes to money fund regulations
Investment Company Insitute (ICI) works with industry leaders and white house working group
Changes proposed to address liquidity and credit risk and create better transparency
Many proposals circulate. Some viewed as radical
SEC adopts first round of new regs Feb. 2010
Implementation throughout 2010 and 2011
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential11
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential12
What does the future hold for money funds?
Industry generally supports new SEC regulations Liquidity provisions successfully tested May be another round of regulations? (liquidity
facility, floating NAV)
Rationalization of money fund providers – fee waivers
Impact on rating agencies
Return to prime funds
Importance to Capital Markets
Money funds expected to remain viable going forward
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential13
The New Environment—Dodd-Frank
Repeal of Reg Q
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 as banks assessing strategy
What does this mean for…
• Banks’ technology around DDA platform
• ECR as a product
• Other short-term investments – money funds, treasuries, etc
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential14
The New Environment—Dodd-Frank
Unlimited FDIC Insurance
2009 and 2010 TAGP provides unlimited FDIC
Dodd-Frank reinstates unlimited FDIC in mandatory program for 2011 and 2012
Banks charged on net assets
Corporate cash all time high 60% increase in corporate cash since 2009 2.25 trillion, 38% DDA
What happens when FDIC program goes away?
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential15
The New Environment—Searching for Yield
Sustained low rate environment
Deposit products – too much cash
Investors evaluating liquidity needs
Individual securities – commercial paper, govt. paper
Structured (laddered) portfolios used to boost yield
Recent institutional fund yields 20bps; structured portfolios going out at least a year 70bps or more
Limited application in treasury
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential16
The Use of Investment Portals Through Crisis
•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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential17
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential18
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential19
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential20
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
20
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential21
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential22
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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential23
Summary
•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
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential24
Telephone and Data Systems
TDS / U.S. Cellular
• 7.1 million landline & wireless customers
• $940 million in corporate cash
Why LiquidityDirect at BNY Mellon (since 2005)
•Ease of use / integration
•Broad access to money market funds
•Reporting / customization
• Security / Segregation of Duties
•Audit Confirmations / SOX 404 testing
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential25
Some Other Benefits
•Access to investment expertise
• Interest rates in one place, no phone calls to trade funds
•Fewer wires (net buy and sell trades)
• Integrate rate, balance, accrual data into daily and monthly accounting process
•With omnibus account, easy to add new fund(s)
• Single audit confirmation from Mellon
•Access to historical data for analysis
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential26
Daily Process – Detail RptMMF dataMMF data
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential27
Daily Process - Workstation
Import LMS dataImport
LMS data
Enter trades
into TWS
Enter trades
into TWS
Import ERP
forecast data
Import ERP
forecast data
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential28
Evolving Investment Strategy• Move to U.S. insured investments (bills, notes, MMF, CDs, CP, and
DDAs)• Move further out on the yield curve
Comments MM
F Pr
ime
(AA
A)
MM
F Ta
x-Ex
mpt
(AA
A)
MM
F Ta
x-Ex
mpt
(AA
A)
CDs,
FD
IC in
sure
d
Trea
surie
s /
Gua
rant
ee
DD
A B
alan
ces
Oth
er
Tota
l
Aug-07 Pre-liquidity crisis 94% 5% 0% 1% 100%Sep-07 Move to treasury MMFs 99% 0% 1% 100%Dec-08 Starting to buy CDs 94% 4% 0% 2% 100%Jun-09 Building DDA balances 69% 19% 5% 4% 3% 100%Mar-10 Starting to buy TGLP CP 70% 16% 11% 1% 3% 100%Jun-10 Starting to buy T Notes 31% 15% 52% 0% 2% 100%Jan-11 Double down on DDA balances 25% 9% 50% 15% 100%Apr-12 Today, more DDA balances 32% 10% 27% 32% 100%
© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential29
Contact Information
•Kirk Black, CTP, CPA, FINRA Licensed Representative
Senior Relationship Manager, Investment Management Group
(412) 234-3976
kirk.black@bnymellon.com
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