Navigating the New Treasury Investing Environment

1
Navigating the New Treasury Investing Environment
Treasury Services

• Presented by
• Kirk Black, CTP, CPA, FINRA Licensed
  Representative
• Senior Relationship Manager, Investment
  Management Group
• BNY Mellon
• Dirk Racine, CTP, CPA
• Director, Treasury Operations
• Telephone and Data Systems, Inc.

2
Audience

• Corporate or government treasury professionals or
  other short-term investors?
• Banks?
• Others in the financial services industry?

3
Agenda

• Introduction
• The liquidity crisis
• New regulations
• Revised 2a-7
• Dodd-Frank
• In search of yieldnew investment strategies
• Investment portals help manage risk
• Case study Dirk Racine, Telephone and Data
  Systems, Inc

4
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

5
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

6
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

7
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

8
The New EnvironmentInvestor 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

9
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 buckCommunity Bankers govt. fund in 1994
• Explosive growth in money funds over last decade
  to as high a 4 trillion at one point

10
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

11
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

12
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

13
The New EnvironmentDodd-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

14
The New EnvironmentDodd-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?

15
The New EnvironmentSearching 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

16
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

17
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

18
Modern Investment Portals Investment Options

• Wide variety of 2a-7 funds
• Relationship requirements could dictate fund
  choice-portal reports to funds
• Other fixed income securitiescommercial paper
  and other discount notes
• New portals offer more extensive optionsmay
  enhance returns
• No fees to use portal

19
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

20
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
21
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

22
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

23
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

24
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

25
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

26
Daily Process Detail Rpt
MMF data
27
Daily Process - Workstation
Enter trades into TWS
Import LMS data
Import ERP forecast data
28
Evolving Investment Strategy

• Move to U.S. insured investments (bills, notes,
  MMF, CDs, CP, and DDAs)
• Move further out on the yield curve

29
Contact Information

• Kirk Black, CTP, CPA, FINRA Licensed
  Representative
• Senior Relationship Manager, Investment
  Management Group
• [phone]
• kirk.black_at_bnymellon.com

30
(No Transcript)