Navigating the New Treasury Investing Environment

1. Treasury Services Navigating the New Treasury Investing Environment Presented by: Kirk Black, CTP, CPA, FINRA Licensed Representative Senior Relationship Manager, Investment Management Group BNY Mellon

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 yield—new investment strategies • Investment portals help manage risk • Case study: Technology efficiently improves diversification • Appendix: Short-term investing best practices

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

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

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 2a7 rules

8. 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 • Deep pocket parents

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 buck’…Community Bankers govt. fund in 1994 • Explosive growth in money funds to over 3.9 trillion by mid 2009. More than 30% growth over 12 month period

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

11. New SEC Regs for Money Funds • Liquidity Provisions • Formerly no minimum liquidity mandates • 10% overnight, 30% weekly • Illiquid securities • limited to 5% (formerly 10%) • Illiquid – more than 7 days to sell at carry • Suspension of redemptions • Purchases by affiliates • Know your investor

12. New SEC Regs for Money Funds • Credit Provisions • 3% in second tier securities vs 5% • Second tier maturing 45 days vs 297 • Stress tests – formerly no requirement • Shorter maturity • Weighted Average Maturity (WAM) to 60 days from 90 • Weighted Average Life (WAL) 120 days. Formerly no requirement • More stringent requirements on repo

13. What does the future hold for money funds? • Industry generally supports new SEC regs • Many providers already practicing certain provisions • Maybe another round of regs ahead (liquidity facility?) • Rationalization of money fund providers • Impact on rating agencies • Return to prime funds • Now some choose to remain in funds despite yields; others leaving funds for yield • Funds drop to under 3 trillion from high of nearly 4 trillion • Money funds expected to remain viable going forward • Importance to Capital Markets

14. The New Environment—Searching for Yield • Sustained low rate environment • Investors evaluating liquidity needs • Individual securities • Deposit products • Structured (laddered) portfolios used to boost yield • Combinations of commercial paper, treasuries agencies • Recent institutional fund yields 20bps; structured portfolios going out at least a year 70bps or more

15. 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 takes effect in July 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

16. The New Environment—Dodd-Frank • Unlimited FDIC Insurance • 2009 and 2010 TAGP provides unlimited FDIC • Extension of original program was optional • Dodd-Frank reinstates unlimited FDIC in mandatory program for 2011 and 2012 • Banks charged on net assets • How will banks absorb the cost?

17. The Use of Investment Portals Through Crisis • Fund neutral provider useful in providing unbiased information on money funds and market in general • Investment portal provides prospectuses, fund fact sheets and statements by fund families directly on portal • Information on all families consolidated in one place • 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

18. 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

19. 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

20. 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

21. 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 21

22. 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

23. 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

24. Case Study—Defense Co • Multi-billion dollar defense contractor • 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

25. Case Study—Defense Co (cont.) • 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 Result: Defense co streamlines process realizing efficiencies equivalent to one FTE, achieves proper diversification and improves accuracy of reporting w/ consolidation

26. Sample Trade Screen

27. Sample Report Page

28. Sample Account Detail

29. Sample Transaction History

30. Sample Fund Research Report

31. 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

32. Appendix: In-house Investing Best Practices • Establish an investment policy – use as a working document • Be flexible – have an interest rate forecast, consider a variety of alternatives, analyze and compare, avoid fear of failure and the unknown • Be disciplined – make thoughtful decisions, avoid home run / strike out mentality • Take action – have a plan, avoid indecisiveness • Review performance – set benchmarks and monitor performance regularly

33. The Corporate Investment Policy • Established by Treasury department • Annual reviews and approvals by CFO, CEO, and BOD • Quarterly reviews and updates by Treasurer, CFO

34. The Corporate Investment Policy • Quarterly reviews and updates by Treasurer, CFO • Investment objectives – Statement of policy • Safety –Specific securities types –Approved specific names –Approved credit ratings –Approved broker / dealers • Liquidity –Maximum maturity per security type –Avg maturing range for portfolio –% of cash available with daily liquidity • Diversification –Limits by security type –Limits by individual issuer name • Returns –Objectives –Benchmarks: Fed Funds, Libor, T-Bills, BMA –Review periods – monthly, quarterly Addressing the followingissues

35. Be Flexible • Establish a plan – monthly interest rate forecast • Use forecast to formulate a strategy • Consider alternatives – at least weekly review relative values available in the market • Perform risk / reward analysis, monetize differences between alternatives • Share investment policy with B/Ds – ask them to identify opportunities and make recommendations • Solicit advice

36. Be Disciplined • Shift biases – don’t over react to short term changes • When making changes – consider impact to overall portfolio, average maturity, credit ratings, portfolio composition, etc. • Have a policy on when to: • Take losses • Take a gain • Exit a credit – sell a security

37. Take Action • Too many investors make a decision on day one and never change • Have a plan – consider your policy, liquidity needs, interest rate forecast and market opportunities in executing your plan • Know the value of a basis point on returns – are you doing what you can to maximize investment performance given policy parameters?

38. Review Performance • Given objectives, benchmarks and policies, how did you do? • Suggest monthly documentation of performance • Understand why you’re succeeding / failing • Be careful about “hidden costs” in wire charges, safekeeping costs, transaction charges • Make necessary changes

39. Investing Can be Fun“Make better use of your broker/dealers” • Be inquisitive and informed • Use your B/Ds for information, assistance, access and quality execution • Build relationships with your B/Ds – you are business partners • Share information with your B/Ds • Put them in competition

40. Contact Information • Kirk Black, CTP, CPA, FINRA Licensed Representative Senior Relationship Manager, Investment Management Group (412) 234-3976 kirk.black@bnymellon.com