navigating the new treasury investing environment n.
Skip this Video
Loading SlideShow in 5 Seconds..
Navigating the New Treasury Investing Environment PowerPoint Presentation
Download Presentation
Navigating the New Treasury Investing Environment

Navigating the New Treasury Investing Environment

141 Views Download Presentation
Download Presentation

Navigating the New Treasury Investing Environment

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  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