Navigating the New Treasury Investing Environment

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

http://www.teldta.com/index.html

© 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?


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


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


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


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


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


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


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


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


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


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


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


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?


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


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


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


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


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


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


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


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


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


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


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


Daily Process – Detail RptMMF dataMMF data


Daily Process - Workstation

Import LMS dataImport

LMS data

Enter trades

into TWS

Enter trades

into TWS

Import ERP

forecast data

Import ERP

forecast data


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

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F Ta

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FD

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alan

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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%


Contact Information

•Kirk Black, CTP, CPA, FINRA Licensed Representative

Senior Relationship Manager, Investment Management Group

(412) 234-3976

[email protected]

Navigating the New Treasury Investing Environment

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