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
Dirk Racine, CTP, CPA
Director, Treasury Operations
Telephone and Data Systems, Inc.
Audience
•Corporate or government treasury
professionals or other short-term investors?
•Banks?
•Others in the financial services industry?
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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?
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
Daily Process – Detail Rpt
MMF data
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
Daily Process - Workstation
Import
LMS
data
Import
ERP
forecast
data
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
Enter
trades
into TWS
Evolving Investment Strategy
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
Total
DDA Balances
Treasuries / Guarantee
CDs, FDIC insured
MMF Tax-Exmpt (AAA)
Comments
Pre-liquidity crisis
94% 5%
0%
Move to treasury MMFs
99%
0%
Starting to buy CDs
94% 4%
0%
Building DDA balances
69% 19% 5% 4%
Starting to buy TGLP CP
70% 16% 11% 1%
Starting to buy T Notes
31% 15% 52% 0%
Double down on DDA balances
25% 9% 50% 15%
Today, more DDA balances
32% 10% 27% 32%
Other
Aug-07
Sep-07
Dec-08
Jun-09
Mar-10
Jun-10
Jan-11
Apr-12
MMF Tax-Exmpt (AAA)
MMF Prime (AAA)
• Move to U.S. insured investments (bills, notes, MMF, CDs, CP, and DDAs)
• Move further out on the yield curve
1%
1%
2%
3%
3%
2%
100%
100%
100%
100%
100%
100%
100%
100%
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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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential
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© 2010 The Bank of New York Mellon Corporation, Proprietary & Confidential