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Greg Fayvilevich, Senior Director: Fitch Ratings
Tony Carfang, Managing Director: Treasury Strategies, A Division of Novantas
May 2017
Cash Management Tune-Up: Investment Products and Strategies
1
Regulation Has Impacted Every Money Market and Deposit Instrument Available to Treasurers
Massive Intrusive Global
2
Corporate Cash Levels – Higher Than Ever
160
180
200
220
240
260
280
Co
rpo
rate
Cash
(¥T
)
Japan Corporate Cash
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
Co
rpo
rate
Cash
(€T
)
Eurozone Corporate Cash
0.2
0.3
0.4
0.5
0.6
0.7
Co
rpo
rate
Cash
(£T
)
UK Corporate Cash
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
Co
rpo
rate
Cash
($T
) US Corporate Cash
Source: European Central Bank, Treasury Strategies
£0.66T
Source: Bank of Japan, Treasury Strategies
Source: Federal Reserve, Treasury Strategies
$2.1T
Source: UK Office for National Statistics, Treasury Strategies
€2.3T ¥257T
3
Value Proposition of Money Market Instruments
High relative yield
Daily liquidity
Ultra-low risk
Low minimum transaction size
Low fees
Diversification
Convenience
TMS connectivity
Portfolio accounting
Professional management
Imagine the perfect liquidity management instrument. Let’s call that 100 on a 0-100 scale:
4
Instrument Attributes – Today
Source: Treasury Strategies
Prime
MMF
Treasury
MMF
T-Bills/
Repo Bank DDA
Ultra-Short
Bond
Funds
Direct CP SMAs In-House
Mgt
High relative yield x x x x x
Daily liquidity ? x x x x x
Ultra-low risk x x x x
Low minimum
transaction size x x x x x
Low fees x x x x x x x
Diversification x x x x
Convenience ? x x
TMS connectivity x x x x
Portfolio accounting x x x x x
Professional
management x x x x x
5
Value Proposition of Money Market Instruments
Ranking of each instrument prior to the post-crisis regulations (Dodd-Frank, Basel III, MMF):
Instrument Utility before regulation
Prime money funds 95
Treasury/government MMFs 92
Treasury bills – direct 90
Bank demand deposits 85
Ultra-short bond funds 80
Commercial paper – direct 75
SMAs 60–80
Internally-managed portfolios 40–80
Treasury Strategies’ estimate
6
Value Proposition of Money Market Instruments
Investor utility of each instrument before and after the post-crisis regulations (Dodd-Frank, Basel III, MMF):
Instrument Before After
Prime money funds 95 ?
Treasury/government MMFs 92 88
Treasury bills – direct 90 85
Bank demand deposits 90 85
Ultra-short bond funds 80 80
Commercial paper – direct 75 70
SMAs 60–80 55–75
Internally-managed portfolios 40–80 35–75
Source: Treasury Strategies’ corporate clients’ experience
7
The Market Already Imposes VNAV, Fees and Gates on All Other Instruments
VNAV Fees Gates
Treasuries
Agencies
CP
Bank deposits
CP and other
money market
instruments
Banks –
suspension of
convertibility
FDIC resolution
Liquidity gaps
Auction rate
securities
8
How US Money Fund Regulations Impact Corporate Investment Policies
Final regulations address many of the concerns raised by Treasury Strategies and others during
the consultation process with the SEC.
Significant recordkeeping relief under new U.S. Treasury/IRS guidance
Relief from the “wash sale” rule
Preservation of amortized cost accounting for securities maturing in 60 days or less
Enhanced tools for fund boards to act in the best interests of fund shareholders
These four items go a long way toward preserving the investor utility provided by MMFs.
This requires careful evaluation of the language in the current investment policy.
A stated objective of “preservation of principal” does not necessarily rule out VNAV funds
More restrictive language such as “a constant net asset value” requirement would necessitate a policy
change to permit continued investment
A stated objective of “daily liquidity” does not necessarily rule out funds subject to fees or gates
Email [email protected] for brochure on investment policies with specific suggested
language.
9
What Our Clients Are Doing
Examining investment policies
Considering redesigning operating bank structure
Assessing opportunities to relocate their balances
Some basic corporate treasury activities will have more utility; our clients are:
Thinking about operating vs. reserve cash levels
Improving cash forecasting
Improving visibility of all cash balances
Watching the money fund industry’s new products
Monitoring bank prices and rates
Being alert for new deposit products
Considering consolidating vs. fragmenting bank services
Talking with their banks about their Basel III impacts/plans
10
CHALLENGE IMPACT
BASEL III: Regulations penalize banks for relying on less-stable wholesale
short-term funding.
Banks to turn away certain corporate deposits.
Reduced bank issuance of short-term debt, limiting the supply of high-
quality, short-term investments.
ALTERNATIVE CASH MANAGEMENT PRODUCTS: Money fund
regulation is leading asset managers to develop ‘alternative’ cash
management products such as private unregistered funds and short-term
bond funds.
Treasurers and cash managers will need to evaluate the new products and
update investment guidelines to incorporate these new strategies.
Emerging products are not as tightly regulated as traditional money funds,
allowing for greater flexibility, but also the potential for greater risk and less
transparency.
CHANGING INTEREST RATE ENVIRONMENT: Rate in the U.S. began
rising, but remain extremely low or negative in Europe and Japan.
Treasury professionals will need to re-think their cash management
strategies and policies. Cash forecasting is valuable to better structure cash
to meet changing market dynamics.
SUPPLY OF SAFE, LIQUID INVESTMENTS: Supply of high-quality, short-
term securities continues to shrink.
Flexible investment guidelines increasingly to ensure access to desired
investments. For example, outdated investment guidelines that fail to include
all of the ‘big three’ rating agencies (Fitch, S&P and Moody’s) unnecessarily
decrease investment opportunities. Rating criteria for money funds not the
same across all three agencies, creating new risks.
REGULATION AND LEGISLATIVE UNCERTAINTY: European Money Fund
Reform, cash repatriation.
Funding business operations, especially for global corporations, is more
complex.
A New Landscape for Cash Management
11
Cash Management Options Increasing
PRODUCT TREND VALUATION REDEMPTION
RESTRICTIONS REGULATED
RESTRICTED
ACCESSIBILITY
Bank demand deposit Bank – Basel III Constraints Stable No Yes No
Time/certificates of deposit Bank – Basel III Constraints Stable Yes Yes No
Private money funds Newer for treasurers, low utilization Stable (generally) By contract No Yes (large clients)
Ultra-short bond funds More utilization Floating NAV Some Yes No
Short-duration ETFs Low utilization by treasurers, differing
investment standards Floating NAV No Yes No
Separately managed accounts Traditional option, increased usage for
corporates segmenting cash Book/Market value
No, investor may
bear gain or loss No No
Retail prime MMFs MMF reg constraints, declines. Natural person =
retail investor Stable NAV Yes, fees & gates Yes Yes (retail only)
Inst. prime MMFs Most MMF reg constraints, declines Floating NAV Yes, fees & gates Yes No
“Short maturity” prime MMFs Manager – prime fund designed to mitigate
MMF reg concerns. Increasing utilization Potentially stable
Yes, but potentially
less likely Yes No
Government MMFs Primary option as treasurers re-allocate cash Stable NAV No Yes No
Structured bank deposits FDIC insured bank deposits above $250,000 Stable NAV Yes (T+1) No Yes (Max $100mm
per Tax ID)
Direct investments in money market
instruments
Increasing importance in CP market, for
investors that have measurable cash flows Book/Market value
No, but investor
bears losses on sale No Some
12
Re-allocation to Government Funds: Treasurers along with other investors moved more than $1 trillion out of prime funds as a result of money
fund reform. Most utilized government funds as a safe default option. In 2017, a rising interest rate environment could create shifts from government
funds as spreads widen and investors decide on options.
Funding Difficulties: Flows from prime funds increasing costs of borrowing in the short-term market, particularly foreign banks.
MMF Reform Created Significant Change in Short-term Markets
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
3/16 5/16 7/16 9/16 11/16 1/17 3/17
($ Bil.)
Th
ou
sand
s
Govt Institutional Prime Institutional
Source: iMoneyNet.
13
Spreads Rise, Likely Farther After Rate Hike: Prime funds normalizing portfolios post-reform, coupled with additional Fed
rate hike have propelled spreads higher.
Prime and Government Fund Yield Spread Widening
0.0
0.2
0.4
0.6
0.8
1.0
8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17
(%)
Government Institutional Prime Institutional
Source: iMoneyNet.
Money Market Funds 7-Day Gross Yields
0.0
0.2
0.4
0.6
0.8
1.0
8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17
(%)
Government Institutional Prime Institutional
Source: iMoneyNet.
Money Market Funds 7-Day Net Yields
14
Regulation drove liquidity to highest levels: To prepare for outflows anticipated due to regulation effective date managers increase liquidity to
far higher than regulatory thresholds or historical averages.
Weekly Liquidity Down From Peak for 28 Prime Institutional Funds: But managers continue to maintain conservative buffers to 30%
Range in weekly liquidity is large: No market standard for weekly liquid assets, with funds ranging from 30s% to 100%. Investor composition can
be a key factor influencing this decision.
Prime Institutional Money Fund Liquidity Declines for Most Funds
0
10
20
30
40
50
60
70
80
90
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
(%)
Individual Prime Institutional Funds
Weekly Liquidity Down from Peak for 28 Prime Institutional Funds
As of 10/7/16 As of 3/20/17
Source: Fitch, Crane Data.
15
NAVs Near $1, Consistent and Stable: NAVs are very close to $1 and changes are very small even as market reacts to
increases in the Fed Funds Rate.
Fitch’s Rating Criteria for Prime MMFs Focuses on Portfolio Risks: Primary rating factors for money funds and other
liquidity products is to evaluate liquidity, credit, and market value risks in portfolios.
Review Institutional Prime Funds NAV Performance: Meet Investment Objectives?
0
2
4
6
8
10
12
14
16
18
0.9998 0.9998 0.9999 1.0000 1.0001 1.0002 1.0002
(No. of Funds) 2/20/17 3/6/17 3/20/17
Source: Fitch, Crane Data.
16
0.995
0.996
0.997
0.998
0.999
1
1.001
1.002
1.003
1.004
1.005
8/1/2016 9/27/2016 11/25/2016 1/26/2017 3/27/2017
Review Institutional Prime Funds NAV Performance: Meet Investment Objectives?
NAV Volatility Minor Post-Reform: NAVs for the four largest institutional prime MMFs show minor volatility.
0.995
0.996
0.997
0.998
0.999
1
1.001
1.002
1.003
1.004
1.005
8/1/2016 10/1/2016 12/1/2016 2/1/2017 4/1/20170.995
0.996
0.997
0.998
0.999
1.000
1.001
1.002
1.003
1.004
1.005
4/5/20172/4/201711/30/20169/2/2016
0.995
0.996
0.997
0.998
0.999
1
1.001
1.002
1.003
1.004
1.005
8/1/2016 10/1/2016 12/1/2016 2/1/2017 4/1/2017
MMF
Reform
MMF
Reform
Fed
Rate
Hike
Fed
Rate
Hike
Fed
Rate
Hike
Fed
Rate
Hike
MMF
Reform
MMF
Reform
Fed
Rate
Hike
Fed
Rate
Hike
Fed
Rate
Hike
Fed
Rate
Hike
17
Review Alternative Products: Understand Varying Degrees of Risk Across New Investments
Structuring cash between strategic and operating is increasingly important when considering differing risk profiles
of prime MMFs and short-term bonds.
18
Review Investment Guidelines: The Markets Changed Dramatically, Keep Flexibility
Investment flexibility and diverse credit views important. Perform a review of investment guidelines to ensure flexibility.
$2 trillion of global structured finance and $1.6 trillion of global banks and corporate finance bonds issued with Fitch and one other
rating (Fitch +1) since 2009. Investment guidelines that do not include Fitch ratings are a competitive disadvantage compared to peers
due to less flexibility, less supply, less opportunities.
Sample investment guidelines language: “Investments must be rated A/A/A2 or higher on the long-term scale and/or F-1/A-1/P-
1 or higher on the short-term scale by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody’s). Money market
funds must be rated equivalent of ‘AAA’ by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody’s).”
Global Bank & Corporate F + 1 Global Structured Finance F + 1
209 221
264
238 229
252
280
256
0
50
100
150
200
250
300
2009 2010 2011 2012 2013 2014 2015 2016
($ bn)
192
158
252
216
288
199
259
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014 2015 2016
($ bn)
19
Fitch AAAmmf Rating
Liquidity Risk is Essential Component of Criteria
S&P AAAm Rating
Does Not Address Liquidity Fees and Redemption Gates
Money Market Fund Ratings (assigned to money
market funds and other cash management
products) are an opinion on a fund’s capacity to
fulfil its investment objectives of providing ready
liquidity and preserving principal.
“A money market fund rating is a forward-looking opinion
about a fixed-income fund’s ability to maintain principal
value (i.e. stable net asset value and to limit exposure to
principal losses due to credit risk. We generally do not
lower ratings to ‘Dm’ when the manager of any fund
suspends redemptions for up to five business days.”
Additionally, if a fund elects to impose a 2%
redemption fee this is a “credit positive.”
Case study: Investors are focused on money fund liquidity but not all MMF AAA ratings are the same at assessing this risk.
Review Investment Tools: Assess Portfolio Risks are In line with Investment Goals
Which Approach is More Aligned with Your Concerns?
20
What’s Next?
Will the crisis era regulations be modified?
21
Contact Us
Tony Carfang
Managing Director
Treasury Strategies, A Division of Novantas
312-443-0840
Greg Fayvilevich
Senior Director
Fitch Ratings
212-908-9151
22
Treasury Strategies, A Division of Novantas, is the leading treasury consulting firm. Armed with decades of experience, we’ve developed
solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies
around the globe.
We serve corporate treasurers, their financial services providers and technology providers for the complete 360°view of of treasury.
About Treasury Strategies
Solutions: Assessment / Optimization / Selection / Implementation
• Payments Strategy
• Bank Relationship Management
• Technology Business Requirements and Gap
Analysis
• Technology Selection, Implementation and
Optimization
• Treasury Change Management and Resource
Support
• Global Cash and Liquidity Management
• Cash Forecasting
• Financial Risk Management
• Treasury Organization
• Leading Practices Review and Benchmarking
www.youtube.com/c/treasurystrategiesincconsulting
Connect With Us
www.Treasurystrategies.com +1 312.443-0840
http://www.treasurystrategies.com/networking-communities
23
Industry Leading Research
• Money fund trends: monthly update dashboard
• Special reports highlighting key themes
• Commercial paper dashboard
• Distribution dedicated to corporate treasurers
Active Media Engagement
Prime Money Funds Getting More Liquid Ahead of Reform. Shift toward on liquid
assets suggests they are readying for a growing wave of redemptions over the next few
weeks, according to Fitch Ratings. –CFO Journal 9-14-2016
Fed: Banks Cut Use of Short-Term Debt Ahead of New Money-Fund Rules In
recent months, investors have moved more than $800 billion out of such funds and into
government funds, according to Fitch Ratings. –The Wall Street Journal 10-6-2016
Cash is No Longer Trash. Money-market funds have sharply increased payouts.
Municipal-bond money funds, yielding more than 1%, are an especially good deal. –
Barron’s 10-8-2016
A $1 Trillion Paradigm Shift Boosts Demand for U.S. Bills “This was a structural
change,” said Gregory Fayvilevich, an analyst in the fund and asset management
group at Fitch Ratings. “Prime money funds traditionally made up a very big portion of
holders of CP. That is why you are seeing a very big impact.” –Bloom 10-10-2016
Fitch Ratings: Strong Commitment to Short-term Market and Cash Management
www.fitchratings.com/shortterm Research portal for treasurers.
24
Fitch Ratings’ credit ratings rely on factual information received from issuers and other
sources.
Fitch Ratings cannot ensure that all such information will be accurate and complete.
Further, ratings are inherently forward-looking, embody assumptions and predictions
that by their nature cannot be verified as facts, and can be affected by future events or
conditions that were not anticipated at the time a rating was issued or affirmed.
The information in this presentation is provided “as is” without any representation or
warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a
security and does not address the risk of loss due to risks other than credit risk, unless
such risk is specifically mentioned. A Fitch Ratings report is not a substitute for
information provided to investors by the issuer and its agents in connection with a sale
of securities.
Ratings may be changed or withdrawn at any time for any reason in the sole discretion
of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings
are not a recommendation to buy, sell, or hold any security.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS
OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.
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