NEW YORK CASH EXCHANGE OPTIMIZING LIQUIDITY IN A CHANGING WORLD

Transcription

1 NEW YORK CASH EXCHANGE OPTIMIZING LIQUIDITY IN A CHANGING WORLD June 2, 2016

2 Agenda Welcome Remarks & Introduction Regulatory Update and Effects on Corporate Liquidity o o o Evolutions of Liquidity Basel III Money Market Mutual Funds Empirical Data and Real Life Examples o o Evolution of Rates NYU in Practice 2

3 1 WELCOME REMARKS & INTRODUCTION James Santoro Head of Liquidity & Investment Advisory Americas BNP Paribas Timothy Hesler, CTP Assistant Treasurer, Global Banking, Cash Management and Treasury Operations New York University (NYU) Randy Rosen, CTP Director of Commercial Earnings Credit Allowance and Deposit Research INFORMA Research Services 3

4 Panelist Bios James Santoro Jim is a Managing Director and Head of the Liquidity & Investment Advisory group for the Americas at BNP Paribas. Jim and his team work with multinational organizations on end-to-end liquidity and investment solutions. Prior to joining BNP Paribas, he held senior roles in Liquidity and Finance at Bank of America Merrill Lynch and JPMorgan Chase. Jim has also spent time at SG Cowen and Neuberger Berman. In addition to frequently authoring whitepapers on topics covering cash management and liquidity, Jim regularly leads client roundtables and discussions on multiple topics related to Liquidity and Liquidity management. Jim holds a Bachelor s degree from Villanova University and a Masters of Business Administration degree from the University of Notre Dame Mendoza College of Business. Timothy Hesler, CTP Tim is Assistant Treasurer, Global Banking, Cash Management and Treasury Operations for New York University (NYU) where he is responsible for banking, cash management, investments, working capital and payment initiatives, short term debt, foreign exchange and global payment card programs. NYU is the largest private university with 18 schools, 11 worldwide sites and 2 global campuses in Shanghai and Abu Dhabi. Tim was a Senior Expert in the Corporate Finance Strategy practice at McKinsey and Company, focusing on corporate treasury and financial risk before affiliating as a Senior External Advisor to the firm. At McKinsey, Tim worked with senior clients in the US, Latin America and Europe on a variety of Treasury engagements including overall Treasury organization design and transformation, cash management, banking rationalization, foreign exchange hedging and cash flow forecasting. Prior to McKinsey, Tim has substantial experience over 12 years leading finance transformation and corporate treasury advisory engagements across numerous industries for multinational clients as Director, Treasury and Risk, for both PricewaterhouseCoopers and KPMG. Tim provided subject matter knowledge and guidance to client Treasurers and CFOs. Prior to his time in professional services, he also worked in the corporate treasury department for Novartis performing many different functions in treasury and corporate finance. He is a frequent speaker at industry conferences and has authored numerous articles on treasury management. He is a Certified Treasury Professional (CTP) and holds a B.S. in Electrical Engineering from Union College, and an M.B.A. in Finance from Columbia University. Tim is the Treasurer of the Pinnacle Consortium of Higher Education, the Chairman of the AFP's Body of Knowledge Committee and on the Advisory Board for TMI USA magazine. Tim has been the President of the Treasury Management Association of New York (TMANY) for five years. 4

5 Panelist Bios (cont.) Randy Rosen, CTP Randy is the Director of Commercial Earnings Credit Allowance and Deposit Research for Informa Research Services. His primary responsibilities include the liquidity research focusing on small business and commercial product segments. Joining Informa in 1995, he has held the positions of Assistant Manager, Deposit Research and Assistant Manager, Indirect Lending Research. He has completed the Association for Financial Professionals Certified Treasury Professional training and has passed the CTP exam, receiving his Certified Treasury Professional Certification in Prior to joining the company, Mr. Rosen was employed at First Interstate Bank in their retail branch network. He received his BS degree in Business Administration with an emphasis in Marketing from California State University, Northridge and received his MBA from the University of Phoenix. With more than 25 years in the financial services industry and 20 years with Informa Research Services, Mr. Rosen brings to the table a vast array of industry experience, product knowledge, and research expertise. 5

6 2 REGULATORY UPDATE AND EFFECTS ON CORPORATE LIQUIDITY Evolution of Liquidity Basel III Money Market Mutual Fund Reform 6

7 Evolution of Liquidity Lehman Brothers Bankruptcy Sep-2008 USA QE2 Nov USA QE3 Sept Oil Prices Decline July 2014 Further ECB Easing Mar-2016 Financial Crisis 2007 Euro Debt Crisis 2011 Money Market Reform Announced 2014 Money Market Reform in Effect Oct Dec-2015 Basel III U.S.A & Tightening of Money Market Conditions Interest Rate Hike Dodd-Frank Wall Street Reform Jul-2010 NIB DDA Unlimited Insurance ends Jan-2013 ECB Negative Interest Rates June-2014 ECB QE Jan

8 Regulation: Basel III Focus for Banks Liquidity Coverage Ratio (LCR) 30-day ratio requirement designed to ensure that sufficient high-quality liquidity exists to manage through an acute stress scenario (e.g., 3-notch downgrade, partial loss of deposits, etc.) lasting one month. The key implication for bank customers is that the Basel III Liquidity standards will have an overarching impact on how banks value and provide return on client liquidity. Value to BNP Paribas LCR = Counterparty Stock of High Quality Liquid Assets Net Cash Outflows Over a 30-Day Period 100% Liquid assets requirement to offset 30-day loss of funding. Each dollar of run-off requires dollar of liquid asset buffer. Deposit types with lower runoff equates to more value. Runoff Rates Operational Corporate Deposits 25% Non-operational Corporate Deposits 40% Financial Institutions 100% Product Type Corporate Demand Deposit Accounts Corporate Term Deposits Maturity Operational Non Operational Beyond 2 months Between 1 and 2 months Up to 1 month LCR HIGH MEDIUM HIGH MEDIUM LOW NFB HIGH MEDIUM HIGH MEDIUM LOW Economic Value HIGH MEDIUM MEDIUM MEDIUM MEDIUM Net Stable Funding Ratio (NSFR) 1-year ratio requirement designed to improve longer term funding. Deposits assumed to run off during a one-year stress environment that do not provide stable funding are required to be held liquid, rather than, deployed against longer-term assets requiring more stable funding. NSFR = Available Amount of Stable Funding Required Amount of Stable Funding 100% Stable funding requirement over 1-year period. Equity and liability (deposit) financing viewed as stable. Required amount depends on nature of risky assets. Ratio likely to undergo some revisions prior to Laws and regulations created and implemented. Tier 1 capital will take into full effect on January Introduction and required 60% LCR. Introduction of the Net Stable Funding Ratio. Basel III fully implemented. 8

9 Regulation: Specific to Money Market Funds European and US Money Market Fund Reform European Commission SEC European MMF Reform US MMF Reform Status Latest Proposals* FINAL Structure Rating Agencies Sponsor Support Portfolio Quality Portfolio Maturity Portfolio Liquidity Portfolio Diversification Source: EC, JP Morgan. Establishes 3 CNAV Fund Types: Public Debt, Retail, and LV NAV - all subject to Liquidity fees and redemption gates Establishes an internal assessment procedure for determining credit quality of money market instruments. Prohibits external support Reverse Repo limited to 10% per counterparty. Collateral must be eligible money market instruments, i.e. 397 days or less. Government collateral exempt from maturity rule. ABCP included in eligible securitization with exposure limit of 10% of fund. WAM: 60 Days WAL: 120 Days 10% Daily Liquidity 20% Weekly Liquidity 5% single issuer limit Institutional Prime and Muni MMFs must convert to floating NAV and adopt liquidity fees and redemption gates Retail Prime and Muni MMFs must adopt liquidity fees/gates Government MMFs are exempt from structural reforms References to credit ratings have been removed; instead the board will have responsibility to determine whether an issuer has an "exceptionally strong capacity" to meet its short-term obligations Allows sponsors to purchase distressed security out of funds to protect fund from losses, must disclose to SEC if such action is taken Restricts the look through treatment to repo collateralized with government securities or cash Eliminates the requirement that funds invest in only those ABS that have been rated by a rating agency WAM: 60 Days WAL: 120 Days 10% Daily Liquidity; 30% Weekly Liquidity; Limits the purchase of Illiquid securities to 5% of fund portfolio 5% single issuer limit (affiliated entities are treated as a single issuer; sponsors of ABS, including ABCP, are treated as guarantors 9

10 Regulatory Impact On ST Investments Basel III Corporate deposits are increasingly important to banks Products that help meet long-term funding needs are the principal focus for banks True operating accounts and term accounts > 30 days are most valuable Non-operating corporate deposits are still valuable to some banks Wholesale deposits or hot money provide minimal value Banks are tailoring their offer to target stable deposits Corporates can achieve enhanced yield via certain deposits Money Market Fund Reform Floating NAV introduces principal risks similar to other Mutual Funds Corporate Treasurers will need to adjust systems and operations for fluctuating prices May result in significant reallocation of Short Term Cash into alternatives (e.g. Bank Deposits, Treasury/Gov t Funds, Treasuries, etc.) due to principal risk and accounting changes/costs Forces a reassessment of investment policy parameters around daily liquidity instruments like Money Funds Yields may improve following increases in short term rates Prime Fund yields may increase due to lower demand for debt instruments 10

11 Banks Not All Liquidity Is Valued Equally Which products do banks value highest? The ability to provide banks with additional transactions or the ability to place funds out along the curve will translate into the highest yields. Transactional Demand Accounts Tenor Linked Time Deposits (TDs) > 30 Days Decreasing Value to Banks TDs < 30 Days Stable Non - transactional Demand Accounts Off Balance Sheet - MMF Increasing Ability to Realize Higher Yields 11

12 3 EMPIRICAL DATA AND REAL LIFE EXAMPLES 12

13 Evolution of Rates Over $50B non Basel friendly Under $50B take adv. of opportunity Low rate environment Anticipate rate increase in future Competitive product MMDA Rates ECR Rates 0.60% 0.40% 0.20% 0.00% 1.50% 1.20% 0.90% 0.60% 0.30% 0.00% 0.20% 0.40% Over $50B (2011) 0.25% 0.55% 0.35% 0.15% 0.16% 0.45% 0.05% 0.05% 0.03% 0.05% Under $50B (2011) Over $50B (2016) Average Rate Max. Rate Min. Rate 1.25% Under $50B (2016) 1.00% 0.40% 0.36% 0.30% 0.27% 0.22% 0.18% 0.10% 0.02% 0.10% 0.10% Over $50B (2011) Under $50B (2011) Over $50B (2016) Under $50B (2016) 13

14 The Importance of Comparison Shopping Analyzed Account Comparison See the See the whole picture (Fees Charged vs. Rates Earned) Average Collected Balance Less: Reserve Requirement Available Balance for Earnings Credit MONTH: June 2016 DAYS IN MONTH 30 $100, $0.00 $100, Compare Products/Services Offered Get the most bank for your buck Request for proposal (RFP) Negotiate SERVICE VOLUME BANK A FEE BANK Z FEE ACCOUNT MAINTENANCE 1 $35.00 $18.00 BANKING CENTER DEPOSIT 1 $1.50 $0.65 DEPOSITED ITEMS 1 $0.18 $0.16 CHECKS PAID 1 $0.20 $0.10 DEBITS POSTED-ELECTRONIC 1 $0.20 $0.18 CREDITS POSTED-ELECTRONIC 1 $0.20 $0.18 MASTER ZERO BALANCE ACCOUNT 1 $50.00 $25.00 SUB ZBA 1 $10.00 $0.00 CONTROLLED DISBURSEMENT ACCOUNT 1 $ $ CONTROLLED DISBURSEMENT PER CHECK WRITTEN 1 $0.20 $0.16 ACH CONSUMER/CORP CREDIT MONTHLY MAINT 1 $90.00 $30.00 ACH PER FILE 1 $25.00 $5.00 ACH PER ITEM 1 $0.20 $0.12 ELEC WIRE OUT-DOMESTIC 1 $40.00 $25.00 ELEC WIRE IN 1 $25.00 $15.00 REMOTE DEPOSIT SERVICE ONLINE MAINT 1 $62.50 $50.00 TOTAL MONTHLY SERVICE CHARGES EARNINGS CREDIT $ $ ECR: 0.40% ($32.88) ECR: 0.20% ($16.44) Share your offers FDIC DEPOSIT ASSESSMENT FEE $0.15 per $1K ($15.00) NO CHARGE ($0.00) TOTAL MONTHLY/ANNUAL COST TO BUSINESS $ $5,667 $ $3,157 14

15 4 NEW YORK UNIVERSITY 15

16 Sample investment policy reporting for the Working Capital Fund Summary 1. Overview Finance Committee of the Board of Trustees must review performance and approve the Investment Policy Statement (IPS) annually Objectives and Balance - 4/30/2016 Yield Working capital funds are self-managed by Treasury Office Focus is high credit quality and short-term liquidity Investment objectives remain (in order of priority) a) Ensure safety and preservation of principal b) Maintain adequate liquidity to meet University requirements c) Obtain the best available return consistent with safety and liquidity objectives Governance is supported by daily management reporting and detailed monthly cash flow forecast 2. Investment Performance Blended end of month returns for March XX%, April XX%, December XX% Performance exceeded indicative external benchmarks including 30-day T-Bills % and First Tier Treasury Money Market Funds 0.30% Liquidity Preservation of Capital Working Capital Balances 3. Background and Recommendations Money Market reform provisions are going into effect 10/2016 which stipulate that Institutional Prime MMFs valuations will transition to floating Net Asset Value (NAV). NYU s policy states that we will only invest in Aaa-mf and AAAm rated funds. No changes recommended Treasury and Government MMF and individual securities, e.g. CD, CP, T-Bills, will be substituted for Prime MMF. NYU will transition its portfolio this summer as tuition receipts arrive. Source: Daily NYU WSQ Short Term Working Capital Fund Report. 16

17 Short-Term investment allocation compared to external data Instruments Permitted for Investments 0% 20% 40% 60% 80% 100% Primary investments in MMDAs Some banks have high deposit % Assertive on asking for best rates Use rated MM Funds for flexibility Purchase T-Bills for Endowment Money market funds Treasury bills Term deposits Sweep overnight accounts Commercial paper Agency securities Corporate bonds Municipal securities Asset-backed securities Reverse repurchase agreements Auction rate securities Auction rate securities Peer-to-peer investing Do not know 3% 2% 12% 10% 27% 36% 48% 53% 59% 92% 86% 79% 78% 72% From the PwC survey: 86% say preserving principal is their top priority. 75% do not plan to change their current selection of permissible investments. Source: Daily NYU WSQ Short Term Working Capital Fund Report and PwC 2014 Cash Investment Survey 17

18 Navigating the new treasury investing environment NYU Past Present Future Core Short- Term Assets Money Market Funds (MMF) MM Deposit Accounts (MMDA) Securities (e.g. CP, Agencies) Primarily MMDAs DDA balances for ECR Credit Money Market Funds Leave Institutional Prime funds More Securities & Govt. MMF Continue MMDA & DDAs Separately managed accounts? Performance Informally tracked No benchmarks Overall solid returns Reported as CFO metric External benchmarks Considered good returns Reported as CFO metric External benchmarks Bank deposits instead of Prime Governance Approved policy Management oversight Informal w/ Committee Revised Liquidity Policy Annual policy approval Formal with Committee Cybercrime awareness Controls review of cash Annual policy approval Formal with Committee Added cybercrime prevention Market commentary Reporting Daily reporting to CFO & Treasurer by asset, returns, year vs. year comparison Daily reporting enhanced w/ counterparty credit risk & benchmark tracking Daily reporting but desire more automation, analytics and competitive bidding Technology Excel Bloomberg Bank MMF portals Treasury management system Bloomberg Bank MMF portals Treasury management system Bloomberg Bank MMF portals 18

19 Key considerations in strategy and tactics going forward Consensus forecast and University views Desire the aggregation of interest rate forecasts for 2-3 banks plus Bloomberg to be more forward looking Including management reporting on forecasts and macroeconomics As we deepen our global sites, need to apply this to our strategy Educate Finance Committee and senior management on regulations We know we have bank risk but track our counterparties closely Discuss new money market and related investment regulations with management and Finance Committee Impact to liquidity risk and stress scenarios Our 12-month cash flow forecast is a clear liquidity management tool with 30+ university data sourced line items and accuracy tracking Continue to update Policy and stressed liquidity scenarios (e.g. government shutdown, debt ceiling, NYC event, regulatory impacts) Add global sites and campus portal cash balances Add non-us global sites cash balances for consolidated reporting and liquidity picture via our Kyriba treasury management system Will spread our investments to those banks with strong relationships and ones that support our global reach and advantage 19