Liquidity Challenges and Solutions

Transcription

1 Global Banking Symposium 2006 Liquidity Challenges and Solutions Margaret Yao TSS Liquidity & Investment Product Solutions June 7, 2006

2 Treasury & Securities Services A powerful global franchise: Transaction, investment and information services. We service over $360 billion of client cash and investment balances. Worldwide Securities Services Service provider to the securities industry Scale #1 in assets under custody: $11.2 trillion Target Clients Institutional investors and intermediaries Value for Clients Enhance liquidity and asset portfolio performance Offer leading-edge alternative investment capabilities Reduce operating costs by creating efficiencies in noncore areas Reduce risk by providing accurate accounting and reporting Treasury Services World s largest cash management provider Scale #1 in USD clearing: as much as $3.2 trillion processed daily Target Clients Corporations, financial institutions and government entities Value for Clients Optimize cash flows to maximize working capital Promote efficient treasury management Reduce costs of noncore processes for clients Manage operational and settlement risks 2

3 Key Trends and Challenges Globalization Driven by trade, capital and investment flows The dollar still rules Dollar dominance is consistent with its share in international trade and capital flows. This is especially true in Asia, where most trade and capital flows are dollar denominated and many central banks manage their exchange rates versus the dollar Increasing focus on returns Safety and liquidity have been key operating principles. Historically, return was of secondary importance. In recent years, clients have started to focus on return maximization subject to liquidity and risk constraints Asset diversification Within USD, clients are seeking higher returns through broader choices within investment guidelines. Within bank deposits, clients reaching for higher returns via taking more duration or counter party risks Integrated liquidity and investment management (of working capital ) Outsourcing within defined liquidity, investment and return benchmarks to improve operating efficiency, risk management controls and reporting 3

4 Globalization A Centralized Treasury Structure US HQ Oil & Gas Company with $7.2 Billion in Revenue Goal: Consolidate global USD position Solution: Pooling structure (multi-level) Centralized at JPM London to optimize operating cash around the world 250+ affiliates 30 countries Benefits: Centralized reporting & control of global cash positions Single platform for originating payments & liquidity management Reduced funding requirements by about $160MM Maximized tax savings of $30MM JPMorgan London 4

5 The US dollar still rules FX reserves, trade & capital flows Currency distribution of foreign exchange reserves (%) USD EUR JPY GBP CHF Other H USD remains the main intervention currency Despite much market speculation that central banks may reduce their USD holdings, the share of USD in foreign exchange reserves has held up well Source: IMF and JPMorgan (estimates for 2005H1 are based on exchange rate changes and total reserve changes) Currency distribution of trade and capital flows (%) USD EUR JPY GBP CHF Unspecified Trade* n/a n/a 6.2 International n/a n/a 15.9 bonds Cross-boarder banking* FX turnover Source: IMF, BIS, ECB, and JPMorgan estimates * Including trade and banking flows within the Euro area USD dominance is also consistent with its share in international trade and capital flows This is especially true in Asia as most trade and capital flows are USD denominated and many central banks manage their exchange rates versus USD 5

6 Increasing focus on returns Within liquidity and risk constraints Liquidity Profile Balances Treasury Portfolio Working capital Cash retained in to meet working capital & short term requirements Reserve Portfolio Strategic Cash Cash separate from business cycle, available for investments in longer duration & diverse instruments to achieve an enhanced yield DDA MMF CDs, TDs ST Instruments Separately Managed Account Level requires client specified action to retain sufficient daily DDA liquidity Once built-up, business cycle cash can be managed across a range of instruments within investment guidelines This portfolio is typically managed by external fund managers or in-house asset managers against specified return benchmarks & investment parameters Time 6

7 Balance Analytics Portfolio Impact Group 1 : Historical Balances Group 2 : Historical Balances 30 (In Millions) (In Millions) (5) (10) (15) Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 FORTIS CAPITAL CORP. FORTIS CAPITAL CORPORATION (In Millions) Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 Historical Balances Notionally Combined Balances 90 (In Millions) Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04 7

8 Asset Diversification Extending duration, diversifying counter parties Clients are seeking higher returns through broader choices and extending duration within investment guidelines: Separately Managed Accounts Various S/T Money Market Instruments TD, CP, Gov ts & Agencies Return Money Market Mutual Funds Domestic Time Deposits (CD s) Money Market Deposit Account Automated EOD investment Sweeps U.S. Demand Deposit Accounts O/N Time 8

9 Asset Diversification Extending duration, diversifying counter parties DAILY INDICATIVE RATES 1 05/30/2006 a/o 9:15 am source: Bloomberg Last Price FF Diff vs FF Federal Funds Effective Rate U Repo 1 Day ICAP Capital M arkets Repo Trea Week ICAP Capital M arkets Repo Trea Month ICAP Capital M arkets Repo Trea LIBOR Overnight BBA LIBOR USD Overnight CDs Px Last 1 Month Bloomberg CD 1 M onth Month Bloomberg CD 2 M onth Month Bloomberg CD 3 M onth Month Bloomberg CD 6 M onth Month Bloomberg CD 9 M onth Month Bloomberg CD 12 M onth % is spot FF rate at 11 am. Rate not adjusted for bid spread. 4.87% is spot Treasury Repo rate at 11 am. LIBID = 4.934% using 1/8 th bid/offer spread Approx. 10 bps yield pick up extending duration beyond 1 month CD up to 3 months CD Money Funds 100% US Treasury JPM ORGAN 100% US TREAS-INST Prime JPM ORGAN PRIM E M M KT FD-INST Gov't JPMORGAN US GOVERNMENT MM-IN AAA Rated US Domestic MMF (yield lag due to recent rate hike) 9

10 Integrated Liquidity & Investment Management - Foundation for rules based investments Linkage with payments and core cash management services to facilitate the concentration of balances and subsequent investment via either passive or active alternatives. Convenience Operating Efficiency Liquidity (real time) Flexibility Choice Optimized Yield Consolidated Reporting 10

11 Optimizing Predictable & Unpredictable Balances Automated Double Sweep for Non bank FI Client Initiated Book Transfers Client Initiated 3P Wire Transfers AUTOMATED DAILY SUBSCRIPTION & SETTLEMENT Daily Cash Inflow JPMorgan, New York DDA Concentration A/C A/C 001 A/C 002 A/C 003 A/C 004 Cash Outflow Master Servicing A/C s JPMorgan, New York Master Servicing A/C s Automated Sweep Real Time Settlement 1:1 Sweep Built-in Sub- Accounting Funds not comingled No Settlement Risk No Wire Charges Daily Subscription MMF Shareholder Record A/C 001 A/C 002 A/C 003 A/C 004 AUTOMATED REDEMPTION, REAL TIME LIQUIDITY A/C 001 A/C 002 A/C 003 A/C 004 Real Time Liquidity Real Time Settlement 1:1 Sweep Built-in Sub- Accounting Funds not comingled No Settlement Risk No Wire Charges Redemption MMF Shareholder Record A/C 001 A/C 002 A/C 003 A/C 004 Key Client Benefits Integrated management of predictable and unpredictable daily cash positions Operating efficiencies and savings on active intra-day investment activities Real time liquidity and fully automated settlement Immediate use of funds to facilitate payment activities Elimination of human and operational error Consolidated cash and investment reporting One-stop shop Built-in sub-accounting and audit trail Important to financial intermediaries administering client funds Investment choice of investment vehicles JPMFAM as well as 3 rd Party MMF 2 11

12 A Strategic Global Liquidity Product Vision - Informed by client needs Any bank account to any investment account Integrated Relationship Reporting CORE PLATFORM Any Country Any Bank Any Account Concentration Platform Integration Investment Platform Complete array of investments Global Service Delivery CLIENT CHALLENGES Cash fragmentation, inefficient to manage low control, high risk Regulation & tax complexity, resource intensive No integration to business, lack ability to manage total opportunity Inefficient to manage, scale & access to options CLIENT NEED Manage & control fragmented cash positions Simplify & create efficiency in cash operating environment Integrate cash management with investment capability Obtain access to options and invest in an efficient & scalable way 12

13 Thank You Global Banking Symposium 2006