State Street Fund Connect

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1 State Street Fund Connect Money Market Fund Portals: Trends in the portal industry and how technology is adapting to the new regulatory world of cash investments. Gregory P. Fortuna, CFA Managing Director

2 MMF Portal Industry Timeline 2001: Fund Connect achieves fully automated status 2007: Northern Rock bankruptcy in marks the start of credit crisis for the general public MMF holdings gain in importance to investors MMFs reduce/eliminate exposures to SIVs and ABCP Offshore sovereign MMFs launched 2006: Money Market Yields peak at 5.2%. 2010: Portals develop value added features, e.g., transparency, pre-trade compliance 2014 and beyond: Further Expanding Asset Classes Auto-Settlement Floating NAV fund settlement Liquidity Fees Redemption gates Future 1998: State Street launches Fund Connect 2002: SunGard launches portal 2003: ICD launches portal 2004: Mellon LMS launches portal (now BNY Mellon) 2008: Bear Stearns bankruptcy Lehman Brothers bankruptcy Reserve Primary Fund breaks the buck Central Banks aggressively cut interest rates Global flight to safety Temporary Guarantee Program for MMFs is passed 2012: Portals adapt to new regulations and fee waivers New asset classes added Evolution of MMF portals into risk management tools Source: State Street Global Exchange 2

3 MMF Portal Industry Overview $438 Billion in Assets currently Trading via Portals Instruments Traded When Using Electronic Trade Portals (% organizations use Electronic Trade Portals) 100% Organizations' use of electronic, multi-family trading portals for short-term investments Prime MMFs 64% Treasury/Government Securities 15% Bank Time Deposits 32% Treasury/Government MMFs 53% Commercial Paper 13% 0% 20% 40% 60% 80% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 87% 87% 83% 82% 76% 67% 64% 64% 61% All responses Rev <$1bn Rev >$1bn Net Borrower Net Investor Investment Grade Non-investment Grade Publicly Owned Privately Owned Sources: Crane Data, AFP Liquidity Survey (2014) 3

4 Short Term Liquidity Platforms Key Features Access to a wide selection Asset Managers Global platform with Onshore and Offshore investments in a single interface Multiple MMF currencies including USD, GBP, EUR, AUD, CAD, SGD etc. Daily fund statistics, e.g., Yields, AUM, WAM, Ratings etc. Compliance module to manage investment risk Customizable reports Comprehensive fund literature Secure platform with multiple layers of trading authorisation Ability to analyze full short term portfolio in one location Pre-trade analytics module to run scenario analysis at the security level on virtual trades Post-trade analytics module to examine holdings of each fund at the security level Integration to wide range of third-party treasury workstations 4

5 What s Changing MMF Regulatory Summary Effect of Basel III / LCR

6 SEC MMF Reform Requirements 1 Floating NAV Institutional Prime Money Market Funds (no impact to Retail Funds nor Institutional Government, and Treasury) Floating NAV based on current market value of securities in portfolio Rounding to the 4 th decimal Fees and Gates SEC has recommended the implementation of liquidity fees and redemption gates if a fund s level of weekly liquid assets falls below certain thresholds (30% and 10%) Boards have discretion over imposing gates and fees Enhanced Disclosure Money Market Funds will be required to disclose daily online: Levels of daily and weekly liquid assets Net shareholder inflows or outflows Market-based NAVs per share Imposition of fees and gates Any use of affiliate sponsor support 1. Securities and Exchange Commission. Money Market Fund Reform. sec.gov/rules/final

7 Money Market Funds: In Scope Money Market Fund Type Floating Net Asset Value ("NAV") Liquidity Fees Redemption Gate Liquidity Testing Form N-MFP 10% Test 30% Test Website Disclosures Form N-CR Institutional Prime Fund Institutional Municipal Fund (Tax-Exempt) Retail Prime Fund Retail Municipal Fund (Tax-Exempt) Government Money Market Fund * * * Government Money Market Funds are permitted, but not required to impose a Liquidity Fee or Redemption Gate 7

8 Compliance Timeline 60 days 9 months 12 months 18 months 2 years October 14, 2014 August 14, 2014 July 14, 2015 October 14, 2015 April 14, 2016 October 14, 2016 FINAL RULES ARE POSTED TO THE FEDERAL REGISTER RULES BECOME EFFECTIVE FORM N-CR Compliance date WEBSITE DISCLOSURES Historical data must begin to be tracked in order to comply with the April 14, 2016 effective date Form N-MPF Diversification testing Stress testing Form PF Website disclosures FLOATING NAV LIQUIDITY FEES & REDEMPTION GATES 8

9 Average Returns on US Prime Funds 5.11% Focus on Risk 4.86% 3.90% 3.00% Future 1.63% 2.73% 0.95% Focus on Return 1.14% 0.42% 0.11% 0.05% 0.06% 0.03% 0.03% 0.03% Source: Crane s Prime Instit MF Index Calendar Year Returns ( ), imoneynet Money Fund Analyzer ( ) 9

10 Default Risk Percentage of a Portfolio That Can Default Before a Money Market Fund Risks Breaking the Buck 2.50% 1.25% 0.63% 0.83% 0.05% $0.00 $0.20 $0.40 $0.60 $0.80 Market value of defaulted security, cents on the dollar Note: Figure assumes the fund s shadow price is $ and the market value of the security is $1.00 before it defaults. Source: Investment Company Institute 10

11 Sample Timeline Floating NAV NAV #1 Deliver 9:00 AM NAV to TA NAV #2 & WIRE DEADLINE 9:00AM REDS/ FUND VALUATION Deliver 12:00 PM NAV to TA NAV #3 & WIRE DEADLINE 12:00PM REDS/ FINAL FUND VALUATION Deliver 3:00 PM NAV to TA FED WIRE DEADLINE 4:00 AM 7:00 AM 9:00 AM 11:00 AM 12:00 PM 1:00 PM 2:00 PM 3:00 PM 4:00 PM 5:00PM 6:00PM 6:30PM Fund valuation and NAV calculation Fund valuation and NAV calculation Fund valuation and NAV calculation FINAL REPORTING - NAV, TNA, Rate, and yield Fund activity is continually processed For Illustrative Purpose Only 11

12 Floating NAV & the Case for Auto-settlement Investor Short Term Liquidity Portal Money Market Fund Auto-Settlement is bank and custodian agnostic Trade is entered/uploaded into Fund Connect Real-time trading and confirmations with Transfer Agency system via DST, SWIFT or other FTP Real-time automated cash and custody instructions sent to investor s bank via SWIFT Cash wired to target Money Market Fund Eliminates risk of human error Investor Cash Account Cash Payment: MT101, MT103 & MT202 Cash Receipt: MT210 Custody/Accounting: MT540 & MT541 Investor Custody Account 12

13 Fees and Gates Details The Following Rules take full effect October 2016 and apply to Institutional Prime and Municipal MMF s Liquidity Fees Funds must maintain weekly liquidity equal to 30% of Portfolio value. If the 30% is broached a MMF Board can choose to impose up to a 2% fee. This board can choose not to impose a fee, or to impose a lower fee, if it would be in the best interest of the shareholders to do so. The liquidity fee is charged on redemptions and becomes part of fund assets. Gates A money market fund that imposes a gate would be required to lift that gate (a) within 10 business days (although the board of directors could determine to lift the gate earlier) and (b) if and when weekly liquid assets exceed 30% of total assets. Money market funds would not be allowed to impose a gate for more than 10 business days in any 90-day period. 13

14 Enhanced Disclosure Details Daily website disclosure (as of end of prior business day) New Form N-1A (Registration Statement) Disclosures % of total assets in daily and weekly liquid assets Inflows and outflows Chart or graph inflows and outflows for past 6 months NAV to 4 decimal places Chart or graph changes to NAV over past 6 months Require each money market fund to disclose in its SAI historical instances in which the fund has received financial support from a sponsor or fund affiliate Disclosure of: (i) certain of the risks associated with liquidity fees and gates and/or a floating NAV; (ii) historical occasions on which the fund has considered or imposed liquidity fees or gates. 14

15 Fees & Gates/Enhanced Disclosure Monitor All Your Funds Centrally DATE FUND FUND NAME CLASS NET SHAREHOLDER FLOWS % DAILY LIQUID ASSETS % WEEKLY LIQUID ASSETS FLOATING NAV 2/1/ XX Sample Prime Institutional Fund #1 1 $182, % 51.00% /1/ XX Sample Prime Institutional Fund #2 1 $381, % 54.00% /1/ XX Sample Prime Institutional Fund #3 1 $154, % 53.00% /1/ XX Sample Prime Institutional Fund #1 1 $556, % 53.00% /1/ XX Sample Prime Institutional Fund #2 1 ($524,595.57) 44.00% 51.00% /1/ XX Sample Prime Institutional Fund #3 1 ($719,600.95) 42.00% 51.00% /1/ XX Sample Prime Institutional Fund #1 1 ($880,594.56) 40.00% 54.00% /1/ XX Sample Prime Institutional Fund #2 1 ($1,042,658.63) 43.00% 50.00% /1/ XX Sample Prime Institutional Fund #3 1 $28, % 55.00% For Illustrative Purpose Only 15

16 Time Deposits and Basel III Liquidity Coverage Ratio 1 Banks must hold a sufficient level of unencumbered assets that can be converted into cash within a day without decrease in value Prime Money Market Funds may no longer meet this requirement. US banks must fulfill this requirement by 2017, non-us banks must fulfill the requirement by 2019 Client deposits categorized as non-operating, such client deposits not directly associated with an operational/custodial relationship, will be less attractive to banks These deposits are considered the least stable, and thus subject to the most severe run-off assumption. (i.e. 100% of the deposits will leave the bank in the 30 day stress test) This cash will move off balance sheets into alternates such as: Institutional Government and Treasury Money Market Funds Separately Managed Accounts Level 2a and 2b assets cannot make up more than 40% of a bank s High Quality Liquid Asset (HQLA) Pool Banks will hold a greater share of their assets in central bank deposits or treasuries Bank demand for these assets will increase MMF s will compete for treasuries 1. J.P. Morgan Global Liquidity. Liquidity Investors and Basel III. Jpmgloballiquidity.com Davis Polk & Wardwell LLP. U.S. Basel III Liquidity Coverage Ratio Proposal. USBasel3.com

17 Impact on Investors 2a-7 changes may require: Changes to current investment policies through analysis of: Investment objectives Permitted investments Potential prohibited investments Research into newly available short-term investment products Comprehensive tools to manage risk and stay in the know with the changing investment climate Basel III/ LCR Requirements may Impact: Supply of treasury securities in the marketplace Bank relationships 17

18 New Products Using Tools That Can Adapt

19 Return Today s Climate Floating NAV Short Term Bond Funds Ultra Short Bond Funds Stable NAV 2a-7 Institutional Prime 2a-7 Retail Prime Funds 2a-7 Government Funds 2a-7 Treasury Funds For Illustrative Purpose Only Risk 19

20 Return Future Climate Floating NAV Short Term Bond Funds New Floating NAV Ultra Short Bond Funds 2a-7 Institutional Prime Stable NAV Private Placement Funds 2a-7 Retail Prime Funds Max 60 Day Funds 2a-7 Government Funds 2a-7 Treasury Funds For Illustrative Purpose Only Risk 20

21 Transparency

22 What To Look For In a Transparency Solution Macro View Portfolio Overview Headline Risk Concentration Analysis Functionality Comprehensive Search Charting Individual Holding Detail Export capabilities Compliance Module Detail View Instrument Type Country Maturity (WAM/WAL) Rating Currency Key Features Pro-rata exposures USDE equivalents Industry standard exchange rates Pre & Post Trade Holdings Analysis Accuracy of data Source of data (fund or calculated) Data review four eyes minimum 22

23 Transparency: Giving you the tools to evaluate For Illustrative Purpose Only 23

24 Transparency: Giving you the tools to evaluate Duration analysis Maturity (WAM/WAL) Rating For Illustrative Purpose Only 24

25 Next Generation Platform Improve Timeliness of Data Accelerated update schedule Reduce investor risk Pre-trade Compliance on Holdings Data Concentration limits on underlying holdings (country, issuer, instrument type, etc.) Deepen the Data Set Create Apples-to-Apples comparisons Reduce risk of errors / omissions within transparency search engines Trend Analysis Tools Analyze holdings of funds / portfolios across different time frames Dynamic Generation of Accounting / Compliance Reports FAS compliant and GL ready reports direct from portal 25

26 Platform Checklist what will you need? A fully agnostic system that can integrate to upstream/downstream systems, including; treasury workstations, ERP solutions, outside reporting tools, cash or custodian banks, etc. A multi-asset class system that will allow for new products, including; money market funds, time deposits, SMA s, private placements, ultra-short duration bond funds, etc. In-depth analytics that provide pre-trade compliance, post-trade reporting and a comprehensive view of your portfolio s underlying holdings (accounting for concentration limits etc.) A robust built-in settlement solution that provides real-time, automated SWIFT cash & custody management that is Bank & Custodian agnostic. Broad network of global asset management and bank partners. Trusted provider who is agnostic and who s goals are aligned with treasury management clients. 26

27 Disclaimer 2015 State Street Corporation. State Street Global Markets, Global Link and Fund Connect are registered trademarks of State Street Corporation or its affiliates. This document is a general marketing communication. It is not intended to suggest or recommend any investment or investment strategy and does not constitute investment research. This document is intended for distribution to professional investors and is not directed at retail customers. Depending on a professional investor s jurisdiction or origin, products and services outlined in this document are offered to professional investors through one or more of State Street Global Markets International Limited and State Street Bank Europe Limited, which are authorized and regulated by the Financial Conduct Authority in the United Kingdom, State Street Global Markets, LLC, which is a broker dealer registered with the U.S. Securities and Exchange Commission and a member of FINRA and SIPC, State Street Bank and Trust Company and/or their affiliates. The products and services may not be available in all jurisdictions. This document and the information herein does not constitute investment, legal, or tax advice and is not a solicitation to buy or sell securities or intended to constitute any binding contractual arrangement or commitment by State Street to provide securities services or any other services. State Street hereby disclaims all liability of any kind, whether arising in contract, tort or otherwise, for any losses, liabilities, damages, expenses or costs arising, either directly or indirectly, from or in connection with the use of or reliance on this document and/or the information herein. 27