The Changed Landscape for Short-term Investing Post SEC Money Market Fund Reform April 4, 2017 1718920 CRC Exp. 02/23/2018 FOR INSTITUTIONAL USE ONLY AND MAY NOT BE USED WITH THE GENERAL PUBLIC.
A Challenging Landscape Has Increased the Complexity and Cost of holding liquidity U.S. MMF Reform EMEA MMF Reform The supply and demand for cash assets has been altered by MMF Reform and Basel regulations. Political & Economic Uncertainty Monetary Policy Basel III Investment Options will need to be reconsidered as the industry continues to react to change. The complexity and cost of holding liquidity will continue to be a challenge for many organizations. 2
The New Money Market Fund Paradigm INSTITUTIONAL PRIME AND INSTITUTIONAL MUNICIPAL FUNDS GOVERNMENT FUNDS FNAV User experience changes Potential for emergency liquidity fees and redemption gates No changes Portfolio management changes 3
Migration of Assets from Prime to Government The prime fund universe has decreased by over $1 trillion since November 2015, with the majority of cash moving into Government funds AUM ($Bn) 2,500 2,000 1,500 1,000 500 0 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Government Prime Source: imoneynet, Data as of January 31, 2017 4
Fewer Institutional Prime Fund Options Exist The number of institutional prime funds larger than $1 billion has decreased dramatically Data as of January 31, 2017 Number of Funds 50 45 40 35 30 25 20 15 10 5 0 43 26 11 12 8 5 6 4 4 2 Greater than 5 billion 1 billion - 5 billion 500 million - 1 billion 100-500 million Less than 100 million October 31, 2015 January 31, 2017 Source: imoneynet, Data as of January 31, 2017 5
Prime Institutional Money Market Funds Shadow NAV Number of Funds 18 16 14 12 11 10 8 6 5 6 5 4 3 2 0 1 0.9999 1.0000 1.0001 1.0002 1.0003 1.0004 1/31/2017 Source: imoneynet, Data as of January 31, 2017 6
Financial Company CP Outstanding Has Declined A result of the shrinking prime fund universe Assets ($Bn) 580 560 540 520 500 480 460 440 420 400 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Source: FOMC CP Outstanding, not seasonally adjusted, Data as of January 31, 2017 7
Libor Has Been Driven Higher There was a significant spike in LIBOR in the summer of 2016 due to the decrease in AUM of prime money market funds Yield (%) 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 3M Libor 3M OIS Source: Bloomberg, Data as of January 31, 2017 8
Fed Reverse Repo Facility Use by Money Market Funds Has Increased A substantial increase in the usage of the Fed RRP facility following the growth in AUM of government money market funds ($Bn) 500 450 400 350 300 250 200 150 100 50 0 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Source: OFR, Data as of December 31, 2016 9
Consequences of the Big Shift Decrease in fund s demand for Short-term bank debt Short-term corporate debt Short-term municipal debt Increase in fund s demand for Treasury debt Government agency debt 10
Supply / Demand Dynamics Reverting to Prior Form? Money market funds continue to be managed differently Some slow build back of prime fund AUM Opportunities persist for investors as they are more aggressively considering alternatives for prime money market funds 11
Yield Spread between Government and Prime MMFs The yield spread between prime and government funds is widening January 1, 2016 December 30, 2016 0.70 0.60 0.59 0.50 Yield (%) 0.40 0.30 0.20 0.26 0.10 0.00 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Prime Institutional Government Institutional Source: imoneynet, Data as of January 31, 2017 12
What Investors Are Thinking? Will only stay in government funds forever Will use prime funds to some extent Will look to new investment options 13
How do you navigate the environment? Liquidity Strategy Comparison Features Money Market Funds Conservative Ultra Short Bond Fund Income Liquidity Capital Preservation Customization N/A N/A Yes Separately Managed Account Prime Liquidity Strategies Operational Complexity Low Low Medium Custody Embedded Embedded Segregated Fees Fixed Fixed Flexible Gates & Fee Option Yes N/A N/A Portability N/A N/A Yes Transparency Medium Medium High Accounting Simplicity High Medium Medium Investors continue to evaluate alternative strategies to prime money market funds including conservative ultra short duration bond funds, separately managed accounts and bank balance sheet access. This is for illustrative purposes only and is not exhaustive. 14
HP Investment Allocation FY16 Initiated shift from conservative Treasury/Gov t MMF strategy to include more TD exposure 100% % of Portfolio 80% 60% 40% 20% 0% 27% 29% 33% 33% 37% 36% 45% 41% 36% 35% 22% 26% 1Q16 2Q16 3Q16 4Q16 Cash MMF TD/CD 1 HP Confidential
HP Investment Alternatives HP is focused on Security-Liquidity-Yield prioritization while looking at investments Return Prime Funds Earnings Credit Money Market Funds Deposit Accounts Sight Deposits Time Deposits Short Duration Funds Separately Managed Accounts Asset Backed Commercial Paper Income Funds Asset Backed Securities Investment Horizon Primary Liquidity (Daily) Primary Liquidity (On Demand) Secondary Liquidity Tertiary Liquidity Investment Horizon Overnight Less than 3 months 3 months or longer Indefinite Cash Flow Volatility High Medium to High Low Very Low Objective Preservation of capital and immediate liquidity Preservation of capital and T+1 liquidity Preservation of capital and enhanced yield Greater emphasis on maximizing return Strategy Money Market Limited Maturity Obligations Enhanced Income Broad Fixed Income 2 Current investments include products in blue Assessing potential yield benefit of alternative products before proposing any additional shift in strategy beyond increased utilization of time deposits HP Confidential
3 Separately Managed Accounts Overview Goal: To design an investment portfolio that achieves preservation of capital and liquidity while providing greater yield and diversification on Tier 2 and Tier 3 Cash Advantages of SMAs: Individually managed, custom portfolio tailored to HP-specific requirements (e.g. can direct financials exposure where we want it/away from where we do not want it) Can be run according to 2a-7 fund rules to mimic Prime funds without fees/gates and with potentially lower costs Individual securities in a segregated account (HP owns it) Cash management-specific reporting and compliance reporting/support HP-specific liquidity/risk profile Direct access to portfolio management team Higher yields relative to significant overnight and near-term liquidity held by traditional funds The ability to lock-in yields available on longer maturity issues Avoid volatility in traditional funds due to money fund redemptions and large withdrawals Challenges: Risk appetite Accounting requirements/implications of floating NAV (P&L volatility) HP Confidential
The Next Frontier European Money Market Fund Reform Agreement reached, implementation expected in second half of 2018 Outcome is different from the U.S. Some new concepts are in play 15
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