GSAM Global Liquidity Management

GSAM Global Liquidity Management Liquidity Dynamics in Short-Term Debt Markets 2015

Table of Contents I. US Money Market Fund Regulatory Reform Overview II. Short-Term Debt Markets Have Changed Appendix

I. US Money Market Fund Regulatory Reform Overview

US Money Market Reform Overview SEC US Money Market Fund Regulation Overview On July 23, 2014, Securities & Exchange Commission (SEC) approved changes to the rules governing US money market funds (MMFs) Requirements imposed vary based on type of fund (i.e., government vs. prime vs. municipal/tax-exempt) as well as the type of investor (i.e., institutional or retail) Floating net asset value (FNAV) required for all Institutional Prime & Institutional Tax-Exempt/Municipal MMFs Liquidity Gates and Redemption Fees required for all funds (including retail and institutional) except for Government MMFs Government MMFs have the option to voluntarily adopt liquidity fee and redemption gate provisions, if previously disclosed to investor October 14th, 2016 is the implementation deadline for FNAV and Liquidity Fees & Redemption Gates for qualifying MMFs The US Department of the Treasury and Internal Revenue Service released tax guidance allowing simplified tax accounting methods to track gains as well as relief from the wash sale rules for losses on shares of a floating NAV money market fund Industry Transition Plan GSAM was the first to announce our Government MMFs would comply with the new SEC Government fund definition and would not be subject to gates/fees GSAM is currently evaluating current Prime and Tax-Exempt MMFs and to the extent GSAM doesn t have existing products to satisfy client needs we are considering creating additional funds, potentially retail (natural person) strategies 3

SEC new Rule 2a-7 MMF Requirements Requirements by Investor and Fund Type Type of Investors Government (including Treasury) Prime (Commercial Paper) Municipal (Tax-Exempt) Institutional Funds Stable NAV Floating NAV** Floating NAV** (all funds that are not retail funds) No Liquidity Fees / Redemption Gates Liquidity Fees / Redemption Gates Liquidity Fees / Redemption Gates ability to opt in if disclosed in advance based on fund s weekly liquidity levels and at Board s discretion based on fund s weekly liquidity levels and at Board s discretion Clarification that all government funds must invest only in government securities* Retail Funds Stable NAV Stable NAV Stable NAV (funds with policies and procedures to limit investors to natural persons) No Liquidity Fees / Redemption Gates ability to opt in if disclosed in advance Liquidity Fees / Redemption Gates based on fund s weekly liquidity levels and at Board s discretion Liquidity Fees / Redemption Gates based on fund s weekly liquidity levels and at Board s discretion Clarification that all government funds must invest only in government securities* *Government funds will be defined as those that invest a minimum of 99.5% (formerly 80%) or more of their total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash. **Funds will no longer be permitted to use amortized cost accounting methodology like stable NAV funds, but consistent with the SEC s expectations, the U.S. Department of the Treasury and the Internal Revenue Service released two types of proposed tax guidance on July 23, 2014, allowing for simplified tax accounting method to track gains and as well as relief from the wash sale rules for any losses on shares of a floating NAV money market fund. Source: GSAM As of March 2015 4

Non-MMF Post Reform Liquidity Options Solutions depend on product feature New Product Feature determined by either 2a-7 Requirements or constraints from Market conditions Product Options Product Features Product Landscape Prime Money Market Fund Investor Classification Stability Liquidity Yield Other Floating NAV Liquidity Fees Redemption Gates >T+0 Supply constraints AAA Rated Institutional TBD Accounting Treatment (not cash & cash equiv) Options New 2a-7 MMFs Tax-Exempt Money Market Fund Retail TBD Institutional TBD Retail TBD Government Money Market Fund 1 n/a TBD Ultra-Short Duration Fund Separately Managed n/a Accounts n/a US Money Market Fund Regulatory Reform Overview If longer than 90 days 5

Pre/Post Reform: Potential Liquidity Offerings Money Market Funds and Ultrashort Bond Funds Same Feature as Current MMF Similar Feature as Current MMF Liquidity Offerings Post Rule 2a-7 Regulation Reform MMFs Ultrashort Bond Funds Current 2a-7 Prime MMF 9 Institutional Prime MMF Government MMF GS Limited Maturity Obligations Fund GS Enhanced Income Fund NAV Stable NAV Floating NAV Stable NAV Floating NAV Floating NAV Gates & Fees None Gates/Fees None None None Fund Rating AAA TBD AAA AAA/V1 N/A Accounting Treatment Cash & Cash Equiv Cash & Cash Equiv Cash & Cash Equiv Equity 1 Equity 1 Settlement T+0 T+0 T+0 T+1 T+1 Benchmark imoneynet 8 imoneynet 8 imoneynet 8 BAML 3-6 mo U.S. T-Bill Index Max WAM/ Maximum Duration Target (yrs) 50%BAML6moU.S.T-Bill Index/ 50%BAML1yrU.S.T-NoteIndex 60 days 60 days 60 days 9 months 1.75 yrs 2 Maximum WAL 120 days 120 days 120 days 1 year N/A Daily / Weekly Liquidity 10% / 30% 10% / 30% 10% / 30% 10% (Weekly) N/A 5 Maximum Single Issuer 5% 6 5% 6 5% 6 5% 6 N/A Illiquid bucket 5% 5% 5% 10% 15% Maximum Fixed Rate 397 days 397 days 397 days 2 years 5 years 3 Maximum Floating Rate 2 years 4 2 years 4 2 years 4 3 years N/A Maximum Tier 2 No Tier 2 No Tier 2 No Tier 2 15% Tier 2 (A-2 / P-2 / F-2) N/A For illustrative purposes only Source: GSAM. As of March 2015 1 Dependent on auditor s opinion. 2 EIF s target duration range under normal interest rate conditions is expected to be approximately 9 months plus or minus 1 year. 3 Except for asset-backed securities and Treasury Securities deliverable into futures transactions, EIF will not invest in securities with remaining maturities of more than 5 years. 4 Certain floating rate and variable rate securities may have remaining maturities exceeding three years if such securities provide for the Fund to recover the principal amount through a demand feature in three years or less. 5 No stated liquidity requirements for EIF. Prudent portfolio management may likely lead to some average liquidity given the short maturity/duration of the strategy. 6 5% limitation does not apply to cash, certain repurchase agreements, U.S. Government Securities or securities of certain other investment companies. 7 Includes fee waiver & expense limitation 8 Strategy Dependent 9 GSAM Financial Square Money Market Fund 6

Potential Long-Term Implications to Consider Potential Impacts Consider Revisiting Investment Policy to Allow for Additional Permitted Investments Consider funds that permit repo backed by Treasuries and / or other Government securities, if applicable Consider funds with access to the Fed s RRP Consider revisiting fund sponsor counterparty limitations Consider altogether new strategies GSAM s Financial Square Money Market Funds Goldman Sachs Financial Square Funds Approved RRP Counterparties Repos US Treasury Obligations Agency Obligations Domestic CP & Bank Obligations Foreign CP & Bank Obligations Short-Term Corp. Obligations Taxable Muni. Obligations Tax-Exempt Muni Obligations FS Money Market Fund FS Prime Obligations Fund FS Government Fund FS Federal Fund 1 FS Treasury Obligations Fund FS Treasury Instruments Fund FS Tax-Free Money Market Fund 2 1 Effective February 17 th 2015, Goldman Sachs Federal Fund may hold obligations of the Federal Reserve Bank of New York, consistent with its policy of investing only in government securities. The Fund may only enter into repurchase agreements with the Federal Reserve Bank of New York. 2 Effective February 17 th 2015, Goldman Sachs Tax-Exempt Fund may invest in repurchase agreements with the Federal Reserve Bank of New York as one of the short-term taxable instruments, that the Fund may invest in for temporary investment purposes Source: GSAM 7

II. Short-Term Debt Markets Have Changed

Short-term debt markets have changed Mismatched Supply / Demand Dynamics Banks issuance of short-term debt declining Banks continue to adopt Basel III bank regulations, which generally emphasize lesser reliance on short-term issuance New gross leverage ratio requirements (specifically the supplementary leverage ratio or SLR) mean that banks must now hold capital against high-quality, low-risk assets Supply These assets include time deposits and Treasury repurchase agreements (repo) Demand Buyers of short-term debt have not diminished Money market fund assets remain high, with increased demand for high-quality, liquid assets Corporations continue to hold record levels of cash and cash equivalents on their balance sheets Money market fund regulations - shortened funds average maturity while requiring new minimums for weekly / daily assets Banks are adapting their business models to reduce low risk assets, causing an overall pullback in short-term issuance In addition, repo supply is declining significantly since its peak in mid- 2013 Size of primary dealer USD Repo Market Institutional Money Market Fund Assets Remain Steady 1,200,000 1,000,000 800,000 600,000 Govt Institutional 400,000 Prime Institutional 200,000 0 Source: GSAM as of Q1 2014 Source imoneynet as of 1/31/15 Basel III: The Third Basel Accord 9

Impact Formula Summary Basel III Overview Key Components Basel III guidelines provide significant changes to capital requirements, balance sheet composition, longer term funding stability and stress test reporting Financial institutions must implement the components on a glide path of increasing requirements until full compliance in 2019 Regulators worldwide are taking different approaches to implementation. These including earlier timelines, increased minimum standards and significantly higher requirements for systemically important institutions. Basel III Liquidity Coverage Ratio (LCR) Leverage Ratio Net Stable Funding Ratio (NSFR) Capital Requirement A measure of a bank s ability to withstand short term high volume outflows of cash in the event of a financial crisis A measure to limit the risk of banks employing excessive leverage A measure of a bank s long term funding requirements to limit the overreliance on short term funding Provides minimum levels of capital and reserves that a bank must hold High Quality Liquid Assets (HQLA) Net Cash Outflows Over 30 Days >100% Common Equity Tier 1 Capital > 7 % Available Stable Funding (ASF) Risk Weighted Assets (RWA) Required Stable Funding (RSF) >100% Tier 1 Capital Average Total Consolidated Assets > 3 % Banks Investors Banks Investors Banks Investors Banks Investors Authorized Deposit Taking Institutions (ADIs) have less capacity to accept short term deposits and demand for HQLA increases Liquidity investors wanting short term cash deposits may be limited by volume, turned away or charged If a bank wishes to enlarge its balance sheet, it must increase its Tier 1 Capital The value of an investor s business to a bank will decide how much balance sheet they will be able to access. Banks must support on- and off-balance sheet assets with long term stable funding > 1 year Short term cash deposits may be turned away while incentives for longerterm, secured deposits will increase Financial institutions may look to issue equity, increase capital and reduce their asset base Potential reduction in activity with banks that contributes to their RWA Accepting short term cash deposits on bank balance sheets is generally unfavorable across all regulatory frameworks Source: Basel Committee on Banking Supervision, GSAM 2015 10

Regulation in 2015 and Beyond Regulatory changes impacting short-term debt markets Money Market Fund Regulation Bank Regulation US MMF Reform Implementation Supplementary Leverage Ratio (US) EURO MMF Reform Proposed Liquidity Coverage Ratio (US) 2014 2015 2016 2017 2018 2019 Basel Committee On Banking Supervision (BCBS) Basel III implementation guidelines: Capital Requirements Minimum Tier 1 Capital Standard Binding Standards Leverage Ratio Banks begin public reporting Binding Minimum Standard Liquidity Coverage Ratio 60% 70% 80% 90% 100% Net Stable Funding Ratio Binding Minimum Standard Source: GSAM. As at April 2015 11

Appendix

Preparing for a Changing Liquidity Landscape Response to US Money Market Reform As an asset manager, we continue to review the new money market fund rules to fully understand implications Our goal is to partner with clients to ensure we are offering the right product solutions in a changing liquidity market landscape, and to facilitate a smooth transition to the new money market fund (MMF) requirements We believe our clients can break out planning into three phases: assessment, preparation and implementation Today Assessment Preparation Implementation 2+ years As clients transition into the preparation phase, our goal is to partner to: Evaluate impacts of regulation and the market on current strategies Consider current market landscape and impacts to investment solutions Consider trade-offs and potential impacts of different product offerings Engage our clients with proactive communication and client feedback October 14, 2016 Final MMF Implementation Date Source: GSAM 13

Client Checklist Potential Considerations for Liquidity Investors Assessing Today Preparation Implementation Partner with product and service providers to understand future state Reassess liquidity strategy, including asset mix Seek approvals for investment policy changes Assess impacts of reform / market environment on current investment options vs. liquidity management goals Reevaluate investment policy statement Broaden your securities minimum permitted credit quality Widen currency set Broaden the type of permitted securities Revisit counterparty limits Consider ratings Review operational / technology impacts Transacting in a floating NAV Determine organizational impacts Treasury Tax/Accounting Develop internal communication plan and approval process Increased Cost of Liquidity: Once abundant and seemingly free, liquidity is now scarcer and has a cost to investors Bank Regulation Implications: Reduction of overall issuance High-quality, short supply is increasingly limited, due to bank regulation, while investor demand for the same assets remains high Source: GSAM Evaluate risk assessment tools Increase operational efficiency Increase fund transparency Consider implementation implications of updated strategy & investment policy statement 14

Liquidity Fees & Redemption Gates SEC Requirement for all MMFs except Government MMFs FUND ASSETS LIQUIDITY FEES REDEMPTION GATE Fund / Board not permitted to impose Liquidity Fee* Fund / Board not permitted to impose Redemption Gate** If a fund is charging a liquidity fee and weekly liquid assets go above 30%, the fund may no longer charge a fee If a fund is imposing a gate and weekly liquid assets go above 30%, the fund may no longer impose a gate Minimum weekly liquid assets required by SEC since 2010 30% Weekly Liquid Assets 10% Weekly Liquid Assets Board is permitted to charge a liquidity fee on all redemptions (max of 2%) Board is required to charge a 1% liquidity fee on all redemptions Board is permitted to impose a gate on all redemptions for a maximum of 10 business days in any 90-day period UNLESS: Board determines not to impose a fee or to impose a different fee (max 2%) *If stated in their prospectus, all mutual funds are permitted to charge a short-term trading fee (redemption fee), which applies to all redemptions occurring within a certain number of days (e.g., 2% on all redemptions within 60 days of purchase). Money market funds have not historically had short-term trading fees. **All mutual funds are permitted to take up to seven days to meet redemptions as well as liquidate a fund if in the best interest of the fund. For illustrative purposes only Source: GSAM, SEC; As of March 2015 15

Desire for short term liquidity solutions Basel III Implementation Liquidity Coverage Ratio - Impact To Liquidity Investors Liquidity Coverage Ratio A measure of a bank s ability to withstand short term high volume outflows of cash in the event of a financial crisis 2015 2016 2017 2018 EU CRD Deadline 60% 70% 80% 100% US SEC Deadline 80% 90% 100% Impact To Deposit Taking Institutions Impact To Liquidity Investors Short term deposit capacity in the market Banks currently taking deposits for less than a 30 day term will face a material cost as High Quality Liquid Assets (HQLA) will be required to balance the LCR requirement. Deposit taking institutions may start to limit deposits by size, charge fees commensurate with the cost of maintaining their LCR or turn away clients entirely. Banks will likely offer incentives for investing cash for terms longer than the 30 day LCR window. Moves to dissuade short term deposits are likely to increase as the full LCR becomes applicable over the next four years. Authorized Deposit Taking Institutions (ADIs) have less capacity to accept short term deposits Liquidity investors requesting short term cash deposits may be turned away or incur a charge Investors may wish to assess options other than deposits for their short term liquidity. This would mitigate the risk of being denied or being charged for a facility in future. By reassessing their liquidity needs, investors may organize their cash balances into tranches of overnight liquidity, short term requirements and longer term vehicles that can be deployed appropriately. While an LCR exemption exists for Operational Deposits (i.e. those related to the immediate running of a firm, such as payroll), the onus is on the deposit taking institution to identify and flag such accounts. Source: Basel Committee on Banking Supervision (BCBS) 2014, EU Commission & US Securities & Exchange Commission 16

Risk Considerations The Goldman Sachs Limited Maturity Obligations Fund invests in a broad range of high quality, U.S. dollar-denominated money market and other fixed income instruments, including obligations issued or guaranteed by the U.S. Government, its agencies, authorities, instrumentalities or sponsored enterprises, obligations of U.S. banks, corporate notes, commercial paper and other short-term obligations of U.S. companies, states, municipalities and other entities, fixed and floating rate asset-backed securities and repurchase agreements. The Fund may also invest in U.S. dollar-denominated obligations issued or guaranteed by foreign banks, companies and governments or their agencies, authorities, instrumentalities or sponsored enterprises. The Fund is not a money market fund and does not attempt to maintain a stable net asset value. The Fund is subject to NAV risk, which means that the net asset value of the Fund and the value of investments in the Fund will fluctuate. The Fund s investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity and interest rate risk. Any guarantee on U.S. government securities applies only to the underlying securities of the Fund if held to maturity and not to the value of the Fund s shares. Because the Fund may invest heavily in specific sectors (for example, the financial services sector), the Fund is subject to greater risk of loss as a result of adverse economic, business or other developments affecting such sectors. Foreign investments may be more volatile and less liquid than investments in U.S. securities and are subject to the risks of adverse economic or political developments. Investments in asset-backed and receivables-backed securities are subject to prepayment risk (i.e., the risk that in a declining interest rate environment, issuers may pay principal more quickly than expected, causing the Fund to reinvest proceeds at lower prevailing interest rates). The Goldman Sachs Enhanced Income Fund invests primarily in a portfolio of U.S. dollar denominated fixed income securities, including non-mortgage U.S. government securities, corporate notes, commercial paper, fixed and floating rate asset-backed securities and foreign securities. The Fund s investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity and interest rate risk. Any guarantee on U.S. government securities applies only to the underlying securities of the Fund if held to maturity and not to the value of the Fund s shares. Foreign investments may be more volatile and less liquid than investments in U.S. securities and are subject to the risks of adverse economic or political developments. Derivative instruments may involve a high degree of financial risk. These risks include the risk that a small movement in the price of the underlying security or benchmark may result in a disproportionately large movement, unfavorable or favorable, in the price of the derivative instrument; the risk of default by a counterparty; and liquidity risk. At times, the Fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. An investment in a money market portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market portfolio seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market portfolio. 17

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