best practices in liquidity mgmt

8/12/2019 Best Practices in Liquidity Mgmt

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2013 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. 2013 Wells Fargo Bank, N.A. All rights reserved. Member FDIC.

Liquidity management best practices in an evolvingregulatory environmentGlobal Payments Conference


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2013 Wells Fargo Bank, N.A. All rights reserved. Member FDIC.

Agenda

Rate environment looking forward(Why would we want to lookback?)

A reading assignment:2300 pages

Why does it matter to meand my business?

Overkill or reallybeneficial?

Tools you can use

The economy andthis presentation:

Starting slowly andpicking up steam

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Future Rate Environment: the FOMCs view

0

2

4

6

8

1012

14

16

1820

2012 2013 2014 2015

0.250.50.751

1.251.51.7522.52.753.754.5

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Zero interest rates

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The Fed continues toprime the pump

Source: Wells Fargo Securities, LLC

Recent actions by the Fed

Extension of exceptionally lowrate language from late2014 to at least mid 2015.

Reintroduction of mortgage-backed securities purchases:$40 billion per month. Nospecified cap

Reintroduction of Treasurysecurities purchases: $45billion per month. No specifiedcap


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The Dodd-Frank Act

Executive summary of topics Risk-based approach to

financial industry regulation

New regulation ofsystematically risky institutions

Focus on consumer protection

Limits on bank investmentactivities

Mortgage regulation

Genesis of several financial/oversight committees

Signed into law on July 21,2010Implementation of changeslikely over next several years

Dont ever forget2008 Bad mortgages Incomplete securities

ratings Alphabet soup: MBS,

SIVs, CDOs, AAA Housing crash Runs on banks and

money funds

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21 st Century Reform


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Dodd-Frank and the FDIC

1933 - $2500

1934 - $5000

1950 - $10,000

1966 - $15,000

1969 - $20,000

1974 - $40,000,

1980 - $100,0002008 (retroactive) -$250,000

Unlimited FDICinsurance was in placedue to temporarylegislation.

Historically, weve hadlimits.

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Deposit insurance levels


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FDIC insurance assessment shift to assets

FDIC model evaluatesassets based on risk

Assets = entire balancesheet (loans, deposits,etc.)Each financial institutionis assessed different rateShift from domesticdeposits to assets lesstangible equity

New methodology effective April 1, 2011

Whats theimportance of theFDIC model change?

How does this impactme and my business?

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Still a cost of doing business


8/23 2013 Wells Fargo Bank, N.A. All rights reserved. Member FDIC.

Money market mutual fund reform

Type of mutual fund registeredunder the InvestmentCompany Act of 1940Convenient and cost-effectiveway to have a diversifiedinvestment in money marketsecuritiesExist under rule 2a-7, allowingamortized cost method ofvaluation: penny roundingOnly money funds useamortized cost methods; allother mutual funds value NAVusing market value ofsecurities

Source: Treasury.gov: FSOC Proposed Recommendations Regarding Money Market MutualFund Reform

Money market mutual

funds have been ascomfortable as an oldpair of blue jeans

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Money funds as they exist today


9/23 2013 Wells Fargo Bank N A All rights reserved Member FDIC

Money market mutual fund reformTimeline

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May 2010Reform ofRule 2a7

May 2011 SEChosted round tableto discuss morereforms. FSOCrecommendedstructural reforms.

August 2012, SECChair Mary Schapiroannouncedcommissionerswould not supportpublic comment

September 2012,FSOC, led by TimGeithner, took upthe cause

Feb 2013 Lastday for comment




Removes the specialexemption allowingmoney market fundsto use amortized costaccounting and/orpenny rounding.

Objective is to increasetransparency of moneyfunds, with NAV basedon actual market valueof securities.

What has beencomfortable may end upas an unacceptable

investment for someSome say floating NAVwould makeshareholders more likely to redeem withfluctuation

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Floating Net Asset Value




Would require moneyfunds to have a reserve ofassets up to 1%-3% toabsorb day-to-day

fluctuations in the valueof funds securities

Would be an appropriatetransition period and

could be raised throughvarious methods

Opponents point outthat runs would belikely should a fundexceed its capital

buffer.

Fund yields likely would suffer.

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NAV Buffer




Requires 3% of shareholdershighest account value inexcess of $100,000 during the

previous 30 days to be heldback for redemption for a 30 -day period.

Objective is to diminish thebenefits of redeeming sharesquickly when trouble arisesand to reduce the damage tonon-redeeming shareholders.

1 Receivables Management for the Long Term , Aberdeen Group,August 2012.

Full overnightliquidity is lost. Manyclients indicate thismakes money fundsobsolete for their use

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Minimum balance at risk(MBR) Holdback




Floating NAV

Stable NAV with NAVBuffer and MBR Holdback

Stable NAV with NAVbuffer of 3% and othermeasures, including:

more stringentdiversification requirements

increased minimum liquiditylevels

So tell me, whatsgoing to actuallyhappen?

The alternatives arenot mutuallyexclusive.

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Alternatives



Evolving regulation

Liquidity coverage risk ratio- Ensures banks have an

adequate stock of High Quality

Liquid Assets (HQLA) to meet astress test of 30 calendar daysof outflows

- Initial proposal: 100% ratio,2015 implementation, limited to

sovereign bonds and highquality corporate bonds

What is being done to

keep my bank safe?

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Basel III: Global regulation



Evolving regulation

January 2013 update- LCR still implemented in 2015 with

minimum requirement at 60%

- Rises by 10% each year; 100%

LCR in 2019- Asset requirements less stringent

Greater emphasis on cashflow forecasting- Banks will place more emphasis on

stickier assets tied to yourbusiness. More competition foryour dollars?

What is being done to

keep my bank safe?

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Basel III: Global regulation



Where does this leave my company?

Rates are low. What is outthere that is safe and offerscompetitive yields?

Should I take a look at myinvestment policy? (Yes,and continue looking at itover the next few months.)

What are other companiesdoing?

Your investment

policy will dictate yourinvestment choices

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Regulation wrap-up



Sweeps

Sweep accounts provide an automated solution forovernight investingAccess to invested funds, or lines of credit, is alwaysavailable

No need to set a manual investment position everydayCreate efficiencies

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Sweeps

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Off ShoreSweep

CommercialPaper

RepurchaseAgreement

Credit Sweep

MMKT

Mutual Funds

Fed Funds

Overnight Eurodollar Investment

CP Investment

Collateralized Repo Investment

Sweep to available line of credit

Various Money Market Funds

Domestic Correspondent Banks Only


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Wholesale time deposits certificate ofdeposit

Ideal for customers who can sacrifice liquidity forhigher yieldsMinimum balance requirementsVarious Terms 1 through 144 months

Various payment options for interest Monthly

Quarterly

Annually

At maturity

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A full array of fixed income securities

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Money Market

Mutual FundsVRDOsCommercial Paper

U.S. TreasurySecurities

U.S. AgencySecuritiesBrokered CDs

MunicipalSecurities

CorporateBonds

Mortgage-BackedSecurities

INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUEWells Fargo Securities is the trade name for the capital markets and investment banking servicesof Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, a memberof NYSE, FINRA, NFA, and SIPC, Wells Fargo Institutional Securities, LLC, a member of FINRAand SIPC, and Wells Fargo Bank, National Association. Wells Fargo Securities, LLC, carries andprovides clearing services for Wells Fargo Institutional Securities, LLC, customer accounts.


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BrokerageSelf directed strategy

Fixed income and equity investingInvestment representatives consultative approachMarket resources and expertiseAnalysts and investment strategists, reporting,

accounting, safekeepingTraded products corporate debt, government /agency securities, money market funds

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INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUEWells Fargo Securities is the trade name for the capital markets and investment banking servicesof Wells Fargo & Company and its subsidiaries, including Wells Fargo Securities, LLC, a memberof NYSE, FINRA, NFA, and SIPC, Wells Fargo Institutional Securities, LLC, a member of FINRAand SIPC, and Wells Fargo Bank, National Association. Wells Fargo Securities, LLC, carries andprovides clearing services for Wells Fargo Institutional Securities, LLC, customer accounts.


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Managed OptionsExternally managed approach

Customized portfolios = separately managedaccountsMoney Market Mutual Funds (Proprietary)

Short duration fundsOnline reporting servicesInvestment policy creation and review

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Investments: NOT FDIC INSURED * NO BANK GUARANTEE * MAY LOSE VALUE


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Questions?

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best practices in liquidity mgmt

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