PDF Managing Operating Cash in a Dynamic Interest Rate Environment

[Pages:12]Managing Operating Cash in a Dynamic Interest Rate Environment

Steven Lamel, BNY Mellon Treasury Services Anish Patel, MoneyGram International

April 8, 2019

Agenda

Background on Liquidity Changing Environment and Regulations ? Added and Repealed Tools ? Demand Accounts ? Sweeps ? Interest-Bearing and Hybrid Accounts ? Combination Options and Limitations Questions

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Information Classification: Confidential

Background

Little regulation for adequate liquidity levels prior to 2010 ? Driver of 2008 financial crisis ? Capital heavily invested in long-term, illiquid assets for higher yield ? Illiquid assets funding short-term financing

Global response ? Broad central bank easing ? Basel Accords

Market activity ? USD rates (e.g., Fed Funds and 13-wk T-bill) relatively flat from Dec. 2008 up to Dec. 2015 ? Short-term USD-related rates increasing steadily from Dec. 2015 through 2018 ? Balance sheet management requires shift to retain/attract certain balances

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Information Classification: Confidential

Regulations

Regulation Q (Prohibition on paying interest for commercial deposits) ? Repealed (via Dodd-Frank) effective July 21, 2011

BASEL III Accords had global participation ? Series of rules in response to the liquidity crises

Liquidity Coverage Ratio (LCR) rule ? Issued jointly in U.S. by FRB, FDIC, and OCC ? High Quality Liquid Assets (HQLA) held for funding (e.g., balances) "at risk" in a stress event o Friendly and Unfriendly balances (or funding)

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Information Classification: Confidential

Liquidity Tools for Managing Excess Operating Cash

? Demand Deposit Accounts (DDA) ? End of Night Investment Passive Sweep Accounts ? Intra-day Investment Sweep with Money Market Fund options ? Interest Bearing Account options ? Hybrid Accounts ? Combined solutions to leverage peg/target balances

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Information Classification: Confidential

Tools: Demand Deposit Accounts (DDA)

Also known as "Current Accounts" Standard commercial account for 80 years

? Non-interest bearing ? Balances can generate "earnings credits" to offset fees (only) ? No income is produced

o Simplified tax treatment Otherwise, significant latitude for use

? Unlimited transaction activity ? Zero Balance Account/Concentration structure with multiple levels Basis for sweep or credit interest

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Information Classification: Confidential

Tools: Sweep Accounts ? End of Night Investment

Funds swept from the DDA to on-balance sheet deposit product

Options include: ? Cayman Eurodollar o Deposit booked to the Cayman Branch ? International Banking Facility (IBF) o On-shore, limited to non-US national governments, supranational and international entities, non-U.S. offices of financial institutions and non-U.S. residents (subject to certain restrictions) ? Demand Deposit Interest o On-shore, broadly available, limited deposit insurance coverage

Funds are swept from the DDA ? Last transaction of processing day ? Returned to the DDA each day o Principal and interest may be returned to DDA in separate transactions daily ? Funds available to make payments while in the DDA

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Information Classification: Confidential

Tools: Sweep Accounts ? Intra-day Investment Sweep

Investment options include: ? Cayman Eurodollar (on balance sheet) ? Money Market Funds (MMF) o Balances are off of the balance sheet ? Client defines target balance to retain in DDA ? Balances above target are swept daily at time defined by each fund o Cayman/balance sheet sweep may be at a separate time ? Funds in MMF remain invested until DDA balance moves below a target level ? Invested funds are available for payment decisions up to sweep time ? Product limitations may vary by provider

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Information Classification: Confidential

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