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ACT webinar: optimising the goals of security, liquidity and yield in today’s liquidity landscape

• Sponsored by 22 January 2015 | 12.30-13.15 GMT

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Introduction

Will Spinney

Associate Director of Education

ACT

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OPTIMISING THE GOALS OF

SECURITY, LIQUIDITY & YIELD IN

TODAY’S LIQUIDITY LANDSCAPE

Nick Burge

Managing Director, Head of Strategic Liquidity

22nd January 2015

LIQUIDITY LANDSCAPE

5

Low Interest Rates

Risk AversionChanging

Regulations

Record Levels of Cash

LIQUIDITY LANDSCAPE

6Source: Bloomberg Data1 Non-financial institutions only

1. Corporate Cash S&P 12001 ($trn)

1.22 1.16

1.3

1.58

1.78 1.81.95

2.052.04

2.57

2.85

3.06

3.3

3.54

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

LIQUIDITY LANDSCAPE

7Source: Bloomberg Data

2. Low Interest Rates

0%

1%

2%

3%

4%

5%

6%

7%

Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14

LIQUIDITY LANDSCAPE

8Source: Bloomberg Data

3. Risk Aversion: VIX Index

0

5

10

15

20

25

30

35

40

45

50

Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 May-14 Dec-14

LIQUIDITY LANDSCAPE

9

Leverage Ratio

CET1 / Total Assets

Liquidity Coverage Ratio

HQLA / Net Liquidity Outflows

Money Market FundsNet Stable Funding Ratio

Stable Funding / Weighted LT Assets

4. Changing Regulations

LIQUIDITY COVERAGE RATIO - LIQUIDITY OUTFLOWS

10

LIQUIDITY OUTFLOW RATES

Deposits &

unsecured

wholesale

funding

Committed

credit & liquidity

facilities

Secured

wholesale

funding

Individuals

SMEs

Corporates

Financial

Institutions

Stable 5%

Less Stable 10%

Stable 5%

Less Stable 10%

40%

100%

5%

5%

Credit: 10%

Liquidity: 30%

Credit: 40%

Liquidity: 100%

Various rates

dependant on

quality of

underlying

collateral

Operational

deposits

N/A

25%

25%

25%

REGULATORY REFORM – CORPORATE IMPACT

11

Greater complexity of market mechanics

Possible reduction in netting / pooling

Change in relative value of different product sets

Possible changes in credit waterfall

Bank Structures

2

Reduction in credit creation capacity

Overall higher relative cost of credit

Steepening of credit term structure

Banks manage across multiple return metrics

Bank Capital & Liquidity

1

Simplification of derivative product structures

Increase in market infra complexity

Fragmentation of trading liquidity pools

Reduction in traded markets’ liquidity

Markets

3

Reduced attractiveness of MMF funds

Different US and EU regimes

Risk of Financial Transaction Tax

Other Regulations

4

MANAGING LIQUIDITY – LIQUIDITY OBJECTIVES

12

Security

YieldLiquidity

INVESTMENT POLICY

13

Investment Policy

Counterparty Risk

Market Risk

e.g. FX, rates

Liquidity Risk

Operational Risk

Investment Instruments

14

Capital Buffer FundingLiquidityShare

PerformanceBalance Sheet

Strength

Counterparty Openness

Relationship Strength

COUNTERPARTY CREDIT RISK FACTORS

Management Strength

Responsiveness

Credit Ratings News Flow+

Quantitative Factors

Qualitative Factors

LIQUIDITY BUFFER ANALYSIS

15

STRATEGIC PLANNING

16

Historic Cash Flow Volatility

1

Available Liquidity Resources

2

Modelling Future Cash flow and

Liquidity Shocks

3

Flexibility and Business Levers

-3,000

-2,000

-1,000

-

1,000

2,000

3,000

2010 2011 2012 2013 2014

Cas

h f

low

$m

Operations InvestmentsFinancing Change in Cash

4

2,260

3,995

5,285 1,199

536

1,290

- -

-

1,000

2,000

3,000

4,000

5,000

6,000

Cash & STInv

FCF est.2014

Total Cash UndrawnLiq Facility

Long TermInv.

TotalLiquidity

GBPm

Liquidity Snapshot 2014

-10,000

-5,000

0

5,000

10,000

15,000

2013 2014 2015 2016 2017 2018

Cash

Bal

ance

£m

Projected Cash Balance £m

LIQUIDITY MANAGEMENT BECOMING MORE COMPLEX

17

Op Cash

RCF

Deposits

MMFs

Company A

Op Cash

RCF

Deposits

MMFs

CP

Corporate Bonds

Government Bonds

Repos

Company B

EXAMPLE COMPARATIVE YIELDS

GBP Yield Curves

Source: Bloomberg Data 21.01.15, Indicative Deposit Rates

0.32%0.32% 0.32% 0.31%

0.40%

0.53%

0.68%

0.83%

0.99%

0.44%

0.60%

0.67%

0.75%

0.47% 0.46% 0.48%0.51%

0.54%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

0 1 2 3 4 5 6 7 8 9 10 11 12

Ra

te (

ann

ua

l) %

Tenor (months)

UK Gov Bank Deposit MM Fund A1 / A1+ CP Gilt Repo

SUMMARY

LIQUIDITY NEED

Daily liquidity

requirement

PR

OB

AB

ILIT

Y

EXCESS LIQUIDITY LIQUIDITY

REQUIRED

INVESTMENT POLICY LIQUIDITY BUFFER

ASSETS LIABILITIES

Term liquidity

requirement

19

Investment PolicyRegulatory Impact Liquidity Strategy

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Chair’s closing remarks

Will Spinney

Associate Director of Education

ACT

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