Treasury Strategies on Regulatory Reform

© 2009 Treasury Strategies, Inc. All rights reserved.

Impact of Financial Regulationon Corporate Treasury

Presented By:

Anthony J Carfang, Partner

Cathryn R. Gregg, Partner

To:

National Association of Corporate Treasurers

September 9, 2009

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Agenda

Overview

Regulatory changes impacting treasurers

Two specific items of concern

Preparing for the new (post-crisis) world

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Overview – Massive, Intrusive & Global

Massive• Covers all aspects of financial markets• Alters the flow of capital

Intrusive• Into the details—compensation, culpability, organizational structure• Heavy on compliance

Global• Most countries developing their own schemes• International bodies weighing in• Like an arms race

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Major Regulatory Initiatives

• United States – “Foundation,” Group of 30

• United Kingdom – The Turner Report, CP0822

• European Union – The de la Rossier Report

• Others – BCBS/BIS, Walker, G20, …

Regulatory Change Impacting Treasurers

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Regulatory Change Impacting Treasurers

Key US Regulatory Initiatives

• Group of 30 Report

• Obama – “A New Foundation”

• SEC and CFTC money market mutual Fund proposals

• SEC and CFTC derivatives proposals

• Consumer Financial Protection Agency

• FTC Mandates

• FDIC Initiatives

• Treasury Department Initiatives

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Major Regulatory Themes

Curtail non-bank money market activity• Derivatives• Commercial paper• Money market funds

Raise capital requirements• Banks• Broker dealers• Clearing corps• Insurance companies

Increase liquidity buffers for financial services providers• Must hold shorter duration instruments• More government securities

Regulatory Change Impacting Treasurers

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Regulatory Change Impacting Treasurers

Commercial Banks

Investors & Depositors

Borrowers

99%99%

Banking Pre 1965

• High concentration risk• Lack of transparency

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Modern Money Markets

• Efficient• High transparency• Diversified risk portfolio

Regulatory Change Impacting Treasurers

Commercial Banks

Investors & Depositors

Borrowers

15%-20%

80%-85%

Securities Dealers

Money Market Funds

Direct Instruments Markets (CP, Repo)

15%-20%

80%-85%

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Regulatory Change Impacting Treasurers

Commercial Banks

Investors & Depositors

Borrowers

>20%

80%-85%

Securities Dealers

Money Market Funds

Direct Instruments Markets (CP, Repo)

>20%

80%-85%

Government

??

Future Environment

• Features unknown

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Three Specific Items of Concern

Limit money market fund commercial paper holdings to A1/P1 issuers• Proposed by SEC• Comment period ended Sept. 8

Would reduce supply and increase cost of credit for all but a few top-rated borrowers

Key impact• Utilities• Regional banks and their commercial customers• Food and beverage industry• Rust belt companies

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Percentages do not sum to 100% as multiple response are included. Source: Treasury Strategies , Inc.

Potential Destination of Departing MMMF Assets Percentage of all survey responses

Three Specific Items of Concern

Require money market funds to use a daily fluctuating net asset value

• Proposed in Obama “New Foundation” document• Referred to the President’s Working Group on Financial Markets• Recommendations expected Sept. 15

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Regulation of OTC derivatives proposed by Treasury• SEC and CFTC to regulate exchanges and clearing organizations• Distinguish standardized trades from customize trades• Margin, capital and/or collateral requirements (w/ exemptions)

Benefits• Reduced counterparty risk• Pricing transparency

Negative impacts• Increased hedging costs

– Capital, margin and/or collateral• P&L volatility from imperfect hedges• FAS 133 issues, definitions• Liquidity

– Availability of counterparties– Position limit proposals

Three Specific Items of Concern

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Regulatory Change Impacting Treasurers

It may be 5-7 years before market returns to equilibrium.

• Initial regulatory initiatives

– Each country; multiple agencies within each country

• International bodies attempt to harmonize

• Regulatory competition

• Everyone fine-tunes

• New equilibrium

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New environment for Corporate Treasurers• Higher cost of capital• Higher cost of credit• Higher cost of operating services• Higher cost of managing risk• Higher cost of compliance

Fewer financial service options• Fewer (and much larger) providers• Fewer available instruments• Less relationship leverage• Government allocation of liquidity

Preparing For The New (Post-Crisis) World

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New Imperatives for Treasurers • Solidify availability of credit• Shore up balance sheet, capital structures• Improve global cash visibility• Improve global risk visibility • Improve cash forecasting• Upgrade treasury technology• Become working capital efficient• Update investment guidelines

Preparing For The New (Post-Crisis) World

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For More Information, Contact or Follow Us

Anthony J. CarfangTony_Carfang@TreasuryStrategies.com

Cathryn R. GreggCathy_Gregg@TreasuryStrategies.com

www.TreasuryStrategies.com www.Twitter.com/TreasuryStrat312-443-0840

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