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New Realities in Managing LiquidityA Case Study
City and County of San Francisco
Hubert R. White, CFA, CTP
Investment Officer
City and County of San Francisco
City and County of San Francisco: Pool Overview
o Portfolio Size: ~$7.3 Billion (As Of January 31, 2016)
o Actively Managed To Participants’ Cash Flow Needs
o Investment Policy More Conservative Than California
State Investment CodeState Investment Code
o Must Have Sufficient Liquidity To Meet Six Months Of
Cash Flow Needs
o 4-5% Of Portfolio O/N, Roughly 55% Invested < 1 Year
o Rigorous Credit Review And Assessment Process
o Working from a short term and long term cash forecast
2
San Francisco: Portfolio Statistics
State & Local
Government
2.90%
Public Time Deposits
0.02%
Negotiable CDs
14.93%Commercial Paper
6.10%Medium Term Notes
9.34%
Money Market Funds
2.51%
Supranationals
3
U.S. Treasuries
6.80%
Federal Agencies
56.40%
Supranationals
1.02%
Asset Allocation by Market Value
For the month ended January 31, 2016
Average Daily Balance $7,389,504,231.20
Net Earnings $4,201,358
Earned Income Yield 0.669%
Weighted Average Maturity 425 days
San Francisco: Challenges in Managing
Liquidity – Bottom Line
o Increased demand for high quality short-term
Securities coupled with a shrinking supply
due to:
– Changes in 2(a)-7 and migration of Prime Money
Market Funds into Treasury and Agency Money Market Funds into Treasury and Agency Money
Market Funds
– Changes in bank regulations causing an increased
demand for high quality securities along with
increased balance sheet requirements
– Changes in debt issuance preferences
San Francisco: Investment Policy Changes
o Agency Fund Limitation: 70% ----> 85% ----> 100%
o Removed Issuer Limitation (65-70% Average)
o Maximum Duration, When Appropriate
o Adopt Specific Limits On Other Permitted Investments o Adopt Specific Limits On Other Permitted Investments
o Educate And Utilize Different Security Types
– Step-ups, floating rate structures
o Add More Resources , When Possible
o Reassign And Reorganize Investment Priorities
5
San Francisco: Short-Term Fixed Income
Market Liquidity Alternatives
oUS Agency Discount Notes
oCommercial Paper
oGovernment Money Market Funds
oRepurchase AgreementsoRepurchase Agreements
6
US Agency Discount Notes
Overview
o US Dollar-denominated unsecured general obligation with a
maturity less than 365 days
o Federal National Mortgage Association (Fannie Mae), Federal
Home Loan Mortgage Corp (Freddie Mac), Federal Farm Credit
Bank (Farm Credit), Federal Home Loan Bank (FHLB), Federal
Agricultural Mortgage Corp (Farmer Mac), Tennessee Valley Agricultural Mortgage Corp (Farmer Mac), Tennessee Valley
Authority (TVA), International Bank for Reconstruction and
Development (IBRD), International Finance Corporation (IFC),
Inter-American Development Bank (IADB)
o Not a mortgage-backed security – no collateral backing issuance
o Quoted in discount price (Same as T-Bills)
o Date flexibility – maturity date can usually be issued for any
business day
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US Agency Discount Notes
Credit
o Agency and GSE debt = “effective guarantee”
o Agency debt almost = treasury risk
o Low default risko Low default risk
o Direct line of credit into the Treasury
8
US Agency Discount Notes
Liquidity
oHigh Degree of Liquidity
oSize of programoSize of program
oHow they trade – yield comparison
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Discount Note Outstanding in Billions
300
350
400
450
500
Bil
lio
ns
as of 12/31/2015
0
50
100
150
200
250
Federal Home
Loan Bank
(Home Loan)
Federal Home
Loan Mortgage
Corp (Freddie
Mac)
Federal
National
Mortgage
Association
(Fannie Mae)
Federal Farm
Credit Bank
(Farm Credit)
Int'l Bank for
Reconstruction
& Dev (World
Bank)
Farmer Mac International
Finance
Corporation
Inter-American
Development
Bank
U.S. Agencies
Bil
lio
ns
10
U.S. Agency Debt Outstanding
500,000
600,000
700,000
800,000
900,000
US
Do
lla
rs
Fannie Mae
Freddie Mac
0
100,000
200,000
300,000
400,000
500,000
2006 2007 2008 2009 2010 2011 2012 2013 2014
US
Do
lla
rs
Freddie Mac
Farm Credit
FHLB
Farmer Mac
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Commercial Paper
oShort-Term Unsecured promissory note
oMaturities range from 1 Day to 270 Days
oMinimum credit rating must be P1/A-1/F-1
(from at least two of the NRSROs)
o Independent credit analysis performedo Independent credit analysis performed
oApproved Issuer list
oAsset-backed Commercial Paper
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Commercial Paper
13
Commercial Paper
14
Government Money Market Funds
oUS Treasury and Government Money Market
Funds are not subject to Floating NAVs,
Liquidity Fees, or Redemption Gates
o Institutional Class Shareso Institutional Class Shares
oThree different Funds
oActively monitor Fund portfolios
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Government Money Market Funds
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Government Money Market Funds
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Repurchase Agreements
oSecured loan with collateral with an
approved counterparty
oCredit Analysis performed on potential
counterparty
oDeliverable versus Tri-PartyoDeliverable versus Tri-Party
oCustomized to fit needs – Collateral, Term
o Involves signing a Master Repurchase
Agreement and Custodial Undertaking
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Repurchase Agreements
19
Additional Strategies
o Established Due Diligence Process To Monitor Collateral And
Holdings
o Increase Approved Names And Ongoing Credit Monitoring
Process
o Look to Short-term Taxable Muni Market for Opportunities o Look to Short-term Taxable Muni Market for Opportunities
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