eSecLending’s Annual Securities Financing Conference · Fed Policy December rate hike barring an exogenous shock to the economy. Base case for three rate hikes in 2018 Dual mandate

eSecLending’s Annual Securities Financing Conference 2017

eSecLending’s Annual

Securities Financing Conference

Wednesday, October 4, 2017

John F. Kennedy Presidential Library and Museum, Boston


Equity Lending: Demand-Side Perspective on the Lending Market

Phil Prince, Pine River Capital Management

Michael Slomienski, Goldman Sachs

Brian Cahalan, BNP Paribas

Jim Moroney, eSecLending


Introduction to the JFK

Presidential Library

Brooke Gillman, eSecLending


Regulatory Rollback: How Changes to the Components of Financial Services Reform

are Impacting Securities Finance

Greg Lyons, Debevoise & Plimpton

eSecLending’s 2017 Annual

Securities Financing Conference

October 4, 2017

Gregory J. Lyons

Regulatory Rollback: How Changes to

the Components of Financial Services

Reform are Impacting Securities

Finance

6

State of the

Banking Sector

State of the Banking Sector

• In a reversal, EU banks now have higher risk-based capital ratios than U.S. banks.

– Higher capital ratios in EU driven primarily by decreases in RWAs.

– Higher capital ratios in US driven primarily by increases in capital.

7

Banks Highly Capitalized

*Group 1 Banks generally refers to the largest banks in each country that

are internationally active.


• Leverage ratios are lower in Europe compared to the Americas and the rest of the world.

8

Leverage Ratio Remains an Issue


• NSFR compliance remains an issue in both U.S. and EU.

9

LCR/NSFR Compliance

10

Where We’re

Going

U.S. Treasury Core Principles Report

• Core Recommendations

– Changes to Comprehensive Capital Analysis and Review (CCAR), Dodd-Frank Act stress testing (DFAST) and resolution planning.

» Increasing transparency around CCAR processes.

» Eliminating mid-year DFAST.

» Moving CCAR and resolution planning to a 2 year cycle.

– Delay of pending rules (NSFR, FRTB).

– Weakening of the Volcker Rule.

– Modifications to the supplementary leverage ratio (SLR) and the liquidity coverage ratio (LCR).

– Re-calibrating the global systemically important bank holding company (G-SIB) surcharge, total loss-absorbing capacity (TLAC) and the enhanced SLR(eSLR).

– Enhancing Risk-Sensitivity of standardized approaches (risk-based capital, SCCL).

11

Part One: Banks and Credit Unions (June 12, 2017)

State of Regulations

12

International Divergence in Implementation

Regulation U.S. EU Canada

Capital Floor (e.g., Basel IV style).

Implemented via Collins Amendment.

Delayed indefinitely at Basel Committee.

Delayed indefinitely at Basel Committee.

Market Risk Capital (FRTB)

U.S. regulators still evaluating.*

Adopted by European Commission; EU Parliament and European Council considering.

Beginning of regulatory reporting delayed to Q1-2021.**

Leverage Ratio Final Rule adopted. See above. Final Rule adopted.

Net Stable Funding Ratio (NSFR)

Proposed; implementation likely delayed.*

See above. Implementation delayed to 2019.**

Single-Counterparty Credit Limits (SCCL)

Proposed; implementation likely delayed.

See above. Implementation planned for 2019.

SA-CCR (Derivatives) U.S. regulators still evaluating.

See above. Implementation delayed to 2018.**

Implemented

Implementation More Likely

Implementation Status Unclear

Implementation Unlikely

**OSFI has suggested that its implementation would depend on the

timing of key foreign market implementation.

*The U.S. Treasury Core Principles Report recommends a delay in

implementation.

State of Regulations

• Disharmony. Uneven global recovery and mixed signals from the United States cast doubt onto the future of the Basel “project” (and similar cross-jurisdictional initiatives, e.g., cross-border initiatives).

• Case Study (NSFR). Uneven implementation across major jurisdictions.

– EU. Somewhat weaker form of Basel NSFR proposed. Implementation uncertain.

– U.S. NSFR proposed; implementation likely will depend on EU implementation.

– Japan. Until recently, the JFSA was planning on implementing January 1, 2018. Status unclear.

– Hong Kong SAR. “The HKMA will implement the NSFR … from January 2018.” (Risk.net 9/25/2017).

• Consequences. Disharmony could lead to undesirable results.

– Equivalence determinations under foreign regimes could be threatened.

– Uneven playing field across jurisdictions (e.g., given U.S. gold-plating).

13

No Longer Race to the Top

Final U.S. QFC Rules

• September 1, 2017. Last month, the Board of Governors of the Federal Reserve System finalized its rule imposing restrictions on the qualified financial contracts of U.S. G-SIBsand their affiliates and the U.S. operations of foreign G-SIBs (“Covered Entities”).

• QFCs. The rule will require amendments to many “qualified financial contracts.” The term includes:

– Borrower Agreements (MSLAs, GMSLAs, bespoke agreements);

– SLAAs that have borrower default indemnifications (SLAAs)

– Service agreements that have QFC-features (e.g., custody agreements that provide for intraday credit to settle securities transactions).

• Key Exceptions. Certain categories of transactions are excluded.

– Out-of-Scope QFCs. Agreements that do not have default rights that can be exercised against a G-SIB or that have transfer restrictions that would prevent a transfer from the G-SIB in a resolution context are not covered.

– U.S. Nexus Exception. Agreements governed by U.S. law where all the non-Covered Entity parties are based in the U.S.

14

Amendments Required to Sec. Lending Agreements

15

Trump

Administration

Personnel is Policy

Federal Reserve Board – Presidential Appointments

Other Notable

Positions:

16

Vice Chairman

Fischer(Resigning as of

10/13/17)

Chair Yellen

Term Expires: February 2, 2018

(as Chair); January 31, 2024

(as Governor)

Vice Chairman of Supervision

(Randy Quarles -Confirmation Pending)

(Open)

Governor*(Open)

Governor Powell

Term Expires:January 31, 2028

Governor Brainard

Term Expires:January 31, 2028

Governor Tarullo

(resigned)(Open)

General Counsel Mark

Van Der Weide

“Personnel is policy. And changing the personnel will change the policy, will change the interpretation. And we think that is very important” –Gary Cohn, Director of the National Economic Council (April 20, 2017)Deputy Director in the

Division of Supervision and Regulation

Timothy P. Clark(retiring)

*One member of the Board must have primary experience

working in or supervising community banks. 12 U.S.C. § 241.

Federal Reserve Leadership

Contact Information

17

Gregory J. LyonsPartner, Head of Financial Institutions Group

Debevoise & Plimpton LLP

Telephone: 212-909-6566

Email: [email protected]


Short-Term Cash Markets: Current State

Rob Zambarano CFA, Guggenheim

Thomas Kolimago, BlackRock

Phil Picariello, eSecLending

Front End Update

Guggenheim Securities, LLC

October 2017

Overview

Update on the Fed policy, bill supply, RRP facility, Repo markets, and Alternative Reference Rate

Committee (ARRC)

▪ Fed policy

– Expect December rate hike

– Transitory inflation to get boost from hurricane rebuilding efforts

– Balance sheet runoff to have minimal impact in short term

▪ Bill supply

– Debt ceiling deal pushes X-date to mid-March

– Small window for TGA increase results in minimal increase in bill supply ($30-40 billion)

– Post March debt ceiling resolution TGA to rise to ~$350 billion ($150-200 billion in new bill supply)

▪ Balance Sheet

– Composition of Treasuries reinvestments shifts to quarterly refunding dates in mid-2018

– MBS reinvestments will be scaled back by the runoff cap levels

– High hurdle to change runoff policy

▪ RRP

– Remain active policy tool during balance sheet runoff

▪ ARRC

– Broad Treasury financing rate is the preferred reference rate

20Guggenheim Securities, LLC

Fed Policy

December rate hike barring an exogenous shock to the economy. Base case for three rate hikes in 2018

▪ Dual mandate continues to get airtime but financial conditions factor in policy debate

– Labor market continues to absorb slack (average pace of 175k above required 120k pace)

– Wage inflation will signal tightening labor markets

– Fed’s version of “gradual” pace to remove policy once a quarter

▪ Inflation

– Ongoing debate on structural vs cyclical forces impacting inflation

– Recent CPI reports reflect potential uptrend

– Market based measures of inflation trending higher

– Post hurricane demand supportive of cyclical firming

▪ Financial conditions

– Continue to ease in the face of three rate hikes

– March rate hike a reaction to lack of tightening following December

– Pose risk of contributing to asset bubbles and potentially disrupting current economic expansion

– Unintended consequences of prolonged phase of loose monetary policy


Treasury General Account (TGA)

Source: FRED, Amounts shown in dollars (bns).

Treasury’s goal is to maintain level of TGA high enough to facilitate two weeks worth of outflows –

approximately $350 billion.

▪ Debt ceiling agreement uses September 8th as baseline for TGA balance $70 billion

– We expect little change to bill supply with any changes coming in 4-week and Cash Management Bills (CMBs)

▪ December 15th TGA balance must revert back to September 8th balance

– Constrains the ability to increase bill supply for three months without disrupting bill market functioning


0

50

100

150

200

250

300

350

400

450

500

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Bill Supply

Source: Treasury, Amounts shown in dollars (bns).

Treasury plans to absorb SOMA runoff initially with increases in bill supply. Expect more after next

debt ceiling.

▪ Money fund reform has increased demand and resulted in structural bill supply shortfall

– Bills around quarter-end regularly trade through the RRP

▪ Bills as a percentage of total debt outstanding (currently 12-13%) well below the historical level of 20-23%

– Increasing percentage of bills to historical norms would result in an additional $1.5 trillion in bill supply


5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

1,200

1,300

1,400

1,500

1,600

1,700

1,800

1,900

2,000

Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Bills Bills % Total

SOMA Shrinkage: Treasury Maturities

Source: FRBNY, Amounts shown in dollars (bns).

▪ Monthly maturities shift to quarterly refunding dates after mid-2018

▪ SOMA will continue to hold on-the-run issues, reducing auction-cycle specialness concerns


0

10

20

30

40

50

60

70

80

Oct-17 May-18 Dec-18 Jul-19 Feb-20 Sep-20 Apr-21 Nov-21 Jun-22

Maturities Runoff Cap

SOMA Reinvestments: Treasuries


▪ Treasury will have to incrementally increase coupon sizes to compensate for reduced SOMA bids in

future auctions

▪ Plenty of space in intermediate coupons to absorb reduced SOMA demand for next several years


0

5

10

15

20

25

30

35

40

45

Oct-17 May-18 Dec-18 Jul-19 Feb-20 Sep-20 Apr-21 Nov-21 Jun-22

Net Reinvest

SOMA: Projected Treasury Runoff


▪ We anticipate a business cycle slowdown in the first half of 2020 that results in a pause of balance sheet runoff

▪ Approximately $1.1 trillion in balance sheet runoff ($620 Treasuries, $440 Agency MBS)


0

100

200

300

400

500

600

700

800

900

1,000

Oct-17 Jun-18 Feb-19 Oct-19 Jun-20 Feb-21 Oct-21 Jun-22

Cummulative Runoff

Reverse Repo Facility

Source: FRBNY, Implementing Monetary Policy: Perspective from the Open Market Trading Desk.

Fed is comfortable with the current framework of IOER – RRP corridor. After several rate hikes, the fed

funds effective has printed within the target range.

▪ The floor system has been effective for accounts ineligible for IOR

– Most activity in fed funds market is from banks borrowing from nonbanks to earn IOER

▪ RRP acted as a temporary shock absorber during 2a-7 money fund reform

– Reflected demand for safe overnight investments by government funds


0.00

0.20

0.40

0.60

0.80

1.00

1.20

0

50

100

150

200

250

300

350

400

450

500

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

# Counterparties RRP Rate

Reverse Repo Facility – Outlook

Source: Board of Governors of the Federal Reserve System H.4.1 Statistical Release. April 26, 2017.


Federal Reserve Balance Sheet

(USD, billions)

Assets Liabilities

Securities held outright 4246 Federal Reserve notes 1496

U.S. Treasury securities 2465 Deposits 2564

Agency debt 12 Reserve balances (deposits held by DIs) 2201

Agency MBS 1769 Treasury General Account 271

Repurchase agreements 0 Other 87

Loans* * Foreign official 5

Other assets 224 Reverse repurchase agreements 363

Total assets 4470 Foreign official and international accounts 241

Others 122

Other liabilities 6

Total liabilities 4429

Capital 41

Total liabilities and capital 4470

*Less than $1 billion

Overnight Rates

Source: FRBNY, DTCC.

▪ Corridor has been largely successful in maintaining upper and lower bounds around the effective rate

▪ Floor does get “leaky” via bill rates mostly by non-RRP eligible cash

▪ RRP should remain active tool if floor is part of the long-run policy framework


0

20

40

60

80

100

120

140

9/1/2015 12/1/2015 3/1/2016 6/1/2016 9/1/2016 12/1/2016 3/1/2017 6/1/2017

Fed Funds Effective IOER DTCC GCF Repo Index (Tsy) RRP

Repo Volumes Gradually Increase


▪ Collateral providers from less regulatory constrained market participants such as smaller dealers, hedge funds, and

insurance companies are supportive of repo volume increases


0

200

400

600

800

1000

May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16

Agency (other than MBS) Agency MBS Treasury

Money Fund Repo

Source: Cranes, (bns).

▪ Money funds increased repo holdings ahead of fund reform last year

▪ Allocation to repo continues to increase following March rate hike

▪ Majority allocated to overnight repo


15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

500.0

600.0

700.0

800.0

900.0

1,000.0

Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17

Fund Reform Repo Holdings Repo % Total Holdings

Tri-Party


▪ Volumes tend to decline ahead of each month-end and quarter-end as dealers net down their balance sheets


-100

100

300

500

700

900

1100

May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17


GCF Repo


▪ GCF volumes tend to increase as dealers fund via interdealer market (GCF)

▪ Represents part of the other side of the Tri-party unwind


0

50

100

150

200

250

May-11 May-12 May-13 May-14 May-15 May-16

Overnight GCF Repo


0

100

200

300

400

500

600

May-11 May-12 May-13 May-14 May-15 May-16

Term GCF Repo


Alternative Reference Rate Committee Update (ARRC)

Source: FRBNY *June 28 date pending as of 6/13/17.

From the August ARRC meeting: The ARRC discussed how uncertainty about LIBOR’s future after 2021

would affect the ARRC’s transition plans, given that the paced transition plan assumed that LIBOR would

continue to be available for legacy contracts.

▪ Potential publication of three overnight Treasury general collateral (GC) repurchase benchmark rates:

1. Narrow: Tri-party transactions (excluding GCF Repo and Federal Reserve transactions)

2. Broad general collateral rate: Tri-party + GCF Repo (still excluding Federal Reserve transactions)

3. Broad Treasury financing rate*: Tri-party + GCF Repo + Trimmed FICC cleared bilateral transactions

▪ All three rates would be calculated as volume-weighted medians (similar to EFFR and OBFR)

▪ Goal is to provide more transparency and efficiency by improving the quality and breadth of repo market

information to the public

▪ ARRC may need to expand its planning to address rate transitions in legacy contracts in addition to derivatives

in its transition plans for new trading activity

– Next steps include subgroups to develop and refine implementation plans

▪ FRBNY hosting a roundtable on November 2nd


*ARRC’s preferred reference rate.

Disclosures and Legal Notice

Important Information

This material was prepared by Guggenheim Securities, LLC (“Guggenheim”) for use by sophisticated

institutional investors only. The material was not prepared by a research analyst or the firm’s Research

Department and is not fixed income research. The views expressed herein are those of the author.

This material should not be construed as a recommendation or advice or an offer or solicitation by

Guggenheim with respect to the purchase or sale of any investment.

Any financial instruments mentioned herein are speculative in nature and may involve risk to principal and

interest. Any prices or levels shown are either historical or purely indicative.

Guggenheim’s trading desk may have positions in the securities mentioned herein and may have acquired

such positions at prices no longer available. This material is not independent of the proprietary interests of

Guggenheim, which interests may conflict with your own. The author of this material supports the firm’s

trading desk, and his compensation may be tied to the profitability of the trading desk.

While Guggenheim believes that the sources of information provided herein are reliable, it does not

represent or warrant the accuracy or completeness of the information and undertakes no obligation to

provide additional, updated or supplemental information. Any forward-looking statements made herein are

only valid as of the date they are made. Past performance is not indicative of future results, and nothing

herein should be interpreted as a promise of future performance.

Guggenheim, its officers, employees, affiliates and partners shall not be liable to any person in any way for

any losses, costs or claims arising from your reliance on this material.

Guggenheim has prepared this material for your informational purposes and your use only. The material

should not be provided to any person in a jurisdiction where its provision or use would be contrary to local

laws, rules or regulations. The material is not to be reproduced or redistributed to any other person outside

of your organization without the prior written consent of Guggenheim.

Copyright © 2017 by Guggenheim Securities, LLC.


Please contact [email protected]

with any questions.


Thank You.

mailto:[email protected]

eSecLending Securities Financing

Conference 2017

Thomas Kolimago, CFA, Managing Director, Cash

Management

FOR INSTITUTIONAL/PROFESSIONAL/QUALIFIED INVESTORS ONLY– NOT FOR FURTHER DISTRIBUTION

TLS0917U-266060-793464

Federal Reserve Monetary Policy

Target Federal Funds rate as reported in the Federal Open Market Committee

Summary of Economic Projections

Source: Bloomberg, Federal Reserve Note: Each dot represents the median of the member projections. As of September 30, 2017

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

7/2017 1/2018 8/2018 3/2019 9/2019

Rate

(%

)

Forward Rate 9/30 Jun 17 Median Sep 17 Median

FOR INSTITUTIONAL/PROFESSIONAL/QUALIFIED INVESTORS ONLY– NOT FOR FURTHER DISTRIBUTIONTLS0917U-266060-793464

38

Factors impacting supply in the short-term cash markets

Negative impact Description

Basel III Liquidity Coverage Ratio (LCR) Banks are required to hold high quality liquid assets to cover the amount of

bank liabilities that might run in a 30-day stressed period.

Compliance date: January 1, 2017

Basel III Net Stable Funding Ratio (NSFR) Banks are required to hold more deposits and reduce short-term wholesale

funding, making them fund their activities with more stable sources of

funding. Compliance date: January 1, 2018

Supplementary Leverage Ratio (SLR) Raises the cost of low margin business and low-risk assets.


U.S. Operations of foreign banks (application of

Dodd Frank Section 165)

U.S. operations of foreign banks with assets exceeding $50 billion are

required to establish a separately capitalized intermediate holding company

for their subsidiary and will be required to meet the risk-based capital,

leverage capital and liquidity standards similar to U.S. banks.


Positive Impact Description

NY Federal Reserve Reverse Repurchase

Program

Allows approved counterparties to invest cash with the Federal Reserve

Bank of New York in exchange for securities

Source: BlackRock

The opinions expressed are as of July 2017 and are subject to change at any time due to changes in market or economic conditions.

39FOR INSTITUTIONAL/PROFESSIONAL/QUALIFIED INVESTORS ONLY– NOT FOR FURTHER DISTRIBUTION

TLS0917U-266060-793464

U.S. Repurchase Agreement (Repo) Market

Source: New York Federal Reserve. As of August 31, 2017

Primary Overnight Dealer Repo Outstanding: June 2014 to August 2017


-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

6/2

014

8/2

014

10

/201

4

12

/201

4

2/2

015

4/2

015

6/2

015

8/2

015

10

/201

5

12

/201

5

2/2

016

4/2

016

6/2

016

8/2

016

10

/201

6

12

/201

6

2/2

017

4/2

017

6/2

017

8/2

017

Mill

ions (

$)

Dealer Repo Outstanding (mm) Fed Repo Outstanding (mm)

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40

Tax and Accounting Impact:

• The U.S. Department of the Treasury and the Internal Revenue

Service (IRS) issued final regulations permitting the use of simplified

tax accounting for Floating Net Asset Value (FNAV) MMFs.

• The Securities and Exchange Commission (SEC), which has

authority to set accounting standards, clarified that FNAV MMFs will

be treated as cash equivalents.

• The IRS issued a revenue procedure that exempts shareholders of

FNAV MMFs from the wash sale rule.

Summary of Changes

Here’s what you need to know

What are the structural impacts to money market funds?

Prime Institutional

Funds

Municipal

Institutional Funds

Prime Retail Funds Municipal Retail

Funds

Government /

Treasury Funds

Floating Net Asset

Value (FNAV) ✓ ✓ No No No

Liquidity Fees ✓ ✓ ✓ ✓ No

Redemption Gate ✓ ✓ ✓ ✓ No

Stable NAV No No ✓ ✓ ✓

Other key changes

to Rule 2a-7

• Enhanced stress testing and diversification.

• Increased transparency to daily market-based NAV, weekly liquid asset levels and net investor flows.

• Basis point rounding for FNAV funds (to the fourth decimal place).

Information provided as of April 2017

Other Structural Changes

• Government MMFs: Reduction of non-government fund holdings

from 20% to 0.5%.

• Retail MMFs: Funds that have policies and procedures reasonably

designed to limit all beneficial owners to natural persons.

• Municipal MMFs: Reduction of the 25% diversification basket to a

single 15%.The 25% bucket has been removed for all other Funds.


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5

10

15

20

25

30

35

40

45

50

55

9/3

0/2

014

10

/31

/201

4

11

/30

/201

4

12

/31

/201

4

1/3

1/2

015

2/2

8/2

015

3/3

1/2

015

4/3

0/2

015

5/3

1/2

015

6/3

0/2

015

7/3

1/2

015

8/3

1/2

015

9/3

0/2

015

10

/31

/201

5

11

/30

/201

5

12

/31

/201

5

1/3

1/2

016

2/2

9/2

016

3/3

1/2

016

4/3

0/2

016

5/3

1/2

016

6/3

0/2

016

7/3

1/2

016

8/3

1/2

016

9/3

0/2

016

10

/31

/201

6

11

/30

/201

6

12

/31

/201

6

1/3

1/2

017

2/2

8/2

017

3/3

1/2

017

4/3

0/2

017

5/3

1/2

017

6/3

0/2

017

7/3

1/2

017

8/3

1/2

017

Weig

hte

d A

vera

ge L

ife (

Days)

Prime Institutional Prime Retail

Major Movement in Prime Weighted Average Maturities

42

Source iMoneyNet |As of August 31, 2017

Weighted Average Maturities of Prime Funds (September 2014 to August 2017)


Historical Mark to Market Net Asset Values

Sources: Bloomberg and Federal Reserve As of August 31, 2017

Representative Prime Institutional Fund NAV (June 2015 to August 2017)

43

This representative account was selected as a sample of one prime institutional fund and is provided for illustrative purposes only.

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

1.10%

1.20%

1.30%

$0.9970000

$0.9975000

$0.9980000

$0.9985000

$0.9990000

$0.9995000

$1.0000000

$1.0005000

$1.0010000

$1.0015000

$1.0020000

$1.0025000

Representative Prime Institutional Fund (Left Axis) Fed Funds Target Rate - Upper Bound (Right Axis)

Ne

t A

sse

t V

alu

eF

ed

Fu

nd

s T

arg

et R

ate


Spreads on Credit Instruments

Source: Bloomberg. As of August 31, 2017

LIBOR-OIS Has Tightened Post 2a-7 Reform (May 2016 to June 2017)

44

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

Sp

rea

d

3 Month LIBOR (mL) - OIS (%)

3mL - OIS (%)


Historical Yield Spread

Representative Institutional Prime/Government Historical Yield Spread (April 2015 to August 2017)

Sources: iMoneyNet and Federal Reserve. As of August 31, 2017

Historical yields are not indicative of future levels.


0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.00

0.20

0.40

0.60

0.80

1.00

1.20

4/2015 6/2015 8/2015 10/2015 12/2015 2/2016 4/2016 6/2016 8/2016 10/2016 12/2016 2/2017 4/2017 6/2017 8/2017

Spre

ad (%

)Yie

ld (

%)

Average Institutional Government Fund Monthly Annualized Yield (Left Axis)

Average Institutional Prime Fund Monthly Net Annualized Yield (Left Axis)

Spread (Right Axis)

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45

European MMF Reform | Summary of Structural changes

46

What are the structural impacts to European money market funds?

Short Term Money Market FundsStandard Money Market

Funds

Government

(CNAV)

Low Volatility NAV

(LVNAV)

Variable Net Asset Value

(VNAV)

Standard Variable Net

Asset Value (VNAV)

Stable NAV ✓ * X X

Floating Net Asset

Value (FNAV) X * ✓ ✓

Liquidity Fees

** ***** ***

Redemption Gate *** ***

Reference

* The Fund can price to 2 decimal places if the full mark-to-market price does not deviate from 1.00 by more than

20bps, essentially rounding up to 1.00. If the 20bps tolerance is breached the fund will price to 4 decimal places

using the full mark-to-market NAV, essentially rounding down to the nearest basis point

** If the weekly maturing assets of the fund fall below 30% the manager will inform the board who has the discretion

to implement fees and/or gates as deemed appropriate. If the weekly maturing assets of the fund fall below 10% the

board must decide which fees and/or gates they deem appropriate to implement

*** Although fees and or gates are not prescribed for VNAV funds as part of the European Money Market Fund

Reform text, they will be required to be included within funds prospectus under UCITS and AIFMD rules, as they

currently are.

Source: Source: BlackRock’s interpretation of European Money Market Regulation as finalised via a political agreement between the European Parliament, Council and

As of July, 2017


Source: Moody’s As of November 2016

Total Cash Holdings by U.S.

Non-Financial Companies

$0

$500

$1,000

$1,500

$2,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Moody’s Investor Service & Market Watch*As of November 2016

Companies with the most cash

0 100 200 300

Facebook

General Motors

Amgen

Johnson & Johnson

Cisco

Oracle

Alphabet/Google

Berkshire Hathaway

Microsoft

Apple

Largest Cash Holdings of U.S. Corporations($

Bill

ion

s)

$742

$1,769The top 10 companies by cash and cash

equivalents held* (in billions):

$253

$115

$86

$85

$68

$67

$38

$38

$26

$22

Company2015

% Cash Offshore

2016

% Cash Offshore

Apple 93% 91%

Microsoft 94% 98%

Cisco 94% 93%

Alphabet 59% 58%

Oracle 87% 77%

Top Five U.S. Companies with

Cash Overseas†

Source: Moody’s Investor Service. † As of November 2016

47

References to securities are shown for illustration only and should not be construed as investment advice or a recommendation.


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