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August 19, 2009
Managing International Business
in Turbulent Times
Association For Financial Professionals Of Atlanta
Tod GordonManaging Director, J.P.Morgan Liquidity Solutions
Stephen PhelpsExecutive Director, J.P.Morgan Commercial Banking-International
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta2
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
What we’ll discuss today
• The business and economic environment
• Client reactions to a changing climate
• Five principles of liquidity management
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta3
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
In 2008-Unprecedented Times on a Global Scale…
Auction Rate Securities Remarketing Failures
Bear Stearns acquired by JPMorgan Chase
Some monoline insurers downgraded by Moody’s
Crude oil soars to $147/bbl
Mortgage lender
IndyMac collapses
Fed Funds Rate cut 125 bps during January to 3.00%
Fed Funds Rate cut 75 bps to 2.25%
Fed Funds Rate cut 25 bps to 2.00%
Northern Rock nationalized by the UK
JulyJuneMayAprMar AugFebJan
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta4
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
…and Change Happening at an Unprecedented Pace
Fannie Mae and Freddie Mac placed into conservatorship by U.S. Government Merrill Lynch agrees to be sold to Bank of America in an all stock deal for $29 a share
Lehman Brothers files for protection under Chapter 11 of the U.S. Bankruptcy Code after losing 94% of its market value this year
U.S. government seizes control of AIG
Wells Fargo acquires Wachovia
Citi receives protection on $306B of troubled assets
National Bureau of Statistics announces U.S. has been in recession since Dec 2007
TARP funds extended to GM, Chrysler and Ford
American Express converts to bank holding company
The Fed announces that Goldman Sachs and Morgan Stanley are to become bank holding companies, marking the end of an era
Reserve Primary Fund breaks the buck
Putnam Investments LLC closes its institutional Prime Money Market Fund
Lloyds TSB Group agrees to acquire HBOS
Ireland guarantees deposits and bank debt
U.S. Treasury to insure Money-Market Fund holdings
The Fed in conjunction with other central banks quadruples the amount of dollars available to banks to $247B
Iceland nationalizes 3 largest banks
Singapore (MAS) guarantees deposits
South Korea guarantees bank debt
Australia guarantees bank senior debt
China announces $586B stimulus program
Washington Mutual banking business acquired by JPMorgan Chase
DecNovOctSep
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta5
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
In Search of Yield, Did Investors Go Too Far?
Retu
rn
Risk
Traditional Money Market Investments
High-Risk Money Market Investments
Enhanced Money Market Funds (3c7)
Variable Rate Demand Notes
Auction Rate Securities
Commercial Paper
Asset-Backed Commercial Paper
Money Market Funds (2a7)
Money Market Deposit AccountDeposit Account
Repurchase Agreements
SIV Paper
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta6
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Reaction to Market Events: A Rush to Low Risk Investing
High-Risk Money Market Investments
“Low Risk” Money Market Investments
Traditional Money Market Investments
Auction Rate Securities
U.S. Treasuries
Asset-Backed Commercial Paper
Enhanced Money Market Funds (3c7)
Commercial Paper
Money Market Funds (2a7)
Variable Rate Demand Notes
Money Market Deposit AccountDeposit Account
Repurchase Agreements
Fed Funds
Offshore Time Deposit
Retu
rn
Risk
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta7
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
In 2009, clients are reevaluating liquidity management
processes in complex times…
Investment Management
Cash & Liquidity Management
Bala
nce
Sheet
Man
agem
ent
Govern
ance
& R
isk Man
ag
em
ent
Global Environment
Credit ContractionDebt & Capital Market AccessFX & Rate Market VolatilityLow Interest RatesEconomic Slowdown
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta8
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
…reexamining liquidity management priorities…
Investment Management
Cash & Liquidity Management
Bala
nce
Sheet
Man
agem
ent
Govern
ance
& R
isk Man
ag
em
ent
Cash is‘King’
Strengthis an Asset
ImproveFinancialRatios
Oversight& Control
CounterpartyRisk
Systemic &OperatingRisk
Control &Visibilityof Cash
Optimize &Self-fund
Consolidate& Integrate
CapitalSafety
AmendInvestmentCriteria
InvestmentTransparency
Global Environment
Credit ContractionDebt & Capital Market AccessFX & Rate Market VolatilityLow Interest RatesEconomic Slowdown
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta9
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
…and talking to us about the evolution of liquidity management
Investment Management
Cash & Liquidity Management
Bala
nce
Sheet
Man
agem
ent
Govern
ance
& R
isk Man
ag
em
ent
Cash is‘King’
Strengthis an Asset
ImproveFinancialRatios
Oversight& Control
CounterpartyRisk
Systemic &OperatingRisk
Control &Visibilityof Cash
Optimize &Self-fund
Consolidate& Integrate
CapitalSafety
AmendInvestmentCriteria
InvestmentTransparency
Global Environment
Credit ContractionDebt & Capital Market AccessFX & Rate Market VolatilityLow Interest RatesEconomic Slowdown
Investment Management
Cash & Liquidity Management
Bala
nce
Sheet
Man
agem
ent
Govern
ance
& R
isk Man
ag
em
ent
Cash is‘King’
Strengthis an Asset
ImproveFinancialRatios
Oversight& Control
CounterpartyRisk
Systemic &OperatingRisk
Control &Visibilityof Cash
Optimize &Self-fund
Consolidate& Integrate
CapitalSafety
AmendInvestmentCriteria
InvestmentTransparency
Global Environment
Credit ContractionDebt & Capital Market AccessFX & Rate Market VolatilityLow Interest RatesEconomic Slowdown
Client Themes• Risk Aversion, De-leverage• Liquidity Preservation• Collateral Upgrades• Active Risk Management
Client Themes• Review Counterparties• Review Investment Choice• Reset Investment Guidelines• Examine Operating Processes
Client Themes• Reduce Bank Providers• Simplify Cash Positions• Focus on Transparency• Increase Daily Control
Client Themes• Local Market Capabilities• Local Ccy & Bal. Sheet• Integrated Products• Focus on Credit Providers
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta10
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
The Five Principles of Liquidity Management
1.Forecast and segment cash needs
2.Establish appropriate investment guidelines
3.Select investments appropriate for cash segments
4.Establish and verify diversified contingent funding sources
5.Maximize liquidity transparency and efficiency across geographies and legal entities
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta11
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 1Forecast and Segment Liquidity Needs
Forecasting
• Time bucket sources and uses of cash flows
• By significant legal entity
• By geography
• Consider transfer limitations arising from currencies, time zones, local law, tax, regulatory and lending agreements
• Time buckets progress from daily to weekly to monthly
• Continually revise based on latest information
• Stress assumptions for idiosyncratic and market risks
• Identify key drivers and dependencies
• Update periodically or more frequently as the environment changes
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta12
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 1Forecast and Segment Liquidity Needs
• Forecasted excess balances
• Cash is forecasted for
a particular near-term purpose (e.g., business investment and stock repurchase)• Near-term liquidity is a secondary concern
• Unsuitable for volatile cash flows/portfolio, temporary cash
Segmenting Cash
• Intended to fund daily operating needs which may be subject to unforeseen volatility
• Local or regional investment decisions required on daily/weekly basis
Strategic Cash (Horizon—Longer-term)
Sta
ble
Vola
tile
70
40
60
90
0
10
50
80
20
30
Cash Cycle
Operating Cash(Horizon—Daily)
Reserve Cash(Horizon—Daily/Monthly)
TIME
BA
LA
NC
ES
Restricted Cash Pools
• Balances trapped in regulated jurisdictions
• Cash collateral• Adverse tax
consequences
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta13
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 2Establish Appropriate Investment Guidelines
• State objectives
• Specify roles and responsibilities
• List authorized investments
• Balance flexibility and control
• Identify risk tolerances (aggregate and individual)
• Tenors
• Counterparties
• Complexity
• Report investments and any guideline breaches
• Incorporate into firm-wide risk framework
• Update with evolution business model
Safety &Availability
Maturity/Duration
AuthorizedInvestments
CreditQuality
Dealer/Counterparty
Concentration/Diversification
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta14
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 3Select Investments for Each Cash Segment
TotalBalance SheetCash
Operating Cash
• Demand deposit accounts
• Demand deposit accounts with end-of-day sweeps
• Interest bearing demand deposit accounts (non-U.S.)
Pote
nti
al S
olu
tion
s
Strategic Cash
Reserve Cash Solutions plus
• Longer tenor customized separately managed accounts
• Fixed income securities2
• Bond funds2
Liq
uid
ity N
eed
• Money market deposit account
• AAA-rated domestic and international money market funds1
• Certificate/Time Deposits
• Short tenor customized separately managed accounts
Reserve Cash
• Demand deposit accounts
• Money market deposit account
• Private placement vehicles
• Customized separately managed accounts
• Fixed income securities2
• AAA-rated offshore USD and foreign currency funds
• Multi currency interest program
Restricted Cash
1 US registered J.P. Morgan Money Market Funds are distributed by J.P. Morgan Distribution Services, Inc.(“JPMDS”), which is an affiliate of JPMorgan Chase & Co. Affiliates of JPMorgan Chase & Co. receive fees for providing various services to the Funds. Treasury & Security Services and JPMorgan Asset Management activity may be offered by J.P. Morgan Institutional Investments, Inc.(“JPMII”) member FINRA/SIPC.
2 Fixed income securities products are not FDIC-insured, are not deposits of or guaranteed by JPMorgan Chase Bank, N.A., or any affiliates, and are subject to investment risks, including the possible loss of the principal amount invested. Fixed income products are offered through J.P. Morgan Securities Inc. (“JPMSI”), member FINRA/SIPC, a separately incorporated subsidiary of JPMorgan Chase & Co. and an affiliate of JPMorgan Chase Bank, N.A. JPMSI and/or its affiliates may hold a position or act as market maker in the financial instruments mentioned herein (or related instruments) and may also act as underwriter, placement agent, advisor or lender to an issuer of such financial instruments. JPMSI and/or its affiliates may participate or be financially interested in a primary or secondary distribution in the instruments (or related instruments) purchased by you.
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta15
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 4Establish and Diversify Contingent Funding Sources
View as a cost of business—similar to insurance
• Arrange excess contingent funding sources
• Secured and unsecured
• Committed and advised (periodically verify)
• Strive to avoid clauses and terms that restrict availability
• Access/tap cash reserves before needed
• Require counterparties to post collateral as necessary
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta16
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 5Maximize Liquidity Transparency and Efficiency
Centralize treasury management
• Implement information reporting
• better visibility and access to cash balances
• multibank reporting for up-streaming or investing cash
• Reduce administrative expenses
• Improve ability to review banking partners
• Establish contingency requirements
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta17
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Clients are Trending Towards a Global Cash Management Model
Strategic drivers:
• Centralize the application of investment policy
• Enhance visibility and control over internal sources of liquidity
• Minimize FX risks by rationalizing non-strategic currencies
Source: J.P. Morgan Asset Management Global Cash Management Survey 2008
2008 Global Corporate Survey
Globally 29%
Global Oversight/Regional Autonomy 29%
Regionally 19%
Global Oversight/Local Autonomy 12%
Local Autonomy 11%
Globally 45%
Global Oversight/Regional Autonomy 32%
Regionally 13%
Global Oversight/Local Autonomy 7%
Local Autonomy 3%
Now Future
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta18
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 5Maximize Liquidity Transparency and Efficiency
Optimize cash position across geographies and legal entities
• Streamline banking relationships
• Rationalize banks—one banking partner per country
• Rationalize accounts—one account per currency per legal entity
• Transition non-native accounts to a “friendly” location
• Reduce banking fees
• Simplify account administration
• Distribute business among credit banks
• Take advantage of SEPA Credit Transfers (SCTs)
• Cross-border EUR transfers
• Domestic non-urgent EUR transfers
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta19
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
Principle 5Maximize Liquidity Transparency and Efficiency
Centralize liquidity management through a cash concentration structure
• Reduce idle balances• Maximize funds available for investment/to pay down debt
• Realize savings though self-funding—reduces overdrafts and/or external funding requirements
• Enhance returns on concentrated cash—active investment of larger balances
• Centralize FX management • Reduce FX spreads
• Perform fewer, larger FX trades
• Implement a centralized credit facility based on parent company credit standing• Reduce overall borrowing costs
• Simplify overall process
• Consider alternative tax effective structures
Managing International Business In Turbulent Times
Association For Financial Professionals Of Atlanta20
© 2009 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC
“The time to repair the roof is when the sun is shining.”
John F. Kennedy