Impact of Financial Regulation on Corporate Treasury Presented By: Anthony J Carfang, Partner Cathryn R. Gregg, Partner To: National Association of Corporate Treasurers September 9, 2009

Agenda Overview Regulatory changes impacting treasurers Two specific items of concern Preparing for the new (post-crisis) world

Overview

Regulatory changes impacting treasurers

Two specific items of concern

Preparing for the new (post-crisis) world

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

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

Regulatory Change Impacting Treasurers 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, …

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 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

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

Regulatory Change Impacting Treasurers 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

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 Commercial Banks Investors & Depositors Borrowers 99% 99% Banking Pre 1965 High concentration risk Lack of transparency

Banking Pre 1965

High concentration risk

Lack of transparency

Regulatory Change Impacting Treasurers Modern Money Markets Efficient High transparency Diversified risk portfolio Commercial Banks Investors & Depositors Borrowers 15%-20% 80%-85% Securities Dealers Money Market Funds Direct Instruments Markets (CP, Repo) 15%-20% 80%-85%

Modern Money Markets

Efficient

High transparency

Diversified risk portfolio

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

Future Environment

Features unknown

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

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

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

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

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

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

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

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

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

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

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

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

For More Information, Contact or Follow Us Anthony J. Carfang [email_address] Cathryn R. Gregg [email_address] www.TreasuryStrategies.com www.Twitter.com/TreasuryStrat 3 12-443-0840

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