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Structural - FDIC Insured Deposits
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Structural - FDIC Insured Deposits

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  • 1. FDIC-Insured Deposits
  • 2. Agenda Investment opportunity  Full faith and credit US government guarantee  Yields significantly higher than Treasuries  Market dynamics that have precluded institutional arbitrage Structural platform  Direct and wholesale sourcing  Automated screening and evaluation  Crossing Fiduciary agent  Regulatory advantage over product model  Comparison to CDARS 1
  • 3. FDIC is backed by full faith and credit federal guarantee  Guarantees each depositor up to $250,000 of principal and accrued interest per institution – Guarantee applies across depositor types: individuals and entities, US citizens and foreign nationals – Multiple accounts with same registered owner at same institution are aggregated for purpose of insurance limit. Entities formed for the purpose of expanding the insurance of a common owner are likewise aggregated. – Institution is determined by a unique FDIC identifier; different bank branches are not typically considered separate institutions, but reference to FDIC number is required to confirm  Full faith and credit backing affirmed in statute and case law – Competitive Equality Banking Act of 1987: “it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depositor institutions are backed by the full faith and credit of the United States.”1 – 1988 United States District Court for the District of Columbia ruling (Massachusetts Credit Union Share Ins. Corp. v. NCUA): “The Court concludes that it was the clear and unambiguous intention of the Congress to guarantee the resources of federal depository institutions with the full faith and credit of the United States. Having explicitly done so, it need not either authorize or appropriate funds for this purpose until it deems it necessary.” 2 – Backing most recently affirmed in Federal Deposit Insurance Reform Conforming Amendments Act of 2005, requiring all institutions to display signage stating that, “insured deposits are backed by the full faith and credit of the United States Government.” 3  FDIC insurance is independent of whether an instrument was issued in a denomination below FDIC Insurance limits (i.e., jumbo CDs subsequently broken up and sold enjoy full protection) – FDIC insurance assessments are paid on all deposits, regardless of account or instrument size – Insurance applies so long as current ownership is within stated limits – Accounts custodied by intermediary agents are not aggregated for FDIC insurance purposes – “Funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian or nominee, shall be insured to the same extent as if deposited in the name of the principal(s).” 41 Public Law 100-86, Title IX2 693 F.Supp. 1225 (D.D.C. 1988)3 Public Law 109-1734 12 C.F.R. § 330.7 2
  • 4. Comparison of non-Treasury instruments with explicit guarantee Explicitly FDIC-insured FDIC-insured guaranteed bank notes deposits agenciesExample issue PEFCO Citibank N.A. Bridgeview Bank 5/15/2012 5/7/2012 5/15/2012Incremental yieldvs. Treasuries1 ~11 ~12 60+basis pointsLimits on arbitrageEffort Moderate Low High  Sourcing  Sourcing  Small-lot purchase  Insurance trackingLiquidity High High Low 1 Indicative yields as of December 31, 2010 3
  • 5. Hurdles to institutional investment in FDIC-insured deposits  Advantage eroded by intermediaries: Yield – Wholesale and retail distribution costs (new issue) – Inter-dealer and retail markups (secondary market term deposits)  Per entity/per bank insurance limit of $250,000 (principal + accrued interest) Capacity  Challenge of sourcing from wide array of issuing banks  Instrument-by-instrument analysis of economics  Screening for: Effort – Duplicative FDIC certificate numbers – Client-specified parameters (e.g., term, excluded banks)  Human error in manual implementation Risk of error  Unlike names associated with same FDIC certificate Liquidity  Bid-ask reflects small size of each holding (term deposits) 4
  • 6. Structural sourcing avoids markups embedded in retail yield Illustrative supply chain for 12-month new-issue term deposit, 1.00% coupon Structural sourcing Price Wholesale Retail Issuing bank Originator Purchaser 99.65 99.75 distributors 99.83 distributors 100.00Yield 1.35% 1.25% 1.17% 1.00%  Negotiate terms  Distribute to brokers,  Sell through full  Register CUSIP, other sales channels service and DTC eligibility discount brokers 5
  • 7. Structural manages two types of deposit instruments Money market TermYield Current yield 1.05% - 0.25% Varies by instrument term Term Daily reset Fixed for instrument termLiquidity Redemption Every Thursday 1 None prior to maturity Tradability - T+3 settlementInstrument form MMDA deposit DTC eligible securityCustody Huntington Bank Client-specified custodianCapacity [In process] >$100 million - Hinges on client parameters 1 Structural only guarantees clients’ ability to redeem each Thursday. In practice, clients can often redeem on other days as well. If Thursday of a given week is not a business day, guaranteed redemption is on Friday. 6
  • 8. Structural’s systematized platform for portfolio construction New Secondary issues market Crossing  Source deposits from multiple channels, avoiding fees embedded by intermediaries – New issues sourced directly from banks and originators Crossing – Secondary market inventory sourced from proprietary network of wholesale dealers and wirehouses Sourcing – Crossing of client sales to benefit both buyer and seller  Ensure entity exposure by FDIC certificate number is within applicable limits  Apply client-specific restrictions, including: Screening – Issuer – Instrument term  MMDA: optimize yield by evaluating daily all available rates Execution  Term: capture best values through automated parsing and evaluation  Reinvest (roll) according to client parameters Liquidity  Provide liquidity as required management – Daily reallocation (crossing) and weekly redemption of MMDA deposits – Crossing or sale of term deposits at best wholesale bid 7
  • 9. Pricing Structural charges all clients the same fees: Deposits1 First $10 million 0.250% $10-100 million 0.200 $100-500 million 0.175 Beyond $500 million 0.150 Treasuries 0.050% Money market funds No fee Breakpoints are applied to aggregate of all accounts in a relationship Structural does not accept commissions, soft dollars or other inducements – Client fees are our sole source of revenue1 Structural waives its fee, basis point for basis point, to the extent that, at time of purchase, yield to maturity on a given instrument is less than 30bps above that of comparable term Treasuries. 8
  • 10. Agency role enables capture of highest yields across banks Illustrative deposit yields offered by banks 2.00%  Banks differ widely in the yields they will 1.50% pay for deposits Agency yield Product vendor capture  Structural, as fiduciary agent, seeks out yield received the highest yields across all issuer banks, 1.00% Network and both directly from banks and in the distribution fees secondary marketProduct net yield Bank  By law, product-based alternatives cannot 0.50% willingness pay higher yield than that offered by to pay lowest-paying participant bank. 0.00% Maximum product capacity Market-clearing yield at full product capacity 9
  • 11. Comparison: Structural and CDARS Structural CDARSYield1 110-125 65Basis pointsApproach  Fiduciary management of short-term  Bank network for bulk purchase of CDs instruments  Pays network clearing rate, less network and  Consider all market yields and distribution fees purchase highest offeredTailoring  Term structure tailored to client  Only available in specified maturities specificationsCost of early Crossing at midpoint of wholesale Term Penaltyliquidity bid/ask spread2 4-13 weeks 100% of interest to term If crossing is not available: ≥26 weeks 50% of interest to term Sale at best wholesale bidCompliance  Regular valuations  Valuations not provided  Tradable: CUSIPs, DTC-eligible  Non-tradable  Exposure report by FDIC certificate  FDIC certificate numbers not provided 1 Indicative yields as of December 31, 2010 for two-year term. Yield range shown for Structural is net of fee. CDARS rates are illustrative “one-way” rates; individual participant banks may offer different yields. 2 Ability to cross hinges on the needs of other clients and is not guaranteed. 10
  • 12. About StructuralOverview Structural was founded in 2005 by leaders in financial markets and technology. Our mission is to build the next generation of passive investment management. We do not attempt to “beat the market” through security selection or market timing. Rather, we use separate accounts, managed to client- specified parameters, to achieve benefits not available through commingled funds. We use technology to ensure that the large number of routine tasks required to obtain these benefits are executed flawlessly and at low cost.Principals Joel Hornstein Ed Nicoll Founder, Chief Investment Officer Founder, Chairman Emeritus Aaron Kessler Matthew Pollock David Slusarski Client Service Marketing & Business Development Trading & OperationsClients  Corporations – We serve publicly-traded and privately-held companies. We offer the convenience of FASB- compliant accounting in addition to the higher yields and safety provided by FDIC-insured CDs.  Family offices – We manage cash to meet commitments including capital calls, pledges, and other planned outflows.  Financial advisors – We partner with financial advisors to provide a cash management solution that is differentiated, convenient and provides real safety and yield benefits to their clients.  Financial services firms – We offer cash management for a range of liability-driven financial services applications (e.g., escrow accounts, reinsurance commitments, and collateral management).  Institutions – We provide cash and fixed income management to foundations, endowments, and other tax- exempt institutions. 11
  • 13. Appendix
  • 14. CD spreads to Treasuries: 1964-20106-month secondary CDs Quarterly average Quarterly average spread to Treasuries 6-month Treasury yield 3.00% 15.00% 2.50% 2.00% 10.00% 1.50% 1.00% 5.00% 0.50% 0.00% 0.00% 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 Source: Federal Reserve Statistical Release H.15: Selected Interest Rates. Chart reflects data from June 12, 1964 (time series inception) through December 31, 2010. 13
  • 15. Secure web interface provides convenience and control Through the secure online interface, clients can: – Specify eligible instruments – Exclude individual banks – Establish liabilities and set liquidity preferences – Schedule wires – View daily portfolio holdings 14
  • 16. Account-specific parameters provide granular controlPermitted issuers Minimum yield  Minimum rating (premium to par)  Spread to Treasuries (pre-tax), by term  Minimum rating (discount to par)  Spread to Treasuries (after-tax), by term  Excluded names  Penalties on premium to par securities – By rating – By termSize Term structure  Minimum per issue  Date-specific requirements  Maximum by issuer  Rolling cash reserves (e.g., <3 months)  Ladder 15
  • 17. Crossing reduces cost of term deposit liquidity  Midpoint of bid-ask, if meets criteria for one or more accounts Purchasing clients  Else, highest price above highest wholesale bid at which suitable to one account Selling client Matching engine  ~15bp round-trip transaction Competitive cost on instruments <9 months wholesale bids 16
  • 18. Mechanics of MMDA deposit custody Custodian Ownership records  Structural sources and Bank A – MMDA negotiates money market Client 1 - $249,000 deposit accounts (MMDA) with Client 2 - $249,000 Bank A - MMDA each bank Client 3 - $249,000 $19.5 million  Bank records deposit owner asStructural ... “Custodial entity, for benefit of client Structural clients” Bank B - MMDA Client 1 - $249,000  Custodian maintains records of Client 2 - $249,000 Bank B - MMDA ownership for client interest in Client 3 - $249,000 $7.0 million each deposit ...  Ownership allocations may be Bank C - MMDA adjusted daily, if deposit Client 1 - $249,000 inflows match or exceed Client 2 - $249,000 Bank C - MMDA outflows Client 3 - $249,000 $14.3 million  Deposits may be redeemed ... any bank business day, subject to Federal Reserve limit of 6 Bank D - MMDA withdrawals per month per Client 1 - $249,000 bank Client 2 - $249,000 Bank D - MMDA Client 3 - $249,000 $5.2 million ... 17
  • 19. Tax posture of bank deposits owned by foreign subsidiaries  Purchase of U.S. bank deposits is not deemed repatriation of dividends – Investment by foreign subsidiaries in “United States property” may give rise to “deemed dividends.”1 – U.S. bank deposits (and U.S. Treasury obligations) are explicitly excluded from definition of “United States property.”2  Interest paid on U.S. bank deposits to foreign corporations is not subject to U.S. tax – Interest paid on registered obligations owned by a foreign corporation is considered “portfolio interest.”3 – Portfolio interest is explicitly exempt from U.S. taxation: “In the case of any portfolio interest received by a foreign corporation from sources within the United States, no tax shall be imposed . . .”41 Internal Revenue Code § 9652 Internal Revenue Code § 956(c)(2)3 Internal Revenue Code § 881(c)(2)4 Internal Revenue Code § 881(c)(1) 18
  • 20. Process to retrieve funds in the event of bank failure Acquiring bank does not assume liabilities  Acquiring bank has the option to call the CD at par  Requires payment of principal and accrued interest by the earlier of maturity date and 60 days (although typically much faster) Bank taken over by another institution (typical) – 95% of banks and 99.4% Acquirer assumes liability as its own of total deposits among banks where FDIC has  Continues paying interest and returns principal at term intervened since 19791  Acquiring bank can reset interest rate – Holder has the option to put the CD to the acquiringBank fails bank if rate is reset  For the term of any CD, failed and acquiring banks are considered separate institutions for the purposes of calculating deposit insurance limits Bank placed in receivership Need to file claim with FDIC – 5% of banks and 0.6% of  Principal and accrued interest through day bank is placed total deposits among into receivership are paid (up to FDIC limits) banks where FDIC has  Structural monitors all bank failures and immediately intervened since 1979 contacts custodian to confirm form filing  FDIC stated intent to make payments within two business days of bank closing2, as a practical matter brokered deposits held through a fiduciary take slightly longer – Risk: opportunity cost of lost interest accrued after date bank enters receivership  Clients can borrow against CD if cash is needed earlier 1 FDIC: Failures & Assistance Transactions: http://www2.fdic.gov/hsob/ 2 FDIC: When a Bank Fails: http://www.fdic.gov/consumers/banking/facts/payment.html 19