N O R T H E R N T R U S T Jeff Porta, Senior Vice President [email protected](312) 557-0474 City of Fresno Fire and Police Retirement System & City of Fresno Employees Retirement System Northern Trust Update Robert Ernst, Senior Vice President [email protected](312) 444-5498 Don Anderson, Vice President [email protected](312) 444-5386 Patrick Fitzgibbons [email protected](312) 557-1819
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Northern Trust Update - Fresno · To offset or eliminate costs of custody and administration ... intensity of borrower demand (Fed Funds Rate – Rebate Rate) 11 . How Revenue is
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Agenda Item: 1:00 pm Joint Meeting of the Retirement Boards Meeting Date: 8/26/2014
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A Unique Business Focus
Founded in 1889, Northern Trust is a market leader of asset servicing and asset management solutions for institutions and private clients around the globe.
A highly focused business model supporting two client bases across a single operating platform
Wealth Management
Corporate & Institutional Services (C&IS)
Asset
Servicing Asset
Management
WORLDWIDE INSTITUTIONAL INVESTORS
U.S. and European PRIVATE CLIENTS
Assets
under custody
US $6.00 trillion
Assets
under administration
US $3.5 trillion
Assets
under management
US $924 billion
As of 6/30/2014
Source: Northern Trust
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Northern Trust Profile
Founded in 1889, Northern Trust is a market leader of asset servicing and asset management solutions for institutions and private clients around the globe.
Outstanding Long Term Financial
Performance
5 Yr
CAGR
10 Yr
CAGR
15 Yr
CAGR
Trust Fees 4% 8% 8%
Revenues -1% 7% 7%
Expenses 0% 8% 8%
Net Income -2% 6% 5%
Assets Under Custody 13% 10% 10%
Assets Under Management 10% 6% 9%
S&P 500 15% 5% 3% As at 12/31/13
Asset Servicing Banks Historic P/E Ratio
Superior Capital Strength Strong & Steady Credit Ratings
85% of Northern Trust’s total securities portfolio composed of triple-A rated securities
Average re-pricing duration of <1year
High Quality Balance Sheet
As at 06/30/14
The long-term ratings of both the Corporation and our main bank subsidiary,
The Northern Trust Company, are the highest assigned by Standard &
Poor’s and Fitch Ratings to any comparable U.S.-based banking institution
Northern Trust’s long-term ratings from Moody’s Investors Service are the:
second highest assigned to a comparable U.S.-based banking institution
Overall Credit Risk - Established framework to size borrower credit limits to reduce concentration risk via three tests: Credit exposure relative to the borrower’s capital, size of our exposure to the borrower relative to other market participants, and size of our exposure to the borrower relative to Northern Trust’s total lending program
Ratings The majority of our borrowers will have a long-term individual or parent-level credit rating of A- or better and a short-term rating of A-1 or better from at least one NRSRO.
Financial responsibility and compliance - Each borrower and parent borrower must provide audited financial statements, be financially sound and in compliance with regulatory capital requirements
Parent Organization - We also focus on the condition and creditworthiness of the borrower’s parent organization
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Demand from the Borrower Community
Equity Markets
Loan balances continued to climb throughout the second quarter
supported by rising equity prices and higher volumes associated
with European yield enhancement trading activity.
As equity prices rose, hedge funds closed out losing short positions,
resulting in lower on loan balances and narrower intrinsic spreads
on certain hard to borrow securities, though strong pockets of
borrower demand remain.
European dividend season was in full swing during the second
quarter with pricing levels generally lower on a year-over-year
basis. Contributing factors included lower dividend yields in some
markets as well as borrower balance sheet constraints impacting
demand.
Fixed Income Markets
U.S. Treasury yields remained subdued despite signs of potential
interest rate hikes in the coming year.
The global regulatory environment continues to pressure borrowers
to reduce their balance sheets, impacting demand for lower intrinsic
value securities (i.e. US Treasuries).
Demand for high grade sovereign debt (especially vs. alternative
collateral) remains high as industry regulation requires borrowers to
pledge high grade collateral versus other financial transactions.
Market Drivers
As equity prices continued to climb, market volatility dropped to levels not
seen since before the financial crisis, nearly 50% below historic averages.
With equity markets pushing toward record territory, some investors added
to their long holdings of equities, contributing to an increase in short
hedges and borrower demand.
General Recent Observations and Trends
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Collateral Reinvestment: Current Observations & Trends
Central Bank activity taking center stage – although different paths are emerging:
The European Central Bank (ECB) lowered its deposit rate to -10 basis points. This marks a first for a major economy to
have negative rates. Europe is facing deflationary pressures which should lead to an accommodative central bank for
some time to come.
The US Federal Reserve (Fed) is nearing completion of its bond buying (quantitative easing) program, and market
expectations are for a rate increase in mid to late 2015.
The Bank of England (BOE) is closest to raising its short-term policy rates in response to a strengthening economy and
quicker-than-expected reduction in unemployment. A rate hike is expected as early as the end of 2014.
Supply dynamics in the short-term markets remain under pressure:
The regulatory environment has caused financial firms to issue less short-term debt, while money market investors hold
a large supply of cash – both pressuring rates lower.
The Fed’s fixed rate full allotment repurchase agreement facility has proved vital to the short-term markets in providing
investments for money funds. Proof of it’s importance is demonstrated daily, averaging over $100 billion in usage, with a
peak at quarter-end of $339 billion.
The prospect of higher rates has not made it’s way to the short-term markets. The technical factors of supply and
demand are outweighing the fundamentals pointing to higher rates.
Current portfolio positioning:
Neutral portfolio duration to minimize the impact of future rising rates.
Strong overnight liquidity positions focused on repurchase agreements and time deposits of well-capitalized financial
institutions.
Longer-dated trades of floating-rate instruments as opposed to fixed-rate.
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Brief Overview of Key US Regulatory Developments
Northern Trust is tracking global regulatory developments that may impact securities lending and is actively engaged with various federal agencies on these regulations either directly or through industry groups.
Regulatory Development Anticipated Impacts Next Steps
Dodd-Frank
Volcker Rule - 619 · The final regulation does not exclude securities lending cash collateral pools from the scope of
the Volcker Rule and therefore may curtail agent lenders’ sponsorship of unregistered cash
collateral pools.
Final Rules issued December 2013;
Conformance deadline July 2015
· Lending agents may consider alternative strategies/structures for cash collateral reinvestment.
Counterparty Concentration Limits – 165(e) · Limits a bank’s combined credit exposure to a single counterparty to no more than 25% of the
may face constraints on providing indemnification and accepting sovereign debt as collateral.
Securities Lending Transparency – 984 · Requires SEC to increase transparency in securities lending. Awaiting proposed rules (overdue
since mid-2012); no clear timeframe
for rules to be issued · SEC expected to develop regulations that align with proposals from the Financial Stability
Board’s Workstream on Securities Lending and Repo.
Money Market Reform · SEC adopted rules for “prime” money market funds that involve requirements such as floating
NAV. Additional restrictions, such as redemption gates and liquidity fees will be at the discretion
of the fund board.
Final rules approved July 23, 2014,
with 2 year compliance period.
· Funds having over 99.5% invested in government securities are exempt from these new
requirements.
Basel III
Capital · Increased capital requirements will make it more costly for agent lenders to provide
indemnification.
Final US rules released in July 2013;
effective January 2015
Large Exposures · Similar in concept to Counterparty Concentration Limits; restricts a bank’s combined credit
exposure to a single counterparty to a portion of the bank’s capital.
Final Basel III standard released April
15, 2014, but treatment of securities
lending exposures remains open;
awaiting final rules.
Leverage Ratio · Indemnified securities lending activity to be captured in Basel III leverage ratio.
· Exposure for securities lending to be measured generally by current exposure, which should
be negligible given securities lending positions are over-collateralized.
· Additional leverage ratio impact for any guarantees or exposures beyond replacement
securities in US Agency proposal.
Basel III standards finalized Jan 2014.
US Agencies issued Notice of
Proposed Rulemaking on April 8,
2014.
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Investment Profile: Core USA Cash Collateral Fund June 30, 2014
* Based upon traded basis from holdings reports
NOTE: This information was created using the best unaudited data available to us and may not be completely reliable, accurate, or timely. Data is prepared on a
settled basis, which may differ from traded basis data on the Cash Collateral Holdings report. “Traded Basis” reflects pending trades.
Core USA 6/30/13 Fresno
Average Yield Market to Book Avg Loan Duration
0.24% 0.99999 65 Days
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$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
2007 2008 2009 2010 2011 2012 2013 2014
Int'l Equity
Int'l Fixed
US Equities
US Corp Bds
US Agencies
US Treasuries
Historical Net Earnings Fiscal Years Ended June 30
CITY OF FRESNO
$2,154,273
$1,153,376
$1,015,208
$1,723,512
$823,419
$1,025,408 $1,105,631
$1,237,025
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Earnings Scorecard Year Ended 06/30/14
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Earnings Performance Comparison Year Ended 06/30/14 versus Year Ended 06/30/13
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Performance Scorecard: Top Ten Earning Securities
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Transparency and Information Delivery
Monthly reporting
Performance scorecard:
Account earnings and performance
Security level detail
Client by asset type and account earnings
Date range comparison
Historical statistics graph
Earnings statement - summary and detail
Daily reporting
Securities loaned – detail
Borrower utilization – summary by borrower
Account utilization – loan detail, summary by
account
Collateral – by security type, country and detail
holdings
Executive Summary
Flexible, electronic reporting: Northern Trust provides you with customized reports to help monitor
your Securities Lending activity
Helping to keep you
informed about your
Securities Lending
performance.
Securities Lending
Data Block on
Passport®
Facilitates the online
distribution of vital,
tailored information on
each client’s portfolio
holdings, characteristics,
investment performance
and commentary
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Fully committed to
Securities Lending
Capitalize on Northern Trust’s
Asset Servicing
and Asset Management
strengths
Stable and experienced team
dedicated to
Securities Lending
Northern Trust
Global
Securities
Lending
Northern Trust provides managed risk and proven performance supported by committed professionals.
Why Northern Trust
Exceptional
Capital
Strength
A Core
Business
Unique
Global
Integration
Proven
Performance
Results
Unrivaled
Client
Focus
Sustained financial strength
and stability
Important to work with a
stable and disciplined agent
Indemnification only as
strong as provider
Market expertise provided
by a single global team of
professionals
Technology efficiency
achieved through a single,
global proprietary trading
platform
Competitive advantage
gained via distinctive global
infrastructure
33-year track record of innovative solutions
supported by robust risk management
Focused on optimizing the intrinsic value of client