Optimizing Returns on Cash and Securities

1. Optimizing Returns on Cash and Securities [Company Logo] 2008 NASACT Annual Conference 8/9–8/13/2008 John S. Carter, Director, Global Liquidity & Investments, Citi Mel Deane, Director, Securities Lending, Citi

2. Is it possible to achieve optimum returns given risk, liquidity and yield expectations in today’s current market? In this session we will focus on two key elements for attaining this goal: cash management and securities lending. Overview & Agenda Overview: First, with the financial and credit market turmoil that has persisted in the markets since August 2007, the focus for cash investments has been on safety, preservation of capital and liquidity. The discussion will focus on maximizing the efficiency of your cash, the various investment options available and how current market conditions affect the decision process. Second, in addition to the Securities lending basics and the backdrop of considerable turmoil in the cash markets, the discussion will probe such critical related areas as: what investments are available to security lenders? different collateral types and suitable guidelines, managing your own cash vs. agent. What are the pros and cons? Agenda: • Money Market Review • Institutional Investors: Recent Trends • Money Market Funds-Rule 2a–7 and “AAA” Ratings • Securities Lending 1

3. Money Market Review

4. Investment Trends: Flight to Quality Commentary Percentage breakdown of money market fund product mix (1) • Based on 15 large prime retail and institutional funds(1), ABCP now accounts for only 10% of the funds total exposure down from 16% at the end of 2006 • Offsetting the reduction in ABCP has been an increased investment in U.S. Government and Agency debt, accounting for 14% of total assets as of May 13, 2008, up from 3% in 2006 Money market fund product mix ($bn) (1) Source: iMoneyNet as of May 13, 2008; (1) Data represents the weighted average of 15 Prime retail and institutional money funds including: BGI Prime MMF/Instit, Citi Instit Liquid Reserves/CI A, Credit Suisse Instit MMF/Prime/CI A, Deutsche Cash Mgmt Fund Instit, Federated Prime Oblig Fund/Instit, Goldman Sachs FS Prime Oblig/Inst, Janus Instit Cash Mgmt Fund/Instit, JPMorgan Prime MMF/Capital, Morgan Stanley Inst Liq/Prime/Inst, State Street Instit Liquid Reserves, Centennial Money Market Trust, Fidelity Cash Reserves, Schwab Cash Reserves, Western Asset MMF/CI A, and Vanguard Prime MMF/Investor. 2

5. Since July 2007 US institutional money-market fund assets are up 54%, to $2.2 trillion. More on the flight to quality… Source: iMoneyNet, Money Fund Analyzer, as of 10/06/2008. 3

6. Weaker issuers have been ‘weeded out’ of the market- high quality issuers remain. ABCP outstanding US ABCP Outstanding Euro ABCP Outstanding Source: Federal Reserve, Bank of America. 4

7. What to look for in the coming months… Future themes in the Short-Term Markets • Risk aversion in MMFs will unwind, but with caution • Percentage of cash within MMFs will begin to decline • Fund managers will start to buy further out on the curve • The weighted average maturities (WAM) of MMFs will most likely stay low as global interest rate markets remain in a tightening bias • Strong ABCP will be added selectively • Investors will shift accordingly • The normalization of inter-bank lending rates should drive flows from deposits back to MMFs, but largely in AAA-rated space • Whether demand returns for Dynamic funds has yet to be seen - industry needs to rebuild investor confidence first • As credit market remain volatile, direct investing will continue to be unattractive • Lingering issues to watch • Monolines • Agencies • Brokers • Housing weakness • General economic slowdown 5

8. Institutional Investors: Recent Trends

9. Recently most institutional investors have maintained portfolios with a short time horizon and in a limited set of instruments. Institutional Investor Portfolios—Maturity, Composition, Objectives The 2007 AFP Liquidity Survey, completed June 2007, indicated: Most investment policies emphasize liquidity and capital preservation over yield. Since last August, all the evidence is that institutional investors have: • Increased usage of high-quality bank deposits, government and Treasury issued instruments, and money market funds and are keeping portfolios very liquid • Decreased usage of direct investment instruments (Asset Backed CP, Auction Rates) All other (incl. direct instruments) 46.50% MM Funds 32.40% Bank Deposits 21.10% Source: AFP Source: AFP Avg. Maturity Avg. Portfolio Composition 6

10. Institutional investors have become increasingly conservative, moving excess liquidity toward greater security and liquidity. Investment trends • US money-market fund assets up 31%, to $3.1 trillion (1) • US bank jumbo CD assets up 20% to $2 trillion (1) • Direct CP holdings by US Corporates down 75% to 200 billion in 2008 versus 2007 (2) Sovereign Liquidity Funds Self-directed Investments AAA-rated Liquidity Funds Bank Deposits Non-Rated/ Enhanced MM Funds Not scaled, for illustration purposes only (1) Crane’s Financial Week, 10th March 2008. Refers to 2007 growth.(2) Treasury Strategies Survey, March 2008. 7

11. Reallocation of investment instruments through the credit crisis. Institutional Investments • Largest flows have been in Money Market Funds. $514 Billion increase which represents a net increase of 32% • Second largest flows have been in Bank Deposits & Sweeps. $279 Billion increase which represents a net increase of 36% • Commercial Paper has seen the largest net loss. $623 Billion decrease, a 75% decrease Source: Treasury Strategies, Inc, March 2008. 8

12. When determining the proper cash investment product an investor must first consider these four main factors and their investment policies. Key Issues • Investors must assess their expectations before making an investment decision. Safety is a relative term and does not provide enough explanation as to an investors needs and expectations • Risk: What is the level of “risk” an investor is willing to accept? Investment guidelines may help eliminate several investment options based on the risk involved or the rating of the instrument • Preservation of Capital: Is preservation of capital essential or required? • Liquidity: Is daily liquidity necessary? Is liquidity a prerequisite for all of the cash being invested? Giving up some liquidity may provide additional returns/yield. Not all “liquid” instruments provide protection against “market risk” and possible loss of capital • Expected Return: Given the expectations for risk, preservation of capital and liquidity, what are the available investment products that fit the criteria the investor is looking for? What are the returns/yields on the available products and do they provide a return that the investor is expecting? Different products may provide a wide spectrum of returns given the current market turmoil 9

13. Institutional Money Funds assets rose dramatically in H2 2007 and are expected to continue rising in 2008, with institutional investor behavior as one key driver. Institutional Liquidity Portfolios—Money Fund Usage U.S. Domestic Money Funds Historical & 2008 YTD • Falling market interest rates—short term “lag effect” & lower opportunity costs of using MMFs vs. direct investments • Greater risk aversion—shift away from direct investments • Downturn in economic cycle—treasuries may seek to remain more liquid in uncertain times Money Fund Assets ($B) & Returns (%) Key Reasons MMF assets have increased by $892billion, or 34.2%, in the past 8 months 10

14. Money Market Funds Rule 2a–7 and “AAA” Ratings

15. Money Market Funds are managed according to Rule 2a-7 of the U.S. Investment Company Act of 1940. Rule 2a–7 • Objective • Parameters to ensure a stable $1 NAV • Rule 2a–7 • Maximum WAM of 90 days, 397 day maximum per security • Maximum of 5% invested in any one issuer, 25% per industry • Maximum of 1% per A2/P2 name, 5% of total basket • Credit documentation procedures—ongoing credit analysis 11

16. A rated fund provides added layers of protection and comprehensive on-going due diligence mandated by the rating agencies. “AAA” Rated Funds • Funds may be “AAA” rated by: • Moody’s • S&P • Fitch IBCA • Rating agencies impose further investment restrictions and monitoring beyond Rule 2a–7 • WAM: 60 days • Non-rated funds can buy A2/P2 paper • Non-rated funds are not monitored on a regular basis by a third party, rated funds are continually reviewed on a weekly basis 12

17. “AAA” Rated vs. Non-rated Money Market Funds (1) Rated funds must also undergo weekly monitoring by each agency that rates the portfolio. 13

18. Securities Lending

19. What is Securities Lending? • Temporary collateralized loan of assets from a portfolio to a borrower • A contract between borrower and lender governs all elements of the loan • The transfer of loaned securities and collateral constitutes a pledge • The lender keeps economic benefits of the security • Borrower posts collateral equal to at least 100% of market value of securities • Collateral can be either cash or securities • Proxy Voting is transferred from lender to borrower • Lender can sell securities at any time (1) and the securities will be returned, within normal settlement periods. ((1) assuming instructions are sent by noon T+0 in the market of domicile) 14

20. Why Securities Lending? Reasons for Lending Securities • Generate incremental income • Reduce operational expenses • Financing inventory • Gain trading insight Reasons for Borrowing Securities • Avoid settlement failure • Securities sold but not available for delivery • Cover short trading positions • Support hedging, derivative & arbitrage strategies • Match book funding 15

21. How Securities Finance Works... 1. Trading desk receives feed from custodian (Citi or other) with clients availability, net of sales and restricted securities. 2. Throughout trading day, new loans places and existing securities returned if additional sales, lack of borrower demand, etc. 3. Loans are made vs. cash and/or securities and rebate rate/fee is negotiated with borrower. Existing loans marked-to-market on individual basis to maintain collateral requirements throughout life of loan. 4. Cash collateral invested per client’s guidelines. 16

22. The Steps of Securities Finance • Trading desk receives feed from custodian with client’s availability, net of sales and restricted securities • Throughout trading day, new loans are placed and existing securities returned if additional sales, lack of borrower demand, etc. • Loans are made vs. cash and/or securities and rebate rate/fee is negotiated with borrower • Existing loans marked-to-market on individual basis to maintain collateral requirements throughout life of loan • Cash collateral invested per client’s guidelines 17

23. Cash as Collateral Lender lends your securities and receives cash collateral from the borrower Lender returns, on your behalf, a rebate to borrower on assets held Lender invests the cash into money market type instruments according to your guidelines Lender and you share the income earned from the cash reinvestment less the rebate paid to the borrower (aka revenue split) Types of Collateral Securities as Collateral • Lender lends your securities and the borrower pledges other securities as collateral • The borrower pays a fee to the lender, on your behalf, based on the intrinsic value of the lent securities • Lender and Client share the fee at an agreed upon ratio 18

24. Summary: Optimizing Returns on Cash and Securities

25. Summary • Concerns about credit quality and liquidity have forced investors to move cash to “safe”, high quality instruments • Global corporations are increasingly centralizing their global cash and investing processes and oversight • Money market funds have weathered the credit & liquidity storm and remain an attractive cash investment option • Money market funds and high quality bank time deposits are the most common “active” investments, with usage of the former growing especially rapidly • How is securities lending cash managed differently to 2a–7 Mutual Fund cash? • Underlying assets • Cost of cash—interest rate risk • Liability and asset side of the trade • Does securities lending work for everyone? 19

26. Q&A

28. Mutual Fund Disclosures • An investment in a money market portfolio is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market portfolio seeks to preserve the value of an investment at $1.00 per share, it is possible to lose money by investing in a money market portfolio • Investors should consider a fund's objectives, risks, and charges and expenses, and read the prospectus carefully before investing or sending money. The prospectus contains this and other information about the Funds

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