For treasurers making short-term investments with surplus cash, money market funds (MMFs) have long been a place to find the security and liquidity they are looking for. But since the credit crisis, treasurers have had to closely examine the risk management consequences of trading MMFs. In turn, this has led some to re-evaluate how they interact with MMFs. The growth of independent multi-fund portals has ensured that fund providers’ online solutions now face serious competition. What differentiates these offerings, and what added-value should treasurers be looking for when selecting an MMF portal solution?
Rise of the portal
Whereas a few years ago MMF providers engaged in direct selling to treasurers, the MMF portal has changed that. The acceptance of portals means that you can buy all of your MMFs in one place and that it is extremely unlikely that a provider will pitch directly to a treasurer. But there are still choices to be made, as the portals offered by banks and independent providers tend to differ in terms of functionality.
Bank multi-fund portals tend to be more geared for their particular customers and those with whom they transact. They can offer additional functionality that independent portals do not have, which is generally along the lines of back office sweeping and banking functionality, for example. The independent portals often focus more on trading facilities and market discovery, although the bank offerings are now leaning in this direction.
But what if, as a corporate, you are only interested in using one fund? In this situation, there are very few benefits to using an independent multi-fund portal. The one benefit, while not on the trading or risk management side, is the market discovery capability that an independent portal offers – you can look at what other funds are on the market, how they are performing and how big they are – with all documentation available immediately from a single site. If you are doing due diligence, looking for new funds or for fund comparisons, you can do this from one platform instead of going to every site.
“By integrating the platform into the TMS, the treasurer is able to download all of the executed trade information directly.”
If your treasury uses a treasury management system (TMS), you should also be thinking about how any potential MMF portal will work with your TMS. Bank portals and the single fund portals tend not to do back office integration with TMSs for individual investors, as that is not their business (although some do). Independent MMF portals do tend to offer this. By integrating the platform into the TMS, the treasurer is able to download all of the executed trade information directly, without having to rekey trade data into their back office systems.
While there are some clear pros and cons to using either a bank MMF portal or an independent portal, what can treasurers do to assess which of the different portals would be a best fit for them? This can depend on the structure and complexity of the treasury department in question, so a good first step is to assess what you really want to get from a portal. Some of the key questions could be to what extent the portal is automated, whether you own your own accounts, and if anyone else has the authority to trade on your behalf:
Ten questions for potential portal partners
What kind of portal will I be using?
Is the platform automated?
Who will be able to trade my fund accounts?
How much will the platform cost me?
Does the platform also offer investment advice?
Will the platform help me to manage my treasury policies?
Will the platform provide me with a complete audit trail of all my trading activity?
Will the platform provide me with online fund account statements?
Will the platform offer transparency of portfolio holdings across all my funds?
Will the platform meet my future requirements?
As well as trading, MMF portals should offer treasurers a full view of their risk exposure to the funds they are invested with. Best practices here include:
Analyse your position with regard to your credit exposure.
– make sure that you are in compliance with your investment strategy and guidelines.
– select funds against other criteria you may be looking for or to your company’s criteria.
– the ability to keep everything on file.
“Scale, global reach and a direct, transparent model are all important when evaluating portals,” says Vince Tolve, Vice President, Wealth Management at SunGard. These three points will certainly help treasurers answer some of the questions mentioned above.
Rise of risk management
The fallout from 2008, the collapse of Lehman Brothers and the Reserve Primary Fund breaking the buck has cast a long shadow over the money markets. “The most profound change that has happened in money market funds since the 2008 credit crisis is that due diligence is now the responsibility of corporate treasury. In the past, corporations relied solely on the credit ratings agencies. In today’s fast paced business world, dynamic intelligence is a necessity,” comments Jeff Jellison, US CEO of ICD. Portal providers have understandably been keen to enhance the risk management tools available to treasurers, particularly in terms of visibility.
With ICD, for example, a treasurer can go in and see the different funds they are invested in, and with one click of a button see the top 25 holdings between those funds. This provides visibility over your credit exposure to any name that is out there, with both banks and countries being searchable. Tools such as this are useful for reporting to the CFO or Board, who will frequently want to check on investment exposure, depending on the headlines they have read that morning. Tools within some portals can also provide forward-looking indicators on specific credits. As well as providing your exposure to a specific bank, you can also discover their credit default swap (CDS) pricing, a stock summary and a capital adequacy review.
The setting of credit limits for a particular fund via a portal, either in value terms or percentage terms, is another powerful risk management tool for treasurers. When they come to trade and may be about to breach the limit, the treasurer can be warned automatically by the portal, and potentially blocked from trading. In most cases the warning can be overridden if there is a good reason for the trade, but the warning is captured on the audit trail of the ticket. A breach can also trigger a requirement for a second signatory, even if routinely two people are not required for signing off trades.
It is even possible for a treasurer to breach their MMF limit without trading. With a percentage limit, if other people are taking money out of the fund and the size of the fund is going down, you could suddenly find that your 4.9% of the fund has suddenly become 5.2%. If your percentage limit is 5%, you have now passively breached it. Some MMF portals can alert you to this on screen, and can also contact you via email and SMS to let you know about the breach in case it has occurred outside of your usual working hours. This demonstrates the proactive approach to risk management that many portal providers are taking.
Access all areas: beyond MMFs
Some portals currently offer the ability to buy other products, such as commercial paper (CP) or time deposits. However, the yields on these products are not very good, and the costs involved with buying them through a portal can be prohibitive. This is different to the exact matched price that you get when buying MMFs through a portal. Nevertheless, the amount of products available through an MMF portal could be about to increase, particularly when it comes to managing foreign exchange (FX).
“There is a trend towards convergence of short-term instruments and FX onto MMF portals in response to client demand for a single venue on which a full portfolio can be managed and where the reporting, compliance and transparency tools can be leveraged,” says Greg Fortuna, Global Head of State Street Fund Connect. Fortuna believes that there is sufficient competition and transparency in the short-term fixed income and FX markets for a treasurer to determine whether their portal provider is offering good value and if they feel they are being cross-sold products that are unnecessary they should review their relationship with their provider.
“There is a trend towards convergence of short-term instruments and FX onto MMF portals.”
This trend towards convergence from both MMF and FX portal providers is shared by many in the industry. Providers on both the MMF and FX side, who would previously share clients or have loose partnership agreements in place are actively reassessing their capabilities and looking to build on cross-instrument functionality. “At the moment [the market] is very fragmented, but I think in even a year’s time it will be much more integrated, and in two years’ time there will definitely be seamless integration across the whole range of MMF and FX instruments being traded through a single platform,” says Justin Meadows, Founder and Chief Executive of MyTreasury.
Maintaining bank relationships
A perception that some treasurers might have is that using an independent portal could be detrimental to their existing banking relationships. “One of the bigger hurdles for us when we started in 2003 was getting acceptance for portals. It took some time for corporates to untangle themselves from direct relationships to move to portals too,” explains Jellison from ICD. As the concept of the MMF portal has grown in acceptance, fund providers have faced the challenge of trying to demonstrate to treasurers the value of going directly through them to access the MMFs. “Most, if not all, fund providers are already giving transparency to their clients on a weekly, or even daily, basis,” says State Street’s Fortuna.
Certainly there is nothing to stop a treasurer building on the relationships they have with their direct providers. However, all fund providers are bound by regulations that preclude them from customising a solution for one investor if that is not offered or provided to all investors on an equal basis. This situation is where the multi-fund portals can come in as a means of MMF trading and risk management. Treasurers can do both through a portal, while still investing with all of their relationship banks. For example, if you are the treasurer of a company such as Google and you invest in six different bank funds, and these banks are part of your credit line, you want to be able to demonstrate to the bank that you are still investing with them. Fully disclosed portals allow you to do this.
The fees involved with managing MMF investments can be quite a delicate issue. Some still have the perception that MMF portals are essentially middlemen that add an extra layer of fees to the operations of a corporate. This is a perception that most in the industry reject. ICD’s Jellison states that: “There’s no additional cost to using a portal, even with the addition of on demand analytics and other risk management tools.”
State Street’s Fortuna agrees, arguing that the perception that an MMF portal adds fees to a corporate’s operations is simply incorrect. “A portal can in fact provide significant efficiencies to existing processes without any cost being incurred as portals are remunerated by the fund providers.” Having a single platform on which to trade, report and manage MMF investments can in fact lead to a reduction in the amount of work the treasury team has to do, in areas such as compiling reports and statements in multiple formats, the settlement of trades, reconciliation, and analysis, for example.
Every portal will do things slightly differently, so it is worth investigating where any costs may crop up, not just during the implementation of a portal but also once you are live with it. For example, as mentioned earlier, there is a cost if you are buying some direct securities. But for MMF trading through a portal, most providers seem committed to providing as many services as possible from the few basis points they make. “At SunGard, we have always worked hard with our fund partners to make the lowest fee funds available to our customers while providing the risk management and compliance features of an independent neutral platform,” explains SunGard’s Tolve.
There are two main shifts in the MMF portal market that treasurers need to be aware of today. The first of these is the move towards integrating risk management capabilities into portal functionality. The ability to establish your investment exposure to market events in near-real-time is critical for investment decisions as well as reporting. Implementing limits to your credit exposure in the funds that you are investing in provides peace of mind.
The second trend is the merging of the MMF and FX portal markets that has begun in earnest. While the independent MMF portals are heading this way, the FX portals are also attempting to gain ground in this new market. If, as Meadows predicts, in two years’ time we will see seamless integration across the whole range of MMF and FX instruments being traded through a single platform, it is already time to start investigating what both your MMF and FX portal providers are doing in this regard.
If you have an FX portal but not an MMF portal, or vice versa, and were looking to buy the other, it may be prudent to either wait and see what the market does here over the next year or so, or to quiz your current portal provider (on whichever side) about their plans for additional functionality.