Instead of trading separately and directly with a number of money market funds (MMFs), treasurers looking to optimise short-term yield on their cash holdings are increasingly turning to the single-platform/multi-fund MMF portals made available by banks and independent providers. What are they and what do they offer corporate users?
Money market funds (MMFs) are gaining ground in the short-term space as bank deposits typically remain low or zero yield. The method of accessing funds is changing to meet investor needs and the online multi-bank portal is becoming an increasingly attractive proposition for busy treasurers. The third annual cash management study issued at the end of 2013 by technology vendor, SunGard, collated the responses of 160 corporates globally and found a reduction in the use of telephone transactions for short-term investments from 51% in 2012 to 30% in 2013, in favour of web-based portals.
The attractions of largely automated trading platforms are many, not least being that some also enable other products to be traded too (such as short-duration bonds, separately managed accounts and certificates of deposit). In the MMF space, in addition to the facilitation of trade and settlement across multiple funds and providers, portals typically offer a range of pre- and post-trade services including market intelligence, consolidated reporting, trading access and authorisation, limit setting, position and risk analysis (from counterparty to country risk). By providing market and counterparty intelligence, trading and monitoring all under one roof, treasurers seemingly have access to a one-stop MMF shop. But are all portals created equal?
Portal differences
Multi-fund MMF portals may be offered either by international banks such as Citi and BNY Mellon or by independent providers such as MyTreasury, ICD and SunGard. This is the first great divide – and users seem to be swinging slowly towards the independents, having favoured bank platforms since they first arrived a decade or so ago. Of those that now use portals, the number of treasurers working with independent providers over proprietary bank offerings is rising, according to the SunGard survey. It shows that 35% of all portal users now prefer the independent option, an increase of 15% over the previous year.
Independent providers will always argue that they are cheaper for investors to use but banks will often bundle together their offering with other services such as custody, cash sweeping or asset management, which can create certain operational efficiencies. Whilst this tends to make the true cost of the portal easier to absorb, the flipside is that actual cost is less easy to discern.
The range of fund participation in a bank portal may be limited compared to an independent. This may influence a treasurer’s decision where there is a need for portfolio diversification, although a portfolio of around five to ten is typically used. Banks often have distribution agreements with their fund participants which may be seen as encouraging partiality where advice is offered. Of the independents, ICD and SunGard are permitted to offer investment advice, and are thus regulated, whereas MyTreasury is concerned mainly with (and therefore earns its keep through) transaction processing and execution.
Independent providers will always argue that they are cheaper for investors to use but banks will often bundle together their offering with other services such as custody, cash sweeping or asset management, which can create certain operational efficiencies.
Banks typically offer ‘omnibus’ trading portals, which means the provider will set up and manage accounts on behalf of its users allowing trading and settlement (through a central clearing agent) to take place en masse and anonymously. As independent portal providers, both SunGard and MyTreasury offer ‘fully-disclosed’ direct trading platforms, which allow treasurers to trade directly with each fund on the platform – their independent competitor, ICD, provides a mix of direct, clearing bank facilitated and omnibus trading which clients can use in combination.
With direct trading systems the fund provider knows who its client is. For treasurers, maintaining visibility of ‘share of the wallet’ may be important. For other traders, particularly hedge funds, anonymity may be preferred. If using a bank portal, it may be perceived by other institutions on the treasury’s bank panel as giving that bank preferential treatment; conversely it may be the intention to overtly give that bank the business.
Broadly, the omnibus model offers simplicity and ease of use but trading authority is given away with an omnibus account. Direct trading is more transparent and controllable. The investor opens one account with the portal provider and the portal provider opens an undisclosed account with all of the funds, doing all the admin such as account opening and settlement on the investor’s behalf. Fund providers do not have access to their investors. A disclosed nominee account may be opened in the investor’s name, but this account is still owned by the portal provider. If something happens to the portal provider or an intermediary, such as a clearer, if the client is an undisclosed nominee its anonymity means it will not be able to approach the fund providers; as a disclosed nominee the issue remains that the trading account actually belongs to the portal provider and unless the client is a signatory on that account, return of funds is unlikely until the problem has been resolved. Most omnibus portal users do not have delegated trading authority on their own accounts.
Background movements
At the front end, the look and feel of portals will be quite similar; the difference is all in the set-up where, depending on which portal is being used, trades may be routed through a clearing partner or direct to the fund provider.
Background processes such as clearing and settlement vary according to portal type. Omnibus platforms may offer auto-settlement or direct settlement. Auto-settlement platforms do away with manual processing and payment and settlement requests. Automation will make all the trades across all accounts for the client and will net off all investments and redemptions before calculating what is owed. This does present an element of risk; whilst the money is in transit, if the clearing bank being used by the portal to facilitate the movement gets into financial trouble then the investor’s payment will be locked into the system until such time as the clearer emerges from administration. Bear Stearns was such a clearer, rescued by J.P. Morgan. Auto-settlement is now optional rather than mandatory for most providers.
An alternative omnibus model will execute trades for the client, the client settling directly with each fund, going through the normal payment process for the business as if it was trading outside of the platform. Reference to direct trading on an omnibus account does not mean trading directly with the fund; it refers only to the settlement process. Settlement through a fully direct trading portal typically uses the same direct settlement process as for omnibus although MyTreasury offers an auto-settlement feature developed with Honeywell (see case study below).
Case study
Honeywell is a US-based Fortune 100 diversified technology and manufacturing business which in 2013 reported global sales of $39.1 billion. Globally, Honeywell manages over $7 billion of cash and investments and a component of that is invested in MMFs. All MMF trades in EMEA and APAC today are executed and managed using the MyTreasury MMF portal.
The in-house bank which centralises the cash and provides funding to the affiliates is located in Belgium and overseen by the firm’s Director of Treasury, EMEA, Séverine Le Blévennec. In 2009, when a European regulatory shift ended the in-house bank’s Coordination Centre status, investment in MMFs became possible. With the cash balance notably increasing and the “investible universe of banks” decreasing, it led directly to the implementation of ICAP’s MyTreasury MMF portal. Although Honeywell’s treasury team had been part of a panel of investors that two years prior helped the vendor develop its platform, it still made market comparisons before selecting.
The set-up and integration of the portal was a fairly straightforward process, says Le Blévennec. The project started with the in-house bank and then rolled out to the UK before taking in the Asian markets. Honeywell sent documents to its existing fund providers explaining that beyond a specified date it would only be dealing through the portal. Where existing funds were not already on the platform the invitation was extended to join it, Honeywell having insisted that if the fund was not on the platform it would not deal with it at all. Only one agent (not the fund itself) declined the offer. For those that did, the terms and conditions of trading remain the same or better, she reports.
Le Blévennec notes too that the visibility and transparency that the platform provides over management fees has enabled her to negotiate rebates with various fund managers; in total it has amounted to a return of around $1m, although the low-rate environment has seen some euro funds subsequently cancel their rebates.
One of the key features of MyTreasury for Le Blévennec is its workflow system and ability to set up investment limits in the system. This means there is no need to monitor sub-limits of certain funds. “The platform gives us a view of the aggregate position of all money invested in the same fund. We can set limits and if a new deal would breach one of them, the system sends a warning message. A further control sends an e-mail message in case post trading, the fund AUM decreases causing us to be in breach.”
Honeywell helped MyTreasury develop a feature for reporting underlying exposures, aggregated across all of its funds on the system. This is downloaded as an Excel workbook enabling, for example, a view of the exposure to a specific institution or country across all 68 accounts. Given the volatility of some markets this is a welcome insight. “We could not have done it manually. With this function, if I have any doubts I can download the data and quickly take a decision to rebalance my funds.”
Today, the Group invests in six of the main currencies and has in the region of 40 active funds globally across the 68 accounts (different investors in the group can invest in the same fund). The only countries where Honeywell invests in MMF and where the MyTreasury system is not available yet are China, India and Japan, although the latter is in the pipeline.
Following geographical extension of the system’s use Honeywell worked on portal integration with its SunGard Quantum TMS. This has enabled a high degree of straight through processing, with all transactions being entered automatically for exposure management and settlement for the in-house bank. The interface to the TMS was also further developed to automate the booking of dividend (or rebate) distribution as well as day-to-day accruals on outstanding funds. MyTreasury has also developed an auto-settlement process for Honeywell where each trade automatically generates a SWIFT MT101 payment instruction.
For any treasurer considering using an MMF portal, Le Blévennec advises close inspection of the potential for platform customisation, particularly for reporting. Platform scalability is also important, as is user-friendliness and the ease of integration with existing technology. “I would also ask for references from a number of customers with a similar or more complex business profile who have been using the system extensively.” As a final point she expresses the need for a pro-active and open approach from the provider. “It is easy to deliver a platform where you just execute deals, but the devil is in the detail; when it starts to get more complex you will start to see the difference.”
Added-value
By building in compliance features such as trader limits, counterparty limits and maximum holdings, for example, a portal can automatically monitor every transaction. Electronic portals consolidate huge amounts of investment data and so reporting functions have notably improved in the past few years. ICDs offering, for example, allows users to import external investments (such as bank and time deposits) into its exposure analytics component to give a broad picture.
In addition to consolidated views of exposures, counterparty, currency and liquidity positions, a host of management information may be made available to users, depending upon the provider. These tools may show levels of activity and risk by country, asset type, maturity and so on and may be used to inform asset allocation. Market research, intelligence (including counterparty metrics such as stock price trends, CDS spreads and capital adequacy ratios), market price and news feeds are also typically delivered.
Cost
The explicit cost of using a portal as an investor is zero because the cost of providing a portal is borne by the fund providers. However, for an investor it is important to ask each fund it is already using – or intends to use – whether trading on a portal will alter its terms of trade compared to direct trade. Some funds operate a ‘portal’ share class, using this to effectively charge investors as an offset against the fees it pays to the portal provider.
The valuation debate
The ongoing discussion about MMF valuations, systemic risk and the various proposals for reform put forward by the EC and, in the US, the SEC, will have some impact on the way in which portals operate. The key requirement, if the shift is made to floating Net Asset Value (VNAV) funds will be how the portal provider will get information from the fund transfer agents in a timely manner. The agent, usually a bank, looks after records of investors, account balances and transactions and will provide the actual share price required for daily valuation. With constant NAV (CNAV), investors know the value is ‘one’ (dollar/pound/euro) and for accounting purposes this makes life relatively easy. VNAV brings uncertainty to valuation. On a daily basis portal providers will have to get the price in good time. It may be that cut-off times for investment may have to be brought forward, which for investors is going in the wrong direction. The decision is yet to be made.
The explicit cost of using a portal as an investor is zero because the cost of providing a portal is borne by the fund providers. However, for an investor it is important to ask each fund it is already using – or intends to use – whether trading on a portal will alter its terms of trade compared to direct trade.
Even if floating NAV is the way forward, the focus by almost all portals on prime institutional AAA-rated CNAV funds is unlikely to shift by any great magnitude (assuming the regulators’ proposal to abandon fund ratings is dropped). However, whilst treasurers will not necessarily want to have to seek permission to invest in new funds, if the reforms are accepted some portals may open up to a broader range of fund-types, even exchange-traded funds.
Firstly, this will require significant technological development on the part of the portal providers to accommodate the different fund processing models. And secondly, it would change the risk profile of MMFs. CNAV funds are sold on the back of their perceived robustness but when the US-based Reserve Primary Fund ‘broke the buck’ back in 2008, it cast a long shadow over CNAV money markets everywhere. The SEC stepped in with Rule 2a-7 requiring MMFs to restrict their underlying holdings’ average dollar-weighted portfolio maturity to 60 days or less, and for credit ratings no more than 3% of assets must be in securities falling below the top two ratings. If the sanctity of MMF fund robustness is to be maintained, for all the discussion it may just be business as usual for most providers.
Integration
Treasurers are now able to source market, trade and position data, with most platforms at least offering market views, size of funds, current and historical yield, portfolio information and analytics, and account balances. The discussion about which data is required, when and in which format, should be ongoing and reflective of the changing needs of treasurers and the need to integrate data with existing treasury systems. The closer the integration the more likely straight through processing can be achieved, eliminating the need to re-key daily rate and trade confirmations, for example.
