Single-dealer or multi-dealer?
Since 2009, US software company Streambase has conducted a yearly survey of technology trends in the foreign exchange market. In the 2015 survey, which polled 147 professionals involved in trading FX on both the buy and sell sides, multi-bank platforms were found to be the most popular.
The rationale for this preference is reasonably straightforward. Most companies have multiple accounts with multiple banking partners and the ability to connect to these counterparties through a single channel supports efforts to standardise processes and reduce costs (two things never far from the treasurer’s mind). Using multi-bank portals is also perceived to be the best way for treasurers of ensuring that they have received best price.
For Mitsubishi’s European subsidiary, which brought in its first portal around 12 years ago, that was and continues to be the case. “We chose a multi-dealer platform and one of the key reasons for that was to be confident that we were getting the best price on our trades,” notes Gary Williams, General Treasury Manager at Mitsubishi Corporation Europe.
Treasury will still hop on the single-dealer platforms from time to time though, he explains. However, given that the FX exposures are not enormous, those instances are, he says, few and far between. “If we were to deal something significant we would certainly use a single-dealer portal and talk to the bank direct. That’s because showing everybody on the portal that you have a large deal on the cards can start to affect the price you receive. That’s never a good idea.”
The sentiment that the best price is only achieved through competition on a multi-bank platform is understandably still shared by a large number of treasurers, particularly those at companies that do not tend to find themselves making frequent large trades. “In general, single-dealer portals are not our preference because we want to make sure we get the best rate,” says Dimitris Papathanasiou, Financial Risk Manager at Coca-Cola HBC AG. “We are aware that single-dealer portals have some benefits, but we don’t feel it makes sense to only go to one bank,” he explains.
“Some banks prefer to promote their own electronic platforms by providing better quotes there than the multi-bank platforms. But at least when you use a multi-dealer platform you are pushing the banks to compete with one another, so these dealers are losing our trades.”
But like Mitsubishi’s Williams, Papathanasiou is well aware that multi-bank has its limits. There are, for instance, certain instruments for which single-dealer platforms are better suited. Take options, for example, which he says are not yet available to him through his multi-dealer portal. “Right now most of the banks do not price options in the multi-dealer platform automatically. The process is a bit more manual – you have to go on to the platform and put in a request,” he notes. “But we still get competitive pricing – even outside the platform – as I will never go to just one.”
In the MMF industry we see trends similar to those taking place in the FX portal market. Users seem to be swinging slowly towards the independent providers like MyTreasury, ICD, and SunGard, 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 SunGard’s Corporate Cash Investment Report 2014. It shows that independent, multi-bank portals are far more commonly used than proprietary systems, with 23% of respondents using a multi-bank channel for 80-100% of their FX activities. 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.
The range of fund participation in a bank portal may be limited, compared to an independent portal. 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.
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.
What are the benefits of MMF portals?
They save time and provide a one-stop-shop with access to multiple investment options with fully automated sweep options available.
Portals improve portfolio management and allow the investor to diversify their investment portfolio, manage limits and analyse holdings.
They also improve transparency and provide timely information and analytic data.
MMF portals provide streamlined options, transparency reporting and analytic tools.
They show the entire MMF market place in one application, giving a holistic overview of the short-term investment market.
They also consolidate the need for multiple applications to trade the funds and automate the process downstream.
In addition to analytical capabilities, vendors have also developed methods of controlling and managing risk, as well as creating the opportunity to set credit limits with the various funds and providing in-depth information on each fund’s performance and portfolio.
Cost and integration
Portals are usually free to investors and this often includes the cost of integration into the corporate’s treasury system. The portal providers are remunerated by the funds themselves by way of a commission (usually a few basis points) on each deal. Since the commission is small, investors should not be losing out on any return; but it is worth noting that some portals will take larger commissions, thus restricting the choice of funds if you choose not to pay these higher rates, and in order to balance out the overall cost, returns could be lower.
With the near-zero cost of using a portal (it still requires basic resources, such as person hours), some treasurers are adapting their approach to fund investment. Traditionally, a trading desk would have carried out ten to 15 trades a day, typically early in the morning to account for the time it takes to get confirmation that the trade has taken place. However, since the introduction of real-time processing and automated trades via the portals, providers have seen far more trades taking place later in the day, very close to the funds’ cut-off times.
Cash management in the digital age
It is in the area of cash management that independent providers are perhaps most established, with treasury management systems (TMS) vendors building ever more intricate cash management modules and dashboards into their web-portal offerings. And the advent of cloud has helped significantly here.
Half a decade or so ago and, in the absence of a broad range of cloud-based treasury solutions, the TMS was struggling to find much traction beyond the largest multinationals, particularly in less developed regions. It was not that the treasurers of companies without a TMS were ignorant of the benefits such technologies would bring to their operations. The issue was that companies would issue an RFP and look at all the different systems on the market, only to walk away after being told the budget requirement. After all, half a million dollars upfront (not to mention the ongoing cost of repairs and updates) represents a fairly hefty initial outlay for a platform that is not even profit generating.
However, this is not the case today when treasurers go to talk to any of the software-as-a-service (SaaS) cloud-based, web-portal TMS providers in the market. “Many companies that needed a system but didn’t acquire one just needed a more comfortable entry point,” says Michael Fullmer, Managing Director of SaaS treasury solutions provider Kyriba’s Singapore office. “The ability to move to a full TMS for a few thousand dollars a month versus spending nearly a million dollars: that is very appetising for them.”
Bank connectivity and innovation
Cash management is also where the banks continue to innovate and invest in their digital offerings. Corporate treasury departments naturally require a plethora of financial data from their banking partners in order to execute their cash management duties. But automating and integrating all the data the department requires on such matters as cash positions, payables and receivables and interest rates is rarely straightforward.
How a corporate connects to its banks is, therefore, of crucial importance. There are a number of different channels through which corporates can access data and, within those, various connectivity options, including:
Single bank proprietary connectivity.
Multi-bank connectivity via a portal or SWIFT.
The multi-bank shift
Since the last financial crisis, spreading holding cash with a number of different banks has been a common tactic used by treasurers to minimise their counterparty risk exposures. What is more, with banking regulation producing unintended consequences such as banking de-globalisation or ‘balkanisation’ even those who manage their counterparty risk exposures using other methods are finding they need more banking partners to obtain global coverage. Implementing multiple proprietary electronic banking is inefficient, however, and hardly helpful when it comes to delivering the visibility over funds that the treasurer demands.
Instead there has been increasing interest from the corporate market in the type of enterprise-wide, multi-currency, multi-bank cash management portals. These solutions – which can be integrated with a company’s existing technology – tend to cover a range of different functionalities to assist at each stage of the cash management cycle – payables and receivables, cash forecasting, and supply chain finance (SCF)products to name but a few. Adding to the range of solutions we have, in recent years, seen the emergence of independent SCF portals such as Taulia.
While third-party vendors have used the increasing demand for multi-bank cash management portals to establish rivals to the banks’ own proprietary portals, the proprietary portal has not gone away. In fact, banks continue to see portals as the optimal delivery vehicle for most treasury management services and many are ramping up their investments in such technology as we speak. Indeed, certain proprietary portals now give visibility over account balances and pooling arrangements with third-party banks too. We therefore recommend speaking to your relationship bank(s) to see what they can (or are planning to) offer in this respect.
An even more efficient way for corporates (of a certain scale) who wish to connect to multiple service providers through a single channel is by joining and directly connecting to a bank co-operative network such as SWIFT. Connecting to SWIFT, so the theory goes, can eliminate almost all a corporates’ bank connectivity problems. It replaces multiple bank channels with a single, secure and standardised window to the 8,500 bank and financial institution members on the SWIFT network.
In April 2015, SWIFT announced another 26 new corporate customers had joined the co-operative over the previous six months, bringing the total figure of corporates groups now using SWIFT to 1,450, representing over 28,000 underlying legal entities.
Chart 1: Connectivity – an evolving landscape
Increasing corporate technical sophistication and international reach
Connecting directly to SWIFT has traditionally been viewed as an expensive option for companies and, as such the SWIFT service bureau route is the current ‘connectivity model of choice’, with over 100 providers worldwide. SWIFT service bureaux were created originally to provide secure connectivity to SWIFT but now the best bureaux offer much more than just connectivity: cloud-based applications for payment factories, reconciliation, data transformation, compliance, cash forecasting, sweeping and pooling, are just some of the additional functionalities commonly bundled into offerings.
However, despite the enduring popularity of SWIFT service bureaux, new initiatives in recent years such as Alliance Lite and the latest edition Alliance Lite2 have, through the utilisation of cloud-technology, attempted to tailor direct connectivity to treasuries with smaller technology budgets. Whether the current set of offerings ignite the interest of smaller corporates remains to be seen, but SWIFT clearly has them in its sights. “The SWIFT proposition was at one point all about connectivity; we now have a broader portfolio of offerings in the corporate space,” states Neil Gray, Director Corporate Solutions, SWIFT. “Everything that we are now offering is driving adoption by the mid-tier companies.”
One final recent connectivity innovation worth noting is the ongoing development of additional bank-agnostic messaging systems, such as SAP’s financial services system (FSN). Whilst the common consensus is that SAP’s FSN does not pose an immediate threat to SWIFT, the solution is widely viewed as potentially beneficial for both corporates and banks alike.