Innovation in the short-term space, for corporates at least, is rare. That’s why, for treasurers, the idea of a fixed-term fund (FTF) is one that will surely have eluded most. In fact, until June 2018 FTFs didn’t even exist, says Kevin Cook, CEO and co-founder of TreasurySpring.
By establishing “simple, transparent and standardised exposure to a new universe of single-name, investment grade money-market investments”, he believes FTFs represent the first material new product innovation in the cash management space since money market funds (MMFs) were developed in the 1970s. It’s a bold claim.
Whereas asset managers, banks and hedge funds often have government exposure, bank exposure (often with a reasonable proportion on a secured basis through the reverse repo market), and corporate exposure amongst their portfolios, corporate treasurers typically have only bank deposits and MMFs as their principal means of managing short-term cash (although treasurers operating in global mega-companies may have more avenues open to them).
The reason most treasurers take a straightforward path to bank deposits and (for around 40% of the treasury community) MMFs, is simple. The idea that treasury has the time, budget and resources to put in place the infrastructure to take advantage of anything else is challenging to say the least.
In an ideal world, doing so would mean less risk and more return, but the reality needs complicated contract negotiations, a massive infrastructure lift, a risk-management framework, and accounting and valuation treatments to be formulated. Between the physical act of getting from where most treasurers are today, and the ideal, lies one enormous chasm, says Cook.
In the past decade or so, a number of participants have tried to cross this chasm: the likes of Euroclear and Clearstream have strived to make it easier to get into repos, and platforms have appeared that offer investors electronic trading in the repo market. But unless the investor has the infrastructure in place to affect the settlement of the trades, it still remains off-limits for most.
This is where TreasurySpring says it now has the solution, Cook saying that the alternative investment fund platform that it operates allows treasurers to “easily consume these assets in a standardised, regulated format”. He sees the idea as “complementary” to both the MMF and bank deposit space, offering exposure to a single investment grade issuer for a fixed term. So, whilst FTFs have many of the same characteristics as term deposits, they can provide access to sovereigns and corporates, as well as the secured exposure to financial institutions that has thus far proved elusive. “One simple digital onboarding process can now provide access to an attractive new universe of cash management investments that would previously have required hundreds of hours of internal resources and hundreds of thousands of pounds of infrastructure spend,” Cook explains.
With the treasury mantra of ‘security, liquidity and then yield’ facing pressure from the ongoing low, zero and negative interest rate environment, and investors now more acutely aware of bank-as- counterparty risk, there is perhaps a little less comfort with the traditional ways for treasuries to manage their short-term cash.
But this is not about offering a product to make more money, says Cook of his platform. “We know that’s not how treasurers typically think. We’ve built this solution on the basis of reducing risk.”
It’s clear that risk-free rates in the home currency are not always possible, especially when short-term bank deposits are paying less than risk-free (many being unwilling, post-Basel III, to take on large pools of institutional short-term cash and/or offering rates that are a long way below the risk-free curve). It’s apparent too that few treasurers invest in relatively safe government bills because they need new policy permissions, new dealer relationships and the kind of custody infrastructure that treasuries don’t typically have or want to put in place.
To try to meet all needs, TreasurySpring offers an entry-level product in UK or US government fixed-term funds, backed fully by maturity-matched assets, giving access to the closest thing to the risk-free rate that you can get without a Central Bank account, says Cook. “If you want a seven-day US treasury bill Fixed-Term Fund, we will physically buy the seven day treasury bill and place it in custody at a top tier custodian bank, giving you a legally segregated interest in the proceeds from that treasury bill. It gives you all the benefit of owning the asset directly, without any of the operational and cost headaches of doing so.”
Hard work done
The work done behind the scenes is the key here because the product also offers treasurers the essential infrastructure to go further than MMFs and bank deposits. “For our T-bill funds, we’ve collapsed several dealer relationships, KYC and AML processes, custody, an experienced trading team, Bloomberg data, and the whole operational process around legal set-up, settlement, fund administration and valuation, into a single click,” he explains.
To go any further than this, a treasurer may consider some bank exposure, on a secured basis. Normally this would start to get too complicated for many treasurers because, as Cook says, using the repo market “introduces another level of pain”. It needs a complex legal agreement (a Global Master Repurchase Agreement or a Global Master Securities Lending Agreement), collateral schedules and a tri-party agent set-up with one of the major providers (hence ‘tri-party’ repo) to ensure fair-play with the transaction, especially around the valuation of the securities.
“We have put all of that infrastructure in place, effectively translating what the banks want into what the corporate treasurers want, offering a secured bank Fixed-Term Fund with a rate that is often above the unsecured bank deposit rate,” he notes. “It’s quite hard to argue that you shouldn’t do secured over unsecured, when secured pays you more money!”
As a new platform there may be some concern that TreasurySpring introduces credit risk. Cook is quick to explain that what is offered is in fact a totally segregated pipeline into the market; issuers are completely legally segregated from each other, so there is no commingling of credit risk.
Once treasury cash is on the platform, he says it can be held, rolled or redeemed, with the cash flowing back to the same account through which it originated. “It never touches TreasurySpring because, as a regulated fund manager, all cash flows are dealt with by our independent fund administrator; there is no credit risk in the system beyond the counterparty that the client has elected to obtain exposure to, irrespective of the status of our business.”
With the firm’s Fixed-Term Fund platform soon able to also provide the means for treasurers to invest in highly-rated unsecured corporate debt, diversification in the short-term space is, it seems, now firmly on the table at last.