How to Choose the Right Trading Platform
by Justin Meadows, Founder and Chief Executive, MyTreasury
As the use of MMFs has grown and treasurers have found themselves setting up accounts with multiple fund providers, there has been an accompanying increase in the level of interest in the use of MMF trading platforms. It is now widely recognised that these portals provide a convenient single gateway for treasury investors to access and trade their fund accounts electronically across all their fund providers; they also deliver significant benefits compared to the traditional methods of trading MMFs by phone or fax. However, due to the information (and sometimes misinformation) overload accompanying the rapid increase in the market for MMF platforms there is a real risk of potential users making a platform choice without being fully or properly informed.
As the costs of doing this can be high it’s worth taking the time and effort to ask platform providers the following 10 apparently simple questions, which actually reveal some quite fundamental differences between the platforms and their suitability for your treasury trading. If you don’t get answers, or sufficient evidence to back up any answers you do receive, it’s probably best to assume the worst!
1. What kind of portal will I be using?
MMF platform terminology can be quite confusing as the various providers can use the same terms in different ways. The key distinction is between omnibus platforms where the portal provider is the fund account holder and trades on behalf of investors, and fully-disclosed or direct portals where investors hold their own accounts directly with their fund providers. Whilst this may seem to be pretty straightforward it is actually quite difficult to be completely clear about what you’re going to get, and you may need to dig a little beneath the surface.
MMF platform terminology can be quite confusing as the various providers can use the same terms in different ways.
Omnibus platform providers frequently say they are fully-disclosed because the name of the end investor appears in the name of the account. However, it is important to understand that even if this is the case, the account is owned by them and not by you. This is not just an academic distinction as it means, among other things, that you will only be the beneficial owner of the ‘shares’ you receive for your investment in the fund and not the legal owner. For some organisations this doesn’t matter but for many it is a significant issue. It also means that you will be a client of the platform not the fund, and many investors have found that this has impacted on the communication they have with their funds, particularly the fund managers, which is such a critical element of the investment relationship.
Just to add to the confusion there is also a lack of clarity in the use of the term ‘direct’. The generally recognised meaning is that investors hold their own accounts ’directly’ with their fund providers, hence the name. The portal simply offers the benefits of electronic trading with multiple funds through a single gateway, replacing the traditional method of trading manually with each fund individually by phone or fax. However, the term has also been adopted by some omnibus platform providers to describe the settlement process, and here the term implies that an investor settles directly with each fund rather than go through a third-party clearing agent, which has not been a popular option since the near failure of one of the agents used by a portal during the financial crisis in 2008/09. It has nothing to do with direct trading. In contrast fully-disclosed portals only offer direct settlement, so here the term unambiguously refers to the trading relationship.
All this means that you need to be careful about the way these terms are being used when deciding which portal to choose. You may think that you’re getting a fully-disclosed, direct trading platform because every provider you have spoken to has told you so - but the reality is that you could end up with something not just slightly different from what you were expecting but at completely the opposite end of the spectrum from what you are looking for. So the key questions to ask here are whether you can move your existing fund accounts onto the platform, whether you are the only ones who can sign opening forms for new fund accounts and whether your own people will be the only authorised traders on the accounts. If the answer to any of these questions is ‘no’, then you are not dealing with a fully-disclosed direct trading platform in the generally accepted use of the term.
2. Is the platform automated?
All MMF platforms promise automated trading, but the reality is that in most cases this automation is largely an illusion. Real automation means that a platform is fully integrated with the fund provider’s transfer agents (TAs), which process the trades, to avoid the need for their manual re-entry into the TA systems as is required with the traditional trading methods of phone and fax. Most MMF platforms are not integrated with the TAs but rely on their own staff (typically based in the US) stripping trades out of the back end of the system and then phoning and faxing them through to the fund TAs in Dublin and Luxembourg. Whilst this may well be completely transparent to you the lack of automation actually has some quite important implications.
Obviously the risk of trading errors increases significantly every time a trade has to be entered. With fully automated platforms the trade is entered once by the investor when placing the trade and then is communicated electronically throughout the rest of the trade request and confirmation process. This is in sharp contrast to the manual platforms which require trades to be entered at a minimum of five separate stages in the process, providing many opportunities for mistakes to be made along the way. There is no dispute that fully automated trading is by far the most efficient and accurate method of trading available, so don’t simply take the word of a portal provider for its position on this; go and ask your funds which platforms have implemented truly automated trading that does not involve phoning or faxing at any stage in the trade request and confirmation process.
3. Who will be able to trade my fund accounts?
Closely linked to both the above questions is the issue of who will be able to trade your accounts. You might imagine that when you trade through a fully disclosed direct trading platform this is not an issue as you are obviously trading your own accounts. However, even here you need to be careful because if the platform is not automated you will have no choice but to give delegated trading authority to the platform provider or it would not be able to phone or fax your trades through to the TAs in Dublin and Luxembourg. When you implement these platforms you will be required to send your fund providers a letter giving delegated trading authority to a list of platform provider staff, who are then able to communicate manually any trades you enter in the front end of the system. Who are authorised signatories on your accounts is obviously fundamental to the control you have over your own investments. You can find out where you will stand on this very easily by asking the portal providers to give you a copy of the mandate letter they need you to send to your fund providers: if this includes a list of their staff whom you are asking to be made authorised traders on your accounts then you know you are in trouble. It might also be helpful to validate what you are given by asking your fund providers directly what mandate they expect to receive for you to trade via any particular portal.
All MMF platforms promise automated trading, but the reality is that in most cases this automation is largely an illusion.
Perhaps even more worrying are the omnibus portals when you may well have to proactively make a specific request to be included as an authorised signatory just to be able to trade your ‘own’ accounts. To protect the ‘critical’ role they play in the trading process some omnibus portal providers do not actively encourage their users to become signatories on the accounts that have been opened in their name, so you will be reliant on them to place your trades. It is difficult to envisage any circumstances in which this would not normally be an issue for any organisation but it would obviously become critical if the portal ceases trading for any reason. You don’t want to find yourself in a position where you can’t get immediate access to your money because you are not recognised by your fund providers as authorised signatories on the accounts held on your behalf. So if you are already using or decide to use an omnibus platform for some reason make sure that, at the very least, you insist on becoming authorised signatories on your accounts.