By Helen Sanders, Editor
TMI has seen a significant amount of coverage on money market funds (MMFs) over the past two years, coinciding with a period of substantial but steady growth in the use of these instruments amongst European corporations, particularly in the UK. Use of MMFs in the United States still dwarfs Europe, and the recent credit issues have had very little impact - in fact, with US money market fund assets reaching $3 trillion in October of this year, 2007 marks the biggest asset increase in money market funds’ 35 year history. In Europe, however, the trend continues upwards, with companies in continental Europe as well as the UK increasingly seeing the benefits of AAA-rated money market funds as repositories for their short-term cash, particularly as other types of money funds, such as the investment-style funds in countries such as France have had a rocky ride. In this article, we look at one of the most important developments in the money market fund industry, namely how technology is fuelling the growth of MMFs in Europe and the new opportunities which these tools present.
Companies which use MMFs can really be divided into two categories - those who use them as their primary short-term investment vehicle, who may divide their cash between various funds, and those who use MMFs for only a small amount of their cash - for example, they may only use one or two funds, and often only for late-day cash. While the latter category is still the larger of the two, this is changing, with companies using MMFs more heavily as they become more familiar with them as investment options.
Technology surge
In recent years, there has been a surge in the availability of technology with which to deal MMFs and 2008 promises to be a very significant year in this respect. Many money market fund providers now provide proprietary tools with which to deal their products, some of which, such as Goldman Sachs Asset Management, also provide access to funds of other providers. When dealing technology is new, just as was the case with FX, for example, there is a place for single provider portals, but as the technology matures and investors gain in familiarity, it seems likely that single provider portals will only thrive in certain circumstances: firstly, amongst treasuries that only deal in MMFs to a limited degree, and therefore only need access to one or two funds; and secondly, if access to MMFs is provided as part of a bank’s cash management portal which allows a variety of liquidity-related tasks such as balance/transaction retrieval, cash positioning, on-line deposits/loans etc.
There is a debate in the industry about how much information about the fund banks will want to reveal.
With the exception of these two scenarios, as companies increase the levels of cash invested in MMFs, and expand into a wider range of funds, it is difficult to see that companies will want to use different dealing portals with the associated inconvenience, differences in functionality and lack of integration with the treasury management system. There are already multi-fund portals available in Europe, but January sees launches by two providers of multi-fund portals. Firstly, the SunGard Transaction Network’s (STN’s) Money Markets portal, which is one of the largest portals in the United States, becomes licensed to trade in Europe, with the advantage that many European funds are already available through the portal and it is closely integrated with SunGard’s treasury management systems, although it is not limited to SunGard customers. Secondly, ICAP plc is due to launch MyTreasury in January 2008. The service is based on a European Commission funded project, and combines dealing capabilities for a range of products including MMFs, deposits, loans and ultimately ECP. [[[PAGE]]]
There have historically been two challenges which have dissuaded some corporations from dealing through multi-fund portals. Firstly, many corporations want to ‘look through’ to the underlying assets of the fund to ensure that the fund meets their credit requirements. Secondly, some portals have operated on an ‘omnibus’ basis - i.e. purchases of units in a fund are done either on a customer’s behalf and/or in bulk without the provider knowing who their underlying customer is. This can be detrimental both for the fund provider, as it detracts from the ‘Know Your Customer’ requirement and from the customer’s point of view in that they will often have a broader relationship with the fund provider and will therefore want to ensure that the provider is aware that they are doing business with them. However, these issues do not exist with some of the stronger multi-fund portals, which facilitate trading on a ‘non omnibus’ (meaning full disclosure) basis and do not act as a financial party to the transactions. There can be clear benefits to dealing MMFs electronically, as with other financial products, particularly if the portal is well-integrated with the treasury management system (a point which is still not prioritised sufficiently amongst many treasuries). For example, the treasurer can better demonstrate price discovery and deal/confirm a deal almost instantaneously. With the deal flowing through automatically to the treasury management system, there is no scope for input error and the transaction is then subject to appropriate approval controls. As Dave Mishoe, Managing Director EMEA, SunGard, describes:
“Our solution for trading, research, accrual information and historical activity streamlines our client’s workflow, and becomes an even more powerful end-to-end solution when these functions are integrated with the client’s treasury workstation.”
However, just as the move towards electronic trading for instruments such as FX was not without its pitfalls, there is still some dissent and negativity towards multi-fund portals amongst the banks. After all, if a corporate has a choice of funds, won’t they go elsewhere? This argument seems somewhat outmoded, and perhaps is really only the concern of fund providers with uncompetitive offerings. At a conference recently, a presenter emphasised that you don’t do good business by stopping customers from leaving, you do good business by encouraging them to join. This would seem to be the case here: as multi-fund portals become more prevalent, it will be inevitable that fund providers will need to make their funds available through them. There is also concern amongst fund providers about the information about publicising the composition of the fund. As Justin Meadows, ICAP Plc notes,
“There is a debate in the industry about how much information about the fund banks will want to reveal. While it is inevitable that they will need to make information about the assets in the fund available there is a question of timing and the time and effort required to do so.”
This ability to ‘look through’ to the underlying assets would seem to be critical for corporations, and a continuation of this trend is likely to attract companies which have not yet considered MMFs. At present, however, there is still division amongst fund providers, in some cases resulting in some fairly dirty tactics to encourage corporations to deal directly rather than through a third party portal. Corporations who receive financial or other encouragement should be warned that these practices are illegal in countries such as the United States and are at best unethical.
Going forward, there is considerable scope for Asia currency funds.
While the existence of a multi-funds portal is unlikely to convince a treasurer to invest in MMFs in the first place, a convenient, secure solution with which treasury staff members have a positive experience is likely to encourage investment of a higher proportion of a company’s cash. There are other ways too in which the use of multi-funds portals is likely to encourage growth of the MMF industry. As the Special Feature on Internal Liquidity Management in this edition illustrates (‘Coins under the Cushions’) one issue which a number of companies face is to ensure that the business units and subsidiaries are operating within the company’s investment policies. In many cases, centralisation is a logical solution to this problem, but even within a regional treasury structure, there can be challenges in ensuring that policies and operational procedures are applied consistently. Using the same technology, with the same visibility of funds can be a significant advantage when investing across different parts of the world.
Emerging markets
Emerging markets, particularly South East Asia, have a huge appetite for MMFs, both Asian companies and European/North American multinationals with regional treasury operations. For multinational corporations, treasurers want to invest in similar products with consistent credit criteria and operational processes applied wherever they are. Consequently, there is a growing demand for USD and increasingly EUR money market funds, but going forward, there is also considerable scope for Asian currency funds. Goldman Sachs Asset Management, for example, have already launched their JPY fund. STN is also an expansive network in the region, allowing corporate treasuries to connect to counterparties worldwide through one platform and service provider. By the end of 2008, STN will reach over 60 countries on six continents. [[[PAGE]]]
Corporate investors
According to some commentators, web-based portals for dealing in MMFs are fuelling the use of MMFs amongst corporate investors which in time will encourage more fund providers to place their funds on these portals. This is part of the story but corporate demand alone is not likely to be enough to allay fund providers’ reticence about the ‘look through’ capability into the underlying assets, nor the competitive concerns about investors’ ability to invest in other funds. Corporations are still relatively small investors compared with other institutional investors and fund providers’ behaviour and attitudes are unlikely to change dramatically only in response to corporate treasurers’ demand.
However, financial institutions’ use of money market funds is likely to increase dramatically with the change to Capital Adequacy Requirements under Basel II. Investment in money market funds is now risk weighted to the extent that they are treated in an equivalent way to investment in deposits. For financial institutions with large amounts to invest and high volumes of transactions, availability of multi-fund technology will be key and providers are scaling up their efforts to satisfy the demands of this market. For example, ABN AMRO announced MoneyMarket Express in December 2007, which allows financial institutions to invest in a range of AAA-rated money market funds from a single trading platform. It is these developments amongst financial institutions and large institutional investors, of which corporations are one category, which will encourage greater acceptance of multi-fund portals amongst fund providers which in turn, will provide significant benefits to corporations seeking a secure, convenient trading mechanism for money market funds.
