Published: August 01, 2011
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!
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.
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.
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. [[[PAGE]]]
All MMF platforms will provide their services to you notionally free of charge and get paid a brokerage fee by your fund providers based on the account balances you hold in their funds. But beneath the surface platforms are actually very different in their fee structures and this gives rise to significant variations in the hidden costs they will impose on you.
The fees charged by the various portals have historically been very different. Although there has been some narrowing of fee differentials due to increased competition in the market, significant disparities still remain. While you will not be charged directly for using a platform, where the fees charged are relatively high, you may well face indirect costs as fund providers seek to reduce your rebates or move you to a more expensive share class to offset the fees they now have to pay the platform provider for your business. To avoid any nasty surprises you should always ask your fund providers if you will be financially penalised for moving onto specific portals. And if you are using MMFs for the first time it would also be sensible to ask what share class you would be offered for trading directly with the fund and whether the same share class would be available through any portal you may considering using. Not all portals can offer all the available share classes because their fees make the economics of doing this unsustainable for the funds, so make sure the portal you choose actually offers the most appropriate share class for you.
If you are an existing platform user you may also want to explore whether you can reduce your costs by moving from one platform to another. Some of the higher fee platforms appear to be offering you a good deal by rebating to you some of the management fees charged by your fund providers. But the reality is that you are already paying well above what you should be to cover the portal’s fees and even after their rebate you will still almost certainly be paying higher fees than you would if you traded with them directly and received higher rebates or were put in a cheaper share class. You may well find that moving to a lower fee portal gives you all the operational benefits of automated trading plus the financial benefits of the same level of rebates or management fees that you would get with direct trading. Just ask your funds whether there are any financial incentives available to do this.
Some of the portal providers have staff who are authorised to offer investment advice. Whilst this might at first sight appear to be a good idea the reality is that there can be hidden drawbacks. An obvious point is that most portal staff don‘t have a substantial background in the money fund industry and hence are perhaps not best placed to offer advice in this field. But the major concern arises where the platform has different fee levels in place with different fund providers, giving rise to a potential conflict of interest. It could be perceived that it is in the economic interests of these platforms to encourage more assets to flow through the platform to those funds that are paying them the highest fee. A simple way to avoid this problem is for the platform providers to disclose their fees. While they may be reluctant to do this for reasons of commercial confidentiality there is no reason why these fees cannot be disclosed on a confidential basis to individual investors. So if you are considering using a platform that also offers investment advice, ask for details of the fee schedule with each of their participating funds so that you can avoid any potential concerns about the impartiality of their advice. Alternatively just use a portal that does not offer investment advice so you can be absolutely certain that your investments are made on a truly independent basis - by you!
One of the key benefits of using electronic trading portals is their ability to ensure compliance with your organisation’s treasury policies. To do this effectively a platform needs to allow individual trader permissions to be set and monitored, second signatories to be required either routinely or when a trader permission or treasury policy may be breached and limits to be set for individual fund participation in terms of a maximum value or percentage holdings. If your platform will not allow you to do all this then you will miss out on some of the major reasons for using portals. To check this you need to get the provider of any portal you are considering to demonstrate how you can set:
Just to be on the safe side don’t accept an explanation; require a demonstration.
Another major benefit of electronic trading platforms is the audit trails they can provide automatically for all trades completed via the platform. Again, the capabilities of the various platforms vary significantly in terms of what information they can provide about each trade. The best platforms provide you with details of all actions by anyone in your team related to a trade, such as who raised it and when, who authorised it as a second signatory (if required) and when, who in the fund or its TA accepted it and when, who confirmed it and when, together with details of any warnings issued about potential treasury policy breaches and actions taken in response, right down to identifying who has opened a trade ticket to view it and when. The very best platforms also allow you to recreate the MMF market at the moment you did a trade to see what other trading alternatives were available to you at the time given your fund accounts, whether the fund was still open or not and whether you had sufficient headroom still available to make alternative investments. Check with your preferred portal provider to see whether all these features are available and, if not, explore further to find one that does offer them.
To avoid any nasty surprises you should always ask fund providers if you will be financially penalised for moving into specific portals.
Most platforms have standard reporting capabilities covering current and historical market and trading data. However, real benefits arise from using a platform that also provides consolidated online statements of fund account balances, together with details of actual accrued interest and dividends paid. At present most investors in MMFs estimate daily accrued interest using the latest balance information and the previous day’s daily dividend factor.The problem is that dividend factors are normally reported to only nine decimal places whilst many funds actually calculate accrued interest using dividend factors to between 18 and 24 decimal places. For small balances this does not give rise to serious discrepancies, but for larger ones it often results in substantial time and effort being required to undertake end of month reconciliations between the estimates of interest earned on fund accounts during the month and dividends actually paid by the funds on the first working day of the following month. Another advantage of the automated platforms is that they receive nightly updates from the fund TAs with both end of day balance information and actual accrued interest, thereby removing the need for daily estimation of accrued interest or end of month reconciliation. Again your funds will be able to tell you if their TAs provide accrued interest information to any particular platform you might be considering.[[[PAGE]]]
A number of platform providers have recently jumped on the latest portal bandwagon and offer a reporting tool to provide ‘transparency’ across a range of fund portfolios. The limitations and potential dangers of these offerings have already been discussed in detail in a previous edition of TMI (issue 194 April 2011) and it is important to understand exactly what you are being offered. As the article makes clear a major problem is that portfolio data is currently provided on a highly inconsistent basis by the various fund providers in terms of both the age of the data being published and the ability to uniquely identify individual securities. When these issues are coupled with the lack of consistency of key data reported by the various funds for apparently the same securities and the high level of portfolio turnover resulting from the need to maintain high levels of liquidity in the funds, it is clear that apparent transparency may be at best illusory and at worst dangerous as the basis for making investment decisions. Until the MMF industry has agreed a standardised minimum portfolio data set to ensure consistency of data content and timing across all providers you should always check out any questions or concerns about portfolio holdings directly with the relevant fund providers.
Until now the MMF trading platforms have been dedicated portals that haven’t offered other money market instruments. However, as experience of using them has grown so has the interest of users in being able to trade other money market instruments through a single platform. Perhaps not surprisingly there is a lot of ‘noise’ in the market about who is doing what to try to meet this emerging demand but the reality is rather difficult to discover amid the competing claims. If you already use other money market instruments or expect to do so in the future it may well be worth exploring the (concrete) development plans of any proposed provider to see if they will be able to support your trading needs going forward. This issue is thrown into even sharper relief if you also undertake FX trading.
The benefits of using a single system under any circumstances are substantial but they become even more significant if you are considering integrating your electronic trading system with your back-office systems. Rather than being faced with the need to develop and support multiple interfaces to multiple systems, a single interface to a gateway covering all trading requirements obviously has considerable advantages. In truth it is not easy to get to the bottom of these competing claims but if this is an important aspect of your decision-making then it may well be worthwhile speaking to the relationship managers of the other bank products you are interested in and asking them about the participation status of any new product offerings on the platform you are considering. If your banks are not actively engaged in discussions with the platform it’s probably safe to assume that they won’t be offering that product any time soon!
Hopefully by asking these questions you will have the hard evidence you need to make the most informed possible choice of platform. But before making a final decision you obviously need to decide which of the above questions are the most important for you. Pretty reports and claims of one account opening form and one wire settlement can seem quite attractive when it comes to making a platform selection but there are always trade-offs. More fundamental issues such as fund account ownership, delegation of trading authority and trade and trader risk management might most appropriately be considered first. You will obviously have your own priorities so it will be worthwhile putting in some effort up-front to make sure your selected platform best meets your own particular needs.
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