MMF Portals at the Crossroads: Current Drivers and New Directions

by Justin Meadows, Founder and Chief Executive, MyTreasury

The level of market penetration of MMF portals in Europe has lagged significantly behind that in the US. This is a reflection of both their later introduction in Europe and a relatively slow rate of growth since then. However, during the last 12 months this position has changed significantly and many organisations that have not previously seen the need for a portal have either already moved across to electronic trading or are in the process of doing so. To understand why this shift has come about we need to look at the key business drivers facing both the investor and fund provider sides of the industry and see how these have pushed both sides towards an increase in the use of portals.

Investor drivers and benefits

As the level of financial stress has risen increasing attention has been focused on the ability to ensure compliance with the full range of treasury policies.

Corporate treasuries have always been regarded as cost centres rather than profit centres and as the economic environment has become tougher for everyone the budgetary constraints faced by treasury departments have grown increasingly severe. Understandably this has led to a concerted search for operational efficiencies to deliver more and better services with ever tighter budgets. Under these circumstances it is not surprising that treasurers have been looking towards electronic trading portals to help meet these conflicting demands. This has been particularly conspicuous in the FX market where relatively high trading volumes offer significant opportunities for real efficiency gains and has been reflected in a substantially increased take-up of FX platforms. In contrast the efficiency gains available to most organisations from electronic MMF trading have been seen as relatively small due to the lower trading volumes involved and have not provided sufficient incentive to corporate treasurers to go down the route of implementing a MMF portal.

This situation is now changing as the mounting budgetary pressures are compounded by a second set of business drivers related to an increased need to actively manage risk within treasury departments. As the level of financial stress has risen increasing attention has been focused on the ability to ensure compliance with the full range of treasury policies. In most organisations this involves a broad set of controls ranging from setting and enforcing individual trader permissions, through proper trade authorisation procedures to enforcement of agreed credit limits with individual counterparties. It is notoriously difficult to manage treasury policy compliance, particularly on a timely basis, and so it’s not surprising that this has been a major reason for the recent increase in the uptake of those MMF trading portals that offer effective risk management capabilities.  

So how do portals help treasurers to address these major business drivers? The benefits of MMF portals in terms of easier and more comprehensive market discovery are already well known, as are the operational efficiencies to be gained from electronic trading. But as treasurers have become more knowledgeable about portals they have quickly moved from a position of seeing these as significant innovations to taking them as given and expecting additional major benefits. The blunt reality is that for many organisations a stand-alone MMF portal is still not seen as offering sufficient additional benefits to justify its implementation. But the risk management capabilities of the better portals are now clearly changing this balance and being seen as a sufficient justification for portal implementation.

There are a number of ways in which portals can help treasurers to manage many of the risks they face. By providing investors with daily information about the status and performance of their own funds and the rest of the market, treasurers get the earliest and broadest view of significant movements in size and yields of specific funds and the market as a whole. This is a lot easier than having to collate and analyse information provided in a whole range of formats from individual funds and industry databases as non-portal users are obliged to do.

But the real benefits arise from monitoring and managing adherence to treasury policies. All good portals offer the ability to set individual trading limits for any trader using the system. Some also offer the capability of introducing a second signatory either for all trades or just those above the designated trading limit for each trader. Most platforms allow individual credit limits to be set for each fund in terms of a maximum cash value, issuing a warning if a proposed trade will breach the limit, but the more sophisticated ones also allow users to select a preferred outcome ranging from a simple warning through triggering a requirement for a second, possibly more senior, second signatory to a complete block on any trade that breaches a treasury policy. Some portals also offer the option to set limits in terms of percentage holding in a fund, with the same range of options should the limit be breached. One of the portals is even intelligent enough to recognise that percentage holding limits can be breached without any trading activity on the part of the investor. If a number of other investors put through redemptions it could be that an investor gets into a position where they are breaching their own limit even though they haven’t traded that fund. This triggers an email and SMS message to be sent to the registered traders within the investor organisation to alert them, even if they are not logged on to the platform, and the percentage holding in the fund figure in the market view screen is turned red for a direct visual warning if they are. [[[PAGE]]]

The more sophisticated demands and expectations of investors in the risk arena are also illustrated by their growing requirements for fund portfolio transparency. The days when investors were happy to take the view that they were paying fund providers to look after the credit quality of assets held in the fund portfolio and did not need to concern themselves with such issues are long gone. In an increasing number of cases treasurers are actually prevented from investing in funds that do not provide details of portfolio holdings, either at all or with a minimum required frequency. However, this move from taking no interest in underlying assets to requiring regular portfolio holding information is only the first step along the path investors are going down. One of the major attractions to investors of using MMFs in the recent market conditions has been the diversification of risk. They believe that they are spreading risk by investing across a number of different funds, which all have their own individual portfolios of underlying assets comprising different issuers, types, securities, maturities and credit ratings.  

Investors are looking to their portal providers to offer the ability to look across the portfolios of all their fund providers to provide an aggregate view of their underlying exposure.

But since the collapse of Lehman Brothers investors have increasingly recognised that the pool of available assets for fund managers to invest in has diminished steadily and significantly. This has led to growing concerns amongst many investors that they may actually be inadvertently concentrating rather than diversifying their risk as fund portfolios increasingly contain the same assets. As a result investors are looking to their portal providers to offer the ability to look across the portfolios of all their fund providers to provide an aggregate view of their underlying exposure. This is not only helpful for assessing the risks associated with current fund participation but it is also extremely useful in allowing investors to identify whether introducing one or more additional or different funds will diversify or concentrate their existing risk levels. Again one of the portal providers has already developed this capability and has offered it to clients across an initial selection of fund providers who are able and willing to provide the required data in a suitable format and with industry support the initiative is likely to be rolled out across most, if not all fund providers.

Fund drivers and benefits

The achievement of operational efficiencies is also a major business driver for fund providers. In the recent low interest rate environment yields from fund investments have come under severe pressure and maintaining even existing management fee levels whilst continuing to deliver positive returns to investors has been sometimes difficult. In these circumstances it is not surprising that fund providers have been looking closely at opportunities to achieve operational efficiencies and hence protect their margins for what many people already see as an under-priced product. There are two key ways in which portals can contribute to the achievement of this objective.

The most obvious way portals can help to achieve this is by acting as an effective distribution channel leading to accounts being opened with new investors. Maintaining a sales force to go out and find new investors and provide effective client relationship management to existing clients is a costly exercise and portals can help here either by supplementing or even substituting for the funds’ own activities. However, to offer real gains a portal needs to bring in new assets. There is no net gain to the funds if portals just sign up existing fund clients and then take a fee on assets already invested.  It is simply unrealistic to expect fund providers to pay portals a fee for doing only this.  

However, the potential contribution of portals in this area is not quite as straightforward as it might seem at first sight. Portal providers can obviously help to educate investors about MMFs and what they have to offer but they can’t make specific recommendations about which funds investors should use. So they can promote the industry generally but not any fund in particular. There is also the issue that most funds are registered only in certain selected jurisdictions whilst some funds are not registered in any jurisdictions.  Where a fund is not registered investors can only be signed up in accordance with private placement rules and not through any public promotion either on a portal or otherwise.  

The problem here for fund providers participating on portals with a view to bringing in new clients is that, with the exception of one portal that can customise which users can see which funds in which jurisdictions, portals generally work on the basis that if the fund is shown on the platform at all it is visible to all users whichever jurisdiction they are in. The increasingly robust regulatory scrutiny under which the fund industry is operating means that both the FSA and the funds’ own compliance departments are likely to pay increasing attention to this issue. As a result a number of funds have already reviewed their participation on some platforms. Whilst there has perhaps been a degree of ‘fuzziness’ about this issue in the past it has now come very much into focus and it seems clear that funds will only be able and willing to participate on portals that can clearly demonstrate their ability to control access to particular funds by investors based in different  jurisdictions. [[[PAGE]]]

The role of portals in the achievement of fund provider objectives is even more reduced when the second major potential contributor to operational efficiency, trade automation, is also missing. There are certainly efficiency gains available when a portal delivers automated trading and as a result removes the need for manual trade processing by fund Transfer Agents. This is another area where there has been a certain lack of clarity in the market about whether certain portals actually do offer automated trading. To help clarify this issue Figure 1 illustrates what automated trading really is and Figure 2 illustrates what it isn’t. And just to be clear, investors don’t have to be members of SWIFT themselves to implement the fully automated solution – the portal provider handles all aspects of SWIFT messaging, including picking up the costs. The key distinction is whether the trading process requires the use of a phone or fax at any stage. If the only difference is that trades are faxed or phoned through by a portal provider (typically based in the US) rather than the investor directly there are no efficiency gains to fund providers or their TAs who still have to re-key the trades into their own systems. And actually there are no benefits to the investor either in terms of quicker and more secure trading with fewer errors. The problem here is that, again despite some rather over-zealous claims to the contrary, there is only one portal offering automated trading and so this has not helped to build a strong business case for fund participation on most platforms. The message is simple – investors shouldn’t simply accept what a portal provider tells them about automation – they should go to their existing funds and any others they may be interested in using and ask whether a particular portal offers automated trading of their funds. It won’t take long to identify which portal is the one that really does deliver automated trading and across all the funds.

A note of caution

All of this suggests that, depending on the portal selected, there are clear benefits available to both investors and fund providers. However, a major note of caution needs to be sounded here as the choice of portal can have an impact on the fees that investors are charged by fund providers for investing in their funds. Given the experiences of fund providers to date it is no surprise that they have to consider carefully the economic implications of investors moving from trading directly to trading via a portal. Different portals charge different fees and at the higher end it is simply impossible for the fund providers to maintain existing fee rates, particularly where they are already rebating fees to the client. In these circumstances funds have to tell their existing clients that if they choose to trade through the portal their rebates will be reduced or removed. In other cases even where an investor doesn’t qualify for a rebate the fund provider may be unable to offer the same management fee as for direct trading and is obliged to put the client into a special portal share class with a higher management fee to cover the cost of portal participation.  

So the message here is for investors to choose their portal provider carefully and check first with their fund providers whether this will impact on the fees charged. It also suggests that existing portal users would be well advised to talk to their preferred funds about whether they could get better terms by using a portal that is low cost and actually delivers benefits to the fund providers. Experience has shown that in many cases there is ‘surplus’ available if a high cost portal is no longer used and fund providers have demonstrated that they are more than happy to share this with their investors. Using a superior portal and getting better terms from the funds has generally proved an attractive combination to investors.

New directions

So what does all this tell us about where MMF portals are going? There are two main lessons to be learnt as the market becomes more mature. First it is clear that investors are becoming more sophisticated users of MMF platforms and their expectations of value-added functionality are growing all the time. It is no longer sufficient for portals to provide basic trading functionality; in particular they need to deliver sophisticated risk management, decision support, and analytical and reporting capabilities to remove the need for many of the time-consuming manual tasks currently facing treasury traders. Investors are also beginning to look beyond single instrument platforms for portals to offer automated trading and consolidated reporting across the full range of money market instruments, and ideally FX as well. Full coverage and full automation is the future and the portals that survive and thrive will be the ones who best deliver these twin requirements to investors.

Full coverage and full automation is the future and the portals that survive and thrive will be the ones who best deliver these twin requirements to investors.

Many fund providers are also in the process of reviewing their participation on the various platforms. In the past many of the funds have taken the view that they will join most if not all of the portals as they won’t have to pay if they don’t get any business. But as they have gained more experience of portal participation there has been a growing realisation that participation is not a cost-free exercise and portal providers are very different in fundamental ways. As a result they have become more enthusiastic about participating on some platforms rather than others and several funds are already in the process of formalising these preferences in terms of a rationalisation of their participation on the various portals; in many cases at a global level. This means that there will be a general rationalisation in the portal market place and the platforms that survive this process will again be the ones that meet the two major investor requirements but also deliver clear benefits to fund providers through technical and service excellence, and sensible pricing delivered within a framework of strategic partnership.