Published: February 01, 2012
In the first two days of December 2011, BNP Paribas held its 5th annual Cash Management University at the illustrious Le Pré Catelan in Paris. The focus of the event was how to use cash and treasury management to improve business performance, and more than 160 corporate delegates from around the world attended plenary sessions and participated in workshops that covered every aspect of the corporate treasury function. One popular workshop on the second day examined strategies and tools to maximise return on surplus cash.
The state of play in money market funds (MMFs) for both corporate investors and banks was explained in the first presentation of the surplus cash workshop, given by Xavier Gandon, Money Market Investment Specialist with BNP Paribas Investment Partners. Gandon began by explaining the fast moving environment of the money markets today, and how this affects both portfolio managers and corporate investors. The CESR, the pan-European regulator, has proposed a two-tiered approach to money market funds in Europe with ‘short-term money market funds’ coexisting with ‘money market funds’ that have more leeway in terms of interest rate and credit risk positioning. The Institutional Money Market Funds Association (IMMFA) and rating agencies have respectively updated their Code of Practice and their guidelines for AAA-rated MMFs.
Gandon concluded by highlighting the differences between MMFs and the other most popular short-term investment option for corporates - bank deposits. He explained that within MMFs, liquidity is high and mutualised between investors, whereas bank deposits do not offer the same overnight liquidity. Sector and issuer diversification with MMFs is usually high, whereas deposits come from just one financial issuer, facilitating the counterparty risk monitoring. Gandon also highlighted the fact that, due to their nature, MMFs can add value in areas such as credit risk and interest rate risk since these risks can be managed actively.
Vincent Guéguen, Deputy Head of Group ALM at BNP Paribas also drew to attention the fact that because they are less flexible in term of liquidity and less diversified than MMF, bank deposits often provide a better remuneration for the investor.
Investors have a higher aversion to risk and therefore need an increasing amount of information on the money markets and specific funds, to gain a clearer picture of their exposures across the board. This is where technology can play a key role, with electronic platforms and portals gaining in popularity.
To provide an update for the delegates on the current portal landscape, Maryum Malik, Director of Business Development, Wealth Management Technology Vendor SunGard, presented a guide to why investors require more transparency, the benefits that a portal can bring, and some details on the new risk functionality solution that SunGard has integrated into its portal.[[[PAGE]]]
Portals provide the treasurer with an end-to-end view of the funds available on the money markets, covering price discovery and pre-trade compliance, through to settlement and accounting. This visibility allows corporates to track their exposure to individual institutions and countries. At a time when treasurers can expect questions at any time from senior management about investment exposures, this instant visibility is a very powerful tool.
Historically, Malik explained that the risk analysis process for MMFs could be flawed if it was only evaluated at the fund level, as this only provides minimal transparency of the underlying holdings of the fund. To gain visibility into these holdings, treasurers had to gather them manually, a process which was beset with many of the problems traditionally associated with manual processes, including being time-consuming, error-prone and in variable formats. Malik added that the new risk functionality solution that SunGard has added to its MMF portal is designed to eliminate these issues by consolidating all holdings available on the portal and making them fully searchable in real time. Search metrics include the CUSIP/ISIN codes found on securities, industry sector, credit rating, counterparty and security level. By using an MMF portal, treasurers can assess their risk and exposure based on many different data points at the same time. Compared with previous processes, a portal gives a treasurer much more visibility and therefore control.
The fact that board-level management now holds the treasury function in such high regard is something that many treasurers use to drive budgets for investment in new technology. While it may have been difficult to get senior buy-in for projects such as a portal implementation before the credit crisis, more organisations are learning the value that such an investment can bring.
Providing the perspective of a corporate that has invested in an MMF portal on the panel was Auna Dunlevy, Head of Liquidity and Investments at Royal Mail Group Treasury. Dunlevy said that she had benefited from a number of advantages by using an MMF portal in her role in the Royal Mail treasury department. The consolidated view of information on key money market data makes Dunlevy’s management of her MMF portfolio more efficient, while dealing is simple and always in the same format. Dunlevy explained how she could set both soft and hard trading limits to ensure that investments never go beyond the company’s risk exposure tolerance levels. For compliance issues, she explained that the portal provides a full audit trail, and that the production of deal tickets is automatic. As well as managing existing MMFs in the company’s portfolio, Dunlevy described how the portal could also be used to research new funds.
Royal Mail currently manages 11 MMFs, having been live on the SunGard portal for two years. Dunlevy said that the main benefits that she has experienced in that time can be seen in how much easier it is to assess the performance of MMFs, the better knowledge of the MMF market that treasury has as a result of the real-time visibility, and an overall improvement in treasury operations. At a time when the global economy is fragile, MMF portals clearly offer treasurers a way to manage their investments in an efficient way.
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