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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.