Multi-Fund Portals in a Volatile and Changing World
by Justin Meadows, Head of Business Development, MyTreasury
It’s been an exciting year in many areas of financial services as wave after wave of the fallout from each successive bank failure has rushed then rippled out across almost every area of the financial world. Within this broader context the progress of institutional money market funds has been relatively serene, despite the Lehmans’ failure and subsequent Reserve Fund breaking the buck triggering an exodus from funds in the US. But even though MMFs have escaped relatively lightly, the experience of the industry during these turbulent times and in the changed world that has emerged on the other side has raised a number of questions regarding the role that portals do and should play in the MMF marketplace.
All portals are not the same
To explore this issue fully it’s important to understand how portals work and the similarities and differences between their underlying models. In the same way that not all triple-A rated MMFs are the same, neither are all portals. There are actually fundamental differences between them which impact significantly on the effect they can and do have on the industry, particularly in times of turbulence and change. Since portals were first introduced there has often been a lack of clarity in the minds of many users about just how they work, and there has been no guidance published to help them understand clearly what the various models are, how they differ and their relative costs and benefits. So before reviewing the potential impact of portals it’s helpful to explain briefly how the models vary and why this makes a difference.
Whose client is it?
The basic distinction to be made is whether an investor has an account directly with the fund provider or with the portal provider, who then trades with the funds on behalf of the investor. The first of these is normally referred to as fully disclosed and the second as omnibus trading. Unfortunately, this terminology has given rise to a lack of transparency about exactly what model particular portals are using, sometimes as a result of the confusing use of these terms by the portal providers themselves.
Rather than fully disclosed it’s probably easier to use the term direct. If a portal offers a direct trading model then it’s clear that investors are clients of the fund providers and use the portal as a quick and effective means of trading with their selected funds. Investors open accounts directly with the funds and not with the portal provider. All direct portals are by definition fully disclosed and settlement takes place directly between the investor and the fund.
Treasurers want to be able to get an up-to-date, broad and deep understanding of the market place quickly and easily.
This contrasts sharply with the omnibus trading model when investors open an account with the portal, which then trades with the funds on their behalf on a nominee basis. This can be done either on a disclosed or undisclosed basis. If it is disclosed then the portal will open a new nominee account in the name of the investor. Although this is frequently referred to as a fully disclosed model by omnibus portal providers, investors need to understand clearly that this is not the same as the direct model. The account may have their name somewhere in it but the account belongs to the portal provider not the investor; something investors have not always fully understood. The investor is a client of the portal not the fund and has only the beneficial ownership of any shares purchased through the portal, not the legal title. For some investors all this is an administrative convenience they are happy to live with. For others it gives rise to fundamental issues that prevent them from using omnibus portals.
And finally, just to make things more complicated, investors need to be even more careful about the terminology used as some omnibus portals use the term direct prominently in their promotional material. But the use of the term direct here refers to the settlement of trades. Before major issues arose with the use of third-party clearing agents, omnibus portals would typically settle trades through one of these. In fact this was always one of the major benefits of omnibus portals that helped to offset the loss of a direct relationship with the fund. However, following the well-publicised failure of one of these clearing agents, investors have become extremely reluctant to have their funds transferred via a third party and the omnibus portals have responded by introducing a ‘direct’ model. But it should be clearly understood that the term direct here refers to settlement and not the investment relationship.