Short-term investment markets have been given a shot in the arm by the recent rise in interest rates, but for customers to enjoy the best returns in this dynamic market, custodian banks need to play a bigger part in consolidating and channelling short-term cash. Happily, the technology to do that is available, off-the-shelf and ready to implement, writes Ed Lopez, Calastone’s President of Global Money Market Services
Rising interest rates have brought a surge of investor curiosity in short-term institutional money market funds (MMFs). With the most competitive fund rates as high as 5 per cent or more, it is now worth the effort for holders of short-term cash to aggregate their balances and invest it for as little as 24 hours.
Yet, while funds are benefitting from investor interest, custodian banks may be missing out on opportunities to help their corporate and institutional customers make the best of the kind of low-risk investments that MMFs now represent.
For corporates, the short-term investment challenge has always been how best to aggregate cash holdings and channel them to their preferred short-term investment products in a way that optimises return without incurring costs. For custodian banks holding corporates’ money, the response has been to run automated sweeps of customer cash left in their accounts at the end of the day. The balance is then invested in short-term instruments, usually overnight, to eke at least some return. However, this service is limited to accounts held within that same bank.
But corporates don’t typically hold all their cash in a single account or bank – they mitigate risk by divvying it up between accounts and providers. They may also have operational reasons for keeping cash accounts separate – for payroll, for example. That means there can be pockets of cash that are not invested in the most efficient way, requiring separate transactions and incurring additional fees.
The opportunity lies in finding a clever technique to maximise short-term investment returns by sweeping cash from multiple accounts and banks, consolidating all short-cycle holdings and feeding that cash into the money markets in a hassle-free way. After all, the investment instruments that leading MMFs offer are most likely of lower risk and greater diversification than any banking account.
At Calastone, we have a solution that can help with this. As a third-party network between multiple clients and financial service providers with system-agnostic data and transaction technology, Calastone is ideally placed to effect short-term sweeps from third-party accounts into a single custodian bank account and automate short-term investment of this surplus cash into MMFs. We can eliminate the workload for the custodian bank of building an inter-bank network for cash sweeps and eliminate the workload for the customer of manually identifying, consolidating and investing short-term cash.
The workflow is relatively simple. With prior authorisation from clients, Calastone gathers multiple client custody account balance data at pre-set intervals. This is collated and sent to the prime custodian bank, which makes a sweep calculation and informs Calastone of any cash movements required. Calastone then instructs the client’s custody accounts to transfer funds to the prime custodian bank, which then allocates MMF investments through its dedicated MMF portal.
The gain for the custodian’s customers is clear: they can cut operational risk as all cash balances are aggregated and fewer investments need to be made. This saves time, particularly for smaller teams. Firms also get their preferred investment process of a single bank/custodian which may be superior to their others.
Meanwhile, the custodian bank’s gain is also clear. It can increase the average value of assets under management and therefore investment distribution fees, lower its daily balance-sheet risk and, above all, improve customer approval.
For a custodian bank the opportunity here is to leverage the cash-management capabilities it has already built. A custodian bank will have a liquidity desk that works to consolidate short-term cash across client accounts and channel it to money market funds according to customer mandates. What it won’t have is the capacity to sweep cash from across a client’s entire universe of banking accounts. But Calastone can do that with its ready-made, multi-bank network.
The big difference is that in today’s monetary environment, this is now worth doing. If corporate treasurers are dissatisfied with the under-performance of their short-term investment allocation, the Calastone network could provide the answer to this operational challenge.