As the Covid-19 pandemic swept the globe, corporate treasurers were doing what they do best: managing company cash, hedging FX exposures and risk-managing investment portfolios.
But the environment in which they were doing so was unprecedented in modern times – a genuine “black swan” scenario that tested resilience and reactions to the limit.
Testing the system to the limit
Across Q1 and Q2 money market funds (MMFs) experienced unprecedented outflows, followed by inflows, as investors grappled with the impact of the pandemic. EFAMA note in Q2 MMFs attracted $159 billion in new money – the largest inflow ever observed. It was clear access to, and interfaces with, MMFs had become even more critical than before.
This left treasurers and other investors taking a hard look at their technology and processes and how these relate to MMFs.
Calastone’s independent research surveyed 150 corporate treasurers and financial institutions investing into money market funds, in the US, Europe and Asia, to identify their top concerns in these turbulent times. They were asked what they saw as their strategic priorities, challenges and opportunities. I am pleased to be able to discuss the findings in detail and to offer some thoughts on how to equip treasurers and MMF investors with the resources they need today – and well into the future.
Lack of automation hampers money market fund investors
With yields currently depressed, investors are under pressure to improve operational efficiency and performance throughout the MMF investment process to reduce costs that eat into overall returns.
Yet a lack of automation and over-reliance on manual processes (still, in some cases, using fax) is holding back the drive for greater efficiency and productivity. In our top finding, as many as 93 per cent of respondents reported that parts of the MMF process needed better automation.
We were surprised to see that as many as one-third (30 per cent) of treasurers and portfolio strategy/risk managers at financial institutions said their systems were either “fairly” or “very” unautomated.
In addition, 73 per cent of investors reported a lack of real-time information in some aspects of the money-market fund investment process, making fund selection harder than it needs to be. And 71 per cent of investors noted that real-time connectivity that allows ease of selecting, transacting and reporting are among the top areas that need improvement.
Taken together, these findings cry out for automation and real-time connectivity. Treasurers need better end-to-end automation across each stage of the investment process: from fund selection, trading and settlement to reporting and monitoring. And they need real-time data and connectivity to make fully informed investment decisions.
This is not simply a nice-to-have, it is a critical requirement for treasurers and other investors to create an efficient, resilient market.
Drilling down on the findings – operational efficiency
Respondents felt reporting was the single item most in need of automation (46 per cent) – particularly for financial institutions responding to regulatory requirements. This echoes a number of conversations we have had where treasurers are dealing with a handful of MMFs this can mean receiving reports on rates, positions and transactions in different ways, from PDF attachments to digital formats.
With more automation, treasurers said they would see two key benefits. First: the ability to make more informed MMF investment decisions. Second: the ability to enhance return/yield.
The solution is to digitally transform the transaction process, including taking all the data from the funds, in disparate formats, and converting them into a format that is made available via a treasury management system (TMS) for download.
Automation of fund selection was a priority, too (35 per cent). Fund selection includes market discovery, access to fund information, fund comparisons and market rates. “Not all funds are available in the order management system and, at the same time, all the analysis that we do is outside the system,” explained one respondent at a corporate in the US.
Other respondents were also concerned about the level of automation in transaction execution, with one-third wanting better automation of trading (34 per cent) and settlement (32 per cent) – as we highlighted in our previous blog.
All of this creates unwanted friction, a situation compounded when firms are using multiple funds with different investment managers and a multiplicity of channels to manage funds. Almost two-thirds of firms (61 per cent) use three or more fund providers.
While most respondents said they use portals as the main way of managing funds, our findings also showed that they use multiple additional systems such those for as order management and platforms to source rates and data. Lack of interoperability is a pervasive problem.
Connectivity will ease the workload
Taken together, these last two findings point to a second issue after automation: a relative lack of integration of systems and processes. That means it is hard to achieve full straight-through processing (STP), real-time reconciliation, analysis or reporting.
What these findings tell us is that the friction and lack of automation reported by treasures is, quite simply, an inability to operate in real time.
While 57 per cent of respondents said that information on MMF holdings could be improved, this was trumped by the 71 per cent who simply want better real-time connectivity. A key element of this is fully configurable, real-time reporting of all underlying holdings on MMFs.
According to respondents, the areas that most needed improvement were: access to real-time rates, tenure and fees for MMF options (38 per cent); modelling “what if?” scenarios with regard to liquidity positions and potential returns for different MMF options (31 per cent); and the automatic reconciliation of a transaction into the TMS (21 per cent).
These priorities are likely to become even more urgent as treasurers and portfolio managers grapple with low returns/yields in a market where downward pressure on costs has intensified. This future is further complicated by the operational complexities of employees transitioning from working from home to a “new normal” that is as yet uncertain.
Time for real-time connectivity
In times like these, technology is our friend.
A fully digitalised market ecosystem can offer firms greater immediacy, accuracy and certainty of execution through automated workflows across the investment process – and a network that brings together the entire fund trading process, from order routing through to settlements, transfers and dividends.
It may also be that distributed ledger technology will play a part in the future by letting firms access and use real-time transaction information to reconcile and manage their cash positions through a ground-breaking “mutualised view” of positions in the industry.
It was interesting to see in the UK Association of Corporate Treasurers’ latest annual Business of Treasury report that “technology advances” topped the list of priorities for treasurers – three notches above “capital and liquidity management”.
Technology will help us emerge from the disruption of the Covid-19 pandemic. At Calastone, we stand with the industry and our clients, current and future, in committing to work together to create a more effective, efficient and resilient market for all.