As Covid-19 spread from continent to continent earlier this year, corporations and financial institutions were suddenly exposed to violent disruption.
To steer their institutions through the pandemic, treasurers needed complete clarity over their cash positions and the ability to manage cash resources with speed and agility. Their number one choice was money market funds (MMFs). Between the end of February and early May this year, the flow of cash into institutional MMFs jumped by $946 billion, according to S&P Global. That’s 42 per cent higher than the same 10-week period in 2019.
And with corporate offices closed and treasury teams working remotely, the weaknesses that have long plagued the MMF investment process became too big to ignore.
The problems were starkly revealed in our independent survey of 150 treasurers in the US, Europe and Asia, which we carried out during June and July.
Among the most striking findings: more than 70 per cent of treasurers want better real-time connectivity with counterparties in the MMF process, including banks, asset managers and investment portals. Existing systems to manage daily cash positions at the height of the crisis simply were not up to scratch.
For most treasurers, the process of investing in MMFs and managing and monitoring portfolios has never been smooth. They routinely use multiple systems to make investments and must assemble information from a variety of sources.
The “swivel chair problem”
This leads to what we call the “swivel chair problem”. Treasurers must go through multiple steps using different systems to make an investment in an MMF and transfer cash from a bank account to an investment portal or an MMF manager. Information on portfolio positions is rarely provided in real time; it arrives in different formats and cannot normally be fed directly into the treasury-management system. As a result, treasury teams must source and input data manually, making analysis and reporting time-consuming and error prone.
“Accessing real-time data with regard to the money market is probably relatively limited,” one treasurer told us. “I would say that our fund systems aren’t great at the best of times. We have limited ability to track in real time, or indeed at all, on the money market specifically, other than checking the institutional liquidity fund’s stated yield on Bloomberg.”
Inevitably, treasury teams end up relying on manual workarounds to get everyday processes to work. This slows everything down, adds cost and creates room for error – especially when team members are no longer working in the same building.
Similarly, once a cash transfer is underway, treasurers complain that they have little or no visibility about where their cash is. They cannot be certain when it will arrive with the asset manager or reach their company’s bank account when an investment is redeemed.
Creating the “plumbing”
The overriding problem treasurers face day-to-day is that they have no way of integrating the many different systems they rely on to invest their cash in MMFs, monitor and redeem those investments. They need a way of linking these systems so they can eliminate manual processes and solve the “swivel chair problem”.
This is precisely the challenge that Calastone has taken on: creating the “plumbing” that links all the separate systems used by parties in the MMF market, including corporates, financial institutions, banks, investment portals and asset managers.
The benefits of integrating these systems into one joined-up market are huge.
For treasurers, they include the ability to aggregate information from all the MMF managers and portals they deal with and feed it back into a single dashboard in their treasury-management system or ERP. This is vital, given our survey found that more than 60 per cent of corporates use three or more MMF providers. Integration gives treasurers proper visibility on their MMF holdings and enables reporting and analytics to happen in real time.
Information flows seamlessly
Not only that. Enabling information to flow seamlessly between different systems also brings essential transparency to the investment process. This means treasurers can see where their cash is at every stage, from it leaving their bank account to the moment the transaction is settled – and again when asset managers send cash back to their investors.
Integration of systems is the crucial step required by the MMF ecosystem to make it function properly. It brings massive benefits in terms of increased transparency and access to real-time information.
What no one wants to see is MMFs losing their status among investors as the go to asset class for safety and liquidity.
Surely, now is the time for the industry to respond by digitalising operational processes – there are already proven methods of automation available so it is just a matter of taking the next step. Only then can risk be removed from the investment process. It may even lead to cost savings for everyone in the chain.