Rate cuts and money market funds: What happens now?______

Ed Lopez - President, Global Money Market Services

There’s never been a better time to be in money market funds but with interest rate cuts on the horizon, are MMFs’ time in the sun over? Ed Lopez, Calastone’s President of Global Money Market Services, doesn’t think it’s that simple.

There are the three traditional reasons investors turn to money market funds (MMFs): security, liquidity and yields (SLY) – in that order.

The prevailing narrative around MMFs is that the pandemic was detrimental to the investment vehicle. But while it’s true that there was a considerable run in early 2020, these were more than offset by the record inflows that institutional investors stored away. Amidst the economic panic of the pandemic, investors, seeing MMFs as safe havens, invested $1tn in cash. This led to a huge increase in liquidity, but with interest rates low and an industry trend to waive fees, the yields were nowhere to be seen.

This all changed as central banks hiked interest rates to counteract inflation and the waivers stopped (albeit with fees at notably lower levels). Suddenly institutional money market funds were one of the most attractive vehicles for short-term investors. As a result, 2023 saw $1.3tn of inflows in MMFs and in US and offshore MMFs alone, there was over $6tn sitting pretty and currently enjoying 5%+ interest rates.

However, with many central banks, among them The Federal Reserve and Bank of England, now looking at cutting interest rates before the year is out, fund and asset managers could be forgiven for thinking that the golden age of MMFs is under threat.

The truth is that even if interest rates drop to 4.5% or even 4%, as reported, rates will still be significantly higher than the near-zero or negative yields seen before COVID-19. This doesn’t mean, however, that there aren’t challenges ahead. Even with marginally lower yields, MMF investors – many of whom entered the space when fees were waived altogether – are still likely to expect lower fees, putting more margin stress on funds and portals. And with fees already low, that’s going to be a problem, and one that the competitiveness of the sector is only going to exacerbate. The MMF industry is already a commodified market and the offers that funds make can only vary by so much.

All of which means the real differentiator is the service that fund providers and portals can offer – something that many of the biggest and most forward thinking investment portals have already realised and actioned. Goldman Sachs, JP Morgan and BlackRock, to name a few, have all invested heavily in automating their portals, meaning the gap between the providers that have stalled on automation is as wide as it’s ever been.

As well as setting themselves apart from their rivals, these portals are able to mitigate against squeezed margins. Among other things, this is done via increased efficiency and lower costs from faster and secure settlements, which allow investors to access capital when they need it, directly from any treasury system.

Fortunately, wholesale MMF automation is eminently achievable for all providers, and is still rare enough that it remains a serious differentiator for fund providers, intermediaries and investors.

MMF automation with Calastone

Calastone’s Money Market Services (MMS) enable liquidity fund providers to give their

investors a digital investment process that integrates with any treasury/investment system or portal. This creates stickier relationships, enhances sales opportunities and reduces administrative, and operational, burdens.

Calastone MMS digitally connects the trading, settlement and reporting activities in a seamless, integrated fashion. By automating these processes, fund providers can give their investors greater settlement certainty, instantaneous reporting and a fully trackable trading and settlement process. It also leverages Calastone’s unique ability to connect different systems without the need for complex technology projects.

Calastone MMS is used by the world’s leading fund providers and portals to differentiate their proposition by enabling investors to trade, know their fund and cash positions and get fund information directly in their TMS/OMS at the click of a button.

Find out more here.

Learn more about Money Market Services

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