Magazine Issues » December 2019

Sponsored profile: A digital dawn

Digital_globeFunds Europe talks to Calastone’s chief revenue officer, Ed Lopez, about the coming of a digital dawn for money market funds.

The global demand for money market funds (MMFs) shows no sign of diminishing. They remain the asset class of choice for corporate treasurers looking for a safe place to park their capital. The dilemma for MMF providers is how they make their products stand out in such a crowded marketplace.

According to the recent Global Liquidity Investment Peerview study of global investment habits produced by JP Morgan Asset Management, the enduring appeal of these funds, which are worth more than $6 trillion globally, is as strong as ever.

It states: “Even as the market outlook evolves, stable/constant/low-volatility net asset value (NAV) MMFs remain the most permissible investment (in 92% of investment policies). Most survey respondents (75%) plan to maintain their stable NAV MMFs, based on the market outlook for the coming year.”

Treasurers continue to use MMFs, or liquidity funds, to help them fulfil their fiduciary duty to invest responsibly, providing a diversified, secure and liquid means of investment. At a time when yields are historically low, the relative safety of MMFs are especially attractive.

But it has become clear to fund providers that the popularity of the funds, amid a razor-thin interest rates environment, has created a competitive challenge.

ESG factors
One way to compete is to incorporate environmental, social and governance (ESG) factors into these funds, as has been done by some of Europe’s largest fund providers.

The likes of DWS, the asset management arm of Deutsche Bank, and BlackRock have launched, or relaunched, a series of MMFs meeting ESG criteria. Meanwhile research from Fitch Ratings shows that ESG money market funds saw their assets under management grow 15% to $52 billion in the first half of 2019.

Another way to stand out in the crowded marketplace is to focus on the transparency and operational efficiency of the funds, says Ed Lopez, chief revenue officer, Calastone. “Over the last few years, money market fund reforms have led to a focus on transparency and the sharing of data between corporate investors and the fund, particularly intraday fund data that is standardised and consumable.

“This has driven fund providers to look at how they can provide this information in a timely, transparent and convenient way,” says Lopez.

Unfortunately transparency and operational efficiency have not always been at the fore in the liquid funds world. The creation of online portals more than a decade ago was a big step, injecting some level of automation into the trading process and allowing investors to compare and select funds online.

However, manual processes still prevail, especially in the reporting and post-trade process, creating a source of frustration for investors such as corporate treasurers. “Reporting can be slow and cumbersome while investors also want more certainty that they are invested once their order is sent,” says Lopez.

Furthermore, the data on positions and yields can come through a variety of formats and have to be manually entered into the corporate’s treasury management systems (TMSs) to be most effective. “The lack of any integration between the fund portals and their own systems forces treasurers to resort to spreadsheets, duplicate entry and/or expensive integration projects to pull together the data from their various funds,” says Lopez.

Digital technology
As a result, says Lopez, there now needs to be another step change and the introduction of digital technology to create an end-to-end service where automation exists in more than the investment process. This is where Calastone has sought to address what it sees as a critical market need.

“Calastone’s Money Market Services offering creates a direct link between the MMFs, the various money market fund portals and the investor’s treasury management systems. It creates the ability to automate the whole transaction lifecycle, from client onboarding and technology integration to the investment process to the investor reporting,” says Lopez.

Regulation, namely the EU’s Money Market Fund Regulation, which was introduced in July 2018 and has also been applied in the US, is forcing the supply chain to be more transparent and mandating greater disclosure between the fund providers and the corporate investors.

Consequently, says Lopez, greater efficiency in the reporting of MMF data not only fulfils compliance requirements but also enables fund providers to stand out in an increasingly crowded and competitive marketplace.

Similarly, a better link to their investors’ systems and easier access to their data enables fund providers to improve the onboarding process, says Lopez. “Improving the speed and ease with which clients can be onboarded, and therefore balances invested, is a definite differentiator for fund providers. They have been looking to do this for many years, but scalable agnostic tools have not been available until now.”

It also creates much more operational efficiency, says Lopez, including the elimination of manually inputted dual entry data, which is not only time-consuming but a significant operational risk.

Calastone’s offering was originally developed for a leading MMF provider but now has been spun out to the wider market. This has involved some significant work in building linkages with fund providers’ portals and also the 40-plus TMSs, both those available commercially and those developed in-house.

This work will be ongoing, says Lopez, to keep up with any system updates from existing TMS providers and to track any new entrants. It is in keeping with Calastone’s general business model – to create links between different data formats and systems so that market participants don’t have to.

“It does not make sense for fund providers to build this connectivity themselves. It moves them away from what they do best,” says Lopez. “It will take time and major investment to build the technology in the outset and to maintain the many connections in the future.”

Evidence shows that corporate investors are adopting TMSs in increasing numbers to use them to manage their MMF holdings. JP Morgan’s Investment Peerview study shows that 61% of its respondents now use a TMS from a third party vendor while a further 19% use in-house resources. Of the 209 investors using a TMS, the vast majority (68%) found the benefit of integrating it with their MMF investment as “medium to high”.

Lopez expects the enduring appeal of MMFs to continue, especially if interest rates continue to exert pressure on yields, thereby making the case for greater efficiency and automation in the investment process.

Furthermore, the emergence of ESG-based MMFs has injected a fresh demand for these funds among corporates looking to meet their sustainability goals. It has also strengthened the argument for more transparency and efficiency around fund data, given the lack of standards around ESG information, which in turn strengthens the case for better integration between fund providers’ portals and investors’ own management systems.

©2019 funds europe