Magazine Issues » October 2020

Sponsored feature: Automate my liquidity

Digital_atlasCalastone’s chief revenue officer, Ed Lopez, tells Funds Europe money market fund investors are calling for change. Is this the start of a fund provider arms race?

“Traditionally, liquidity funds have lagged behind the rest of financial services from an automation perspective,” says Ed Lopez, chief revenue officer at Calastone, the global funds network.

If this has always been a problem, it is a much greater problem now, for two reasons. First, institutional investors seeking a safe haven for their cash holdings have turned more and more to the money market fund (MMF) sector during the Covid-19 pandemic just as they did during the uncertainties that preceded the pandemic, such as Brexit and the US-China trade war. 

Outflows at the start of the crisis turned into more of a reallocation from variable net asset value (NAV) funds to constant NAV funds. This caused some variable NAV funds to close, but for the MMFs that remained, there were record inflows in the second quarter of this year. According to EFAMA, in quarter two, MMFs attracted €136 billion in net new money – the largest inflow ever observed on a quarterly basis.

“With Covid, it was hard to predict cash flows, and clients wanted to make sure that the cash they did have was in a safe haven,” says Lopez. “MMFs are by nature safe havens because you are diversifying away from a single banking institute – even more so when you talk about constant NAV funds, which are all mandated to the government.” 

Second, in a low-yield environment, it is hard for MMFs to produce compelling returns, and every basis point counts. A new report from Calastone, based on an independent survey of 150 decision-makers from corporations and financial institutions with supplementary qualitative interviews, shows that 93% of respondents believe that improving operational efficiency by fixing investment process problems using automation is the way to deal with complexity and cost in the MMF sector. 

“People are looking for ways to increase their margins and potentially turn a negative yield into a positive yield,” says Lopez. “If you disintermediate a broker, you potentially get the benefit of the basis points that are being paid to a distributor.”

One reason that automation has been slower to come to MMFs than other mutual funds is that the volume of trades is lower. Typically, large investors will make only two or three trades a month. As a result, where automation has been introduced in the MMF sector, it has been around that trading.

“If you’re putting a large money market investment through, you need to be confident that there are secure and fast execution and settlement processes in place as, in these days of low yield, the amounts are significant enough that every day counts,” says Lopez. He joined Calastone 14 months ago having previously worked for SunGard (now FIS), where he ran SunGard’s networks business outside the US, which included SunGard’s MMF portal.

Lopez describes these MMF trading portals as “the of MMFs”. Investors can compare funds, pick one from a list and buy it. But when using these portals, investors must still engage with their treasury management system (TMS) and banking service solutions; much remains unautomated. 

“At Calastone, what we aim to do is eliminate all those manual steps,” says Lopez. 

The Calastone Money Market Service directly connects all actors from liquidity fund providers to treasurers and their TMS via its Distributed Market Infrastructure (DMI), which is based on distributed ledger technology. It is a technological solution that is entirely independent of any product provider, offering automation in four areas. 

First, it automates trading when the trade is flowing either from the portal into the TMS, from the TMS into the portal, or from the TMS directly to the fund. Second, it automates settlement by automatically triggering a wire instruction to a client’s bank to move the money. Third, it handles sweeps.

“If you’ve got a solution that is automatically calculating your investable cash balance, we can communicate that information to your portal or fund provider for them to invest,” says Lopez. 

The fourth area of automation is reporting.

Calastone launched its Money Market Service earlier this year. Earlier this year, it partnered with JP Morgan on its liquidity portal, Morgan Money, which is one the largest in the world.

“As our survey shows, there is still a much larger need for automation,” says Lopez. “A third of survey respondents identified settlement as one of the key issues, because with MMFs it’s T+0.”

In the future, Lopez sees the Covid-19 pandemic, which has driven flows into safer MMFs, as a propellant of digitisation among liquidity providers. With people working from home, manual processes – even efficient ones that did work – are harder to manage. 

“A lot of people had initiatives around providing further STP to their portals,” says Lopez. “All of a sudden, those initiatives have been escalated or accelerated because of the Covid situation and remote team working.”

In Lopez’s view, there is still huge potential for further automation in the sector. “The MMF industry is an underserved subset of the mutual fund business from an automation perspective,” he says. 

Calastone’s ambition is to be the industry standard for connectivity in the MMF industry. And in a sector where shaving a couple of basis points off costs can be the difference between maintaining or losing your competitive edge, seamless connectivity is certainly a compelling proposition. 

“I tell the liquidity portals that it’s a technologies arms race,” says Lopez. “It’s who can offer the best service, deliver straight-through processing – build the greatest brand. Because otherwise there’s not much between the liquidity funds – or even the portals.” 

Early adopters, such as JP Morgan, will have first-mover advantage. But ultimately, if the Calastone Money Market Service does become the industry standard, we could be talking about a mini-revolution in the MMF sector – one that could greatly benefit investors in liquidity.

© 2020 funds europe