Digital technologies are transforming the first generation of money market fund (MMF) portals. Through the process they are changing the way that corporate treasuries trade and mitigate risk. Next generation, software-as-a-service (SaaS)-driven MMF portals have arrived. Many enterprise-level early adopters and corporate power users have already migrated successfully to this new dynamic and intelligent electronic MMF environment. This is a significant treasury movement and the transition is accelerating due to the demands of a global economy.
Key to this trend is the 2010 US SEC Rule 2a-7 changes in MMF reporting requirements. They set the stage for the disintermediation of risk management away from the credit rating agencies (CRAs) to the direct control and capable hands of treasurers. This new age of fund transparency is in lock step with what industry expert Treasury Strategies refers to as ‘Treasury 3.0’: the evolution of treasury from transactional activities to analytical and strategic activities.
Additional 2010 MMF regulation, that included increased liquidity and shorter weighted average maturity, has made MMFs even stronger. With the potential for a return to more stable financial markets ahead, and transparency-based analytics, MMFs will continue to be the superior path for institutional investors to preserve capital, ensure liquidity and achieve a competitive rate of return.
While several of the ‘new era’ MMF portals appear to share similar characteristics, there are profound qualitative differences that separate a ‘best-of-breed’ portal from the rest. These differences are wide-ranging and corporates need to consider a variety of factors in evaluating their portal selection including:
- Operational ease of use.
- Portal fees and other operational costs.
- System features and functions.
- Analytics intelligence capabilities.
- Perhaps most important, the confluence of operational, analytical and best practices methodologies.
In their first incarnation, MMF trading portals were essentially transactional systems that facilitated short-term investments. They were reliable, but limited in functionality and analytics were non-existent. With the onset of the global financial crisis in 2008 necessity sparked innovation and the treasury world began to change for the better.
As a pioneer, ICD engineered an MMF portal to incorporate functional flexibility, trading agility, enhanced security, and an intuitive, easy-to-navigate trading system with user-friendly design. The platform is complemented by an end-to-end MMF investment process, spearheaded by exposure analytics tools that are deeply integrated into every operational function. ICD’s MMF trading and risk management system has three components:
- ICD Portal.
- Transparency Plus.
- Diversify, analyse, comply, optimise and archive (DACOA) methodology.
The ICD Portal was designed with analytics and best practices functionality to better serve the critical treasury challenges ahead and open architecture adaptable to any enterprise resource planning (ERP) system, treasury workstation (TWS) or treasury management system (TMS) integration. ICD Portal features multi-factor user authentication security, on-board Transparency Plus exposure analytics, a streamlined ICD Trade Ticket system, investment policy compliance management and monitoring, on-demand comprehensive reporting and archival publishing.
ICD Portal is customisable, so corporates can design a tailored portal to fit their specifications and TMS requirements. ICD Portal’s Filter Manager offers a selection of currencies, categories, yield, WAM and assets choices. The Column Manager provides further customisation of key portfolio metrics in both the fund and account display. ICD’s MY ICD Toolbar enables additional customisation in the fund matrix, fund overlay, account matrix and account overlay. Treasurers can tailor the ICD Portal according to their operational preferences.
Most recently ICD Portal’s was integrated into Reval’s TMS. By creating a plug-and-play straight-through processing (STP) platform, the integration has enabled mutual clients to realise the operational efficiencies of STP without the costly and time-consuming development process.
A Purpose-built Engine
MMF data has always existed as the credit ratings agencies and SEC regulation require it. However, in 2008 there was no practical or dynamic means for investors to access this data. Rule 2a-7 amendments in 2010 changed all that by requiring increased fund transparency and regular reporting frequency.
But data is not intelligence and a purpose-built fund exposure analytics engine was needed to command the complexities and break down the details of a best-of-breed risk management application for MMFs. ICD developed Transparency Plus, an exposure analytics application for MMFs launched in July 2010, which enables clients to view consolidated credit risk on individual securities across multiple MMF and separately managed account portfolios. By reducing the intelligence gathering process, it allows corporate treasury groups to focus on the strategic side of treasury operations.
Best Practices for MMF Trading and Risk Management
DACOA is ICD’s best practices for MMF trading and risk management. It enables corporate treasuries to efficiently manage credit and liquidity risk with an end-to-end investment process that incorporates the analytics intelligence of Transparency Plus.
DACOA begins by assisting treasuries in establishing a working compliance policy that reflects the company’s investment objectives and risk tolerance. These investment policy guidelines developed by Treasury Strategies provide recommended investment parameters and ranges for MMF investments.
The acronym may be broken down as follows:
Corporates invest in multiple MMFs to more widely diversify their short-term investment portfolio and mitigate credit and liquidity risk. Investors and cash managers further diversify by setting a maximum investment in a fund’s total assets under management, a maximum investment in any single fund holding issuer, a maximum investment in any country outside its domicile, and limited to investing only in rated funds.
Corporates then analyse the following fund metrics to create a balanced investment portfolio that matches their established investment objectives and risk tolerance:
- Aggregated counterparty exposure.
- Aggregated country exposure.
- Fund holdings details.
- Sector analysis.
- Liquidity profile.
- Portfolio counterparty credit default swap pricing.
- Portfolio counterparty stock summary.
- Portfolio counterparty financial summary.
After large trades and also on a monthly basis investors generate on-demand guideline reports to confirm they are complying with their established MMF guidelines.
Once their portfolio is properly diversified, their positions are analysed and compliance is achieved, investors generate ‘what if?’ scenarios to see if it is possible to improve their yield while remaining compliant and within their risk tolerance. With ICD Transparency Plus these ‘what if?’ scenarios are generated in real-time.
On a monthly basis investors archive their critical MMF summary documentation and decision support reference. ICD offers a report function for internal presentation, treasury defence and historical reference.
Leveraging an advanced MMF trading portal with deeply integrated fund exposure analytics has been transformational for treasury departments, also enabling corporates to effectively and efficiently manage credit and liquidity risk.
MMFs are profoundly different than any other financial instruments, having been specifically created to enable investors to limit credit risk and maintain the stability of their investments. Stability is the unifying goal and intent of risk-averse corporate treasuries. Their mandate is the preservation of capital, daily liquidity at par and a competitive yield and they seek to achieve these objectives by investing in diversified portfolios of high quality, low duration money market instruments. These fundamentals have not changed.
To be sure, more than half the major global corporations are not yet trading in MMFs, and of those who are, still less than half are using portals. This puts portal practicing corporates at about 25% of the global marketplace.
Those corporate treasuries who make the transition to the new treasury MMF trading and risk management paradigm will have profound advantages in capital and credit risk management. Their investment methodology and risk management superiority will have become perfectly clear.
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