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Cash management banks can offer enhanced value Back  
There is an understandable temptation for fund managers to view their cash management banks as just suppliers of a commoditised service. But the right cash management bank also has expert knowledge that can add considerable business-enhancing value. Bill Wrest highlights how managers can leverage this expertise to their competitive advantage.
In mature markets such as the US, with a single national clearing system and a relatively commoditised payments business, many fund managers see price as almost the only point of differentiation among cash management banks. Some Irish managers have begun to emulate the Americans and to regard their banks as vendors of a commodity product. This attitude overlooks both the more complex European payments landscape and the many ways a sophisticated bank can add value, reduce risk, and facilitate smooth and efficient operations for the fund manager.

More than pumping payments
While cash management may sit at the end of the supply chain, it is nevertheless a critical link within it. Failures in cash management that cause failures in client redemptions or investments can do lasting and costly damage to a fund manager’s reputation. A good cash management bank will be able to assist fund management clients in protecting their brand from such damage and also add value in areas such as minimising the impact of SEPA. But this is still only part of the story, especially where managers are moving beyond manufacturing and distributing just their own funds, and into the business of third party distribution. That necessitates an open architecture, which may be readily achievable at the client-facing front end with a mechanism like a portal. However, when it comes to payments, most banks simply don’t have the open architecture to facilitate this sort of operation.

Tail wags dog
In recent years, investor choice has become something of a mantra for managers wishing to remain competitive. This need to provide investment choice drives a huge amount of activity in the market, with multiple funds opening and closing each month. However, the manufacture of new funds is often constrained by operational issues. A manager’s back office systems may be configured to produce a fund’s net asset value (NAV) overnight. Therefore, shifting the NAV valuation point to accommodate (for example) investors from a different time zone in a new fund sub class may be the proverbial show stopper. Unfortunately it may also be a show stopper that individual fund managers and their marketing teams are unaware of until after the launch.

Matters such as this and considerations such as cut off times are areas where a suitably skilled and experienced cash management provider can contribute a great deal to a fund manager’s strategic planning. Best practice would suggest that such a provider can assist the managers’ understanding of the operational implications associated with the launch of a particular fund. For example, a T+0 cash fund, denominated in euro, involves the marriage of multiple cut-off times: the client’s cut-off time, the fund’s cut-off time, the transfer agent’s cut-off time, and the currency cut-off time all have to interact. A capable cash management provider will be well-placed to inform on the implications of this. If the combination of cut-off times results in an investment cut off time so early in the day that it is likely to deter prospective investors, it is better to be forewarned. Alternatively, a manager might assume that if the cutoff for euro clearing is 4pm, the fund could have an investment cut-off of 3pm.

In practice, the various operations that have to be conducted by the transfer agent and the fund’s own back office would probably dictate a cut-off time at least two hours earlier than that. Again, this is something that a good cash management provider should be able to alert managers to in advance.

Value added commentary
There are various other areas where a suitably experienced cash management provider can provide worthwhile commentary and input. One recent example we have encountered has been a client’s launch of a new Asian cash fund. The commoditised approach would simply have been to open a cash management account for the fund manager in Asia, but in isolation this would have done absolutely nothing to facilitate the successful launch of the fund. Instead, we were involved in extensive discussions regarding the potential payment pitfalls, given that the manager was domiciled in a different time zone, which resulted in the decision being made not to offer the fund on a same day basis.

Overnight overdrafts and how to avoid them
Another area where cash management providers can offer additional support and expertise is in real time data and cash matching. For example, same day cash funds will often have huge institutional flows coming in that will contractually settle into the custodian at a prearranged time each day – irrespective of whether the cash has actually been received. Apart from the need for a cash management provider willing to provide very substantial intra-day and overnight facilities, there is also the question of default. If an investor defaults on contractual settlement, the manager will not usually know who it was until maybe the next day, or in some instances the day after that. A provider capable of expediting this identification process from among perhaps hundreds of transactions will mean that there is a chance that the problem can be resolved on the same rather than the following day.

In addition, unapplied funds that do not match trades can be returned much more quickly. Such a provider can mean that the fund manager does not have to endure the reconciliation system and its timing driving the overall fund creation and administration process. If the manager is able to maintain real time positioning, and has a provider able to supply real time clearing information, then real time trade matching becomes possible. This can help to address the costs and capital associated with intra-day and overnight overdraft facilities as well as possibly improving the manager’s risk profile.

It is also worth remembering that increasingly the global reach of a vehicle such as a SICAV and its potential investor base means that these overdraft facilities are also global; a good cash management provider can advise in respect of rolling pan-regional facilities that expedite the free flow of investor funds.

Heading problems off at the pass
A good cash management provider should be able to offer much more than just the basic competence of routing redemptions and receiving subscriptions reliably. That should be taken as read. The value is added when the provider is able to assist the fund manager in optimising the settlement process and avoiding any potential clearing and payment pitfalls; be they exorbitant cross-border fees, value dating issues, or specific local formats. In an investment environment increasingly moving towards shorter settlement periods and increasing inter time zone investment this expertise can assist managers in protecting and enhancing their operational status. It can also aid managers in avoiding the reputational risks that may result from failures in the settlement process.

To conclude, the European landscape for fund managers is about cross-border distribution in multiple regions and time zones. It is about providing choice in terms of currencies and product. It is about providing choice in terms of third party distribution and open architecture. Cash management may well be at the end of this supply chain but it has significant ramifications for the entire process. Cash management should not be the differentiator between one fund and another – that decision should surely rest on a number of criteria, such as brand, image, performance, stability, research and so on. However, if costs or other operational factors do not mesh with the underlying product this may prove reason enough to bypass or move from a fund.

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