Category Investments

Money market instruments finally join the electronic age!

11 March 2010 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Private investors pump billions of rand into money market funds each year. The latest Collective Investment Scheme (CIS) statistics, for Q4 2009, shows R238bn assets under management in domestic money market funds. Net purchases of money market funds topped R2bn over the final quarter. Investors view money market funds as a ‘safe as houses’ income opportunity. But there’s more to the industry than meets the eye.

We turned to a June 2009 educational piece distributed by the Association for Savings and Investment South Africa (ASISA) to learn more. Titled, Pick your money market fund with confidence, the article set the record straight on money market funds and whether these instruments were considered safe.

Fund versus account

The first step is to understand the fundamental difference between a money market fund (unit trust) and the money market accounts offered by a bank. Money market funds (or unit trusts) pool investors’ money, which is then managed by fund managers to purchase a mix of money market instruments. Money market instruments include banker’s acceptances, commercial paper, negotiable certificates of deposit and government bills. “If you delve deep into the holdings of the various funds, you will find that the assets in money market fund portfolios are mainly spread across the biggest banking institutions in the country, providing you with the protection that comes with diversification,” said Peter Dempsey, deputy chief executive, ASISA. True money market funds are regulated and afford investors certain legal protections. Investments in money market funds are also held in trust by appointed trustees.

The Collective Investment Schemes Control Act (Cisca) lays out strict rules to ensure liquidity in the money market space. These include that assets of money market funds may not be invested in money market instruments with a maturity of more than 12 months, that the average maturity of instruments held by the fund as a whole may not exceed 90 days, and fund mangers being restricted in terms of how much money they loan to institutions. The closer a fund is to a 90-day average maturity, the less liquid it becomes.

A money market account typically invests in instruments issued by a single bank and is treated like a bank account. The bank will use the funds in this account to purchase various money market instruments, but unlike a money market fund, the assets in a money market account form part of the balance sheet of the bank in question. If the bank goes under the money market account funds could be affected.

Big changes afoot

Financial advisers deal with the front-end of the money market industry and process purchases and sales of unit trust products on sophisticated trading platforms. Behind the scenes things are more complicated. Fund managers use the cash flowing into money market funds to ‘buy’ and ‘sell’ money market instruments. Until recently South Africa’s R500bn stockpile of money market instruments was subject to manual custody, issuing, clearing and settlement – with records held on an outdated paper-based system! This archaic practice will be replaced from 1 March 2010, from which date all money market instruments will be processed electronically, and paper-based securities will be dematerialised.

“The main purpose of the dematerialisation project is to reduce the existing risks inherent in the current paper environment which is achieve through enhanced straight through processes of the Money Market Settlement System (MMSS),” says Anthony van Eden, chief operating officer at Strate, South Africa’s Central Securities Depository. “The move from the current manual custody, clearing and settlement processes to a fully electronic environment has allowed enhanced straight-through-processing and risk mitigation for all issuers and investors in the informal over-the counter financial market,” he added.

Restoring pride in SA financial markets

The dematerialisation of money market securities has been on the cards for almost two decades. In 1998 the Reserve Bank, retail banks (Absa, First National Bank, Nedbank and Standard Bank) and Eskom identified a need for an electronic solution for the money market industry. These stakeholders formed a Money Market Forum that completed a dematerialised money market blue print in 2002. A period of extensive market consultation followed. Business requirements and specification documents were produced before system testing was completed in 2008/9. The first money market security was issued and settled by Standard Corporate and Investment Bank, FirstRand and their custodians in October 2009 and the entire industry has now adopted the electronic issuing, trading and settlement of money market instruments.

The electronic transacting of money market securities is a significant milestone for domestic financial markets. Benefits include mitigation of operational, settlement, systemic and credit risk. In the dematerialised environment money market securities will be issued, cleared and settled electronically on a real-time, gross principal-to-principal basis, while beneficial ownership will be recorded and updated in the central depository maintained by Strate.

“The impact on private investors is not directly felt other than the security of settlement and custody the MMSS brings,” said Van Eden. He speculated that cost savings as a result of the enhanced straight through process and paperless environment could trickle through to investors depending on the funds’ costing and pricing models. The MMSS should also improve market liquidity and lead to reductions in the overheads associated with issuing and settlement in a paper intensive environment.

Staying ahead of the game

What does South Africa have to do to enhance its financial systems? “To be considered a global financial services hub we must have reliable regulation, infrastructure to provide secure settlement and custody, and be able to facilitate seamless cross-border settlement,” says Van Eden.

Editor’s thoughts: Private investors rely heavily on money market funds and accounts to satisfy their short-term investment needs. The industry collectively accounts for billions of rand of investor funds. Have you ever experienced difficulties with the liquidity or actual return earned on a money market investment? Add your comments below, or send them to

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