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Is new regulation a cash management trust bust?

Cash management trusts (CMTs) have for decades been a stalwart of the Australian investment landscape. Offering better returns than bank balances, they still had the security of cash.

But this venerable asset class is withering. Australian Bureau of Statistics (ABS) data show between the start of 2009 and the end 2015 the total Funds Under Management (FUM) in the Australian Funds Management industry has grown from approximately $A1.5 trillion to almost $A2.6 trillion.

" While there has been some limited relief for CMT managers in the form of notice period deposits, the outlook for the CMT manager is bleak. " 
Matthew Byrne, Associate director, superannuation & funds, ANZ

Over the same period, and in a time of considerable volatility when holding cash has been attractive, CMTs have almost halved from $A60 billion, to $A34 billion. At face value, this inverse correlation between FUM and investments in CMTs is counter intuitive.

However, there have been two key regulatory measures that have put pressure on professional cash managers, decreasing the effectiveness of CMTs in Australia. If these changes prove permanent, professional managers will be forced to re-evaluate the traditional CMT model.

The first measure affecting CMTs is the Australian Government Guarantee Scheme created to support the banking sector and stabilise markets during the Global Financial Crisis in late 2007.

At the peak of the crisis, the guarantee was free up to $A1 million in deposits with a fee of 0.70 per cent thereafter. After 2010 the ability to extend was closed and after 1 Feb 2012 the limit was reduced to $A250,000.

Whilst CMTs would be expected to benefit from this guarantee on cash deposits, there was either a cost to the fund to purchase the government protection or a limit to the amount covered, because of the ceiling. As a result the main recipients of the guarantee were individual bank accounts with smaller balances.

Consequently, the market saw funds leave professionally managed CMTs to be deposited in vanilla high interest bank accounts. The scheme was wound back in 2012 and now only covers individual bank accounts up to $A250,000. Yet this feature is not available to aggregated CMT balances.

So the measure has changed the way the industry manages cash investment risk: an individual's deposit with a sole institution is more secure than a diversified, professional managed cash pool. Again, a development running counter to the intention of lowering the risk in holding cash.

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Source: ABS: 5655.0 – Managed Funds, Australia

At ANZ we are working with our clients on two cash management solutions in response to this market change. A key principle of both solutions is the removal of 'active' cash investment.

The first solution is enshrined in the prudential standard and involves the intermediary or manager moving away from active management and allowing the bank to 'look through' to the end investor. This allows the bank to consider omnibus deposits made by the manager where the end investor is a 'natural person' to be treated as a retail deposit. Under APS210 a retail deposit is treated favourably, and the rate that can be offered is significantly improved.

The second is a technology solution where a bank hosted system facilitates the cash manager opening accounts for each of its investors. As with the first solution this will result in a higher yield on the deposit, however with the additional technology the deposits of individual investors within the omnibus structure can be subject to the Australian Government Guarantee Scheme.

The second measure came in November 2011, when the Australian Prudential Regulation Authority (APRA) released a discussion paper 'Implementing Basel III liquidity reforms in Australia'. In response to the Basel III accord, and specifically focussed on market liquidity risk, APRA through this discussion paper shared a draft of its new prudential standard APS210.

Importantly APS210 required banks to hold High Quality Liquid Assets (HQLAs) equal to 100 per cent of the deposits made by CMTs. Effectively banks could no longer use deposits made by CMTs or wholesale depositors to fund their loan books. In addition HQLAs, which at the discretion of APRA are predominately limited to RBA cash deposits and Australian Government Bonds, provide low returns to the banks.

Under the APS210 Standard Banks appetite for CMT deposits would be significantly reduced. This standard was progressively implemented and became fully operational on January 1 2015. The impact on bank deposit rates was immediate as banks slashed credit interest rates payable to CMTs and other Financial Institution depositors.

The liquidity standards introduced by the Basel committee are here to stay and with them high-yield retail cash deposits from banks. While there has been some limited relief for CMT managers in the form of notice period deposits, the outlook for the CMT manager is bleak. The ability to take a viable management fee and outperform even the bank bill index is going to be a challenge.

While Cash Management Trusts are being used as the key example; this market impact is being felt by all professional cash managers. These structural shifts to the market are seismic.

From the investor perspective, we are already seeing behavioural change – it's clear in the data.

For the industry, if professional cash managers are to meet benchmark returns - indeed for the professional cash management sector to survive in this new regulatory environment - the market needs to innovate.

In an industry that has been relatively stable over past decades, the challenge of creating new products will not be easy. It will require professional cash managers and banks to collaborate and a shift in traditional products and mind-set.

A collateral outcome of these changes affecting the CMT industry is Australian banks can no longer use CMT deposits to fund a loan book. The solutions we're looking at for ANZ are one way such funding can be opened up again.

In the absence of these solutions the future of actively managed CMTs is limited. And flow on impacts for bank funding costs inevitable.

Matthew Byrne is an associate director, superannuation & funds at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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