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Money markets demonstrate proof of life

While money market mutual funds (MMFs) were one of the first casualties of the global financial crisis 12 years ago, they appear to be holding up a little bit better in the current COVID-19-triggered economic uncertainty.

For one thing, MTS, part of London Stock Exchange Group, has launched MTS Depo, an electronic multilateral exchange system for European unsecured money market trading denominated in Euros. Trading has already begun with an overnight transaction executed between two Italian banks.

MTS says that the trading platform was launched in response to growing demand from money market traders for access to more diverse forms of funding, while enabling participants such as corporate treasurers to achieve a return on capital. MTS Depo is available to all users of MTS Repo and can be accessed by dealers in Eurozone countries.

MTS Depo allows participants to negotiate short-term borrowing and lending transparently and efficiently with highly flexible trade terms ranging from overnight to one year. It provides multiple trading protocols including a central limit order book and bilateral trading functionalities.

MTS is currently onboarding new customers and says it expects to have a wide range of credit institutions connected by the end of Q3 2020. In 2020, The European Central Bank, in statistics published on 7 April, estimated turnover in wholesale unsecured money markets in Europe alone as €127bn (US$137bn) per day.

MTS Depo customers trading a range of money market contracts benefit from straight-through processing using the TARGET2 messaging platform, facilitating real-time gross settlement. Additionally, MTS says that moving unsecured money market trading onto its electronic platform enables market participants to reduce manual processing, generating efficiencies and lowering the barrier to market entry in what remains a voice driven, over the counter (OTC) market.

Sustainable growth opportunities

A couple of months ago, CTMfile reported on how corporate assets in MMFs grew 38% year-on-year in 2019 on ICD Portal. The story noted that the Q4 38% average daily balance increase of corporate treasury investments on ICD Portal outpaced the market’s 21% increase in institutional money market fund use tracked by the Investment Company Institute (ICI).

As a reflection of corporate treasurers’ appetite for MMFs as short-term investment instruments, this was clearly good news. Since then, of course, the COVID-19 pandemic has dramatically derailed the global economy, combining a health crisis with a financial crisis that has seen businesses fail and unemployment numbers soar.

Sustainable Research and Analysis research has shown that in the month of March, mutual funds and ETFs posted an average total return decline of -11.94% against an S&P 500 Index decline of -12.35%. Despite this, however, there is a bright side, as sustainable fund assets broke through the US$2 trillion ceiling for the first time ever. In March, the firm’s research shows that sustainable funds and ETFs added a net of US$262.7bn, an increase of 14%. Mutual funds alone actually gained US$267.1bn, up 15%, with US$2.1 trillion in assets. Investors’ desire to put money into ESG-related instruments appears undimmed, and perhaps even driven, by the current market situation.

 

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