Cash Management Programme

 

There are a number of banks and specialist cash management companies ("Cash Managers") that offer a cash management programme (the Cash Management Programme) to futures traders and funds.  Often the Cash Management Programme is combined with the security of trust status  bank accounts.  In simple terms, the Cash Manager will open one, or more trust accounts with a money centre US bank, in the name of the fund, through which they operate the Cash Management Programme.  The investment objective of  the Cash Management Programme is to achieve a small but positive yield enhancement over and above TBills, or some other predetermined benchmark.  It is important to be clear that the Cash Manager does not set out to achieve dramatically enhanced yields, but rather aims to provide a consistent, marginally improved return. 

 

 

 

When establishing an offshore fund it is important to clearly demonstrate to potential investors that the fund has been organised so that the custodial arrangements ensure that the assets are as secure as possible and protected from any third party risk, except, of course, the inherent market risk. 

  

 

In order to provide this comfort to investors it is common practice to appoint a custodian bank as the "Custodian" of the fund.  The Custodian normally receives all subscriptions, which are paid into an account held with the Custodian on behalf of the fund.  Out of this account, the Custodian pays monies to the fund's commodity / futures broker ("FCM").  It would also pay the proceeds of redemptions to shareholders, as well as all the operating expenses of the fund, subject to receipt of proper invoices, which would be provided by the Administrator.   

 

It should be noted, however, that a Custodian will not normally accept responsibility for any assets held outside of its control.  This applies particularly with regard to any assets held in the account of the fund with  the  FCM. 

 

 

Custodians, as a general rule, are paid an annual fee, which is usually calculated as an annual percentage of the average total Net Asset Value of the fund, often subject to a minimum monthly fee. 

 

With a more traditional securities fund, such fees are equitable.  However, with a futures, or commodity fund, where it is normal practice for the majority of the assets to be held with the FCM, such fees are more difficult to justify - particularly,  if the Custodian will not accept any responsibility for the assets of the fund held by the FCM. 

 

 

Most major FCMs operate under CFTC regulations, which require that customers' monies are segregated into a Customers Pooled Segregated Account (the Pooled Account), which is a separate account from the FCM's everyday operating account.  Thus the FCM is not able to utilise customers monies for its own purposes.  However, the segregated account, into which an individual customers money is paid, is not an individually segregated account - it is a pooled segregated account, into which monies belonging to many, if not all of the FCM's customers are paid.   

 

What many, often sophisticated and experienced investors (and even some CTAs), fail to appreciate is that, if the FCM was to suffer a major Client loss, (relating to a Client who was a participant in the Pooled Account), which resulted in a deficit, after applying the sum of all of the assets held for the defaulting Client and all of the FCMs liquid assets, then the Pooled Account could suffer net losses.  In such a case those net losses would be passed on, on a pro-rated basis, to the remaining individual participants in the Pooled Account.

an account providing custodial and cost efficiency for futures and commodity funds. 

 

Custom House has identified Cash Managers who will offer the Cash Manager Programme, operated through two trust accounts held with leading US banks,  (the CMP Trust Accounts) for offshore funds.  The first account will be the  "Operating Trust Account", into which the initial subscriptions would be paid. The net subscriptions (i.e. after deduction of initial charges or sales commissions) are then paid into the second account  - the "Investment Trust Account" - and invested in the money markets, by the Cash Manager, on behalf of the fund.  The Cash Manager will comply with the investment risk profile set by the Investment Manager or Directors of the fund. 

 

Utilising this Investment Trust Account, the Cash Manager would, on a daily basis, not only pay any margins due to the FCM, but also draw down, from the FCM, any balances in the funds account at the FCM which are surplus to the FCMs margin requirements. 

 

Each month Custom House, as the Administrator of the fund, would give instructions to the Cash Manager to transfer money out 

of the Investment Trust Account into the Operating Trust Account, to meet monthly operating expenses.  In addition all other payments to third parties, including CTAs fees and shareholder redemptions, would be made out of the Operating Trust Account. 

 

Both accounts would be held under a trust structure with the named US money centre bank. This means that the monies held in these accounts are truly segregated, in fact and law, in the name of the fund and thus fully protected in the event that the FCM, the Cash Manager, or, indeed, the bank holding the fund's trust accounts, were to fail. 

 

 

 

The main attraction of the CMP Trust Account is that the fund's assets are not vulnerable to losses from third party credit risk, because they are held in an individually segregated trust account. 

 

The experiences of recent years, epitomised by the Barings Syndrome have raised concerns as to which FCMs have sufficient capital to survive a major Client collapse.  What is worrying is that the next major collapse may be larger than any FCM.  Therefore we believe that it can only be prudent for all futures and commodity funds to incorporate a secure custodial structure. 

 

We believe that the CMP Trust Account provides maximum security (with additional cost efficiencies) and should be considered in preference to holding surplus cash assets with an FCM, however well known and however well capitalised that FCM may be. 

 

 

The CMP Trust Account ensures that the fund's reserves will receive daily attention from professional cash managers. Professional management - knowing which securities to buy in a given class - can help ensure the highest return commensurate with the risk parameters and liquidity requirements of each fund. Cash managers add value as a result of the economies of scale they achieve on behalf of all their clients, their knowledge of the specific issues within each risk / return category, and their continuous monitoring of market conditions.

 

 

The CMP Trust Account is a truly cost efficient (and therefore performance enhancing) alternative to the classic custodial bank arrangements.  Minimum custodial fees can equate to as much as  0.5% p.a. of the NAV for a small fund, whereas the yield on a cash management programme is usually paid net of  cash management fees.