Rethinking cash management in fund administration

After years of low interest rates, the change in the rate environment put client cash back on the agenda. The Bank of England’s Bank Rate history illustrates the scale of that shift in the UK: rates rose sharply after 2021, making the difference between cash products more meaningful than it had been for years.

For fund administrators, this is not simply an invitation to chase yield. It is a reason to look more deliberately at the cash managed on behalf of clients.

Different balances have different purposes, liquidity needs and time horizons. Operational cash, acquisition funding and proceeds awaiting distribution should not automatically be managed in the same way. The practical question is: which solution best fits the purpose of this cash?

Operational cash starts with liquidity

Call accounts remain the foundation of day-to-day fund cash management. Capital calls are received, investments are settled, expenses are paid and distributions are made through accounts that provide ready access to cash.

For money needed at short notice, that flexibility is usually more important than an incremental improvement in interest. A higher rate is of little value if the cash is not available when an obligation falls due.

A fund manager will naturally focus on investment performance and investor outcomes. A fund administrator has a different vantage point: visibility across a portfolio of separately held client balances. That broader view can support a more strategic conversation with banking partners about service, products and pricing, while each client’s liquidity requirements remain central.

Depending on the bank and account structure, portfolio-level pricing or interest-aggregation arrangements may improve the return available across a broader set of balances. This is not necessarily the same as physically pooling client money. Ownership and account segregation may remain unchanged, but any arrangement still needs clear client terms, appropriate governance and transparent economics. Our explainer on client cash pooling looks at that distinction in more detail.

Match the solution to the purpose of the cash

Some balances require immediate access. Others have a more predictable lifecycle. A capital call may have completed ahead of an acquisition, exit proceeds may be awaiting distribution, or cash may be held pending the completion of a transaction.

Before selecting a product, ask:

• What is this cash for?
• What is the earliest date it could be needed?
• How certain is that time horizon?
• What operating buffer must remain immediately available?
• What do the fund documents, treasury policy and applicable rules permit?
• What is the net benefit after fees, administration and any loss of flexibility?

Those answers create a practical starting point:

• Call or current accounts generally suit operational cash and uncertain short-term requirements.
• Notice accounts may suit cash with a reasonably predictable horizon when the notice period can be accommodated.
• Fixed deposits may suit balances that can be committed for a defined term without compromising expected obligations.
• Money market funds may be considered where an investment product is permitted and its risk, liquidity and governance characteristics are appropriate.

When cash becomes an investment decision

There are circumstances where a traditional bank deposit may not be the only option. HM Treasury describes money market funds (MMFs) as an alternative or complement to bank deposits used by a range of investors for cash management.

The distinction between the two matters. An MMF is an investment product, not a bank deposit, and is subject to investment risks that do not apply in the same way to deposits. European securities guidance has long made that distinction explicit (ESMA’s common definition of European MMFs).

Many MMFs are designed to provide high liquidity and frequent dealing, but access, value and redemption remain subject to the fund’s terms and market conditions. Before using one, the relevant decision-makers should consider matters such as:

• eligibility under the fund’s investment and treasury policies;
• capital, credit and liquidity risk;
• dealing and redemption arrangements;
• fees and the return after costs;
• currency and valuation considerations; and
• the approvals, monitoring and reporting required by the fund’s governance framework.

For some balances, an MMF may be appropriate. For others, a bank account or term deposit will remain the better fit. Different cash balances justify different decisions.

The conversation with banks is changing

One of the more encouraging developments we have seen is not a new technology or product. It is a more collaborative conversation between banking partners and fund administrators.

As cash management has returned to the agenda, banks appear more willing to understand how administrators operate across multiple clients, fund structures and liquidity profiles. In turn, administrators can have a clearer conversation about their cash segmentation, operational requirements and governance constraints.

This is more useful than discussing a product in isolation. It allows both sides to consider how account structure, deposit products, pricing and connectivity can support better client outcomes. As we have argued elsewhere, the strongest banking partnerships are built when both sides understand what creates value and operational burden for the other.

A more structured approach to client cash

The biggest opportunity may not be a new banking product. It may simply be a more consistent decision process.

Fund administrators can begin by segmenting cash according to its purpose and likely time horizon, setting minimum liquidity requirements, documenting the permitted options and reviewing placements when circumstances change. Technology can support that process by providing a consolidated view across banking partners and making exceptions easier to identify, but the underlying policy and governance still matter.

The role of the fund administrator is not to chase the highest headline rate. It is to help ensure that client cash is managed deliberately and appropriately, with liquidity, governance and return considered together.

This article provides general information, not investment, legal or regulatory advice. Product suitability depends on the fund documents, jurisdiction, product terms and governance requirements that apply in each case.

Bring more structure to client cash

Explore how Flinq can support visibility and more consistent treasury and cash-management decisions across your firm.

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