Bank of America (BoA) has taken the dramatic step of selling its $87bn money-market funds portfolio to investment giant BlackRock.
Industry observers have said that the sale highlights the pressures that US regulatory changes have placed on the diversity of traditional banks’ service offerings.
The deal parties already had close ties via a cross-ownership arrangement sealed in 2006 between BlackRock and Merrill Lynch, a firm that BoA later bought.
Under the terms of the new deal, BlackRock – in keeping with its speciality – will take over management of BoA’s entire roster of money-market clients, many of whom are corporate treasurers.
Once the deal closes – potentially as early as next spring – assets under management in BlackRock’s global money-market platform are expected to hit around $370bn in value, based upon current levels.
BlackRock co-head of global cash management Tom Callahan said: “Expanding our partnership with BoA presents a tremendous growth opportunity for BlackRock’s cash management business.
“At a time of tremendous change in the cash-management industry, this alliance underscores BlackRock’s commitment to market leadership in delivering outstanding liquidity solutions to our clients.”
BoA spokeswoman Susan McCabe said: “The transaction is consistent with BoA’s ongoing efforts to simplify our business – in this instance by outsourcing certain product manufacturing functions to an industry leader
“Rather than manufacture liquidity solutions in-house, the bank will focus on delivering best-in-class liquidity products solely from third-party providers.”
McCabe’s comments on BoA’s moves to simplify its structure are revealing. In a separate statement to Bloomberg, Callahan noted that US finance managers are busily overhauling asset holdings in order to meet Securities and Exchange Commission rules that require funds to have floating share prices.
Meanwhile, key clauses of the Basel III regulatory package have made the prospects of retaining sizeable cash deposits much more expensive for traditional banks.
“The large compliance cost across the whole industry makes the cost of business substantially higher,” Callahan told the site, noting that the current climate “favours scale players”.
Meanwhile, Karen Petrou – managing partner at US consulting firm Federal Financial Analytics Inc – drew attention to the pressures of low interest rates which, of late, have forced many fund managers to waive clients’ fees. “It's a highly problematic business under current low rates,” she told the Wall Street Journal.
While specialist cash-management firms would benefit fund managers in the long term, Petrou added, banks carrying out similar work would struggle against layers of regulation.