The spectrum of topics that one could cover on global pooling structures is quite extensive and topical, with liquidity management and funding as centre of plate for any international bank’s audience and their concerns of effective risk and balance sheet management.
This article will cover the bookends of the subject at hand… On the far left: even prior to initiating a project to adopt or expand a pooling…. And on the far right: after the structure is in place and you look to extract value.
Leading up to a global pooling project….
When corporate treasury evaluates a liquidity management and pooling initiative, we typically observe some topical market trends. First, the team reviews and revises commercial trading models in light of the Organisation for Economic Co-operation and Development’s base erosion and profit sharing (OECD-BEPS) action points on transfer pricing, permanent establishment and the like. Also increased global merger and acquisition (M&A) activity, particularly in the consumer and healthcare sector, is presenting challenges to corporate treasury as it implements organisational synergies and efficiencies.
Along the way, the team also examines the “highways” of the related cash flows and the potential “potholes” from legacy bank structures. The combination of these factors is triggering resurgence in bank (account) rationalisation. After which, the optimally engineered liquidity management structure, whether that be pooling and/or a centralised payment solution, are pursued.
That’s not to overlook that there are still those who skip the bank rationalisation step and go straight towards a bank pooling structure to help harness valuable internal liquidity. This is quite often in evidence, especially with notional pooling structures to avoid concern over intercompany lending and the associated tax or accounting considerations. In fact, pursuit of notional pooling is still prevalent despite the sometimes perceived “rocky road” ahead for that service due to accounting and regulatory standards. Banks such as Citi continue to see notional pooling as a core component of global liquidity management. In the market, it also remains a highly relevant cash management solution – although variations in how the product is positioned, delivered or priced are naturally occurring with some providers.
Steps to Bank Rationalisation:
- Know your needs. Whether banks like it or not, their detailed focus on Basel III implementation – along with educating the treasury community on how deposits are reported to regulators and why they price the way they do – has caused clients to look more closely “under the hood” to determine their needs and appetite.
Examine your need for bank capital to support funding goals. Determine how banks can align with your centralisation and operating objectives for treasury and the rest of your enterprise. Define your appetite to allocate your wallet for banking services in conjunction with your counterparty risk objectives and against the back drop of your buying model.
Suggestion to jumpstart: Leverage a tool or process to aggregate consistent subsidiary level data. Extract details on their revenues and expenses by currency that must flow through bank accounts; determine the payment and receivable volumes across the various types and, if they are cost justified, review bank and bank accounts utilised and why, etc. Analyse the data to call out “red flags” and understand your true banking requirements at the local level.
- Redefine bank strategy to be multi-faceted. Understand the bank’s appetite to support your company on both sides of their balance sheet. Additionally, there may be products or geographies that are more important to one bank over another. Keep your focus on the bank’s product capabilities as they exist today, as well as being able to service you as your needs evolve. Weigh and rank bank providers based on the value they bring to your processes and risk management with advisory services, customer service support and being able to meet your unique requirements.
Suggestion to jumpstart: Utilise a relationship dashboard to analyse your needs and the relationship value to the bank as you look for win:win ways to segment your wallet with preferred providers.
- Engage in open dialogue with your banks to clearly understand their perspectives on return hurdles, regulatory impacts, commitment to the business and relationship. Leverage that knowledge and utilise it for bargaining power with your chosen banks that are at, or near, “pole position”.
Suggestion to jumpstart: Develop a tiered strategy for your banks in line with your policy and governance.
On the other end of the spectrum, after you have vetted the best solution and scope, gone through the request for proposal (RFP) process and have implemented the structure, and the pool is in place…
Steps to Liquidity and Risk Management (from the pool):
- Boost your active management: Don’t become complacent just because a pool is in place and you are automatically offsetting long and short balances. You can actively manage each currency individually and utilise the (notional) pool to provide cover on unexpected mis-matches that could impact your profit and loss (P&L). Others actively drain the pool in one currency to increase yield or seek other methods to optimise earnings.
Suggestion to fine tune: Compare on-shore vs. offshore rates and consider, over time, if the currency mix in the pool (vs. centralised management of on-shore liquidity) should be altered for further financial benefit without limiting liquidity access and control.
- Push the limits of automation by staying current on ways to reduce points of “leakage” in your pooling structure including: minimising loss of value due to cut-off times or structure fragmentation, understanding bank capabilities and evolving regulations that allow more currencies or jurisdictions to be pooled, re-evaluating adoption or expansion of an in-house bank (IHB) to capture more countries and currencies in the pool, etc. Automation can free treasury’s time for better management and reduced operational risk.
Suggestion to fine tune: Each year, conduct a full review of what is not in the centralized pool and why.
- Calibrate management of FX hedging: Adjust your foreign exchange (FX) hedging programme by naturally offsetting cash flow and balance sheet exposures where possible, improving forecasts, and exploring ways to make hedging more efficient such as incorporating layering, FX options and segmented strategies for G10 vs emerging market (EM) currencies.
Suggestion to fine tune: Capitalize on your organisation’s centralized liquidity management initiative with an extension to improve internal financial discipline and aggregation of risk through enhanced cash flow forecasting.
In conclusion, go after a supercharged pooling solution that is right-fit for your needs today and that can evolve with you in the future. Key pointers to keep in mind when planning for the project include taking time to extend the value that can be created while you have the all-important buy-in from your partners. Test the limits of the benefit you can create. Look for ways to tune-up your banking structure. Increase the horsepower on your liquidity and risk management.
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