Treasury Centres Need the Right Legal Structure

Establishing a regional treasury centre (RTC) requires technology and banking partners, but one of the key constituents should also be a legal firm in order to help corporate treasuries understand the full legal implications of setting up an RTC. Whether the facility is to be in China, Southeast Asia, India, Africa, eastern Europe or elsewhere, the jurisdiction and scope of the RTC will impact its legal constitution and should be one of the first matters to be addressed, explained Lawrence Tondel and John Casanova, partners at Sidley and Austin law firm, to gtnews. Structuring the framework of an RTC is vital preparation work. 

Tondel said that a corporate will usually start on the legal framework for a treasury centre by setting up an umbrella agreement to use with its bank and listing the key legal issues to discuss. Casanova added that some corporates may pick different banks to support their treasury centre in different regions, since even global banks may not be great in every jurisdiction, and the corporate may want to use the strongest bank or specialisation skills in each region. The corporate can then negotiate with the bank to ensure an understanding of the key legal issues in whatever country the RTC is being formed, simultaneously establishing a structure for managing risk and itemizing the distinct responsibilities and ‘chain of command’. 

While the umbrella agreement for a new RTC is designed to cover every jurisdiction, the corporate would need to make exceptions if the agreement is illegal or restricted in a specific jurisdiction – China, for instance, has certain currency restrictions and other peculiarities that need to be obeyed. A universal RTC establishment protocol is useful, but it will need to be tweaked to suit each specific region and local laws. Corporates also need to realise that some restrictions may be based on practices, policies or procedures, rather than actual written law. 

Jurisdiction

The RTC umbrella agreement should also specify the law to be used in the event of a dispute. Corporates should preferably choose a jurisdiction which is a major financial centre and which is sophisticated, so that they will get a fair, equitable and expert hearing if need be. In Europe, for example, the Netherlands is often a preferred location. In countries where local practice or policy requires local law to prevail, Tondel said that the corporate may use a representation and warranty by the bank as an alternative, to make sure the RTC agreement is enforceable. 

Once the structure of the RTC agreement is in place, the bank can work with its offices, affiliates, partners and joint ventures to explain the framework in each local location where the corporate will operate. Translations may also be required by local law and need to be started early so they can be completed in a timely fashion. 

Key Legal Issues

There are a variety of legal issues the corporate should make sure are covered in its agreements and RTC documentation. One of the most important business aspects is the daily netting of all balances so that the treasurer has one number summarising the position at the end of the day, if this is allowed. The corporate treasury may have a credit line to make sure it does not end up in an overdraft position. 

A legal issue that varies between locations, depending where an RTC is sited, is how the bank and corporate deal with confidentiality and data protection – for instance, Europe is very strict about its Data Protection Act (DPA). There needs to be a clear, single agreement on the provisions for all parties involved in an RTC to adhere to. 

Another important consideration is signing authorities. The corporate may need new bylaws or provisions, given the dozens of agreements that may be needed to support each jurisdiction. The corporate, bank and any technology or support agencies should all jointly work out what will be satisfactory for the involved parties, Tondel said, rather than wasting money on lawyers. 

Think About Exit Plans Early

Another legal and business issue to consider, advises Tondel, is how termination of an RTC would occur if need be. Corporates can terminate jurisdiction by jurisdiction, but they will need a transition period built into the agreement since they can’t simply stop banking on a day’s notice. The corporate will thus need to negotiate on the causes and processes so that they can transfer responsibilities to another bank, be covered during the transition and ensure a soft landing.

Another issue, explains Tondel, is how the RTC agreement affects the bank’s risk-weighted capital position. While the bank may enter into separate arrangements in any number of jurisdictions, it may also need to look at them as a whole when it calculates its risk-weighted capital, particularly in respect of any funding obligations that might arise in the context of the overall arrangements. The bank’s documents will often include security arrangements, such as set-off and pledging, to deal with risk-weighted capital. 

Liability

Given that there are multiple parties on each side, another issue to address is whether liability will be joint or several. The corporate would not want its liabilities in one country to affect its credits and assets in another country. To address the issue of liability, arrangements can be structured so that the liabilities of the corporate are several rather than joint. The bank will often require that the liabilities of its affiliated banks be several as well. In such situations Tondel said a corporate would seek a guarantee from the bank, which is not often practicable with most banks, or comfort letters. 

Experienced corporates will usually have an experienced procurement officer negotiate interest rates, foreign exchange (FX) rates and other fees, as well as how long fee structures will stay in place so that they can leverage the larger scope of the RTC relationship with the bank to reduce costs. In one case, Tondel said, a corporate spent four months negotiating FX rates and ended up with more favorable fees. Addressing the relationship on a global basis was financially successful in this case. 

Centralised communications and reporting is a key benefit of an RTC and creates efficiencies, continues Tondel. The treasurer may want a combination of daily, weekly or monthly reporting. The corporate should also have the capability for electronic posting of payments and expenses, with interest balances electronically posted by the bank in each of the regions it is using. The corporate will also need separate tax and fee reporting structures, which may require IT support. These requirements need to be discussed at the beginning of the relationship. 

Another key consideration, according to Casanova at the Sidley and Austin law firm, is for the corporate to understand exactly how the money will flow, since money flows drive wraps, warranties and service standards for the agreement. It needs to know what it is actually receiving, whether there is a real-time flow, and how the data entry and account sweeps will occur. The chief financial officer (CFO) of a corporate should be able to see whether funds are in bank accounts or have been swept. 

The Process for an RTC Agreement

When the corporate and the bank and any other interested parties start working together to set up an RTC, it is important to set a time schedule at the beginning of the process, advises Tondel, so that everyone understands what is realistic. It may well take 12 to 18 months to set up a centre, and global treasury or head office staff need to understand these timelines. As implementation progresses, the corporate, bank and lawyers involved in the project can benefit from regular phone calls to get everyone on board. 

The corporate and the bank must also understand from the beginning whether the bank can provide the services in all the jurisdictions the corporate wants to include. In one case he knows of, Tondel said a bank determined about four months into the process that it was unable to provide the service in a few unique jurisdictions. Since banks may use a combination of joint ventures, partners, affiliates and independent service providers in some jurisdictions, it is important to assess from the beginning whether all these parties are willing to accept its agreement and participate adequately. 

The various cultural and legal perspectives of a global network should not be ignored either. In one case, Tondel said, a corporate was initially told an RTC agreement would not work, and was then subsequently told two weeks later that there were no problems, after discussions between the parent and the bank branch had resolved outstanding issues among themselves. 

While setting up a regional treasury centre can bring many benefits, it is also important to be clear from the beginning about the legal framework and documentation that will underpin the RTC. Along with looking at the banking and internal structures for the treasury centre, then, corporates should also set up the legal structures effectively and manage expectations effectively to ensure that RTC is firmly rooted and launches successfully. 

 

 

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