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Liquidity Management © David Blair 2013 – [email protected] – Page 1
Liquidity Management
What is liquidity management?
Liquidity management can refer to the practices we use in corporate
treasury to concentrate cash (aka liquidity). Liquidity management
can also refer to the investment decisions resulting from cash
concentration. They go together because, once we have
concentrated our cash, we need to do something with it. This article
will concentrate on the former ie cash concentration.
Why do we need liquidity management?
“Waste not, want not” as the saying goes. Just as we humans need
to shepherd ecological resources, corporations need to manage
cash with care. Cash is a scarce resource these days and,
according to MGI’s Dec 2010 report “Farewell to cheap capital?” [1],
this scarcity is likely to get worse. As a result of multiple rounds of
quantative easing and other liquidity measures undertaken by
western central banks, top corporates can borrow very cheaply on
public debt markets at the moment. But smaller companies are
cash squeezed because banks are contracting their balance sheets
to meet ever tightening liquidity regulations designed to make the
banks less risky and because economic uncertainty and pervasive
risk aversion have sharply reduced their investor pool.
Even in good times, wasting cash by leaving it dispersed and idle
has to be sub optimal for most corporates. Idle cash increases
costs by tying up capital unnecessarily and reduces operational
flexibility. Corporates that use some kind of value based
management like EVA or CFROI and understand from using WACC
that low interest rates do not equate to cheap capital appreciate the
importance of efficient cash management.
The biggest savings in capital efficiency normally come from
addressing issues in the working capital cycle – accounts
Liquidity Management © David Blair 2013 – [email protected] – Page 2
receivable, inventories, accounts payable. The resulting cash is a
core responsibility of treasury and is relatively easy to manage,
because money is easier to move than customers, warehouses,
and suppliers.
Cash concentration also enhances control over cash. Cash that has
been centralised can be deployed according to group priorities or
invested according to group investment policy. It is easier to ensure
consistent and compliant use of cash from one location than from
many locations.
Cash concentration also helps to manage and reduce credit risk.
Once we have concentrate our cash to one place, we are free to
invest it in the safest way possible – for instance in a high
availability money market fund – and thereby to reduce our
exposure to banks. This has been a major benefit of liquidity
management during the global financial crisis.
Another benefit is the significant workload reductions that come
from properly implemented liquidity management. Done properly,
liquidity management structures can be thought of as outsource in
house bank type functionality to banks. We reduce the workload in
subsidiaries without significantly increasing central treasury
workload, once the solution is up and running.
Bank relationship management is often raised as an issue when
discussing liquidity management. Clearly banks want corporate
liquidity, especially idle funds dispersed in current account around
the world. Banks appetite for liquidity has increased since the global
financial crisis. But, as described above, efficient cash and working
capital management is increasingly germane to corporates too post
GFC. Concentrating cash helps corporates to deploy liquidity more
strategically for BRM purposes.
The perils of cash concentration
Liquidity Management © David Blair 2013 – [email protected] – Page 3
Before we dive into the standard techniques for cash concentration,
we need to consider the corporate context.
Another duty of liquidity management is to ensure that the
corporation has cash where needed, when needed, and in the right
currency. In our enthusiasm for concentrating cash, we must avoid
leaving subsidiaries short of funds – for instance in certain
regulated emerging markets where cross border funding can be
problematic, and may take time to arrange.
Also in the context of regulated and developing markets, we need to
keep in mind the limits of the techniques described below. In some
emerging markets, a weekly manual payment to the concentration
centre may be the best realistic (and cost effective) outcome.
Internal or external?
When discussing cash concentration, we often think of a variety of
bank services like pooling and sweeping (see below). It is worth
remembering that there are a variety of internal business models
that can help concentrate cash – for instance: principal structure,
re-invoicing, commissionaire, single legal entity, etc. And, as
mentioned above, in emerging markets simple manual processes
may be the most cost effective solution.
Precursors to liquidity management
Liquidity management arrangements like sweeps and pools
represent the automation – normally by outsourcing to banks – of
precursor arrangements to ensure first cash visibility and then
control over cash.
Visibility means having next day visibility over global cash. This can
include exchange control countries because for visibility we just
need balance reporting, there is no money moving so no
regulations apply. Visibility is normally achieved with SWIFT or
agency balance reporting solutions across multiple banks.
Liquidity Management © David Blair 2013 – [email protected] – Page 4
Control means having access to execute payments from multiple
banks globally. Control is normally achieved with SWIFT or agency
payment messaging solutions across multiple banks.
Liquidity management means leveraging the visibility and control
with an automated system (usually outsourced to a bank) that
concentrates cash globally or regionally.
While this is a logical and necessary sequence, it does happen that
visibility and control are put in place simultaneously as part of a
liquidity management roll out project.
Pool or sweep?
The terms “pooling” and “sweeping” are often used interchangeably,
and the term “cash pool” is often used to refer to sweeping
structures like zero (or target) balance accounts (ZBA). For current
purposes, we will distinguish between notional pooling and
sweeping.
Notional pooling is an arrangement with a bank whereby the bank
agrees to pay credit interest and charge debit interest on the net
balance of a designated group of accounts (and not on each
account individually) – as illustrated in figure 1.
In the above example, instead of receiving credit interest on the
gross credit balance of +500 and paying debit interest on the gross
debit (overdraft) balances of -300 -190 = -490, and incurring
typically very large bank spreads on the difference between the
Notional poolNotional balance = +10
Account ABalance = +500
Account CBalance = -190
Account BBalance = -300
Liquidity Management © David Blair 2013 – [email protected] – Page 5
credit and debit interest rates, the corporation would only receive
credit interest on the net credit balance +10.
Key characteristics of notional pools include:
- No movement of funds
- No change of ownership of funds
- Balances remain at bank
- No additional accounting entries
- Bank normally needs right of offset
In contrast to notional pooling, sweeping means transferring funds
from participating accounts into a designated master account (and
the reverse in case a participating account is in overdraft), normally
at the end of each banking day – as illustrated in figure 2.
In the above example, funds are transferred (or “swept”) at the end
of the banking day from Account A to the Master Account and from
the Master Account to the other two accounts, so that Accounts A
and B and C show a zero balance at the day’s close. The economic
result is similar to the notional pooling above in the sense that the
bank pays interest only on the Master Account balance of +10 and
the corporation avoids the spread between bank credit interest
rates and bank debit interest rates.
Key characteristics of sweeping include:
- Movement of funds to and from the master account
Account APre bal. = +500
Post bal. = 0
Account CPre bal. = -190Post bal. = 0
Account BPre bal. = -300Post bal. = 0
Master AccountPre balance = 0Post bal. = +10
Liquidity Management © David Blair 2013 – [email protected] – Page 6
- Ownership of funds passes to pool master entity
- Sub account balances become intercompany balances
- Daily accounting entries required
- Bank does not need right of offset
Notional pooling and sweeping are very different ways of achieving
the goal of cash concentration. Which is better for any given
corporation depends on business model, corporate structure,
culture, geography, regulatory context, etc.
Notional pooling
Notional pooling requires that the bank gets the right to offset the
pooled debit and credit balances in the bank’s own balance sheet
so that the bank need not set aside regulatory capital for the gross
pooled balances. If the bank does not have the right of offset from
its regulators then the bank will have to set aside capital to cover
the gross pooled balances; this capital has a cost which the bank
will need to recoup from the corporation somehow, thereby
negating the spread saving described above.
In order to get the regulatory right of offset, banks need to be sure
that they have the right of offset with regard to the client. This
means that bank must have a legally enforceable right to use
pooled credit balances to cover pooled overdraft(s) for instance if a
subsidiary goes into default. This is typically done with a floating
pledge of credit balances to cover any overdraft balances that may
exist from time to time. Some regulatory regimes require that such a
pledge be supplemented with a general cross guarantee, and the
situation can be further complicated based on different jurisdiction’s
bankruptcy practices.
Some regulators do not allow the right of offset required facilitate
notional pooling (for example, USA). Some countries prohibit
intercompany lending and intercompany guarantees; this precludes
Liquidity Management © David Blair 2013 – [email protected] – Page 7
cross guarantees, and thereby makes notional pooling impossible.
Many emerging markets prohibit notional pooling directly.
Notional pooling enhancements
Notional pooling has evolved over the decades. One area of
improvement has been multi-currency pooling. Originally notional
pooling was only done in one currency. Later some banks
experimented with overnight foreign exchange swaps to bring in
other currencies, but that proved too complicated and expensive to
be viable. The leading providers now can offer multi-currency
notional pools including 40 or more currencies – albeit with
important caveats (see below).
Multi-currency notional pools offer an interesting alternative to
forward foreign exchange contracts for hedging foreign exchange
exposures. But note that most providers are not efficient enough to
make this economically viable, because their interest rate spreads
are too wide (which compares unfavourably with the relatively low
capital weighting of forward contracts).
Early notional pools were single entity; this obviated the need for
cross guarantees. Multiple entity notional pools are now normal.
Notional pools can now also cross borders, involving entities from
different countries. Cross border pooling raises tax issues (see
below). But note that, for regulatory reasons, all the bank accounts
in a notional pool must be in one bank branch. Some banks offer
multi branch arrangements – for example, interest optimisation –
but this is not as cost effective as true notional pooling because the
bank does not have the right of offset and will therefore need to
recover a capital charge.
Sweeping
From a regulatory perspective, sweeping is simpler. It can be done
in any situation where money can be transferred. Indeed, sweeping
need not be a bank service at all. Many corporate TMS (Treasury
Liquidity Management © David Blair 2013 – [email protected] – Page 8
Management Systems) can read in MT942 electronic intraday bank
statements, compute a sweep amount, and then initiate MT103
payment instructions. The same process can be done manually,
given sufficient resources. Most corporations choose to outsource
the process to banks because banks have greater scale in
technology and are more likely to run 24 hour operations needed to
do this globally, and because banks have been doing this for
multiple decades.
Challenges for sweeping include tax and regulatory issues around
transforming bank balances into intercompany balances, and
operational issues around managing and accounting for the daily
sweeps.
The challenges are not insurmountable. They are basically the
same as those facing any in house bank which allows subsidiaries
to go into debit with the IHB. IHB is out of scope for this article.
Interest allocation
In case of notional pooling, none of the accounts intrinsically
receives or pays interest. From a tax perspective (and from an
internal accountability perspective), this can end up looking like the
credit balance accounts subsidising the overdraft accounts. Indeed
tax authorities have attacked notional pools on the basis that they
distort intercompany transfer pricing.
To some extent the same problem can occur with sweeping. Unless
the corporation has an ERP or TMS set up to calculate interest on
intercompany balances, there will be no interest payments other
than at the master account level.
Because of this, most banks who offer pooling and sweeping
services, offer various forms of interest calculation services, where
the bank calculates interest on behalf of the corporate and often
executes interest settlement as well.
Liquidity Management © David Blair 2013 – [email protected] – Page 9
The three most common methods are:
- Arm’s length interest. The bank calculates interest on each
account at market rates including a market risk premium. This
results in a profit for the group (which approximates the saving
of bank spread) which would normally be credited to treasury
or head office.
- Gross interest reallocation. The bank allocates the pool net
interest amongst all the pooled accounts in proportion to their
balances such that all pooled accounts benefit equally from
the spread saving.
- Net interest reallocation. The bank allocates the pool net
interest amongst all the pooled accounts which have balances
in the same direction as the pool net balance (normally credit
balances). The distortive effects may be problematic fiscally
and organisationally.
Please note that most providers do not offer flexible interest
allocation, and some do not offer it at all. They will suggest that the
corporate do their own interest allocation. This brings issues of
complexity (especially when dealing with bank spread as well),
workload, and heightened tax risk. Since the method of interest
allocation can have big tax consequences in terms of whether the
balance is considered to be a bank or inter-company balance and in
terms of transfer pricing, this is a more important issue than it might
at first appear to be.
Tax considerations
Tax is beyond the scope of this article and in any case different
corporations will present different tax situations, so it is advisable to
seek specific tax advice on any cross border movement of funds.
Just to give a flavour of the typical issues arising in different cash
concentration arrangements, here are some common tax
considerations.
Liquidity Management © David Blair 2013 – [email protected] – Page 10
Many tax authorities restrict related party loans with limits like thin
cap rules, debt to equity ratios, deemed dividends, withholding tax,
etc. Since swept balances become intercompany balances, this is a
problem when using sweeping arrangements to provide
intercompany funding.
Although balances that are notionally pooled remain bank balances
and not intercompany balances, many tax jurisdictions have rules
requiring balances that are supported by intercompany guarantees
be deemed as intercompany balances. Since many banks require
cross guarantees to support notional pooling, this can create a tax
risk for corporations wishing to use notional pooling for
intercompany funding. Just to be clear, cross guarantees need not
trigger deemed intercompany tax treatment – it depends on how
they are built. The specifics in each case will be critical, so specific
and competent tax advice is necessary.
Finding specific and competent tax advice is not easy. There is a
general lack of understanding of notional pooling. Many supposed
experts generalise from single cases. Beware of sweeping
generalisations like “Pooling does not work in [country x].” Look for
more nuanced understanding like “These conditions that must be
met to make pooling work in [country x].” Be aware that tax firms
(and even individual offices) may have internal disagreements on
these issues; so a tax partner in the same firm may be telling your
pooling provider that it works, while another tax partner in the same
firm is telling the corporate that pooling does not work. Be prepared
to educate your tax adviser on the critical nuances of you provider’s
pooling arrangements.
In some cases, it may be beneficial for tax purposes and also for
reporting purposes (for instance to net off pool balances on
consolidation under IFRS-IAS32) to periodically execute a physical
sweep even in a notional pool. Leading providers offer automated
services to execute such sweeps overnight so that the business is
Liquidity Management © David Blair 2013 – [email protected] – Page 11
not disturbed. This is typically over a weekend so that it does not
disturb the business.
Pool and sweep
Although we have compared notional pooling and sweeping as
alternatives, in practice they are often combined. In order for the
bank to achieve right of offset, notional pooling is normally done
within one branch. In order to concentrate cash from various
countries, we normally first sweep from in-country accounts to the
branch where the notional pool is run, and then pool within that
branch – as illustrated in figure 3.
The local accounts of the participating subsidiaries are swept to or
from accounts in the pooling branch held in the name of each
subsidiary so that the balances in the pooling branch can be
notionally pooled (or included in some kind of sweeping or ZBA
arrangement if that is preferred by the corporation).
Many corporations prefer to maintain in-country accounts –
primarily to ease collections but also to facilitate local payments. In
particular certain statutory payments must be done through local
banking systems.
Notional pool at pooling branch
Notional balance = +10
Sub A pool a/c
Balance = +500
Sub C pool a/c
Balance = -190
Sub B pool a/c
Balance = -300
Sub A local a/cPre bal. = +500
Post bal. = 0
Sub C local a/cPre bal. = -190Post bal. = 0
Sub B local a/cPre bal. = -300Post bal. = 0
Liquidity Management © David Blair 2013 – [email protected] – Page 12
These arrangements are often called “overlays”. The local banks
may be different from the pooling bank. The local accounts may be
in different currencies. The notional pool itself may be multi-
currency, or the sweeps from the local accounts may include
conversion between local currency and pool currency.
Overlays can be multi-layered. For instance, in country pools can
sweep into regional pools, which are in turn swept into a global
pool. Often this was done because of bank’s limitations on offering
a truly global solution. Sometimes this mirrors the corporate’s
regional treasury arrangements. The best providers today offer truly
global solutions.
Although multi-layered pools are still quite common, the trend is
clearly towards single global pools. These are simpler which
reduces operational risk and workload, and also more efficient
which maximises cash concentration – see chart/ figure N.
Regulatory issues
Overlay structures introduce multi-currency and cross border facets
to cash concentration, which tend to increase regulatory complexity.
For instance, a single currency notional pool poses the issue of the
bank’s right of offset as a condition for pooling cost effectively. In
case of multi-currency notional pooling, some regulators take the
view that, even when they have an effective right of offset, banks
must set aside capital to cover foreign exchange risk (in case they
have a shortfall if the currency of a defaulting overdraft account
rises against the offsetting credit account currencies). Banks in
such jurisdictions will have to reflect their added capital costs in
their charges for the pooling arrangement.
The cross border aspect may trigger exchange controls and other
regulatory constraints, in addition to the tax issues discussed
above. Sweeping is generally expected to be an automated
process. The required automation is often not possible in exchange
Liquidity Management © David Blair 2013 – [email protected] – Page 13
control environments where paper documentation has to be
submitted and approved prior to payment.
Operational issues
Overlay structures raise some interesting operational issues. The
sweeps need to be carefully timed with respect to the paying bank’s
cut-off times. The standard process typically requires the paying
bank to send SWIFT MT942 intraday statements which the
receiving bank will use to determine the amount to instruct with a
SWIFT MT103 payment instruction. A typical timeline is illustrated
in figure 4 below.
Time Action
15:30 Bank A sends MT952 intraday statement
16:00 Bank B sends MT103 payment instruction
16:30 Cut-off for receipt of MT103
17:00 Bank A executes payment
17:30 Bank A treasury cut-off time
18:00 Central bank clearing closes
The cut-off for the paying account is almost three hours before the
central bank closes. Between customers waiting to the last moment
to pay and banks practicing intra-day liquidity management, these
last three hours are when most collections come in. So the sweep
will miss a substantial part of the day’s collections. Some
corporations use their own cash flow forecasts to make the sweep
instructions, but then they risk running into unplanned overdraft if
they sweep too much.
Liquidity Management © David Blair 2013 – [email protected] – Page 14
This loss of value is made worse by time zone issues. A common
example is USD collections in Asia. USD has to clear in New York,
where FedWire closes at 18:00 EST which is 06:00 the following
morning in Singapore and Hong Kong. This means that USD funds
will be coming in with good value for twelve hours after Asian
branches have closed their books. And fifteen hours after the
MT942 on which the sweep was based.
Another issue with time zones concerns the direction of sweeping.
Sweeping westwards goes with the rotation of the earth – often
called following the sun – and facilitates sweeping from Asia to
Europe or Canada – Asia’s cut-off times are early morning in
Europe, leaving plenty of time for bank processing and corporate
investment decisions. Sweeping eastward goes against the sun and
complicates sweeping from Americas and Europe to Asia – Asian
bank branches and treasury centres are closed before the start of
Americas work days, which makes the loss of one value day almost
unavoidable.
In general, sweeps to overlays lose at least one value day.
With this in mind, it may be simpler and almost as effective to wait
for MT940 end of day statements and send MT103 payment
instructions the following morning. This obviates the risk of
sweeping too much and would catch more of the late incoming
funds.
An alternative which avoids the intricacies of inter-bank
collaboration is to set up standing instructions at the subsidiary
bank to sweep to the overlay bank during their close of business
process. This is technically just like doing a sweep to an investment
or deposit account, which is an established capability at many
banks. Some receiving banks will want the paying bank to send an
MT202 advice to receive or a direct copy of the MT103 to ensure
good value.
Liquidity Management © David Blair 2013 – [email protected] – Page 15
These less sophisticated alternatives work particularly well in a
follow the sun situation such as sweeping from Asia to Europe.
They do not bridge the information gap, but if the provider offers
good value on funds received, interest yield will be maximised.
Mono banking (using only one bank) might seem attractive from this
perspective, but in fact most bank branches have to manage their
daily liquidity on an almost stand-alone basis for organisational and
regulatory reasons. In other words, banks are not indifferent about
where their cash is located.
Generally, sweeping between two branches of the same bank
brings up the same issues as sweeping between different banks.
The one exception I know of is offered only to extremely large and
profitable clients of the bank, which makes me suspect that it is
done as a loss leader.
Investment
Although I earlier defined the investment part of liquidity
management to be outside the scope of this article, it is important to
understand the flexibility a proposed overlay solution will give for
investing or otherwise deploying the concentrated cash.
The corporate will be looking for
- late cut-off times,
- automatic processing during the bank closing cycle,
- freedom to sweep to other institutions,
- flexibility to specify trigger sweep levels,
- flexibility to change sweep instructions when needed, and
- reasonable default yield when there is no investment sweep.
Business continuity
As with all treasury operations and especially ones based on
technology, it is important to understand the implications of the
Liquidity Management © David Blair 2013 – [email protected] – Page 16
overlay arrangements not being available for whatever reasons. Are
manual backup procedures realistic? Are the resources available to
execute the backup procedures? Are the liquidity consequences
survivable? How frequently should the business continuity plan be
tested?
Smoke and mirrors
Pooling and sweeping are conceptually simple. Liquidity
management products are often presented in slick diagrams that
gloss over the complications discussed above. It’s clearly a case of
caveat emptor to avoid disappointments with operational,
accounting and tax hiccups down the road.
One good mitigation strategy is to be very clear and explicit about
corporate objectives for liquidity management. For instance, is the
goal simply cash concentration, which implies only credit balances
and only one way sweeping? Does it include inter-company
funding, implying some accounts in overdraft and two way sweeps?
Does it include foreign exchange hedging, implying a multi-currency
notional pool with zero or minimal spreads?
It is easy to be impressed with broad statements like “We have live
customers pooling across 100 countries and in 40 currencies.”
Corporates need to drill down and ask specifics about each country,
such as in what currency and is it two way sweeping? For each
country, corporates need to ask
- what can be done in local currency and in G3 currencies,
- whether the planned pooling branch has relevant local
currency nostro accounts,
- whether over draft is possible in local and hard currency, and
- whether sweeping is one way or two way.
Additionally, the corporate has to reach comfort on the tax
implications of the proposed arrangement country by country.
Liquidity Management © David Blair 2013 – [email protected] – Page 17
Successful reference customers do not guarantee fiscal success
because each corporate has a different tax profile.
Preparing detailed scenarios or use cases setting out operational,
accounting and tax requirements and seeking specific responses
country by country in RFPs helps to preventing misunderstandings.
The selection of the bank branch to do MCNP will require
understanding of the bank’s treasury practices. For example,
Singapore is a good location for MCNPs but the bank’s Singapore
branch may not have the require nostro account to facilitate pooling
Scandinavian currencies.
The proposed fee structure will impact the pool’s usability. For
example, a wide spread between debit and credit interest rates will
preclude using the pool for foreign exchange risk management.
Banks have some flexibility in how they charge for pooling, so it is
important to understand the wider consequences.
It is also important to understand how proposed sweeping
arrangements will handle back valuation. Many solutions do not
handle back valuation at all. Each corporation will have to decide for
themselves how important this is in their business.
A good way to ensure a clear understanding of the pros and cons of
different liquidity management offerings is to include a market
leading specialist in RFPs. This will help highlight operational,
accounting and tax issues at an early stage. The clear leader in
liquidity management capabilities is Bank Mendes Gans – a
boutique corporate treasury services firm in Amsterdam. Mendes
Gans was originally founded by corporates to provide treasury
services, and, since it provides only liquidity management (along
with related netting and IHB services), it does not compete with
global banks for conventional banking business.
Please find below a suggestion of the format for an RFP checklist:
Liquidity Management © David Blair 2013 – [email protected] – Page 18
For readability, the table above has been simplified. Some
questions to ask about each country when assessing liquidity
management solutions include:
- (for Local currency and hard currency separately)
- Sweep in
- Sweep out
- Notional pooling
- Overdraft availability
- Credit interest rates
- Debit interest rates
- Ability for corporate to set intercompany interest rates
- Two way sweeps
- Zero balancing sweeps
- Target balance sweeps
- Conditional sweeps (enabling corporate to set sweep minima
and maxima to meet regulatory and fiscal constraints)
- Back valuation
- Cut off times to achieve same day value
- Flexibility of interest allocation / reallocation
In addition to the checklist above, a good metric for liquidity
management evaluation is what we call Total Liquidity Capture.
This is the total amount of liquidity that will be included in the
proposed liquidity management solution when implemented. Total
Liquidity Capture can be compared with total liquidity to determine a
Checklist for liquidity RFP
Country Local currency Hard currency Two
way sweep
Interest rates
Back valu-ation
Sweep in
Sweep out
Pool Sweep in
Sweep out
Pool
� � � � � � � � � � � � � � � � � �
Liquidity Management © David Blair 2013 – [email protected] – Page 19
percentage captures by the proposed solution. Also, when
combined with the interest rate information gleaned from the
checklist, Total Liquidity Capture can be used to calculate the
interest saving from interest spread eliminated and improved yield
on concentrated cash. Applying the company’s WACC, we can also
compute the benefit to the business of implementing the proposed
solution.
Where elimination of external subsidiary funding is a major driver of
the proposed solution, measuring Total Funding Capability is also a
useful metric. Calculating Total Funding Capability helps assess the
solution's capability to support local and hard currency overdrafts.
Sweeps and roundabouts
Taxes on transfers are a further complication in some emerging
markets – in addition to regulatory constraints. To mitigate these,
and to manage payment charges in case of very small sweeps,
many cash pooling solutions allow corporates to set minimum
sweep amounts (trigger sweeps) and set target balances. It is also
increasingly common for software to be able to perform any-to-any
sweeps across a designated group of accounts (rather than
sweeping everything to and from a master account). This minimises
overdrafts whilst also keeping transfer taxes and charges at a low
cost effective level.
Target balance sweeps allow corporates to maintain targeted
balances in local accounts. This might be to ensure minimum
emergency funds are always available locally, or to satisfy local
regulatory requirements.
Trigger or threshold sweeps allow the corporate to set the minimum
amount to be swept, with a view to controlling transfer costs. This
might be set from a zero balance or a target balance base.
For some, the regulatory, fiscal and operational challenges will
seem too much. One option might be interest optimisation which
Liquidity Management © David Blair 2013 – [email protected] – Page 20
does not require right of offset or movement of funds. Interest
optimisation is basically an agreement under which the bank agrees
to reward the corporate for leaving credit balances in one
jurisdiction with either cheaper loans or higher yields in another
jurisdiction.
Others may opt to do it themselves, either manually or using TMS
functionality to check balances and initiate sweeps.
In any case, there is no need to leave idle cash scattered across
the planet.
Notes:
I would like to express my gratitude to Byron Gardiner who kindly
shared his wealth of experience with me for this article.
[1] McKinsey Global Institute: Farewell to cheap capital? The
implications of long-term shifts in global investment and saving
http://www.mckinsey.com/Insights/MGI/Research/Financial_Market
s/Farewell_cheap_capital
[2] EVA = Economic Value Added is a measure of economic profit.
It is calculated as the difference between the Net Operating Profit
After Tax and the opportunity cost of invested Capital. This
opportunity cost is determined by the weighted average cost of
Debt and Equity Capital ("WACC") and the amount of Capital
employed.
http://www.sternstewart.com/
(http://www.valuebasedmanagement.net/)
[3] CFROI = Cash Flow Return On Investment: Like the IRR
calculation of a project, the CFROI metric is a proxy for the
company’s economic return.
https://www.credit-suisse.com/investment_banking/holt/en/index.jsp
Liquidity Management © David Blair 2013 – [email protected] – Page 21
Liquidity Management © David Blair 2013 – [email protected] – Page 22
Acarate Consulting
Clients located all over the world rely on the advice and expertise of
Acarate to help improve corporate treasury performance.
Acarate offers consultancy on all aspects of treasury from policy
and practice to cash, risk and liquidity, and technology
management. We also provide leadership and team coaching as
well as treasury training to make your organisation stronger and
better performance oriented.
www.acarate.com
David Blair, Managing Director
25 years of management and treasury experience in global
companies
David Blair was formerly vice-president treasury at Huawei where
he drove a treasury transformation for this fast-growing Chinese
infocomm equipment supplier. Before that David was group
treasurer of Nokia, where he built one of the most respected
treasury organisations in the world. He has previous experience
with ABB, PriceWaterhouse, and Cargill.
David has extensive experience managing global and diverse
treasury teams, as well as playing a leading role in e-commerce
standard development and in professional associations. He has
counselled corporations and banks as well as governments.
He trains treasury teams around the world and serves as a
preferred tutor to the EuroFinance treasury and risk management
training curriculum.