Cash pooling structures evolve

Kimberley Long
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Cash pooling can provide substantial cost and efficiency savings, but it is not a simple solution for corporate treasurers to implement. Euromoney reports on a new initiative that mixes elements of a standard cash pooling and a notional pooling structure.

Cash pooling looks to be the problem solver for corporate treasuries trying to work across numerous jurisdictions and currencies. By pulling funds to the main treasury centre, the process gives an overview of the cash available each day, and how funds can be moved to best serve a given business. Although it sounds ideal in principle, the working processes are complex.

Benoit Desserre

Cash pooling comes with inherent FX risk attached, as cash is physically pulled from each location to be converted. Notional cash pooling has been developed to offer a way of mitigating FX risk by removing the need to physically pool together funds, instead keeping them in their home countries. Despite the potential for cost savings, not all corporate treasurers are convinced it is the best solution.

Benoit Desserre, head of payments and cash management at Société Générale, says: "Some very large corporates are completely opposed to using notional cash pooling. It is a very complex tool and needs considerable knowledge and rigour to be able to manage it. Cost is the main reason for using notional pooling. It removes the cost of FX as the currencies are not exchanged and remain 'as is' on its original account. The gain comes from the removal of the FX charges, and for some this is a significant sum of money."

For some corporates, developing a structure that mixes elements of both a standard cash pooling and notional cash pooling creates the ideal facility. Consulting engineering firm Arup worked with HSBC to develop its pool, which draws its international funds together to the UK.

Richard Abigail, group treasurer at Arup, says: "It is a hybrid structure. Money is moved from the other markets to London but it is not concentrated or commingled. Each foreign entity opened an account with HSBC UK to act as a mirror account. When it is in the UK it is notionally pooled. Virtually everything we can currently move is in the pool and we are increasingly trying to automate it."

  There was a lot of work to implement the structure, especially as it is a hybrid

Richard Abigail

The process of establishing the pool meant changes to how the treasury was run in each company. Time needed to be spent on educating each local jurisdiction on how moving cash centrally and having a clearer overview of the strengths and weaknesses of each location helps the company as a whole.

Abigail says: "There was a lot of work to implement the structure, especially as it is a hybrid. There are a lot of documents to go through. It takes time internally to convince people of the value of taking on this new banking construct."

Referring to Arup, Abigail explains how savings can be achieved: "Adopting cash pooling has brought about £1 million in savings each year. It has also allowed the company to drive treasury further as a function within the business. The pool has brought about greater awareness of cash balances, and the risks in FX and trading. The group holds around £100 million in cash, but now has a buffer of just £1.2 million for all pool participants. Previously the US business had wanted a $5 million buffer to cover their operations alone."

Even if cash pooling can help to implement a more holistic operating model, treasury processes are inevitably still subject to individual rules and laws that are present in each country.

Abigail says: "We cannot get access to India, Brazil and South Africa, and instead have to go through the standard processes of inter-company settlements." Although this adds time to the process, he says it is still worth pooling the other countries and working on these separately.

Europe is surprisingly a particularly difficult market to operate in, despite the progress made on allowing the flow of cash across borders.

"Implementing pooling in Europe proved to be the trickiest region," says Abigail. "There are specific laws to navigate in Germany and Italy, and Turkey is generally a difficult country to operate it."

There are also issues to overcome on the bank side, since HSBC has not been able to sweep Dubai, Canada and Poland. These technical issues are, however, due to be resolved soon.

As the role of the corporate treasurer evolves and international companies look to how they can operate more efficiently, the appeal of cash pooling might grow. As every company has distinct needs, banks are reluctant to offer it as a one-stop solution as it is almost impossible to compare the experience of two different companies. Ultimately, because of its complexity, the structure might remain one that is only truly viable for the biggest companies with the most treasury experience.