Features : Global Liquidity Management Comes Of Age

Global banks and corporations have been talking for years about cross-border pooling and sweeping. Now theyre showing it really works.

The term globalization may have lost its edge re-cently, but there is no doubt that more compa-nies are increasingly operating in more markets around the world. As they do so, their bank accounts multiply, and they find themselves with different cash positions in different countries and accounts.

Banks have seen the opportunity this presents for creating products that will tidy up those balances and allow companies to offset credit balances in one ac-count against debit balances elsewhere. The two main techniques in the market today are pooling and sweep-ing. Pooling means offsettingoften notionallythe different balances so that only the net balance needs to be managed. Sweeping means physically transferring balances from accounts into a single central account.

Klaus-Bernd Schalkowski, head of liquidity management and account services, Europe, global cash man-agement at Deutsche Bank in Frankfurt, says that five or six years ago physical sweeping of funds was happen-ing more on the domestic level. Today, with the intro-duction of the euroand with clients increasingly cen-tralizing their treasury activitiesboth pooling and sweeping are being used in a cross-border context. Be-yond that, there is now the prospect of increasing cross-regional pooling and sweeping, all of which lead to the bigger picture of global liquidity management fully integrating the United States, Europe and Asia.

At the very apex of the system sit those few global corporations that want a single cash management pic-ture: all their balances translated into a single currency and shepherded into a single account that they can manage as just one balance. Admittedly, there are pre-cious few organizations at this stage and few banks that can realistically offer this capability. Most banks and companies are at some intermediate stage en route to this cash management nirvana.

Sweeping Takes Center Stage

Of the two basic techniques, sweeping is becoming the more widely used. This is partly because pooling begins to run into obstacles once it goes cross-border and encounters regulatory and tax issues.In Europe, says St John Potter, regional manager for liquidity and investments at JPMorgan Treasury Services EMEA,true cross-border notional pooling is very difficult to achieve because of cross-jurisdictional aspects. Potter explains that one of the major impediments to exten-sive notional pooling is the security that banks want. If a client goes into liquidation, banks want the guarantee that short balances in one account will be offset by long balances elsewhere. Rules in one jurisdiction are often not sufficiently aligned with those in other juris-dictions to let this happen.


St John Potter, regional manager for liquidity and investments at JPMorgan Treasury Services EMEA

Hence sweeping has moved to center stagehelped by the fact that advances in enterprise resource plan-ning (ERP) systems and treasury management systems are helping corporations cope better with the account-ing complexities of sweeping.The physical sweeping of cash also does away with the bank guarantee issue.

The classic benefits of any sweeping arrangement as is evident right down at the retail level, where cus-tomers offset positive balances against payments due on mortgage borrowingsis the enhanced interest ef-fect.Any offsetting arrangement will reduce overdrafts. At the same time, says Jean Lecuyer, cash pooling prod-uct manager at BNP Paribas Cash Management in Paris, the concentration of funds in a single account through sweeping gives a corporation more leverage in negoti-ating credit lines.An international notional pooling sys-tem means that all credit lines still have to be arranged at the level of the sub-accounts, where a corporate will have less negotiating power.

The concentration of funds also gives more firepow-er when the net result is a positive balance and the company is going in search of investment products. It will be in a better position to take advantage of the money market funds that are becoming a staple offer-ing from liquidity management banks.

Giving Banks an Edge

According to Dorothy Rule, global product manager for liquidity and investment solutions in Citigroups Global Transaction Services, banks such as Citigroup consider the ability to offer alternative investment strategies as one of the differentiators in their ser-vicealong with cash management and forex.Its the combination of the three thats really telling, she adds.
There are also the more traditional gains, such as sim-ple cost savings.As Nick Diamond, senior sales manag-er for global treasury services at Bank of America, ex-plains, outsourcing of liquidity management to banks can mean savings for a company in people, in treasury management systems and on the cost of executing cur-rency swaps. Diamond emphasizes, however, that in each case there needs to be a corporate cost-benefit analysis.The signs are that this is something more com-panies are becoming alert toparticularly as the banks step up their marketing and product efforts. As yet, though, they still have a way to go in winning their client companies over.
For instance, George Dessing, corporate treasurer at Amsterdam-based global media company Wolters Kluw-er, says that the company is looking at bank solutions. For the moment, however,Wolters Kluwer has its own internal system for managing cash via current accounts and inter-company loans.We operate a manual sweep with a small time delay in order to concentrate cash in Amsterdam, says Dessing. Zero-balancing is done lo-cally, and we take the cash out on a timely basis.
A treasurer with a major UK travel company accepts that banks are now competing much more with one another to provide this kind of service and pushing it much more in Europe. There are three or four global players that really do have something to offer.But he is not jumping at the chance to take the new service. While I can see the functionality has improved a lot, Im concerned that the checks seem to get bigger at the end of the month whenever a company takes on a new service of this kind, he says.

The Benefits Of Netting

Besides reducing the number of bank accounts and concentrating funds, companies can improve their liquidity management by optimizing commercial flows and improving the resulting internal forecasting of cash flows. And, as AOL Time Warner, one of Deutsche Banks clients demonstrated, netting delivers additional benefits. In this context netting means the reduction of financial flows within 350-plus entities, strung out across more than 30 countries worldwide. Rather than make payments for every intra-company sale and purchase, the respective information is input through a real-time Internet system maintained by Deutsche Bank. Then, at the end of the netting cycle, each of the subsidiaries makes or receives a payment in its domestic currency that reflects its net position vis–vis the rest of the organization. This reduces considerably the costs associated with internal cash management. The system, says Deutsche Banks Klaus-Bernd Schalkowski, has been working efficiently for a number of years.
Information is one of the critical elements in this kind of netting system, and the banks could, arguably, face competition from IT companies in handling this aspect of cash management. Schalkowski insists banks have a much stronger record of organizational consistency and are better placed to guarantee the level of security required. No less important, he says, netting requires special FX and cash management know-how, and a full integration into related bank services makes life easier.

Europe Plays Catch-Up

Sweeping and pooling have been used at the domes-tic level for some time, and in this respect the US has al-ways been a long way ahead of Europe. With a single currency, jurisdiction and tax environment, the US has been a natural market for these kinds of services.
In Europe, the arrival of the euro has made the 12 states that use the new single currency a natural play-ground for sweepers and poolers. Lecuyer says BNP Paribas Cash Management has seen its international concentrations growing by a steady 5%-10% a year as more companies move to adopt ZBAszero balancing accounts.
As more companies expand globally, the demand for these kinds of services from outside the euro area is growing. Paul Haralson, director, international cash man-agement, with Duke Energy Corporation in Charlotte, NC, says, Weve added more entities in Europe in the past few years, and this has meant that we are installing a suite of products to handle sweeping for these.The company is also active in Australia and in Latin America, where it converts funds into US dollars, transfers them to US dollar accounts in the US and then pools them.
This last approach reflects the ways in which trea-surers adopt regional solutions to cash pooling.The US will have one modus operandi and Europe another, while treasurers adopt other regional approaches to cope with Latin America and with Asia. Sweeping is much more difficult in Asia,where exchange controls such as those imposed by the Malaysian government in the aftermath of the Asian crisis of 1997-98make the whole process much more difficult.
In any situation, as Rule at Citigroup points out, the specifics of the clients legal structure across its corpo-rate organization and the pattern of, for instance, with-holding taxes will influence the approach that the bank adopts in tailoring a solution.Theres no cookie-cutter approach, says Rule, but you have to mix and match the building blocks. That can mean working with a client to achieve the best possible structure based on the recommendations of their own tax adviser.
In Latin America, where the dollar is never far from the peoples minds, the solution for some US corporates has been to shift funds into dollar accounts in the US. This means, as Gabriel Turiello, finance manager at agri-cultural equipment supplier John Deere in Montevideo, says, We sweep all balances through a net account in the US, usually on a daily basis.This means the role of the local treasurer becomes more limitedand so does the role of the local bank. Overall, local bank relation-ships are likely to be among the most difficult aspects of liquidity management going forward.

Global Banks, Local Solutions

Where possible, global banks will aim to provide a service directly to customers through their own branches. While none of the leading players is repre-sented in every single market where a company may trade, the majors all emphasize the breadth of their presence.We have branches in over 90 countries that do cash management, forex and investments where our staff know the local regulations, says Rule.

Dorothy Rule, global product manager for liquidity and investment solutions in Citigroups Global Transaction Services

Many corporates, though, are reluctant to relinquish relationships with purely local banks that have served them well in different parts of the world. In some cases, says Schalkowski, this can mean separating receivables and payable accounts and assigning a particular role to the local institution.As long as local subsidiaries are ad-vising the central treasury of fund movements, then the treasury is able to fund accounts at local banks so that unnecessary overdrafts do not arise and credit lines could be centralized.We find that where the customer tells the local bank,you can keep the local business if you support regional and global solutions, then we can cooperate with the local banks, he adds.

In any event, the task of the global liquidity manage-ment banksthat handful of banking institutions that want to offer a service in this areais to find ways of accommodating third-party banks within increasingly automated frameworks for sweeping funds.

This will be the future battleground, predicts Potter at JPMorgan: How to get real liquidity management with genuine third-party banks that are not our chosen part-ners in particular markets. Clients want to work with a multi-bank environment, and the global liquidity manage-ment providers have to fit themselves around this. JPMor-gans Global Agency Treasury division is, says Potter, as flexible and diverse as possible to cope with this.

This kind of overarching solution is the end game in sweeping, pooling and other global liquidity-manage-ment strategies. But it is not a panacea. As Nick Dia-mond at Bank of America says:There are still country regulations out there, and global liquidity management is not the answer to all treasury wishesfor example effectively moving money out of Mexico or managing funds in Korea. Its a set of tools that can help get around some of the problems.

Paying the Price

banks investment in underlying technology. And, says Roger Valensi,co-president at cash management and bank communications software providers XRT Iberoamerica in Madrid, there is still a clutch of issues to do with secu-rity, networks and formats that needs to be addressed.

Roger Valensi, co-president at cash management and bank communications software providers XRT Iberoamerica in Madrid

The cost of setting up a sweep between two ac-counts could be as little as $30-$50 a month. For that reason, as Diamond admits, liquidity products as a stand-alone are not hugely profitable for the banks.The value to the bank is likely to come from performing the underlying treasury management functions for the cus-tomer and from selling other treasury products such as money market funds. As a result, says Diamond,If the customer wants the icing of global liquidity manage-ment, then they have to realize that we need to have some of the cake as well.

And, Diamond notes, the corporates will need to make a commitment to use the banks services for a reasonable period of time.Its not a plug and play so-lution that clients can switch from one bank to anoth-er, he says.

Those perceptions are recognized across the indus-try. As Valensi says, Big corporations will study how much business to give each bank in exchange for glob-al liquidity management services. Pooling isnt big busi-ness, because the cash doesnt even stop in an account for one day.

All this means that global liquidity management is more talked about than practiced. Although the solu-tions have been on the cards for two or three years, in practice institutions such as Bank of America are even now at an advanced stage with only a small number of clients to provide the full global service. We do ele-ments of cross-currency pooling, global funds move-ment and regional pooling with each of them. Now were talking to the clients about pulling that all to-gether, says Diamond.

Graham Field