How do companies centralise treasuries? The most important consideration depends upon the organisational structure of treasury. This structure will determine what processes and procedures can be used to manage treasury on a global basis. Once these concepts are decided, companies can focus on the legal structures and locations to employ to make the organisation work.
Core Treasury Centre
Some companies choose to centralise as much activity as possible, particularly capital market activity and financial risk management, into a core treasury group, at or near corporate headquarters. Typically short-term investing, borrowing, cash movement activities for all domestic entities also are managed within this organisation.
It is less common, at least for US companies, to try to manage international treasury operations out of the core group, although there have been notable exceptions. Timing, taxes, local banking regulations and related laws often make it more practical to manage these functions at a non-US global centre, a series of regional centres, coordination centres, shared service centres, on an outsourced basis or at a totally decentralised level.
Non-US Global Centre
Many US companies set up a non-US based centre to manage their international liquidity needs. Centres like this allow the company to move funds around the world without suffering the adverse tax consequences of repatriating funds through a US entity. Typically these centres act as the hub of internal international funding and investing. They are often located in or near major financial centres and/or in jurisdictions with attractive tax laws, good networks of double taxation treaties and sound, but liberal capital markets regulations. Favourite locations include Belgium, Ireland, Netherlands, UK and Switzerland in Europe, Hong Kong and Singapore in Asia, and Miami and Brazil for Latin America.
Initially the goal of these centres was to create a vehicle that could serve as an in-house bank. Excess cash could be deposited and short-term loans could be facilitated through a common call account structure. At the very least the concentration and management of cash through the centres saved on the bid- ask spread of dealing with local banks, reduced external borrowings, and concentrated excess funds in the hands of staff with professional short-term investment skills. In addition, the centralization of activity helped companies understand their cash flows better, leading to better forecasting and financial management. Originally, the movement of funds to and from and subsidiaries required the staff of the centre and the local staffs to physically move the funds from and to the centre.
Over time, new bank pooling products increased the efficiencies of these centres. In a physical banking pool, cash is swept daily from subsidiaries with long positions and placed into a master or header account under the control of the treasury centre. Similarly, entities with short positions are provided loans from the master account. This innovation has reduced the costs of administering the flow of funds between legal entities, making centralisation more affordable for many companies.
In the past several years, the pooling concept has been further enhanced by the development of notional pooling. In a notional pool the various subsidiaries each have an account with the pooling bank. The bank simply pays interest to the subsidiaries with long positions and provides working capital funds to the others. The bank effectively nets the long and short positions without physically moving the cash from the long accounts to the short accounts, reducing the administrative burden of managing the cash. Under the right tax structure the pools can also include a US corporate account, further facilitating global cash management.
It also has become possible to increase the efficiencies of the treasury organisation by moving the management of local accounts into the treasury centre as well, reducing the workload and responsibilities of individuals handling cash inside the subsidiaries.
Regional Treasury Centres
Some companies find it more efficient to have several regional treasury centres rather than one non-US or other non-home country centre. The regional centre approach allows the company to tailor the process of each centre to the requirements of the region and keeps the staff of the centre more attuned to local conditions. Thus, a company may have a European centre with a pooling structure, an Asian structure that supervises in-country activities and several different centres in different parts of Latin America.
Coordination Centres
As alluded to above, in parts of Asia and Latin America it is still not practical to concentrate funds in one legal entity or set of bank accounts because of capital controls, banking legislation or other laws or customs. Many multinationals, however, still find it useful to put in place regional coordination centres that manage the various subsidiaries’ treasury activities. Legally these can set up as a treasury specific company or as part of the regional headquarters staff. They effectively act as the management for local in-country treasury staff.
Typically these are located in key regional cities such as Hong Kong, Singapore or Tokyo in Asia or Rio in Brazil in Latin America. In addition for the Americas the centre is often located in Miami or at corporate headquarters.
Shared Service Centres
Another approach is to centralise treasury activity in a global or series of shared service centres. Often these centres are responsible for international accounting, taxes, receivables and payables as well as treasury liquidity. Because of their breadth of activity, they are typically headed by a general finance manager or controller and the team organisationally reports to the treasury on a dotted line basis.
Outsourced Centres
Another form of organisation is to remove the process out of the company entirely. Often smaller companies or ones that only recently expanded internationally want to reap the benefits of centralising their international treasury activities, but do not have the expertise or budget to develop an international treasury structure.
Such companies find outsourcing to be an attractive alternative. Basically a bank will act as agent and perform the tasks associated with a regional treasury or shared service centre, effectively acting as the international staff for the treasury department.
Because of the relative homogeneity of regulations across legal jurisdictions, outsourcing is most advanced in Europe with several cities such as Dublin and Amsterdam serving as the major outsourcing hubs.
Summary
There are many different ways to develop centralised treasury organisations. Which way is best is a function of the nature of the company and the regions of the world in which it operates. No one size fits all. Indeed many companies use different structures and organisations in the different regions of the world at the same time.