Global Liquidity: Business-driven Solutions for a Fluid Market

Financial liquidity is obviously a precious commodity, so it is hardly surprising that so much effort is expended on maximizing its availability. In recent years, the focus of that effort at many MNCs (multinational corporations) has shifted. Regional liquidity solutions, which most MNCs have had in place for some time, are being absorbed into a quest for global liquidity. The ideal is to deploy the corporation’s liquidity, irrespective of time zone, to provide optimal support for the organization’s business objectives around the globe.

The two case studies below provide differing examples of how to achieve this. Leaving the specifics aside for a moment, both illustrate a number of general principles about global liquidity solutions:

• One size doesn’t fit all. Though there may be common technical or regulatory/tax constraints, a global liquidity solution is essentially a customized strategy. There may be generic building blocks involved, but there are a myriad of ways to combine these blocks for a corporate best fit.
• This is not a static landscape. What is impossible today may be feasible tomorrow, as banks and treasurers continue to explore and innovate.
• The business dictates. A global liquidity solution is not a piece of theoretical perfection for the treasury’s gratification – it should ultimately be driven by the requirements of the business.
• A global liquidity solution does not necessarily mean that the corporation has to use the bank providing the solution as its primary cash management bank in every region of the globe. It makes the solution easier to implement if it is, but it isn’t necessarily an absolute make or break requirement.

Company 1 – European multinational

Currency profile

• Payables: The company operates a global sourcing policy, and in view of its size is usually able to insist upon USD settlement of its invoices for raw materials and components. It has manufacturing operations in Asia, Europe and the US, which incur operating expenses in USD, EUR, GBP and HKD. It also employs local sales forces, which are mostly recompensed by commission in local currency by the appropriate manufacturing unit. A third-party logistics company is used for deliveries, which bills (depending upon location) in one of the four currencies mentioned above.
• Receivables: The company’s manufacturing entities sell their (typically large ticket value) products to retail outlets or distribution centers – the company does no direct business with end users. As a result, its receivables profile consists of high value and low volume debtors, which makes its cash flows relatively easy to predict. The company sells in USD, EUR, GBP and HKD, but for countries outside that currency group it mainly sells in USD.

Cash flow summary

• USD – Outflows and inflows
• EUR – Outflows and inflows
• GBP – Outflows and inflows
• HKD – Outflows and inflows
• Other minor currencies – Outflows and inflows (net positive)

Accounts and liquidity management

All accounts (apart from USD) are held locally, and at the end of each day are (preferably) notionally pooled or zero balanced, depending on what is permissible/appropriate under local regulation. As the company has a USD bias, it has elected to establish three USD pools – in Asia, Europe and the United States.

The company has three regional treasury centers that handle liquidity management, which are also located in Asia Europe and the United States. As mentioned earlier, the preferred liquidity management tool at an individual currency level is notional pooling. If this isn’t possible, zero balancing is used, with the relevant regional treasury center managing the resultant flows and booking the associated intercompany loans as appropriate.

Apart from USD, this is a fairly uncomplicated structure with each currency managed to a single long end of day currency position that is then managed by the treasury center for the region. By contrast, the company’s USD positions tend to fluctuate appreciably between regions and can be overdrawn, as well as positive.

Global liquidity solution

The company devolves intraday liquidity pool management for its USD positions to its three regional treasury centers, so each center manages its USD pool in its own time zone. At the close of business hours in Asia, the USD pool balance is swept into the European USD pool. At the close of European business hours, the process is repeated, with the USD balance being swept to the US.

The US treasury center then makes the final end of day liquidity management decisions. These take account of factors such as the balance on the company’s commercial paper program, and whether the net USD pool position is overdrawn or in credit.

Company 2 – Asian multinational

Currency profile

• Payables: The company is headquartered in Asia with most of its business in “upstream” energy products, rather than retail distribution activities such as gas stations. Since its raw materials are predominantly priced in USD, this constitutes the bulk of its currency outflows. The company has a refining operation in continental Europe, which incurs raw material expenses in USD and ancillary operational expenses in EUR. There is also a petrochemical operation in the UK, which again incurs raw material expenses in USD and has operational expenses in GBP.
• Receivables: All the company’s inflows from its various business units are in USD.

Cash flow summary

• USD – Outflows and inflows
• EUR – Outflows
• GBP – Outflows
• Minor Asian currencies – Outflows

Accounts and liquidity management

Apart from USD, all accounts are held locally with Bank of America acting as the company’s principal daily cash management bank. For USD, accounts are held in Asia, Europe and the United States. The company has a single global treasury center based in Europe, which is responsible for all EUR, GBP and USD positions. Any other minor currencies in which the company is active are handled at an in-country level. In the case of the major currencies the company is usually net positive in USD and net negative in EUR and GBP.

Global liquidity solution

There are some similarities with Company 1 in that the Asian USD pool is automatically swept into the European USD pool at the close of business Asia time, but thereafter the situation differs. The company’s debit GBP and EUR balances frequently outweigh the value of USD held in the European pool. However, by midday EST (Eastern Standard Time) the company has usually accrued a significant surplus USD balance in its major US bank accounts. Therefore, at that point, Bank of America applies a zero balance direct debit to those accounts and credits this balance to accounts in the European pool. Although it is only midday EST when this happens, it is still late enough to include all US lock box, ACH and controlled disbursement items, as well as some high value CHIPS items. At the same time, it is still early enough for this surplus to be incorporated into the USD pool in Europe.

This augmented European USD pool is then in turn amalgamated with the EUR and GBP balances in a true1 multicurrency notional pool. This minimizes the interest expense on the EUR and GBP debit balances and leaves a net positive USD balance. This can then be invested back into the US each day after the close of business in Europe.

Conclusion – automated horses for innovative courses

In both cases these companies have arrived at a highly efficient use of liquidity that is tailored to their individual circumstances. Another common factor is automation – all the sweeps (including the second company’s reverse USD sweep into Europe) are fully automated to produce consolidated net positions.

The second company’s solution also illustrates the dynamic and innovative nature of the global liquidity landscape. The received wisdom has been that global liquidity management always operates on an East to West basis (“follows the sun”), but in this case the company is effectively reversing the flow between centers West to East (albeit temporarily) in order to maximize the benefit from its liquidity. Furthermore, the way in which it combines its EUR, USD, and GBP balances is one of the first examples of a true, fully integrated cash management and multicurrency pooling solution.

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