It Didn't End with the Euro: Catching the Next Wave of Liquidity Enhancement
The creation of the eurozone in 1999 made it possible for companies to centralise a good portion of their cash and liquidity, making considerable gains in treasury control and oversight. But Europe still presents a complex and challenging environment: treasurers must take account of multiple currencies, regulatory frameworks and national payment systems. If European treasuries could replicate US levels of efficiency and centralisation, the benefits would be huge.
In fact, the conditions now in place allow much further advancement in European treasury practices. There will not be another single ‘big bang’ event like the launch of the euro. Instead, Europe’s regulators are making a series of incremental changes, each of which eliminates yet another barrier to efficiency. The countries that recently joined the European Union (EU) are moving closer to adopting the euro. And, leading banks are introducing more advanced solutions that enable clients to streamline and automate their regional liquidity management.
As the European Commission seeks to enhance the efficiency of Europe’s economy, it has introduced a number of initiatives designed to ease financial flows. A 2004 EU Directive abolishing withholding tax in most countries on cross-border interest payments between associated companies has made cross-border zero balancing sweeps more attractive. A further initiative that will ease the flow of funds across borders is the EU regulation on low value cross-border payments. From January 2006, banks must price cross-border payments of up to €50,000 the same as domestic payments, as compared to the current limit of €12,500, in effect since 2003.
Additionally, from 2007 a new legal framework will apply to all transactions within the EU, providing common rules across the entire banking industry for defining minimum requirements for transaction services such as credit payments and direct debits. Crucially, it will make charging for these services much more transparent.
Finally, a key stage in this process will come when Europe’s payments infrastructure becomes more unified. This will happen with the introduction of the Single Euro Payments Area (SEPA), and with the EU accession countries’ adoption of the euro. SEPA’s introduction is scheduled for 2010, although delays may occur given the enormous costs involved. Meanwhile, the EU accession countries are liberalising laws governing cross-border currency flows as, for example, Poland, Hungary and the Czech Republic and Slovakia did recently. The accession countries intend to join the eurozone between 2007 and 2010, depending on when they are able to meet the Maastricht Treaty criteria.
Cash management banks are playing their part by developing more advanced solutions. These are allowing companies to streamline and automate daily cash concentration, inter-company funding and net investing, freeing time to focus more on treasury strategy.
These efficiencies are now possible not just for euros but across currencies. By using cross-currency notional pooling solutions, companies can more easily optimise liquidity across operating entities – including offset of positive and negative positions in different currencies – while avoiding daily inter-company loan bookings and FX deals/swaps. A cross-currency notional pool also makes investing much simpler, as only a single net position needs to be invested in the market.
Automation can also easily be used to achieve region-wide cash concentration. Many companies already use cross-border ZBAs to sweep all local end-of-day cash positions held at their primary bank into one liquidity centre. It is now possible to concentrate cash held at local banks as well. This can be accomplished using multi-bank cash concentration services. These work by checking intra-day balances at local bank accounts and issuing draw-down wires to sweep cash into the concentration accounts at the primary bank. This eliminates the manual work required to check local bank balances, forecast local cash needs and issue transfer instructions.
Finally, getting the best out of your liquidity management in Europe is really all about the details. To pick just one example, companies arranging cross-border ZBA sweeps need to ensure they do not breach minimum capitalisation rules that exist in some countries. Understanding potential tax and legal implications – with the assistance of corporate tax advisors and experienced bankers – remains key.
By combining advanced tools for liquidity management, treasurers can achieve the next wave of efficiency in their operations in Europe. Multinational clients with businesses across Europe are implementing advanced solutions to bring their regional liquidity structures under better automation and control.
Companies can use a Cross Currency Notional Pooling solution to streamline inter-company funding and investment of multi-currency position. Each legal entity retains its own currency account, avoiding co-mingling of funds. By offsetting positive and negative cash positions across currencies, the company avoids bank overdraft charges. Also, they need to execute just one transaction for investing net excess cash or funding deficits. As a result, the company retains control while effectively outsourcing daily multi-currency cash position management and in-house bank administration to the bank.
Companies are automating treasury operations through automated Cross-Border ZBA and Multi-Bank Cash Concentration (MBCC) services. MBCC automatically checks balances at local banks, and initiated target-balance sweeps into centralised accounts with your chosen bank. Where the non-euro currency positions are small MBCC and ZBA transfers can simultaneously convert the cash to the central pool currency at FX spreads agreed with the bank. Whereas previously the company might have been reviewing local cash positions and manually doing transfers and the FX conversions, this all occurs automatically.
So, what are smart treasurers doing now? Here is a checklist, as a starting point for initiating much deeper discussions, both internally and with bankers:
In summary, the past five years of gains in treasury management in Europe were just a beginning. By taking action now, companies can hope to repeat the gains made in the first wave of liquidity optimisation.