Trends in Netting Systems
We have provided netting systems to our client base for more than 12 years, during which time we have seen many trends come and go. I think it is fair to say our clients, having between $500m and $150bn turnover and operating in 10-130 countries, are likely to feel the effects of globalisation, centralisation and regulation more than most.
Five years ago we thought that the majority of companies would migrate to a centralised ERP platform. This would result in a pre-agreed consolidated download of intercompany invoices. There would be no need for remote entry by the business units or for our netting software, for example, to include dispute resolution features. While some companies have indeed succeeded in this process, we see that many companies still use the netting system to collect data from disparate accounts payable and accounts receivable systems. Netting software still performs a useful function in this case, providing a convenient means of communicating intercompany invoices.
Those five years have seen a significant improvement in the architecture available for treasury systems and netting is no exception. The move to web enabled systems has meant new opportunities. The faster implementation times and global support model of the hosted ASP providers, the availability of ‘off-the-shelf’ Internet systems and a more self service culture among subsidiaries brought about because they now have secure access via the Internet to centralised treasury functions. Business units can input or import data, see their counterparty invoices in real time and perform post netting tasks such as invoice reconciliation without treasury involvement.
In spite of modern dealing systems such as FXall, Currenex and others, we have not found a system that allows the locking of a rate for approximate amounts. Hence dealing is still done the traditional way, with a call to the dealer or managed by the company’s chosen outsource organisation.
A few companies, although it was never many, used book rates to give the business units guaranteed intercompany rates. It now seems that with the pressure on treasury to account for profit and costs, business units are now expected to manage currency fluctuations, but not necessarily with their local bank.
This raises another interesting trend: many more business units are hedging flows with treasury rather than with the local banks. Accommodating the settlement of these deals was always one of netting’s propositions, but it is interesting to see that this has now become the norm. Inclusion of hedging settlements in the net is increasing but is still not sophisticated, being mostly between two currencies; again the business unit takes the profit or loss on the hedge.
One practice has held true through this period: very few clients take the net FX positions onto their own books. They continue to play safe and trade away positions two or three day spot.
There have been pioneers in the use of receivable driven netting, thus improving cash flow and giving a real picture of business unit liquidity. Now receivable driven netting is the norm, replacing the payable driven process which was used by so many.
Payment factories (or perhaps ‘centralised disbursement’ would be a better description) are now run in many ways, the use of a netting system allows this centralisation to squeeze every last benefit from the process. The use of the new web architecture supports the self service approach, allowing business units to maintain their vendor files without treasury involvement but still allowing centralised control by the use of tools such as secondary approval, payment and trading limits and enforcement of payment methods.
The use of an account pooling structure for the settlement of final net positions has become the norm. Treasury simply takes the export settlement file produced by the netting software and imports this to its chosen electronic banking or treasury management system for disbursement. Business unit cash accounts are debited or credited accordingly by the use of inter-account transfers and direct debit or drawdown instructions. No more late payments and charges, loss of float etc and the problems associated with business units managing their own settlement.
Invoice level netting adds value and its use is more prevalent than five years ago. There are many benefits which have been mentioned in articles elsewhere but the opportunity for online dispute resolution, automation and straight-through processing seem to be key drivers.
In conclusion, as a software provider we see evidence of the continued trend towards centralised treasury, to yield the benefits for risk management, meet corporate compliance obligations, economies of scale, specialised knowledge and more. Secondly we see that netting remains a useful tool in the modern treasury environment.