Debating the Merits of Using Multi-Currency Liquidity Management
ABN AMRO hosted a breakfast discussion on multi-currency liquidity management at the Eurofinance conference in Berlin on 6 October 2005, which gtnews chaired. The aim of the breakfast meeting was to stimulate debate amongst corporate treasurers about the benefits to be gained from centralising liquidity management through using multi-currency pooling and multi-bank sweeps. Some 40 corporate treasurers attended the breakfast demonstrating high interest – not surprising given the constant search for improved efficiencies and improved working capital management.
In a short introduction to some detailed research that ABN AMRO commissioned, Chris Tarrant, director of UK based financial research company BDRC, outlined that 84 per cent of treasurers interviewed are using single currency automated zero-balancing/concentration and 47 per cent are using single currency interest optimisation/notional pooling. Interestingly some 63 per cent of the 101 treasurers interviewed for the research are still using manual sweeps. The research was carried out in July 2005 and consisted of telephone interviews with global and regional treasurers of multi national companies, 71 of whom were based in Europe and 30 of whom where based in North America.
The reason for this reliance on manual sweeps was, according to those interviewed, related to several factors but the management of balances held with third party banks in cross-border liquidity structures topped the list of reasons:
Some 69 per cent of those interviewed expressed a preference for a global structure for the centralisation of the management of their company’s liquidity, which contrasts to the 48 per cent who already have a current global structure in place.
Issues that were identified as being of concern for treasurers’ liquidity management were (in order): minimizing risk, the forecasting of financial information flows, maximising returns, tax issues with respect to pooling balances, value dating, effective centralisation of liquidity management, treasury’s control over accounts and account opening, and the management of bank relationships.
The research found that there was high interest in cross-currency notional pooling with some 44 per cent saying they were very or quite likely to use it. Reasons given for this interest were the perceptions that it could be used to optimise returns, have control/visibility/flexibility, have access to cash/maximum liquidity, the ability to eliminate FX Swap transaction, and the efficient use of resources/time.
The BDRC research also found that interest in cross-border interest optimisation was also high – with some 40 per cent expressing that they were very or quite likely to use it. The benefits of this tool was seen by the interviewees as the ability to optimise returns, improved simplicity, an increasingly efficient use of resources/time, and increased control/visibility/flexibility.
The research also showed that of those interviewed 10 per cent are currently using cross-currency notional pooling, while a further 4 per cent are using a cross-border interest optimisation solution.
According to BDRC’s Tarrant: “The research shows that efficiency is a key driver for treasurers. Automated centralisation of funds is already well-developed, allowing treasurers to get the control they need. Now it’s a case of enhancing the model by including more currencies, automating more of the processes and creating more global liquidity management structures.”
Following the presentation of the results from Chris Tarrant, Mark Taylor, ceo of gtnews introduced the discussion on more wide-spread use of cross-currency pooling for multiple currencies, and the prospect of extending existing pooling structures to include other currencies. The forty-odd treasurers who attended the meeting in Berlin were interested in the topic and keen to find out more but some held reservations.
Many large companies are currently using cross-currency swaps to manage multiple currency positions. Some companies do not see this as a problem as they have a back-office team to process these swaps. Other companies are looking to reduce or even avoid these swaps because they create a lot of administrative work. Each FX-swap creates four different payments on two bank accounts in two different countries at two different moments in time. They need to be initiated, tracked and posted. Cross-currency pooling reduces the need for these activities to a minimum.
Bob de Vos, European treasury director of Reader’s Digest’s European Shared Service Centre in the Netherlands said: “I find it interesting that cross-currency pooling allows one to use idle money (also small balances) to increase the total available liquidity. I am anxious to see the results of the cross currency pooling as I am expecting one country to go live with it this week.” This project is in its early phase of development so it was too early for Mr de Vos to comment any further on howthe results.
Gavin Jones, treasury director Europe of Royal Ahold was not entirely convinced of the benefits of automating multi-bank sweeps, and said he was not surprised that 63 per cent of treasurers surveyed in the BDRC research still conduct manual sweeps. He said that there was a high degree of sophistication, knowledge and skill amongst many corporate treasury departments and that manual sweeps suited some companies better than an automated process. “The treasury team has information of their daily and intra-day cash dynamics and it’s often more efficient for them in terms of pricing and value dating to move funds manually rather than have a bank do it automatically. From a treasurer’s perspective, the question would be why would I have the bank moving my balance automatically when I have more precise information about my expected balance by the end of the day? The bank will initiate the sweep 30 minutes before the cut-off time, but funds may still flow into the account after that time. Is automation delivering an optimal liquidity position and where is the benefit versus cost?”
Jones explained his views in more detail: “With modern EFT systems often linked into the TMS manually transferring funds is quick and straight forward, as are the use of FX dealing platforms if cross currency swaps are the method used to concentrate funds. Until the banks understand their client’s cash dynamics and can actually demonstrate the specific value they add to that client by automating the ‘pooling’ I would expect to see the use of more manual methods of concentration remain pretty high.”
Meanwhile Pia Pasanen, treasury manager at Ericsson and based in Stockholm in Sweden, said that while her company was currently not participating in any such structures, she could see many benefits connected to cross-currency pooling, such as:
Pasanen said: “Ericsson is not using these products so my “hands-on” experience is still quite limited. However, as I do have a good overview of the activities carried out by our own subsidiaries and I can see the potential of the new products now being introduced by the banks. Our ambition is to evaluate the products and see if we can find a possibility to test this way of working on a smaller scale to start with.”
She added that she saw cross-currency pooling as a somewhat “controversial” idea. “So far all the automation and process improvements connected to ‘straight through processing’ have been focused on areas like accounts payables and salaries, among others. Now corporate dealing desks are starting to face these same improvements that have been carried out in other areas. This is a challenge for the banks and I believe that it will take some time before corporates will seriously start considering automation within this field. Before cross-currency pooling can be done on a great scale, a corporate must consider what their hedging policy should look like, how the roles and responsibilities are changed as a result of introducting cross-currency pooling etc. Corporates will need to shift their focus to a strategic level instead of just managing daily transactions.”
Willem van Alphen, ABN AMRO’s Global Head of Cash Pooling, closed the breakfast meeting by addressing some of the concerns that the above discussion raised.
He said the question that treasurers had to ask themselves was did they want to centralise their company’s cash in one place or not? Of course there are compelling reasons to centralise currencies he said but essentially it is up to the company to decide if this is right for their company. Some of the reasons for centralising currencies include:
He addressed the point raised by several treasurers who were unconvinced about the need to change from manual to automated sweeps by saying that automation was a means of reducing the workload of the treasury department – an added tool for them to use to free up time and resources.
“I can understand the position that you can do manual swaps – but the point is that there are structures available that can help you to free up your workload. Many smaller treasury teams are looking for ways to simplify their day-to-day operations and using automated sweeps could be one way to address this”, he said. He admitted that the bank can only act on existing balances and visible cash flows and that the company may have more information about expected cash flows that can be used to fine-tune multi-bank sweeps, but “it is all a matter of how much time you want to spend on this kind of non-strategic activity in your treasury team”, he said.
Of course he admitted that ‘the devil is in the detail’ so to speak. He said that companies had to address which currencies they wanted to centralise – core currencies or non-core? And whether they would centralise small or large balances? “Choosing where to centralise and what currencies to centralise are big decisions. Naturally your company will still want to have the benefit of lower cost clearing by clearing in-country – but these tools address these demands,” he said.
On the question of where to centralise van Alphen said there were three main options available to companies: to centralise in the home country – US dollars in the US for example or sterling in the UK. “The second choice is to centralise in the euro centre, or the third choice is to use a combination of the first two.” he added.
And how can you centralise – what instruments will your company use to achieve it? Van Alphen outlined the choice between manual and automated sweeps, mono-bank and multi-bank sweeps. Companies would also have to choose the frequency they were interested in moving funds – would it be on a daily, weekly or ‘event-driven’ basis?
And then he pointed out that treasurers must choose how to manage their centralised positions. “Treasurers can use money market operations and FX-swaps on a currency by currency basis, or they can use cross currency notional pooling to manage a single position.” This, he said, will create full interest compensation between opposite balances in multiple currencies, very similar to single currency interest compensation.
Van Alphen was adamant that treasurers do not have to choose between doing the transaction where processing is cheapest, and where centralising your liquidity is most beneficial to your company. Instead he believes that companies can do both. Where it is cheapest to do the transaction and do your liquidity centralisation where it is most beneficial to your company.
Addressing some concerns over cut-off times van Alphen said: “The multi-bank sweeps can be done automatically and cut-off times can be addressed so that they are not an obstacle.”
There is certainly a large amount of interest in the area of centralising currencies to improve liquidity management. But the consensus from the breakfast meeting was that it is important for each company interested in the centralising multiple currencies in a more inclusive liquidity structure to look at its liquidity position in a realistic manner and identify if new banking products may be helpful in reducing the operational activity burden on a company’s treasurer.
gtnews recently conducted a two question poll on the topic of centralizing currencies. We asked respondents which currencies they keep outside of their home countries and where they keep their euro pool or concentration account. The answers to the two questions provided some interesting insight into the habits of international treasurers who are already conducting some pooling in Europe. Of the 273 corporates who responded to the poll the dollar and sterling were the most frequently held currencies outside of their home countries, and the most frequently mentioned locations for a euro pool were the UK (31 per cent), ‘other’ (16 per cent) and the Netherlands (13 per cent). For a more thorough investigation of this poll’s results please see next week’s write up on gtnews.