Why it Pays to Keep Currency Close to Home

One aspect of global liquidity that should be emphasized is the advantage of holding currency in its indigenous country to benefit from latest cut-off times for payments and investment. In this article, I would like to discuss U.S. dollars because it is the dominant global currency in international trade and investment.

Of course there are client specific reasons why customers have USD accounts outside of the U.S. For instance the Global Trader Program (GTP) in Singapore requires an in-country organization to be the “nerve center” for offshore trading activities but it also expects them to “make significant use of Singapore’s banking and financial services”. Likewise, the Finance & Treasury Center (FTC) scheme requires MNCs to establish regional and/or international treasury and risk management functions in Singapore in order to provide treasury, financing and other financial services for their own account and for affiliates/group companies . Those accepted into the GTP, FTC type schemes, are eligible for tax concessions which are always a significant driver and worth consideration when structuring a liquidity solution.

In the case above, tax reasons could influence an organization to consider conducting banking activity out of the U.S. Even if a bank account is opened in Singapore for local payables and receivables, from a global liquidity perspective it is worth considering the harnessing of that liquidity in a central place. If a bank provider could offer an automated sweep to fund a Singapore account from a U.S. DDA, that organization could centralize liquidity in the most efficient region for U.S. dollars, but also meet the customer’s local banking needs with a linked U.S. dollar account in Singapore. Many providers offer sophisticated sweeping capabilities between their branches allowing a customer to use balances throughout the global day and tying the final end-of-day balance to an investment at the end of the U.S. banking day.

There are regulations in certain countries that restrict offshore banking. If your organization banks with a provider in a regulated environment and also banks with the same provider in a non-regulated environment, consider leveraging that relationship to increase the effective overall yield across your organization’s global balances.

I am often asked if one bank can meet a customer’s needs. The truth is, it depends. For those organizations that can use accounts in one location, it is relatively easy. When more locations need to be included, find out if the provider is on the ground or not, but don’t let that be the final determiner. See what options are available. One bank may be able to provide all you need with one branch in-country or even with a strategic partner bank. If the bank is running more efficiently with lower fixed costs, it is in a better position to pass along the savings to its customers. Today, many organizations or at least the treasury center or in-house bank can often bank out of country with the same support of a local bank. E-banking and global customer service networks make this very easy. In my opinion, the most efficient liquidity structures are those that are integrated from ground level payables and receivables, up through concentration and investment or debt service, and final g/l posting and reporting.

Where a provider cannot meet your needs at the local and concentration levels and you opt for multiple providers, look for a sweep solution that is the most transparent to your organization. Examine if they are true end-of-day sweeps that zero balance sub-accounts to integrated investments and the solution compliments your information needs vs. less optimal intra-day sweeps that leave stranded liquidity in the sub-accounts.

Susan Skerritt, partner of Treasury Strategies, listed in her GTnews article (5-April-2004) that many “internal factors” can make or break a global liquidity structure. The trick is to really understand your organization and where you can use incentives to influence behavior and also what parts of your organization should be left unchanged (for now). Find a provider that can help meet your goals for centralization but still work with you to satisfy decentralized concerns in your organization. Providers have sweeping and pooling capabilities that can mobilize and control funding across an organization. They also have technology that can be leveraged to fill the need for information and creating internal incentives. The bank should provide a robust blend of product functionality and information with a platform that can grow with you and continually meet your needs as you evolve. It is best to look at a liquidity structure as a partnership between the treasury center and the subsidiaries/operating units with the provider helping to facilitate and enhance the relationship.

Before going down the path of crafting a liquidity structure it is best to have a good grasp of the hard and soft “internal factors”. Choose a provider for its ability to meet your global liquidity needs while minimizing “internal factors”.

• Hard factors:
• Legal/tax posture and investment guidelines which define the flow of funds and accounting/reporting requirements. Physical sweeping is often more preferred by organizations because it largely reduces tax issues to those associated with intercompany loans. Notional pooling with offset eliminates physical balance commingling but may be subject to various interpretations and possible double taxation. When considering either solution, be mindful if the bank has minimum balance requirements and/or early cut-off times that disjoint liquidity.
• Payables and receivables. Is the liquidity solution integrated to the rest of your cash flow management? Do you need a local banking presence or can your needs be met from one location? How can your provider best help you?
• Costs. How much is the liquidity structure going to cost in time and expense to implement and maintain? vs. How much will it save with an efficient account structure, reduction in funding costs, automation, risk reduction, lower resource expenses, etc?
• Soft factors:
• Culture and creating the proper incentives to achieve your goals.
• Can the information and product set that the provider brings to the table help the members of a decentralized organization still feel they have control of their businesses, make their jobs easier, and give them the proper recognition they need to help keep the business running at an optimal level?

Pooling even in the U.S.?

We know that U.S. banking law restricts the payment of interest on corporate transaction accounts, but U.S. banks offer automated sweeps to interest or dividend bearing commercial paper or London or Caribbean deposit accounts, or to other investment vehicles. From a user perspective, the investments earn interest on their available balances almost exactly the same as the funds in a London bank account. Additionally, organizations sometimes think that more sophisticated pooling structures, including notional pooling are not available in the U.S., but there are many banks that do offer such services.

What about U.S. Tax Considerations?

Organizations may think to avoid liquidity structures based in the U.S. because of U.S. tax considerations. A general rule of thumb here is: It is not necessarily where you bank, but where you are incorporated. Often companies incorporate offshore to take advantages of tax treaties and reduce WHT. Many times, there is no reason that banking be conducted in country “X” simply because the entity is incorporated or formed in country “X”. Furthermore, another important factor is that bank deposit interest is generally exempt from U.S. withholding tax with respect to non-U.S. entities. Subject to certain qualifications and exceptions, a U.S. entity’s deposits on and offshore are generally subject to the same U.S. tax treatment.

Some best practices to consider when planning a global liquidity structure

Centralize. Leverage the power of centralized information and decision-making (e.g., using Treasury Management systems and/or Shared Service Centers). Consider centralizing liquidity within the confines of your legal and tax structure, both in-country and cross-border. Maximize cash efficiency, invest at higher effective yields, leverage information and volume-based transactions, reduce expense and optimize resources.

Automate. Strive for straight-through processing, maximizing efficiency and leverage technology. Utilize the myriad of cost-effective tools available to sweep and pool internally generated funds, and link that cash to investments or debt service.

Standardize. Rationalize account structures, develop contingency procedures and standardize information flow. Is your account structure as efficient as it could be? Does the structure cause liquidity to be trapped or underutilized? Could a different structure facilitate more productive relationships with your providers? Is the information generated from your accounts standardized so that you can consolidate information to support decision making surrounding your cash and liquidity management process? Are the proper contingency procedures in place at your provider and within your own shop to operate optimally at all times?

Digitize. Utilize electronic and web channels to enhance the flow of information and transaction initiation, forecasts, multi-bank reporting, real-time account and transaction information, payment and investment initiation. Leverage Enterprise Resource Planning (ERP) systems to facilitate G/L entries, accounting for inter-company loans, and process bulk payment or receivables files. Take advantage of the automation that you’ve put in place.