Cash Management Structures: Why in-House Banking and Netting are a Must for Today's Global Treasury

January 5, 2017

Cash Management Structures: Why In-House Banking and Netting Are a Must for Today's Global Treasury

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Today’s Presenters

Jason DobbsManager

Greg Person, CTPVice President, Global Presales


Discussion Framework

Goals of IHB Structures

Explore IHB Elements

Internal Collaboration & Design

Intercomany Netting Considerations & Benefits

Role of Technology


Do I have visibility into my corporate liquidity, and can I access it?

Do my global subsidiaries have the liquidity they need to be successful?

Do specific subsidiaries hold too much local cash, and what is the associated cost and risk?

Are my intercompany invoices settled in accordance with internal payment terms?

Are my intercompany lending agreements in compliance with US and local tax / legal requirements?

Do I have the technology infrastructure to support the business and balance my employees’ time?

How do I answer….

Goals of In-house Bank Structure


Control & Access - Cash–Aggregate funds–Increase investment & reduce external borrowings

Efficiency – Payments– Simplify settlements– Centralize lending

Enhance – Working Capital Management–Efficient use of auxiliary currencies–Natural hedging created

Typical Goals of IHB Structures


IHB – Structure and Progression

In-house Banking ElementsFrom Sweeps to FX


FinCo as Sweep Aggregator

Sub Account Functions Receive funds

Process payments

May aggregate cash from other subs

Sub Account Functions Cross Border to FinCo or Pool

Bank or TMS initiated

Surplus – send funds to FinCoEOD

Cash need – Fund overdraft to target limit or zero (requires credit agreement)


Pooling


Sweep to IHB Notional Account


Aggregated funds increase short term investable cash

Streamlined portfolio management

Benefit to banking relationship models

Investing


Centralization of Interco financing to FinCo(s)

“Cash” held at FinCo for settlements or repayments

Progression to Hub & Spoke model for Interco agreements

Lending


IHB Holds multiple currencies

Book deals to IHB for natural hedging

Easily facilitated for IHB Participants

Non-participant trading?

FX Trading


Address Kyriba Singapore liquidity deficit with Kyriba Canada surplus

Reduce SGD external expense, achieve higher consolidated investment balance

In-house Bank Liquidity Example

Kyriba Finance Co(FinCo IHB Entity)

Kyriba Canada

Kyriba Singapore

External Bank

External Bank

Deposits USD 50M

Sell USD 10M

Buy SGD 15M

Invests USD 40M

Borrows SGD15M

(USD 10M)

Internal Collaboration & Design


Accounting – Necessary to develop and manage entries associated with Interco’s to and within FinCo for various activities

FinOps – Interco AP/AR integrations for auxiliary systems; build of programs in TMS

ERP Team – Additional IHB programs to support TMS processing of funds

Corporate & International Tax – Structure and tax regulations; who can and can’t participate; terms and rates (with Treasury)

Legal – Drafts of agreements, terms and conditions, and ongoing documentation requirements

Banks and BAM team – Changes in account structure, bank sweeps, and credit agreements

Treasury – Funding, investing, FX execution (internal & external); monitoring and compliance; technology

Key Players


Regulatory Considerations


Final Reg385 (Oct 2016) broadly exempts debt issued by CFCs and foreign corporation

Regulation revived scrutiny of intercompany pooling–Documentation–Demand facility agreements–Treasury service agreements–Borrowing terms & interest spreads–Default consequences–Repayments

Regulation Section 385

Multi-lateral Netting


Intercompany ‘due to’ and ‘due from’ balances are created through natural course of business

Intercompany balances must be settled in timely fashion in accordance with intercompany payment terms and/or services agreements

Examples of intercompany balances & positions that must be settled:– Trade payables– Cost shares– Compensating adjustments– Service agreements– Intercompany loan, interest – Dividends, capital contributions, etc.

Intercompany Balance & Multi-lateral Netting Foundation


Managing Intercompany Settlements without Netting

Large payment volumes Bank transaction fees

Settlement risk

FX payment costs

Inefficient Use of Resources High manual effort to enter and release payments

Time consuming GL posting

Error prone

Tax and legal compliance Intercompany invoices not settled within payment terms

Inadvertent intercompany lending

Deemed dividend / 956 income

FX payment costs

Inefficient GL posting


Multi-lateral Netting Solution

Reduce physical payments, lower bank fees and eliminate settlement risk

Elimination of bank settlements and corresponding settlement risk

Reduce tax treatment risk; avoid US repatriation tax under Section 956

Improve internal and external audit compliance and transparency

Optimize intercompany GL posting and reconciliation

Consolidate and hedge FX exposures

Comply tax and legal requirements

Integrated Treasury, Risk, Netting &

Payment System


Single legal entity reduces intercompany payments/receipts– Reduce 7 physical transactions to 1 IHB posting

Reduce FX trades across 4 currencies pairs

Consolidate FX position

Netting Statement Example

Netting

Particpant Counterparty

Invoice

Currency

Payable

Amount

Netting FX

Rate

Receivable

Amount

Settlement

Currency

Netting

Settlement

ACME-BV ACME-DE EUR 132,804.12 1.05 USD (139,975.54)

ACME-BV ACME-UK GBP 980,902.44 1.22 USD (1,196,700.98)

ACME-BV ACME-CA CAD 59,924.59 0.74 USD (44,344.20)

ACME-BV ACME-CA CAD 0.74 1,248,930.43 USD 924,208.52

ACME-BV ACME-US USD 678,902.39 1.00 USD (678,902.39)

ACME-BV ACME-US USD 1.00 138,942.45 USD 138,942.45

ACME-BV ACME-JP JPY 30,241,994.00 117.65 USD (257,050.52)

ACME-BV USD (1,253,822.66)


Accounting – Responsible for monitoring, entering and reconciling intercompany balances and payments

FinOps & ERP Team – Interco payable integration to netting systems & ERP(s)

Corporate & International Tax – Structure and tax regulations; who can and can’t participate in netting program;

Legal – Drafts of netting agreements, terms and conditions, and ongoing documentation requirements

Treasury – Managing netting cycle, executing settlements (internal and external), FX management and trade execution (internal & external); monitoring and compliance; technology

Key Players for Netting

Technology


Simple access for global users (accountants, controllers, etc) Request funding / submit deposits to IHB

Enter intercompany payables

Access IHB & Netting statements

Manage against KPIs, target balances

Full audit & transparency

FX exposure management

Optimize global liquidity strategies

IHB balance limit compliance

Single Global Technology Portal for IHB and Netting


Standardize, simple netting process workflow to promote global adoption

On-demand statements to support month-end close

Historic intercompany reporting (tax inquiries)

Single Global Technology Portal for IHB and Netting

Entity Act Plan F (U)

Acme CA 0.9 0.5 (0.40)

Acme UK 1.6 1.0 (0.60)

Acme JP 0.8 1.0 0.20

Acme DE 0.5 0.5 -

Acme AU 1.1 1.0 (0.10)

M ar 15 USD Equiv

Cash Balance Scorecard


Summary

Treasurers are tasked with ensuring access to adequate liquidity to fund corporate operations, global business units and corporate strategy

Optimal liquidity at appropriate level of risk and cost

Executing corporate capital allocation strategy, share buyback, M&A, debt pay-down

In-house Bank as low cost liquidity source

Internal cash is cheapest form of finance

Automation through bank pooling structures

Global deployment involving global entities, currencies and multiple bank relationships


Summary cont’d

Multilateral Netting to enhance productivity and controls

Settle intercompany invoices timely and efficiently

Reduce bank fees, FX costs and eliminate settlement risk

Ensure legal and tax compliance

Consolidate FX exposures

Provide transparency and automation to GL application

Initial investment and due diligence

Collaboration with treasury, tax, local finance and legal

Loan documentation and arm’s length terms (reg 385)

Optimization through automated bank pooling

Technology investment and transparency


Further Reading

Success Story: Chalhoub Group Treasury establishes an active in-house bank function to automate their key cash and FX management functions

Get the case study>>

Blog post: Why Treasurers should adopt multilateral netting

Check out the post>>

http://www.kyriba.com/clients/success-stories/chalhoub-group?utm_source=KDC_SS&utm_medium=WBPPT&utm_content=CS&utm_campaign=IHBwbn_01052017

http://www.kyriba.com/blog/greg-person/why-treasurers-should-adopt-multilateral-netting?utm_source=KDC_SS&utm_medium=WBPPT&utm_content=BP&utm_campaign=IHBwbn_01052017

Questions?

Greg Person CTP

[email protected]

Jason M. Dobbs

[email protected]

mailto:[email protected]

mailto:[email protected]


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Date post:	10-Jan-2017
Category:	Economy & Finance
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Cash Management Structures: Why in-House Banking and Netting are a Must for Today's Global Treasury

Economy & Finance