Page 89 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes
cash pools in place for a number of years across Europe. In the US, treasury has established
a daily sweeping structure, allowing for centralised investment activity of US cash balances.
Outside the US, the situation has been more decentralised, with some countries maintaining
local autonomy, resulting in external borrowings and trapped cash in-country. One of
treasury's objectives is to repatriate funds more effectively and gain greater control over
the global cash position. To achieve this, the company has implemented a multi-currency
global notional pooling arrangement. An important element of this is the ability to allow
self funding, provide cash visibility, and centralise the management of surplus cash. The
pool is now functional in 50 countries across 25 currencies. Furthermore, as central banks
remove some of their countries' fiscal constraints, further countries may be added in the
future in either their functional or non-functional currencies.
This structure was not easy to implement, and initially, business units were worried that
they would lose autonomy over their financial management, but these concerns have not
been justified. Local finance departments still manage their day-to-day bank relationships
and cash management, but have access to cash internally at a known benchmark rate based
on a recognised market index, rather than having the uncertainty of trying to borrow
externally. Business units which are net investors benefit from market-based overnight
returns, and cash remains within their own accounts. As people came to understand the
structure more fully, they also recognised the time savings which allowed them to
concentrate more on their core business. Treasury uses their bank's system for payments.
For example, a depositor will put in a credit advice for the amount it wishes to deposit, to
which an overnight return is applied on receipt by treasury. The system then treats the
credit as an overnight rolling deposit and applies interest accordingly. When cash is
required, the business unit can make a payment request which is processed by treasury
and treated effectively as an overdraft position when the account balance goes negative.
Outcomes of notional cash pooling

This solution has proved very effective. At a local level, business units have reliable
income on investments or borrowing rates. Treasury can net intercompany payables and
receivables, reducing the number of external transfers and limiting the impact on the
balance sheet. When the structure was first implemented, treasury saw a significant decline
in external debt, which has since remained steady even though the company has embarked
on significant merger and acquisition activities. With the current cost and uncertainty of
borrowing, this has had a marked effect on the business, and there has been a considerable
change to the debt to capital ratio which would be difficult to refinance in the present
conditions.
By implementing this structure, the company's exposure has moved from the external
banks (with the exception of the cash pool bank) to the company's internal entities, a risk
which it is in a greater position to control. Although in theory there is an exposure to the
bank providing the global notional pool, if the bank were to default, there is a set-off
clause to other participants so only a net cash position would be at risk. Surplus cash is
invested in other money market funds each day to diversify investment risk, so the only
risk to the cash pool bank is dealing and settlement risk.
Rationalising bank relationships
Another way in which the company is seeking to manage its cash and liquidity risk more
effectively is to limit the number of banking partners with which it works to the highest
quality banks. The company has a large number of cash management banks in place,

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