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1 NETTING. 2 Bilateral Netting GBP20 A B GBP15 What will you do?

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Presentation on theme: "1 NETTING. 2 Bilateral Netting GBP20 A B GBP15 What will you do?"— Presentation transcript:

1 1 NETTING

2 2 Bilateral Netting GBP20 A B GBP15 What will you do?

3 3 Bilateral Netting A will owe B GBP 5 Save on one transfer fee Save on GBP30 of Float

4 4 Bilateral Netting GBP20 A B USD30 What will you do?

5 5 Bilateral Netting GBP/USD 2.00 A will owe B GBP20 B will owe A GBP15 A will owe B GBP5 Save one transfer Save float Save GBP30 FX

6 6 ? Netting USD30 A B EUR30 GBP 20 USD40 C

7 7 Benefits of Multilateral Netting Quantitative Reduced number of transfers Reduced FX trading volumes Reduced FX margins Reduced transfer costs Guaranteed payment dates (Float benefit) Centralised management Reduced banking costs

8 8 Pre Netting Source: Coprocess SA

9 9 Post Netting Source: Coprocess SA

10 10 Multilateral Netting A multinational company has the following typical monthly inter-company flows Figures in Thousands Co A UK GBP 2,000 Co B France GBP 1,275 USD 1,750 EUR 3,500 Co C USA Peso 3,250 Co D Argentina

11 Multilateral Netting First Step. Put flows, in currency, into the matrix. Note. Normally this step would be skipped 11

12 12 PayorCo A GBP Co B EUR Co C USD Co D Peso Receiver Co A GBP- Co B EUR- Co C USD- Co D Peso-

13 13 Multilateral Netting Rates GBP/USD 1.8467 EUR/GBP.6931 GBP/Peso 5.6949 Float: pre netting 3 days, post netting zero. Transfer costs GBP20 per transfer FX costs 0.1 of one percent Interest rate in GBP 4.75% Undertake a netting in GBP and calculate what the annual savings would be to the company of introducing a centralised netting system assuming this is an average month.

14 Multilateral Netting Next step Now convert into GBP terms 14

15 15 PayorCo A GBP Co B EUR Co C USD Co D Peso Total Receiver Co A GBP- Co B EUR - Co C USD - Co D Peso - Total

16 Multilateral Netting Next step Now take the information and fill in the next matrix 16

17 Multilateral Netting CountryPaysReceivesNetFlows Eliminated A GBP B EUR C USD D Peso Total 17

18 18 Multilateral Netting Now work out the savings Savings Transactions = Float = Fx =

19 19 Benefits of Multilateral Netting Qualitative Introduces discipline Standardisation of procedures Better quality and more timely information Clear time frames Reduced administration Inter- company dispute resolution Centralisation of exposures Other liquidity management activities

20 20 Typical Netting Cycle 5 th 6 th 7 th 10 th 11 th 13 th 14 th Cash F,cast Collection Trial net Adjustments Final Transactions Problem resolution due of data netting settled

21 21 Multilateral Netting Items Inter-company payables Inter-company receivables Third party payables Third party receivables Financial flows

22 22 Multilateral Netting Structural Issues Country level Regional or global level Basically, who to include, what is allowed

23 23 Multilateral Netting Policy Issues Billing currencies Credit period Settlement dates Exchange rates Conflict resolution

24 24 Multilateral Netting Forms Bank Managed – Fully - Partially Company managed Internet- based

25 25 Multilateral Netting Variations FX Matching Leading and Lagging

26 26 FX Matching Sub 1 Sub 2 Sub 3 Net FX Sales Net FX purchases Sub 2 Sub 3 Sub 1 USD for saleGBP for saleEUR for sale EUR required USD required GBP required Matching Services

27 27 PayorsCo A GBP Co B EUR Co C USD Co D Peso Total Receiver Co A GBP- - Co B EUR 2,000,000 - 947,6362,947,636 Co C USD 1,275,000 - 570,6861,845,686 Co D Peso 2,425,850 - Total 3,275,0002,425,850 947,636570,6867,219,172

28 CountryPaysReceivesNetFlows Eliminated A GBP(3,275,000)0 0 B EUR(2,425,850)2,947,636521,7862,425,850 C USD( 947,636)1,845,686898,050947,636 D Peso(570,686)2,425,8501,855,164570,686 Total(7,219,172)7,219,172(3,275,000)3,944,172 3,275,000 28

29 29 Multilateral Netting Savings 5 transactions at GBP20 to 4 saving 1 = 20 Float 7,219,172 x.0475 x 3/365 = 2,818.44 Fx 3,944,172 x.001 = 3,944.17 6,782.61 =81,391.32 pa


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