NETTING

Bilateral Netting GBP20 A B GBP15 What will you do?

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

Bilateral Netting GBP20 A B USD30 What will you do?

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

? Netting USD30 A B EUR30 GBP 20 USD40 C

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

Pre Netting Source: Coprocess SA

Post Netting Source: Coprocess SA

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

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

Payor Co A GBP Co B EUR Co C USD Co D Peso Receiver -

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.

Multilateral Netting Next step Now convert into GBP terms

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

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

Multilateral Netting Country Pays Receives Net Flows Eliminated A GBP B EUR C USD D Peso Total

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

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

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

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

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

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

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

Multilateral Netting Variations FX Matching Leading and Lagging

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

Payors Co A GBP Co B EUR Co C USD Co D Peso Total Receiver - 947,636 2,000,000 947,636 2,947,636 1,275,000 570,686 1,845,686 2,425,850 3,275,000 7,219,172

Country Pays Receives Net Flows Eliminated A GBP (3,275,000) B EUR (2,425,850) 2,947,636 521,786 2,425,850 C USD ( 947,636) 1,845,686 898,050 947,636 D Peso (570,686) 1,855,164 570,686 Total (7,219,172) 7,219,172 3,944,172 3,275,000

Multilateral Netting 5 transactions at GBP20 to 4 saving 1 = 20 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