1. Liquidity Management Techniques
Pooling and Cash Concentration

2. Liquidity Management
Having funds available to meet all known and unknown commitments
In the right currency
In the right place
At the right time
Minimise cost of funds and debit interest
Maximise use of surplus funds and interest earnings

3. Liquidity Management As always a balance between
the costs and benefits of having liquidity and
the costs and benefits of lacking liquidity

4. Liquidity Management How may a company improve liquidity? External
Through borrowing
Through suppliers
Internal
Better practices on inventory, receivables short term investment
Better control of cash resources around the group

5. Liquidity Management Focusing on maximising Internal liquidity
utilising existing but wasted resources
Pooling / Cash Concentration
First: Notional Pooling

6. Notional Pooling
With Notional Pooling there is no actual movement of funds.
With Notional Pooling there is no co-mingling of funds
Credit balances are offset against debit balances and the net is used to work out the debit or credit interest paid or received
Also referred to as ‘interest offset pooling’

7. Notional Pooling Position prior to pooling
Average Balance Average Balance
+ 900, ,000
Average Balance Average Balance
- 300, ,000
Credit interest at 4 % = 1,250,000 x .04 = 50,000
Debit interest at 6 % = ,000 x .06 = 51,000
Net cost to group = ,000
But if notionally pooled
Sub 1
Sub 2
Sub 3
Sub 4

8. Notional Pooling Position if pooled
Average Balance Average Balance
Average Balance Average Balance
Net position = + 400,000
So 400,000 x .04 = 16,000 an improvement of 17,000
Sub 1
Sub 2
Sub 4
Sub 3

9. Notional Pooling Benefits
Maximise interest earned
Minimise interest paid by
As much as possible, for as long as possible, in
one place

10. Notional Pooling Taking Advantage
Tiered Interest Rate Structure 8
Interest 7
Rates 5 4 3
Balance in 000’s

11. Stepped versus Banded Amount in GBP Interest Rate 1 to 250,000 0.10
0.20
500,001 to 1,000,000
0.50
Over ,000,000
0.90
Company
Balance
Tier
Interest rate
Interest A
355,000
250,000
.001
250
105,000
.002
210 B
400,000
150,000
300 C
Total
1,260
Pooled
1,005,000
.009
9,045
Benefit
7,785

12. Notional Pooling Benefits
Improves the balance sheet by offsetting surplus balances against group debt
Reduces and may eliminate short term borrowing (will probably still need credit lines as back up with limits on individual subs)
Reduces overall exposure to banks

13. Notional Pooling Benefits
May improve internal discipline and control
Do not have to move funds
- reduce costs of transfers
- reduce management time

14. Notional Pooling Requirements
Pooling agreement
Cross guarantees
Legal right of set off
Tax indemnity
Ability to link accounts for interest calculations. Obvious, but not every bank will have the capability
Interest apportionment
Board resolutions

15. Notional Pooling Issues
Bank charges
Resident non-resident issues
Tax issues (arms length)
May be treated as a form of lending with no transfer of funds ownership
Interest offered may be low / or charged high, so Treasury may wish to actively place funds or borrow

16. Notional Pooling Active Management
Investment of 400,000
Sub
Sub
Sub
Sub T
+ 400

17. Types of notional Pooling
Single currency, single country
Single currency, cross border
Multi-currency, single country
Multi-currency, cross border
What is possible?
What is offered?
What does it cost the bank?

18. How Banks Charge for Pooling
Interest rate spread
Reserve asset charge (cost recovery)
Set up fee
Management fee (monthly per account)
Interest apportionment fee
Account maintenance fees
Electronic reporting fee
Money movements, receipts/payments
FX if involved

19. Pooling Due diligence Is pooling permitted? Tax issues
Withholding tax – Res/non Res issues
Arms length rule
Is debit interest an allowable deduction?
Is thin capitalisation an issue?
Location?

20. Pooling Due diligence How do laws of offset relate to Multi entities?
Multi currencies?
Cross border aspects?
How does the bank cover?
Are cross–guarantees necessary?
Are Central Bank reserve ratios calculated gross or net?

21. Pooling Due Diligence Impact on group of using one bank
Should all operational accounts be included in the pool?
Impact of cut-off times for movement in and out of pools
Value dating practices for cross border movements into and out of the pool.

22. Cash concentration
Sometimes Notional Pooling is not possible or not wanted
Rules and regulations
Structure of banking industry
Legal issues
Then we may have to cash concentrate i.e. physically move the funds to attain the same benefits.

23. Cash concentration Example of Zero Balance Cash concentration
End of day 750 invested
Sub
Sub
Sub
Sub
Concentration
a/c

24. Cash Concentration There are various forms of cash concentration
Zero balance, as illustrated
Target balance, to keep a specific amount in each account
Threshold, to move funds only when an account moves in excess of a figure
Collar, when a threshold is reached, funds are moved but a balance is left

25. Cash Concentration
All will depend on the costs involved versus the needs of the group elsewhere, the sums involved and the overall treasury objective

26. Cash Concentration Issues
Drawbacks
Transfers may have to be done manually
Will involve transfer fees
Transfers to/from non resident ac’s may add to central bank reporting and to cost
Local rules and regulations may prohibit/complicate cross border movements

27. Cash Concentration Using MT101 to concentrate
Customer
Instruction Advice
Lead Bank
MT MT103
MT MT103
Sending bank
Credit customer
concentration
account
Debit sending
bank nostro
SWIFT
Network
Debit customer ac
Credit vostro ac

28. Liquidity Management Interest Enhancement
As mentioned earlier, sometimes rules and regulations make cash concentration and cash pooling difficult, uneconomic or illegal
Nonetheless, Banks have developed ways to enable companies to gain some benefit from their balances
The banks recognise that the balances they hold, even where blocked, are reflected on their balance sheet and therefore of value

29. Liquidity Management Interest Enhancement
Suppose that the bank will normally charge interest on deficits at LIBOR plus ½ and pay on surpluses at LIBID – ½
To the extent that balances offset each other the bank will adjust these rates
E.g.
Account No 1 has a surplus balance of
GBP 100 and account No 2 a deficit of
GBP 50.

30. Liquidity Management Interest Enhancement
There is an offset of 50% so
They would charge interest at, say, Libor plus1/4
And pay interest at LIBID – 1/4