1. NETTING

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

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

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

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

6. ? Netting
USD30
A B
EUR30
GBP USD40 C

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. Pre Netting Source: Coprocess SA

9. Post Netting Source: Coprocess SA

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

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

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

13. Multilateral Netting Rates GBP/USD 1.8467 EUR/GBP .6931
GBP/Peso
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

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

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

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

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

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. 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

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

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

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

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

25. Multilateral Netting Variations
FX Matching
Leading and Lagging

26. 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

27. 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

28. 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

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