Hybrid pools improve liquidity management

With US companies holding onto cash and looking to make best use of internal liquidity, they are increasingly evaluating more complex pooling structures to manage global funds. And it is not just the largest firms that are doing it. These days, more and more companies of different size and structure are looking to make use of notional and hybrid notional cash pools to better manage global liquidity.

Lisa Rossi, Managing Director, Global Head of Liquidity Management, Global Transaction Bank, Deutsche Bank, says: “The economic crisis made credit a limited commodity requiring closer attention. In the US, the additional FDIC coverage and its associated cost along with historically low interest rates have increased the need to manage overnight deposits more aggressively.”

Rossi adds: “More sophisticated cash concentration structures and notional pooling solutions are being assessed. Corporates want to be able to move funds automatically and to any global location for more efficient cash management.”

One liquidity structure of increasing interest to US companies is the hybrid notional cash pool. In notional cash pooling, a company’s banking partner looks at all the current accounts in the pool including accounts in overdraft and those with positive balances--and determines interest on the overall balance thus providing an automatic offset of negative balances and any positive notional balance can be set up for automatic investment in overnight investment products.

Although with the low-rate environment money markets are not generating much return, companies still see them as the investment of choice for short-term balances.

In addition to offsetting negative balances the notional pool reduces the need for swaps or foreign exchange (FX) transactions in order to manage global cash. It can also allow companies to negotiate better interest rate margins based on the entire notional cash pool than would be the case looking at smaller balances in each locale.

The main advantage is that you don't have to physically offset balances or engage in complex short-term intercompany lending. Sara Lee, for example, set up a multicurrency notional pooling structure about three years ago.

The company maintains local accounts with one strong domestic bank in each country in which it operates. It has a cash pool in each country, and a multi-currency notional cash pool overlaying the local pools. However, some countries do not allow participation in notional pools--including major markets such as China, India, some other Asian, Latin American and African countries, and a few Eastern European countries.

Enter the hybrid pool.

A hybrid pool makes use of both notional and physical pooling structures to cover the different markets in which they have operations. In a physical pool, money is physically moved through a series of intercompany lending agreements—to offset negative balances and sweep funds into a master account.

Rossi says: “Corporate clients are looking for hybrid notional pooling, which combines both physical and notional offsets to handle multi-legal entity structures and inter-company funding requirements for a corporation.”

Although not a new concept, the hybrid pool is of growing interest to multinational companies further down the value chain it is not just for the largest blue-chips anymore. Liquidity management is a priority for all types and sizes of company.

This article is published by courtesy of www.cfozone.com.