Post on 10-Jan-2017
January 5, 2017
Cash Management Structures: Why In-House Banking and Netting Are a Must for Today's Global Treasury
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Today’s Presenters
Jason DobbsManager
Greg Person, CTPVice President, Global Presales
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Discussion Framework
Goals of IHB Structures
Explore IHB Elements
Internal Collaboration & Design
Intercomany Netting Considerations & Benefits
Role of Technology
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Do I have visibility into my corporate liquidity, and can I access it?
Do my global subsidiaries have the liquidity they need to be successful?
Do specific subsidiaries hold too much local cash, and what is the associated cost and risk?
Are my intercompany invoices settled in accordance with internal payment terms?
Are my intercompany lending agreements in compliance with US and local tax / legal requirements?
Do I have the technology infrastructure to support the business and balance my employees’ time?
How do I answer….
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Control & Access - Cash–Aggregate funds–Increase investment & reduce external borrowings
Efficiency – Payments– Simplify settlements– Centralize lending
Enhance – Working Capital Management–Efficient use of auxiliary currencies–Natural hedging created
Typical Goals of IHB Structures
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IHB – Structure and Progression
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FinCo as Sweep Aggregator
Sub Account Functions Receive funds
Process payments
May aggregate cash from other subs
Sub Account Functions Cross Border to FinCo or Pool
Bank or TMS initiated
Surplus – send funds to FinCoEOD
Cash need – Fund overdraft to target limit or zero (requires credit agreement)
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Sweep to IHB Notional Account
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Aggregated funds increase short term investable cash
Streamlined portfolio management
Benefit to banking relationship models
Investing
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Centralization of Interco financing to FinCo(s)
“Cash” held at FinCo for settlements or repayments
Progression to Hub & Spoke model for Interco agreements
Lending
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IHB Holds multiple currencies
Book deals to IHB for natural hedging
Easily facilitated for IHB Participants
Non-participant trading?
FX Trading
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Address Kyriba Singapore liquidity deficit with Kyriba Canada surplus
Reduce SGD external expense, achieve higher consolidated investment balance
In-house Bank Liquidity Example
Kyriba Finance Co(FinCo IHB Entity)
Kyriba Canada
Kyriba Singapore
External Bank
External Bank
Deposits USD 50M
Sell USD 10M
Buy SGD 15M
Invests USD 40M
Borrows SGD15M
(USD 10M)
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Accounting – Necessary to develop and manage entries associated with Interco’s to and within FinCo for various activities
FinOps – Interco AP/AR integrations for auxiliary systems; build of programs in TMS
ERP Team – Additional IHB programs to support TMS processing of funds
Corporate & International Tax – Structure and tax regulations; who can and can’t participate; terms and rates (with Treasury)
Legal – Drafts of agreements, terms and conditions, and ongoing documentation requirements
Banks and BAM team – Changes in account structure, bank sweeps, and credit agreements
Treasury – Funding, investing, FX execution (internal & external); monitoring and compliance; technology
Key Players
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Final Reg385 (Oct 2016) broadly exempts debt issued by CFCs and foreign corporation
Regulation revived scrutiny of intercompany pooling–Documentation–Demand facility agreements–Treasury service agreements–Borrowing terms & interest spreads–Default consequences–Repayments
Regulation Section 385
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Intercompany ‘due to’ and ‘due from’ balances are created through natural course of business
Intercompany balances must be settled in timely fashion in accordance with intercompany payment terms and/or services agreements
Examples of intercompany balances & positions that must be settled:– Trade payables– Cost shares– Compensating adjustments– Service agreements– Intercompany loan, interest – Dividends, capital contributions, etc.
Intercompany Balance & Multi-lateral Netting Foundation
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Managing Intercompany Settlements without Netting
Large payment volumes Bank transaction fees
Settlement risk
FX payment costs
Inefficient Use of Resources High manual effort to enter and release payments
Time consuming GL posting
Error prone
Tax and legal compliance Intercompany invoices not settled within payment terms
Inadvertent intercompany lending
Deemed dividend / 956 income
FX payment costs
Inefficient GL posting
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Multi-lateral Netting Solution
Reduce physical payments, lower bank fees and eliminate settlement risk
Elimination of bank settlements and corresponding settlement risk
Reduce tax treatment risk; avoid US repatriation tax under Section 956
Improve internal and external audit compliance and transparency
Optimize intercompany GL posting and reconciliation
Consolidate and hedge FX exposures
Comply tax and legal requirements
Integrated Treasury, Risk, Netting &
Payment System
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Single legal entity reduces intercompany payments/receipts– Reduce 7 physical transactions to 1 IHB posting
Reduce FX trades across 4 currencies pairs
Consolidate FX position
Netting Statement Example
Netting
Particpant Counterparty
Invoice
Currency
Payable
Amount
Netting FX
Rate
Receivable
Amount
Settlement
Currency
Netting
Settlement
ACME-BV ACME-DE EUR 132,804.12 1.05 USD (139,975.54)
ACME-BV ACME-UK GBP 980,902.44 1.22 USD (1,196,700.98)
ACME-BV ACME-CA CAD 59,924.59 0.74 USD (44,344.20)
ACME-BV ACME-CA CAD 0.74 1,248,930.43 USD 924,208.52
ACME-BV ACME-US USD 678,902.39 1.00 USD (678,902.39)
ACME-BV ACME-US USD 1.00 138,942.45 USD 138,942.45
ACME-BV ACME-JP JPY 30,241,994.00 117.65 USD (257,050.52)
ACME-BV USD (1,253,822.66)
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Accounting – Responsible for monitoring, entering and reconciling intercompany balances and payments
FinOps & ERP Team – Interco payable integration to netting systems & ERP(s)
Corporate & International Tax – Structure and tax regulations; who can and can’t participate in netting program;
Legal – Drafts of netting agreements, terms and conditions, and ongoing documentation requirements
Treasury – Managing netting cycle, executing settlements (internal and external), FX management and trade execution (internal & external); monitoring and compliance; technology
Key Players for Netting
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Simple access for global users (accountants, controllers, etc) Request funding / submit deposits to IHB
Enter intercompany payables
Access IHB & Netting statements
Manage against KPIs, target balances
Full audit & transparency
FX exposure management
Optimize global liquidity strategies
IHB balance limit compliance
Single Global Technology Portal for IHB and Netting
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Standardize, simple netting process workflow to promote global adoption
On-demand statements to support month-end close
Historic intercompany reporting (tax inquiries)
Single Global Technology Portal for IHB and Netting
Entity Act Plan F (U)
Acme CA 0.9 0.5 (0.40)
Acme UK 1.6 1.0 (0.60)
Acme JP 0.8 1.0 0.20
Acme DE 0.5 0.5 -
Acme AU 1.1 1.0 (0.10)
M ar 15 USD Equiv
Cash Balance Scorecard
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Summary
Treasurers are tasked with ensuring access to adequate liquidity to fund corporate operations, global business units and corporate strategy
Optimal liquidity at appropriate level of risk and cost
Executing corporate capital allocation strategy, share buyback, M&A, debt pay-down
In-house Bank as low cost liquidity source
Internal cash is cheapest form of finance
Automation through bank pooling structures
Global deployment involving global entities, currencies and multiple bank relationships
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Summary cont’d
Multilateral Netting to enhance productivity and controls
Settle intercompany invoices timely and efficiently
Reduce bank fees, FX costs and eliminate settlement risk
Ensure legal and tax compliance
Consolidate FX exposures
Provide transparency and automation to GL application
Initial investment and due diligence
Collaboration with treasury, tax, local finance and legal
Loan documentation and arm’s length terms (reg 385)
Optimization through automated bank pooling
Technology investment and transparency
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Further Reading
Success Story: Chalhoub Group Treasury establishes an active in-house bank function to automate their key cash and FX management functions
Get the case study>>
Blog post: Why Treasurers should adopt multilateral netting
Check out the post>>
Questions?
Greg Person CTP
gperson@kyriba.com
Jason M. Dobbs
jdobbs@actualizeconsulting.com