Photo of Matthew Xu, Pfizer and Lillian Sim, J.P. Morgan.

This case study profiles a solution as a result of the regulatory changes in 2014 which offered an opportunity to set up centralised payments and collections with netting and automated cross-border cash concentration and intercompany loans in foreign currency and RMB. This ‘on-behalf-of’ structure has SAFE approval.

The challenge

Pfizer maintains a large manufacturing and sales presence across Asia Pacific, with businesses across multiple entities in China. As a majority of its China subsidiaries’ trading counterparties are offshore group member companies, Pfizer often had to conduct gross-in or gross-out transactions for payments and collections for each entity in each country, with significant resources dedicated to administrative work resulting in operational inefficiencies.

Following a change in regulations in 2014, the opportunity to set up centralised collections and payments with netting and automated cross-border cash concentrations and intercompany lending transactions in foreign currency and renminbi (RMB) became possible.

The solution

Pfizer seized this opportunity and partnered with J.P. Morgan, in an end-to-end submission for approval of their application to the State Administration of Foreign Exchange (SAFE).

J.P. Morgan facilitated discussions between Pfizer and SAFE Shanghai to confirm the final centralised payments and collections structure, and ensured close follow-up with SAFE throughout the entire process. Pfizer obtained formal approval from SAFE in September 2015, and implemented its first US dollar (USD) on-behalf-of (OBO) transaction in record-breaking time in mid-November 2015.

The scope of the cross-border centralised payments and collections solution enabled Pfizer to:

• Centralise its intercompany current account cross-border transactions with an offshore net basis settlement infrastructure model, allowing it to utilise its capital more efficiently.
• Transact via a single counterparty.
• Improve visibility at the group level.
• Improve its funding efficiency globally.
• Standardise work and settlement flows as well as risk controls in China.
• Have flexibility on foreign exchange (FX) bidding from various banks, to manage FX risk.

Best practice and innovation

Having a deep understanding of Pfizer’s business, J.P. Morgan tailored a solution for the USD OBO business, which was well coordinated among Pfizer’s units including the SSC in Dalian, the operating entities in Shanghai, Suzhou and Dalian, the regional treasury centre in Singapore, as well as the global in-house bank (IHB) in Dublin, Ireland. In addition to helping Pfizer implement best market practices, J.P. Morgan also provided detailed advice that took Pfizer’s control requirements into account and ensured compliance with end-to-end processing requirements.

Throughout the implementation process, Pfizer’s GFS in Dalian closely monitored all facets of the end-to-end operational process in detail, with strong and dedicated support from J.P. Morgan including:

• Preparation of settlement schedules based on the global netting arrangements.
• Document delivery.
• Transaction initiation.
• Regulatory reporting.

The solution took a forward-looking view of regulatory relaxation, leveraged J.P. Morgan’s close communication with regulators and its deep understanding of the regulatory processes, and has resulted in full integration with both Pfizer global standards and China’s specific regulatory requirements.

“Pfizer has risen to the challenge and is the first company in China to successfully implement its OBO structure in 2015 within a quick turnaround time from obtaining the formal approval of SAFE – as a result of a deep understanding of the regulatory changes, the high quality of application documents submitted, and the close communication established throughout the process. We are delighted to see this achievement and congratulate Pfizer on this great milestone.” – Director, General Affairs Department, SAFE Shanghai.

Key benefits

• Operational efficiencies, with improved visibility of cash.
• Higher controls of FX risk and lower FX costs, with FX bids from Pfizer’s two other banking partners now also embedded into the OBO settlement process.
• Reduced costs resulting from decreases in account maintenance expenses.
• Better cash flow forecasting due to standardised and homogenous systems within the GFS in Dalian, which further supports the provision and compilation of cash flow data, leading to improved cash flow forecasting.