The challenge

Prior to November 2018, FMC’s approach to liquidity management in Asia Pacific was inefficient. The company operated a highly decentralised treasury structure in the region with each of its 13 markets managing its own cash balances through multiple local banks. This resulted in high levels of idle cash in each market that generated low yields on local currency balances. Further, lack of visibility into the region’s overall cash levels and balances across multiple local banks had to be collated manually. High funding and FX conversion costs compounded the issue.

The company’s volume of idle cash was highest in China where it held long positions in Chinese yuan (CNY). However, utilising the excess liquidity in China to fund other markets proved challenging due to the country’s strict capital controls that prohibited companies moving funds freely across borders.

FMC sought a flexible regional liquidity solution that would allow it to efficiently manage surplus balances across its key Asia Pacific markets – especially China – and minimise FX and funding costs. While it already had an existing structure in China with its incumbent bank that linked all its Chinese entities to a domestic header account, Chinese regulations require companies to have a domestic cash pool linking to at least two Chinese entities before it can be integrated into a broader offshore structure. Furthermore, both domestic and offshore cash pools needed to be implemented by the same banking provider.

FMC required a regional liquidity solution that did not disrupt its existing banking set-up in China.

The solution

FMC worked with J.P. Morgan to implement a single-entity, multi-currency notional pool (SEMCNP) in Singapore to centralise its liquidity across six key markets – Australia, China, Hong Kong, Japan, Singapore and New Zealand. The liquidity structure enables the company to notionally offset short positions in one market with long positions in another without requiring the physical conversion of currencies. Additionally, excess balances across the region will either be automatically pooled for participating entities to self-fund one another in the form of working capital, or invested to maximise yields. Any further surplus can also be used to fund working capital shortfalls or pay off short-term debts in its operations in EMEA and the Americas as required.

FMC and J.P. Morgan underwent extensive discussions with the People’s Bank of China (PBOC) over a span of two months and were granted exceptional approval to utilise just a single Chinese entity that’s connected to two offshore entities – in Singapore and Hong Kong – under a custom 1+2 sweeps structure. Twice a day, the unique structure automatically sweeps surplus CNY balances from the China entity into the offshore accounts which is then moved into the SEMCNP. CNY balances from its other domestic cash pool (with its incumbent banking provider) are also funded to FMC’s China account under J.P. Morgan and further swept to the SEMCNP.

Best practice and innovation

The unique solution is a first within the treasury space and will provide flexibility for companies that have already established domestic cash pools in China with an incumbent banking provider and those that do not have multiple onshore entities in China – to establish regional cross-border liquidity structures.

Key benefits

• Over US$500,000 in estimated cost savings per annum.
• Increased mobilisation of trapped cash out of heavily restricted markets such as China.
• Improved yields.
• Rationalised the number of banking providers.
• Decreased working capital costs.
• Reduced FX costs.
• Improved visibility.

“We collaborated closely and developed a credible relationship with the PBOC to ensure the solution is fully compliant with the local regulator,” says Oliver Li, Asia Treasury Manager.