Eric Mueller, Head of Cash Management Corporates EMEA and Head of Global Network Banking EMEA, Deutsche Bank, responded:

An overlay cash pool connects local cash pools/bank accounts held at various banks to a cross-border cash pool provided by a single regional bank. Credit (debit) balances with each local (cash pool) bank are then automatically or manually swept/funded each day with one regional cash pool bank in order to achieve a regional central cash position.

Key differences and challenges of an overlay cash pool in comparison to a local and regional cash pool (notional pool, target or zero balancing (ZBA) with just one bank partner (locally and regionally) are the following:

• The sweeping/funding of balances between various local banks and the overlay bank, which may require manual transfer efforts and includes risk of missing the final end of day balance after clearing cut off.
• There is no transfer of back and future value days.

While overlay cash pools were rather popular in the last century, the introduction of the euro in 1999 has strongly accelerated the migration from the use of overlay cash pools to the use of one regional cash pool partner, which also provides local cash management services.

The single euro payments area (SEPA) enables corporates to further increase regional cash pooling efficiency. Many corporates are currently establishing central account solutions by moving the vast majority of payments and collections to one account per legal entity per region – ring-fenced within a domestic cash pool. Benchmark corporate treasuries – those with integrated in-house bank solutions, such as the SAP In-house Cash centre application – are going a step further by running a large number of payables and receivables of various group entities through a single account solution within transparent payments and collections ‘on behalf of’.

This means that cash pools, at least for euro within SEPA, will become history in the medium term.

Suzanne Barry, Head of Liquidity and Investments EMEA, Bank of America Merrill Lynch, responded:

Cash pooling is an essential liquidity management technique. It brings together a number of individual bank accounts to pool balances, optimise interest and improve an organisation’s liquidity management – across multiple jurisdictions, currencies and entities depending on the type of cash pool in place. Cash pooling falls into two main types:

1. Physical pooling.
2. Notional pooling.

Physical pooling is often referred to as physical cash concentration, target or zero balancing (ZBA) or sweeping. Balances are physically swept to a header or master account on a periodic basis and may have certain parameters, for example a minimum or maximum balance, a percentage sweep, target balance and a variety of other parameters depending on the provider capabilities. Physical pooling is available on a domestic, cross-border, cross-region and multi-bank basis and is also dependant on the provider capabilities.

Notional pooling is a tool for interest enhancement whereby debit and credit balances on a series of accounts owned by the same or different entities and domiciled in the same country are notionally netted for interest calculation purposes, without a physical movement of cash. Multicurrency notional pooling offers the ability to achieve a net notional position in a single currency without the need to perform traditional FX or swaps, and extends the benefit of further interest savings as a result of compensating balances in different currencies.

An overlay cash pool is provided by an international bank offering physical or notional pooling on a multinational, multi-entity company-level in country, in region or globally. Overlay cash pools allow changes to existing bank relationships when necessary without disrupting the operation of the cash pool and allows changes to the cash pool to take place without disrupting the underlying banking structure.

Richard Jaggard, Head of Transaction Banking, Europe, Standard Chartered, responded:

To start with let’s recap on the principal structures used in cash management structures: zero balancing (ZBA) and notional pooling.

1. ZBA requires the physical movement of funds from, or to operating accounts to achieve a single net cash position in a single, central account.
2. Notional pooling does not require the physical movement of balances between accounts.

These structures are used both domestically and regionally/globally. Arguably to maximise the structure’s efficiency it would be good to have all cash managed with one entity. However, treasurers are increasingly dividing the cash position either by nominating regional cash management banks that can manage cash for a part of their portfolio across multiple countries in a geographic region, or they are recognising that they separate cash management into in-country banks for their operational requirements and regional/global banks for liquidity management – the latter is an overlay structure.

With an overlay the treasurer has a couple of structures which deliver similar benefits to ZBA and notional pooling but with somewhat more complexity. They can move the funds in local currency to the liquidity bank and then use a bank’s automated FX rate engine to swap into a single currency. With the increased transparency of FX rates, this model is becoming more acceptable as it reduces the time and cost of treasury having to transact on positions itself. Another option is a multicurrency pool where the funds remain in local currency but the bank notionally recalculates all balances to a base currency for balance offset and interest calculation purposes.

There are challenges with these structures and the complexity rises with the geographical scope of the overlay. Regulations are a major determinant. For example, company law in some countries restricts inter-company loan structures and prevents the use of a ZBA structure. In other countries the balance sheet reporting required by central banks may not allow banks to offset onto their balance sheet the company’s accounts, which often reduces the benefit of a pooling structure. However regulations are constantly changing, particularly in fast-developing economies where often the changes favour what the treasurer is looking to achieve. If you are operating in these economies, selecting a banking partner that has extensive presence in these markets is extremely important to ensure you can benefit from the changes.

Hugo Parry-Wingfield, EMEA Head of Market Management for Liquidity and Investments, Citi Transaction Services, responded:

An overlay cash pool isn’t necessarily distinct from a notional, conventional target or zero balancing (ZBA) cash pool, but could contain components of all three. It is a cash management service that facilitates the aggregation of liquidity from a series of multiple underlying banks or accounts into a single bank or banking structure. This could be within a single bank, but typically an overlay structure refers to a multi-bank structure. By pooling its cash, a company benefits from improved control and cash visibility. It can improve financial efficiency by reducing interest costs and time and effort, if this process if being done manually.

If these balances are held at two different banks, then the cash has to physically move from the local bank to the overlay bank. This can be done by the corporate instructing its local bank to push the funds to the overlay bank – ie every day at a particular time the bank pushes excess cash into the overlay bank account structure. The other alternative is for the overlay bank to pull the cash from the local bank at a predefined time and within certain parameters.

A corporate has to consider the structure they have before the cash moves to an overlay structure, as well as after it is moved. For example, a corporate could have a euro cash pool in France before the cash is subsequently moved into the overlay structure. That cash pool is independent of the overlay structure, and could be a conventional target, ZBA or, depending on the market, notional cash pool.

The same applies to the cash once it is in the overlay bank. Once the cash has come to Citi, for example, it could then be part of a much broader cash pool which could have elements of physical or notional pooling. That is why an overlay cash pool could be all of these things at once.