Cash & Liquidity Management

Multi-currency notional pooling: the working capital solution for global corporates

Published: May 2022

Multi-currency notional pools offer important cost and flexibility benefits to global corporates. Rather than borrowing from the bank, companies can be self-funding while the FX element means treasury can minimise the need for expensive FX transactions to access a particular currency in the spot market.

Person holding digital globe with currencies around it

Portrait of Amy Eckhoff, APAC Head of Liquidity & Account Solutions Specialist at J.P. Morgan Payments

Amy Eckhoff

APAC Head of Liquidity & Account Solutions Specialist

J.P. Morgan logo

Portrait of Tim van Bijsterveldt, Executive Director, Liquidity & Account Solutions Specialist at J.P. Morgan Payments

Tim van Bijsterveldt

Executive Director, Liquidity & Account Solutions Specialist

J.P. Morgan logo

Take two cash management scenarios for a multinational company with payment obligations around the world. On one hand, the company runs a costly overdraft and prefunds all its obligations. On the other, it sets up a notional multi-currency cash pool covering the US, APAC and EMEA, whereby the surplus cash in the different regions passes from one to another over a 24-hour period to meet working capital needs.

The structure allows the company to leverage idle internal cash, the most cost-efficient source of funding a company has and preferable to short-term credit facilities, freeing up other reserves to target growth strategies. All the while offering the ability to tap different fungible currencies to make payments whenever and wherever needed without a currency conversion.

Multi-currency notional pooling offers an effective and cost-efficient liquidity structure that allows treasury to leverage surpluses hidden in subsidiaries, reduce dependency on overdrafts and play off different currency balances for maximum flexibility. “The solution marks the start of our global treasury reinvention and serves as a foundation for our ambitions to set up a global cash pool and in-house banking structure,” says Cecilia Li, Head of Global Treasury at BeiGene Limited, the global biotech company that specialises in the development of drugs for cancer treatment. “By moving away from manual processes towards automation, we have been able to reduce our error rates and minimise risk exposure.”

J.P. Morgan suggests two key strategies – multi-currency notional pooling and negative yield optimisation – to complement physical cash concentration tools and FX hedging. Traditional physical cash pooling centralises funds across multiple bank accounts to reduce idle balances and deficits whereas notional pooling achieves a similar result but is accomplished by creating a notional position resulting from an aggregate of all the accounts without physical transfer of funds. Add on the multi-currency element to a notional pool, and treasury teams don’t need to carry out FX transactions to access a particular currency, introducing a valuable element of flexibility.

Macro backdrop

Today’s uncertain global business environment makes effective liquidity management and FX hedging increasingly important to provide funding stability and cost optimization. But the combination of rising interest rates and volatile stock market valuations creates a demanding debt funding environment. For this reason, rather than tap external funding, it makes sense to leverage internal surpluses built up in the loose credit conditions post-2008 and often held out of sight in idle balances across fragmented global accounts or pushed down into subsidiaries.

“These cash surpluses are often generating optimal returns and are not deployed,” says Tim van Bijsterveldt, Executive Director, Liquidity & Account Solutions Specialist at J.P. Morgan Payments, adding that subsidiaries also often over-forecast their cash needs because they do not have automated processes or sufficient visibility across accounts.

Mobilising internal idle cash for self-funding and working capital purposes also frees up costlier debt finance to drive long-term growth and shareholder return via acquisitions or entering new markets. “The economics of recycling internal cash for operating purposes rather than using external funding really do pay. Rising rates mean raising capital is more expensive than leveraging internal cash for operating purposes,” says Amy Eckhoff, APAC Head of Liquidity & Account Solutions Specialist at J.P. Morgan Payments, where analysis of corporate financial statements found global multinationals on average hold at least 30% in idle cash.

Multi-currency notional pooling also provides support and cost benefits for companies facing a mismatch between their forecasts and actual need to access funds like, for example, an unforeseen payment obligation. “Notional pool pricing will almost always be more favourable and beneficial than a spot or overnight swap rates,” says van Bijsterveldt.

FX Element

Multi-currency notional pooling enables corporates to decide which currencies they want to keep operating in a surplus balance while running others intentionally negative. If there is a surplus in one currency, say US Dollar, and treasury doesn’t borrow more in another currency than they have US Dollar, corporates can draw down another currency at a preferential rate. This can be done manually or by using the same automated cross-sweeping tool that is commonly used to move out restricted currency balances from the more complex markets in Asia. “It might sometimes be better for treasury to draw down in Japanese Yen rather than keeping that account surplus from a an interest rate perspective without impacting underlying business operations,” explains van Bijsterveldt who says the strategy allows treasury teams to really look at the currency composition of the pool and run certain positions short on purpose.

It makes for a compelling solution for companies pushing into new regional markets against the backdrop of digitisation and trends in real-time payments, shifts online and the proliferation of wholesale business to business marketplaces. Having local currencies on tap in the regions and keeping the currency in the market where it connects to a local business is increasingly sought-after, explains Eckhoff. For example, a company might be receiving new flows of revenue from online customers in currencies not received before; need to service pay-outs on a rapid basis or apply cash into the business as quickly as possible, all requiring the frictionless ability to fund and have settlement optimisation. “Before, treasury could slightly pre-empt, but today corporates need access to cash quickly in the right place and in the right currency,” she says.

Expanding on the idea of the right currency in the right place, Eckhoff and van Bijsterveldt explain that the multi-currency element offers a new, hybrid model. Under notional pool structures, different currencies and country of incorporation of certain entities are unable to participate directly and the common way to move money around is via inter-company loans.

The multi-currency approach not only gives timely access to funds at pace (unless you convert Asian currencies in Asia, it is rarely settled same day) it also allows treasury teams to respond to rising rates when deciding which currency to draw down. “Rising interest rates are good on surplus balances but not so good on negative positions as you are charged more,” says van Bijsterveldt.

This FX element also holds real flexibility. Treasury teams are not forced to convert currencies and can be more thoughtful on choosing which tenors to expand and manage: bills will still get paid as long as there is a sufficient balance, as different entities can access funds in the entire ecosystem. It offers companies a way to absorb unhedged flows and an alternative to the short-term FX market to fund the business on an immediate basis in an approach that was particularly useful at Goodyear, explains James Ho, Regional Cash Management Manager & Japan Treasurer at the tyre company. “Together with J.P. Morgan we implemented a flexible, scalable liquidity solution which has helped Goodyear achieve its treasury objectives to lower idle cash and financing costs without adding additional FX exposures or manual work.”

Key considerations

Multi-currency notional pools require a few key considerations. Treasury teams need to ensure the accounting principles that lie behind intercompany or commercial flows coming in and out of the pool are robust. This means working with internal advisors and ensuring treasury benefits from the net treatment in their balance sheet – as opposed to gross positions that require capital set against them. Elsewhere, treasury teams should be mindful of the tax considerations around the jurisdiction of the pool. “There is a responsibility to understand how the pool fits with clients’ ecosystems and existing infrastructure,” says Eckhoff. “Multi-currency pooling entities have more complex accounting standards. If one entity is continuously drawing down and not contributing, then auditors and accounting experts might re-consider if direct participation in a notional pool is appropriate,” adds van Bijsterveldt.

Indeed, both Eckhoff and van Bijsterveldt reflect that treasury should be mindful of what the cash is funding, keeping in mind pool funding is only meant as a working capital tool for short-term cash fluctuations or asymmetric demand from different business centres; regulators will quickly distinguish between inter-company loans and capital injections. It is not the right funding mechanism to finance a new factory, for example, and structural loans on a long tenor basis are better handled outside the pool. It also requires cohesion across regions and treasury teams in different jurisdictions need the expertise to manage the pool, handing it on in different time zones.

Multi-currency notional pooling benefits companies with fragmented bank accounts and supports account minimisation; it helps companies with a large cash burn to leverage internal cash and is an effective way to recycle cash from cash generating parts of the business. The structure also allows companies to extract the currency they like from the notional pool for redeployment if another currency is in surplus. “Multi-currency notional pooling is becoming an increasingly important tool for multi-nationals to lever their cash positions supporting new ecosystems that need to be managed at pace and at scale,” concludes Eckhoff.

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