Cross-border cash pooling solutions can help corporates to optimise their cash management structures by pooling their funds into a single liquidity basket. However, they can also prove to be an administrative headache. We explain what cross-border pooling options are widely available to treasurers and how they work.

A cross-border or multi-country cash pool is a cash management structure that allows a business to concentrate the cash it holds in different countries, across separate bank accounts, in one location. This technique provides corporates with an effective way of interest optimisation and improved liquidity management as excess balances from one subsidiary can be used to offset debit balances in another. A cross-border cash pool can be a physical, notional or hybrid structure, depending on the jurisdictions covered and the legal requirements therein.

For the purposes of this article, we are using a definition of pooling that includes both sweeping and notional pooling. This may differ slightly from the definitions used by some cash management banks who prefer to classify sweeping structures, including zero balance account and target balancing structures as cash concentration rather than pooling. When establishing a cross-border cash pooling structure, the first choice that the treasurer has to make is whether to opt for pooling per legal entity or pooling per country.

Pooling per legal entity

When a subsidiary maintains multiple bank accounts in different currencies and countries, pooling the bank balances in each country on a legal entity basis can offer benefits to the group treasury. Cross-border sweeps are delivered to a pool in one country – concentrating all the subsidiary’s cash into a single position and providing much sought after visibility over all accounts. From this position, the net balance is swept to a master account in a central cash pool on either a notional or zero balance basis.

Pooling per country

If the decision is made to set up pooling per country, cash pools set up in the participating countries will see the various subsidiaries’ bank account balances swept to a master account in each country. These master account balances are then swept cross-border into a central pool in the main country of operation.

Multi-bank cross-border solutions

Cross-border pooling solutions can also be categorised according to whether multiple local banks are used in each country, or a single network that covers the region (or indeed the world) is employed. Using local banks in each individual country may be advantageous if the corporate operates in a relatively small number of countries, especially if it requires highly specific local expertise and services.

Using a larger regional network bank offers the advantages of harmonised services and documentation, and the possibility to execute true end-of-day-based cross-border zero balancing. In order for a regional network bank to be a viable option, it must have branches or operating subsidiaries operating in all the countries in which the corporate is active.

It is sometimes possible to implement a hybrid solution, whereby domestic banks provide local services, such as payments and collections, whereas a larger regional bank provides cash pooling services. With these hybrid solutions, balances held with local banks are often concentrated to a central treasury account held with the pooling bank.

Certain banks even offer multi-bank sweeping services that automatically transfer balances between local bank accounts and the main cash management bank. Using SWIFT messages, the cash management bank monitors the sub-account balances at the local banks, before sending a transfer request to transfer the funds to the master account. The receiving local bank then executes a payment instruction that transfers the money to the cash management bank.

Since cross-border multi-bank sweeps go through the correspondent banking process, the sweeps usually happen before the end of the business day, and it is often impossible to achieve a zero balance using this setup. However, it can be possible to achieve a zero balance through multi-bank sweeping in cases where banks develop collaborative solutions.

Cross-border zero balancing

When the corporate has established the main country of operation they wish to use for cross-border zero balancing structure, they then need to set up bank accounts with the concentration bank in this country. The focus for all liquidity in the structure is on a single master account in this country. Depending on factors such as the scope of operations and the type of business that the corporate operates in, the corporate will have to weigh up the benefits of potential locations, as well as carrying out a thorough evaluation of the tax and legal issues that may exist in the potential locations.

There are a variety of ways in which a cross-border zero balancing sweeping arrangement can be set up:

1. Cross-border zero balancing by legal entity

   Automatic sweeps from the subsidiaries’ bank accounts in the different country branches of the concentration bank go directly to the master account at the central pooling location. Should the subsidiary have multiple bank accounts in the same country, the balances need to be consolidated or netted on to one account before this process, to limit the cross-border sweeps to one per country. If a corporate uses cross-border zero balancing by legal entity, they need to be aware of the tax issues that can arise from cross-border inter-company loans being created between the master account holder and the operating companies.

2. Cross-border zero balancing with domestic zero balancing

   If the corporate has a number of subsidiaries in each participating country, a two-step process can reduce the number of cross-border transfers involved in the sweeping arrangement. In this case, the master account holder would open a non-resident bank account, or target account, with the concentration bank in each participating country. The purpose of this is to enable cash concentration to take place on a domestic basis within each country first, prior to a second cross-border zero balancing sweep arrangement from the target account in each country to the master account held in the final pooling location. Once again, cross-border inter-company loans are generated by cross-border zero balancing with domestic zero balancing.

3. Cross-border zero balancing with domestic notional pooling

   In this set up, the subsidiary balances are notionally pooled in each country first. The cross-border transfer is made from a master account in each of the domestic notional pools to the master account in the central pool location, taking the balance of each country’s notional pool to zero.

   Not every bank offers notional pooling, so the corporate will need to ensure this is possible with their preferred bank before proceeding. In most cases, the group treasury is the master account holder in the zero balance pool in each country, as well as at the central pool location. This solution allows local subsidiaries to maintain ownership of their cash balances and negates the need for inter-company loans.The one exception to this rule is if any inter-company loans arise between the master account holders of the domestic cash pools and the central master account holder. The only way that this could happen is if the master account holder in the zero balance pool in each country is different from the master account holder in the central pool location.

Variation on a theme

Banks often adapt their cross-border zero balancing solutions to meet the particular needs of the company. Beyond a plain vanilla ZBA, there are also several variations on the end-of-day sweeping theme:

• Constant balancing

  Constant balancing operates on exactly the same principle as zero balancing, but a residual amount is maintained in the sub-accounts as opposed to a balance of zero. The advantage to sub-account holders of this method is that a balance is immediately available at the start of the trading day to action payments, and interest is accrued on the sub-accounts.

• Target balancing

  Target balancing differs from plain vanilla ZBAs in that transfers are made from the master account to the sub-accounts in the opposite direction to which the zero balancing transfers were sent, so the sub-accounts keep a target balance. As the target transfers have a book date of ‘today’ but a value date of ‘tomorrow’, the sub-accounts always have a credit book balance but a zero value balance.

• Trigger balancing

  Trigger balancing is when upper and lower amounts are set on sub-accounts. Balances that exceed these amounts trigger the zero balancing process to take place, but only on those sub-accounts that meet the limits (these limits may vary for each sub-account). Trigger balancing can eliminate the need to sweep insignificant balances and lower the number of sweeps that take place, which in turn can reduce banking costs.

Some banks also offer the possibility to execute zero-balance sweeps at intervals other than the standard end-of-day frequency. This may benefit companies when activity on certain sub-accounts is low during certain periods of the month or year.

Cross-border notional pooling

A cross-border notional pool allows corporates to optimise interest across a number of accounts in a variety of countries. In this case, the debit and credit balances of the participating accounts in each separate country are pooled for interest purposes. This may or may not involve cross-border transfers.

Structuring notional cash pools on a cross-border basis can be difficult, due to the cross-guarantees required. This is one of the reasons why some banks that offer domestic notional pooling may not also offer cross-border notional pooling. Once again, cross-border tax and legal issues must also be taken into account by the corporate if they are to achieve full set-off. Some of the variations that corporates should be aware of from banks that offer this structure include:

• Some banks may only arrange cross-border notional pools in major currencies.

• Some banks will only arrange cross-border interest compensation.

• Some banks may insist that the funds must first be physically transferred to one account in each pooling location before the accounts are notionally pooled cross-border.

It is possible that the bank may offer a cross-border notional cash pool without any transfers of the liquidity balances being required. With no transfers, there is no single location for this type of cash pool. The bank simply calculates the interest differently or arranges rebates to reflect the credit and debit balances that are being maintained.

Once it is established that a cross-border notional cash pool is the corporate’s preferred option, and their chosen bank can provide this in the countries required, an assessment of the structure being offered is required by the treasury to establish whether it meets business requirements of the organisation. Some of the main structures for cross-border notional pooling are outlined as follows:

1. Cross-border notional pooling with domestic zero balancing by country

   In this structure, a domestic zero balancing cash pool is set up in each participating country. The balances on the master accounts for each of the domestic zero balancing country pools are then swept cross-border to accounts in the same name in the central notional pool. Sweeps can be two-way or one-way, depending on the treasury’s requirements. The country accounts in the central pool are notionally pooled for interest purposes. Using this structure, inter-company loans can be created in country, but not cross-border.

   If the master account holders in the domestic pools are local subsidiaries, this type of structure can be very useful. Ultimate control of the notional pool master account will most likely lie with group treasury.

2. Cross-border notional pooling with cross-border zero balancing by legal entity

   Unlike the first option above, this structure negates the need for a domestic cash pool to be established, as cross-border sweeps are made on a legal entity basis. Within the cross-border notional pool, separate accounts are opened for each subsidiary using the structure. Sweeps are set up from all accounts held by the subsidiary in every country directly to its notional pool account in the ultimate pooling location. In some circumstances, the subsidiary may have multiple bank accounts in any one country. In this case, it can be beneficial to zero balance on a legal entity basis within the country first.

   Cross-border notional pooling with cross-border zero balancing by legal entity ensures that there is no co-mingling of funds between subsidiary balances. The subsidiaries themselves retain control of their operating accounts, while their balances are simultaneously used to improve the group’s interest charge. Should the subsidiaries require funding at the local level, the two-way zero balancing sweeps also enable them to be funded indirectly by the master account holder in the cross-border notional pool.

3. Cross-border notional pooling with domestic notional pooling

   In-country notional cash pools are established for each country that the corporate requires in this structure. The master account holder for each of these then arranges transfers to an account in their own name that resides in the cross-border notional pool in the main pooling location. These accounts are then notionally pooled. The main benefit of this structure is found on the legal side, as the amount of participating accounts in the cross-border notional pool is streamlined.

Restrictions

The wide variety of liquidity management structures that exist offer the treasurer the opportunity to gain full visibility over their end-to-end cash flows and positions. More than that, they also then allow the treasurer to make their corporate cash work harder for the business. It is also important for the treasurer to be fully aware of the legal and tax requirements of the structure they choose to implement, and they should pay particular attention to any regional or national legislative restrictions.