Insight & Analysis

Pooling your resources

Published: Mar 2023

Whether to opt for physical or notional cash pooling is not always an either/or decision for corporates seeking to move away from inefficient bank account and liquidity structures.

Blue piggy bank being dropped into the water

The choice between physical and notional pooling depends on a corporate’s liquidity needs, goals and organisation, although notional pooling is often coupled to physical pooling where the master accounts of physical cash pools are looped in a notional pool structure.

Philippe Penichou, Managing Director Global Head of Sales, Wholesale Payments & Cash Management at Société Générale refers to notional pooling (and in particular, multi-currency notional pooling) as a more bespoke solution intended for corporates with activities in various currencies, an operational centralised treasury, and the appropriate working capital pattern.

“It is relevant in particular for corporates that are long in multiple currencies and have operational or investment strategy needs in one or more currencies, and who want to optimise their cash without the need to perform daily FX transactions,” he says.

Avoiding the burden of performing daily FX transactions reduces costs and allows companies to assess their hedging strategy on an annual or seasonal basis. A notional pool also enables treasurers to reach their target of running a highly efficient worldwide treasury with a small team – as few as two or three highly qualified treasurers or cash managers can run it for an entire group.

“According to our research fewer than 5% of corporates are running such a solution, leaving the vast majority with a classical cash pooling structure,” adds Penichou.

Cash is usually physically pooled by currency to a single entity using intercompany loans, often on a cross-border basis, explains Stephen Randall, Global Head of Liquidity Management, Treasury and Trade Solutions at Citi. “Notional pooling can then be best used as a service to help optimise the use of cash supporting mismatches in cash flows between currencies,” he says.

Both solutions are popular with corporates as they deliver on the centralisation of cash and help unlock and optimise their working capital notes Adnan Ahmad, Head of Liquidity Products Europe, Global Payments Solutions at HSBC, adding that client preference for a particular solution is driven by company structures, scale and geographic presence.

“The majority of corporates with a global footprint use a hybrid structure of physical and notional, typically concentrating on physical pooling to a central location for visibility and control, and then wrapping a notional pool around these balances to achieve both self-funding and interest optimisation,” he says. “Corporates with a smaller or domestic footprint – or those with no borrowing requirement – tend to use only physical pooling.”

Laurent Chenain, Global Head of International Trade and Transaction Banking at Crédit Agricole CIB agrees that the objectives of physical and notional pooling are different. While treasuries implementing notional cash pooling are searching for interest optimisation at every level of their organisation, physical cash pooling enables treasuries to concentrate their liquidity into one single master account.

“Notional pooling allows subsidiaries to keep control over their cash and can be a good solution as a first step towards centralisation although it has more restrictions in terms of feasibility from a legal and bank capability perspective,” he says. “Physical cash pooling is used by centralised organisations which need – or want – to have a better grip over their cash.

At the announcement of its Q322 results, Adidas noted that non-recurring costs related to accelerated cash pooling in high inflationary countries had an adverse effect on gross profit and operating overheads during the quarter.

However, cash pooling has been a positive strategy for many companies. For example, biotechnology firm Roche’s cash pooling solution in Saudi Arabia has enabled it to minimise excess liquidity in that country and increase automation of cash management.

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