Bilateral Netting GBP20 • A B GBP15 What will you do?
Bilateral Netting • A will owe B GBP 5 • Save on one transfer fee • Save on GBP30 of Float
Bilateral Netting GBP20 A B USD30 What will you do?
Bilateral Netting GBP/USD 2.00 A will owe B GBP20 B will owe A GBP15 A will owe B GBP5 Save one transfer Save float Save GBP30 FX
? Netting USD30 A B EUR30 GBP 20 USD40 C
Benefits of Multilateral NettingQuantitative • Reduced number of transfers • Reduced FX trading volumes • Reduced FX margins • Reduced transfer costs • Guaranteed payment dates (Float benefit) • Centralised management • Reduced banking costs
Multilateral Netting • A multinational company has the following typical monthly inter-company flows Figures in Thousands Co A UK GBP 2,000 Co B France GBP 1,275 USD 1,750 EUR 3,500 Co C USAPeso 3,250Co D Argentina
Multilateral Netting • First Step. Put flows, in currency, into the matrix. • Note. Normally this step would be skipped
Multilateral Netting Rates • GBP/USD 1.8467EUR/GBP .6931 • GBP/Peso 5.6949 • Float: pre netting 3 days, post netting zero. • Transfer costs GBP20 per transfer • FX costs 0.1 of one percent • Interest rate in GBP 4.75% • Undertake a netting in GBP and calculate what the annual savings would be to the company of introducing a centralised netting system assuming this is an average month.
Multilateral Netting Next step • Now convert into GBP terms
Multilateral Netting • Next step • Now take the information and fill in the next matrix
Multilateral Netting Now work out the savings Savings • Transactions = • Float = • Fx =
Benefits of Multilateral NettingQualitative • Introduces discipline • Standardisation of procedures • Better quality and more timely information • Clear time frames • Reduced administration • Inter- company dispute resolution • Centralisation of exposures • Other liquidity management activities
Typical Netting Cycle 5th 6th 7th 10th 11th 13th 14th Cash F,cast Collection Trial net Adjustments Final Transactions Problem resolution due of data netting settled
Multilateral NettingItems • Inter-company payables • Inter-company receivables • Third party payables • Third party receivables • Financial flows
Multilateral NettingStructural Issues • Country level • Regional or global level Basically, who to include, what is allowed
Multilateral NettingPolicy Issues • Billing currencies • Credit period • Settlement dates • Exchange rates • Conflict resolution
Multilateral NettingForms • Bank Managed – Fully - Partially • Company managed • Internet- based
Multilateral NettingVariations • FX Matching • Leading and Lagging
FX Matching Sub 1Sub 2 Sub 3 Net FX Sales Net FX purchases Sub 2 Sub 3 Sub 1 USD for sale GBP for sale EUR for sale Matching Services EUR required GBP required USD required
Multilateral Netting Savings • 5 transactions at GBP20 to 4 saving 1 = 20 • Float 7,219,172 x .0475 x 3/365 = 2,818.44 • Fx 3,944,172 x .001 = 3,944.17 6,782.61 =81,391.32 pa