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Liquidity Management Techniques. Pooling and Cash Concentration. Liquidity Management. Having funds available to meet all known and unknown commitments In the right currency In the right place At the right time Minimise cost of funds and debit interest

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liquidity management techniques

Liquidity Management Techniques

Pooling and Cash Concentration

liquidity management
Liquidity Management

Having funds available to meet all known and unknown commitments

  • In the right currency
  • In the right place
  • At the right time

Minimise cost of funds and debit interest

Maximise use of surplus funds and interest earnings

liquidity management3
Liquidity Management

As always a balance between

the costs and benefits of having liquidity and

the costs and benefits of lacking liquidity

liquidity management4
Liquidity Management

How may a company improve liquidity?

  • External
  • Through borrowing
  • Through suppliers
  • Internal
  • Better practices on inventory, receivables short term investment
  • Better control of cash resources around the group
liquidity management5
Liquidity Management
  • Focusing on maximising Internal liquidity

utilising existing but wasted resources

Pooling / Cash Concentration

First: Notional Pooling

notional pooling
Notional Pooling
  • With Notional Pooling there is no actual movement of funds.
  • With Notional Pooling there is no co-mingling of funds
  • Credit balances are offset against debit balances and the net is used to work out the debit or credit interest paid or received
  • Also referred to as ‘interest offset pooling’
notional pooling position prior to pooling
Notional PoolingPosition prior to pooling

Average Balance Average Balance

+ 900,000 + 350,000

Average Balance Average Balance

- 300,000 - 550,000

Credit interest at 4 % = 1,250,000 x .04 = 50,000

Debit interest at 6 % = 850,000 x .06 = 51,000

Net cost to group = - 1,000

But if notionally pooled

Sub 1

Sub 2

Sub 3

Sub 4

notional pooling position if pooled
Notional PoolingPosition if pooled

Average Balance Average Balance

+ 900 + 350

Average Balance Average Balance

- 300 - 550

Net position = + 400,000

So 400,000 x .04 = 16,000 an improvement of 17,000

Sub 1

Sub 2

Sub 4

Sub 3

notional pooling benefits
Notional PoolingBenefits
  • Maximise interest earned
  • Minimise interest paid by

As much as possible, for as long as possible, in

one place

notional pooling taking advantage
Notional PoolingTaking Advantage

Tiered Interest Rate Structure


Interest 7

Rates 6




0 50 100 200 300 400

Balance in 000’s

notional pooling benefits12
Notional PoolingBenefits
  • Improves the balance sheet by offsetting surplus balances against group debt
  • Reduces and may eliminate short term borrowing (will probably still need credit lines as back up with limits on individual subs)
  • Reduces overall exposure to banks
notional pooling benefits13
Notional PoolingBenefits
  • May improve internal discipline and control
  • Do not have to move funds

- reduce costs of transfers

- reduce management time

notional pooling requirements
Notional PoolingRequirements
  • Pooling agreement
  • Cross guarantees
  • Legal right of set off
  • Tax indemnity
  • Ability to link accounts for interest calculations. Obvious, but not every bank will have the capability
  • Interest apportionment
  • Board resolutions
notional pooling issues
Notional PoolingIssues
  • Bank charges
  • Resident non-resident issues
  • Tax issues (arms length)
  • May be treated as a form of lending with no transfer of funds ownership
  • Interest offered may be low / or charged high, so Treasury may wish to actively place funds or borrow
notional pooling active management
Notional PoolingActive Management

Investment of 400,000

Sub 1 + 800

Sub 2 + 700

Sub 3 - 200

Sub 4 - 900


+ 400

types of notional pooling
Types of notional Pooling
  • Single currency, single country
  • Single currency, cross border
  • Multi-currency, single country
  • Multi-currency, cross border
  • What is possible?
  • What is offered?
  • What does it cost the bank?
how banks charge for pooling
How Banks Charge for Pooling
  • Interest rate spread
  • Reserve asset charge (cost recovery)
  • Set up fee
  • Management fee (monthly per account)
  • Interest apportionment fee
  • Account maintenance fees
  • Electronic reporting fee
  • Money movements, receipts/payments
  • FX if involved
pooling due diligence
PoolingDue diligence
  • Is pooling permitted?
  • Tax issues
    • Withholding tax – Res/non Res issues
    • Arms length rule
    • Is debit interest an allowable deduction?
    • Is thin capitalisation an issue?
    • Location?
pooling due diligence20
Pooling Due diligence
  • How do laws of offset relate to
    • Multi entities?
    • Multi currencies?
    • Cross border aspects?
    • How does the bank cover?
    • Are cross–guarantees necessary?
    • Are Central Bank reserve ratios calculated gross or net?
pooling due diligence21
Pooling Due Diligence
  • Impact on group of using one bank
  • Should all operational accounts be included in the pool?
  • Impact of cut-off times for movement in and out of pools
  • Value dating practices for cross border movements into and out of the pool.
cash concentration
Cash concentration

Sometimes Notional Pooling is not possible or not wanted

  • Rules and regulations
  • Structure of banking industry
  • Legal issues

Then we may have to cash concentrate i.e. physically move the funds to attain the same benefits.

cash concentration23
Cash concentration

Example of Zero Balance Cash concentration

End of day 750 invested

Sub 1 + 350

Sub 2 +500

Sub 3 +550

Sub 4 - 650



cash concentration24
Cash Concentration
  • There are various forms of cash concentration
  • Zero balance, as illustrated
  • Target balance, to keep a specific amount in each account
  • Threshold, to move funds only when an account moves in excess of a figure
  • Collar, when a threshold is reached, funds are moved but a balance is left
cash concentration25
Cash Concentration
  • All will depend on the costs involved versus the needs of the group elsewhere, the sums involved and the overall treasury objective
cash concentration issues
Cash Concentration Issues


  • Transfers may have to be done manually
  • Will involve transfer fees
  • Transfers to/from non resident ac’s may add to central bank reporting and to cost
  • Local rules and regulations may prohibit/complicate cross border movements
cash concentration using mt101 to concentrate
Cash ConcentrationUsing MT101 to concentrate


Instruction Advice

Lead Bank

MT101 MT103

MT101 MT103

Sending bank

Credit customer



Debit sending

bank nostro



Debit customer


Credit vostro ac

liquidity management interest enhancement
Liquidity ManagementInterest Enhancement
  • As mentioned earlier, sometimes rules and regulations make cash concentration and cash pooling difficult, uneconomic or illegal
  • Nonetheless, Banks have developed ways to enable companies to gain some benefit from their balances
  • The banks recognise that the balances they hold, even where blocked, are reflected on their balance sheet and therefore of value
liquidity management interest enhancement29
Liquidity ManagementInterest Enhancement
  • Suppose that the bank will normally charge interest on deficits at LIBOR plus ½ and pay on surpluses at LIBID – ½
  • To the extent that balances offset each other the bank will adjust these rates
  • E.g.

Account No 1 has a surplus balance of

GBP 100 and account No 2 a deficit of

GBP 50.

liquidity management interest enhancement30
Liquidity ManagementInterest Enhancement
  • There is an offset of 50% so
  • They would charge interest at, say, Libor plus1/4
  • And pay interest at LIBID – 1/4