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Wholesale Banking

Multi-Currency Notional Pooling simplifies global liquidity management

Liquidity management of international companies is complex. Branches and subsidiaries often have different liquidity requirements, which may vary over time. A wide range of currencies creates additional challenges. In order to make optimum use of available liquidity and to keep funding costs low, the Treasury should be able to obtain a comprehensive picture of the company-wide liquidity situation as soon as possible.

Physical cash pooling, in which the balances of the subsidiaries are transferred to a central master account of the parent company, only helps to a limited extent because it involves high costs resulting from currency conversions and intercompany loans when the liquidity positions change ownership. It may also make sense to leave the liquidity at the subsidiaries so that they are able to act quickly if necessary.

Notional pooling, in which balances are not physically transferred but calculated on a fictitious basis, does not solve the problem either, as it is usually offered by banks without currency offsetting. The objectives of having central access to liquidity in individual countries and optimising interest income are therefore not fully achieved.

Multi-currency notional pooling, which only a few banks offer, addresses this problem. This is based on an overlay concept whereby a mirror account in the same currency is set up for local currency accounts with a special bank such as Bank Mendes Gans. The liquidity can be transferred physically between local and mirror accounts - in both directions - and can be automated by the bank. The mirror accounts form the company's multi-currency cash pool and allow the Treasury to have a full overview of the liquidity situation of the subsidiaries.

The total balance of this pool is determined on the basis of the European Central Bank's (ECB) fixing. The Treasury can have the desired amount in the currency of its choice available. Since this step takes place without physical transfer between the individual pool accounts, there are no conversion costs at the level of the total pool and the currency positions of the individual accounts are unaffected. Consequently, the daily expenditure in currency management is reduced, meaning that currency management can be run much more strategically. As a rule, many currencies can be taken into account. Account balancing can take place several times a day, if the technical capabilities of the local banks allow it, therefore providing a particularly up-to-date picture of the situation and an intraday access to the total liquidity.

Once multi-currency notional pooling is in place, the liquidity surpluses and deficits can be managed in accordance with legal requirements without the need for complex intercompany loans. The overlay is also easier for branches compared to other pooling models, as their cash management processes and the connection to local banks remain largely unaffected - this is a particularly important factor for local customer relations.


Featured article by Andreas Gottlieb is director of transaction services at ING Wholesale Banking Germany in Frankfurt am Main, 10.06.2022, DerTreasurer 02/2022