Cash Management Structures: Why in-House Banking and Netting are a Must for Today's Global Treasury

January 5, 2017
Cash Management Structures: Why In-House Banking and Netting Are
a Must for Today's Global Treasury

© 2016 Kyriba Corp. All rights reserved. PROPRIETARY & CONFIDENTIAL. 2
Today’s Presenters
Jason Dobbs
Manager
Greg Person, CTP
Vice President, Global Presales

Discussion Framework
Goals of IHB Structures
Explore IHB Elements
Internal Collaboration & Design
Intercomany Netting Considerations & Benefits
Role of Technology

 Do I have visibility into my corporate liquidity, and can I access it?
 Do my global subsidiaries have the liquidity they need to be successful?
 Do specific subsidiaries hold too much local cash, and what is the
associated cost and risk?
 Are my intercompany invoices settled in accordance with internal payment
terms?
 Are my intercompany lending agreements in compliance with US and local
tax / legal requirements?
 Do I have the technology infrastructure to support the business and balance
my employees’ time?
How do I answer….

Goals of In-house Bank Structure

Control & Access - Cash
–Aggregate funds
–Increase investment & reduce external borrowings
Efficiency – Payments
– Simplify settlements
– Centralize lending
Enhance – Working Capital Management
–Efficient use of auxiliary currencies
–Natural hedging created
Typical Goals of IHB Structures

IHB – Structure and Progression

In-house Banking Elements
From Sweeps to FX

FinCo as Sweep Aggregator
Sub Account Functions
 Receive funds
 Process payments
 May aggregate cash from
other subs
Sub Account Functions
 Cross Border to FinCo or Pool
 Bank or TMS initiated
 Surplus – send funds to FinCo
EOD
 Cash need – Fund overdraft to
target limit or zero (requires
credit agreement)

Pooling

Sweep to IHB Notional Account

 Aggregated funds increase short term
investable cash
 Streamlined portfolio management
 Benefit to banking relationship models
Investing

 Centralization of Interco financing to FinCo(s)
 “Cash” held at FinCo for settlements or repayments
 Progression to Hub & Spoke model for Interco
agreements
Lending

 IHB Holds multiple currencies
 Book deals to IHB for natural hedging
 Easily facilitated for IHB Participants
 Non-participant trading?
FX Trading

 Address Kyriba Singapore liquidity deficit with Kyriba Canada surplus
 Reduce SGD external expense, achieve higher consolidated investment balance
In-house Bank Liquidity Example
Kyriba Finance Co
(FinCo IHB Entity)
Kyriba Canada
Kyriba Singapore
External Bank
External Bank
Deposits
USD 50M
Sell
USD
10M
Buy
SGD
15M
Invests
USD 40M
Borrows
SGD15M
(USD 10M)

Internal Collaboration & Design

Accounting – Necessary to develop and manage entries
associated with Interco’s to and within FinCo for various activities
FinOps – Interco AP/AR integrations for auxiliary systems; build of
programs in TMS
ERP Team – Additional IHB programs to support TMS processing
of funds
Corporate & International Tax – Structure and tax regulations;
who can and can’t participate; terms and rates (with Treasury)
Legal – Drafts of agreements, terms and conditions, and ongoing
documentation requirements
Banks and BAM team – Changes in account structure, bank
sweeps, and credit agreements
Treasury – Funding, investing, FX execution (internal & external);
monitoring and compliance; technology
Key Players

Regulatory Considerations

Final Reg385 (Oct 2016) broadly exempts
debt issued by CFCs and foreign corporation
Regulation revived scrutiny of intercompany
pooling
–Documentation
–Demand facility agreements
–Treasury service agreements
–Borrowing terms & interest spreads
–Default consequences
–Repayments
Regulation Section 385

 Intercompany ‘due to’ and ‘due from’ balances are created through
natural course of business
 Intercompany balances must be settled in timely fashion in accordance
with intercompany payment terms and/or services agreements
 Examples of intercompany balances & positions that must be settled:
– Trade payables
– Cost shares
– Compensating adjustments
– Service agreements
– Intercompany loan, interest
– Dividends, capital contributions, etc.
Intercompany Balance & Multi-lateral Netting Foundation

Managing Intercompany Settlements without Netting
Large payment volumes
 Bank transaction fees
 Settlement risk
 FX payment costs
Inefficient Use of Resources
 High manual effort to enter and release payments
 Time consuming GL posting
 Error prone
Tax and legal compliance
 Intercompany invoices not settled within payment terms
 Inadvertent intercompany lending
 Deemed dividend / 956 income
 FX payment costs
 Inefficient GL posting

Multi-lateral Netting Solution
 Reduce physical payments, lower bank fees
and eliminate settlement risk
 Elimination of bank settlements and
corresponding settlement risk
 Reduce tax treatment risk; avoid US
repatriation tax under Section 956
 Improve internal and external audit
compliance and transparency
 Optimize intercompany GL posting and
reconciliation
 Consolidate and hedge FX exposures
 Comply tax and legal requirements
Integrated Treasury,
Risk, Netting &
Payment System

 Single legal entity reduces intercompany payments/receipts
– Reduce 7 physical transactions to 1 IHB posting
 Reduce FX trades across 4 currencies pairs
 Consolidate FX position
Netting Statement Example
Netting
Particpant Counterparty
Invoice
Currency
Payable
Amount
Netting FX
Rate
Receivable
Amount
Settlement
Currency
Netting
Settlement
ACME-BV ACME-DE EUR 132,804.12 1.05 USD (139,975.54)
ACME-BV ACME-UK GBP 980,902.44 1.22 USD (1,196,700.98)
ACME-BV ACME-CA CAD 59,924.59 0.74 USD (44,344.20)
ACME-BV ACME-CA CAD 0.74 1,248,930.43 USD 924,208.52
ACME-BV ACME-US USD 678,902.39 1.00 USD (678,902.39)
ACME-BV ACME-US USD 1.00 138,942.45 USD 138,942.45
ACME-BV ACME-JP JPY 30,241,994.00 117.65 USD (257,050.52)
ACME-BV USD (1,253,822.66)

Accounting – Responsible for monitoring, entering and
reconciling intercompany balances and payments
FinOps & ERP Team – Interco payable integration to netting
systems & ERP(s)
Corporate & International Tax – Structure and tax
regulations; who can and can’t participate in netting
program;
Legal – Drafts of netting agreements, terms and conditions,
and ongoing documentation requirements
Treasury – Managing netting cycle, executing settlements
(internal and external), FX management and trade execution
(internal & external); monitoring and compliance;
technology
Key Players for Netting

Simple access for global users (accountants,
controllers, etc)
 Request funding / submit deposits to IHB
 Enter intercompany payables
 Access IHB & Netting statements
 Manage against KPIs, target balances
 Full audit & transparency
 FX exposure management
 Optimize global liquidity strategies
 IHB balance limit compliance
Single Global Technology Portal for IHB and Netting

 Standardize, simple netting
process workflow to promote
global adoption
 On-demand statements to support
month-end close
 Historic intercompany reporting
(tax inquiries)
Single Global Technology Portal for IHB and Netting
Entity Act Plan F (U)
Acme CA 0.9 0.5 (0.40)
Acme UK 1.6 1.0 (0.60)
Acme JP 0.8 1.0 0.20
Acme DE 0.5 0.5 -
Acme AU 1.1 1.0 (0.10)
M ar 15 USD Equiv
Cash Balance Scorecard

Summary
Treasurers are tasked with ensuring access to adequate
liquidity to fund corporate operations, global business units
and corporate strategy
 Optimal liquidity at appropriate level of risk and cost
 Executing corporate capital allocation strategy, share buyback,
M&A, debt pay-down
In-house Bank as low cost liquidity source
 Internal cash is cheapest form of finance
 Automation through bank pooling structures
 Global deployment involving global entities, currencies and
multiple bank relationships

Summary cont’d
Multilateral Netting to enhance productivity and controls
 Settle intercompany invoices timely and efficiently
 Reduce bank fees, FX costs and eliminate settlement risk
 Ensure legal and tax compliance
 Consolidate FX exposures
 Provide transparency and automation to GL application
Initial investment and due diligence
 Collaboration with treasury, tax, local finance and legal
 Loan documentation and arm’s length terms (reg 385)
 Optimization through automated bank pooling
 Technology investment and transparency

Further Reading
Success Story: Chalhoub Group Treasury establishes an active in-house
bank function to automate their key cash and FX management functions
Get the case study>>
Blog post: Why Treasurers should adopt multilateral netting
Check out the post>>

Questions?
Greg Person CTP
gperson@kyriba.com
Jason M. Dobbs
jdobbs@actualizeconsulting.com

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