Notional cash pooling enables businesses to manage group finances from a single account, providing corporate treasurers with an accurate, combined view of accounts that may be spread across several affiliated organizations in various jurisdictions and currencies.
It is not legal in the United States. However, it is well-known in Europe and Asia as an efficient way for large multinational corporations to manage their balance sheets at the group level. It enables businesses to balance their liabilities, including those of their affiliates, with their assets.
At the same time, in order to ensure the increased transparency required to protect the financial system, Basel III has mandated that banks clearly report all of their clients' assets and liabilities.
This would have no significant implications for physical cash pooling. However, where there has been no physical transfer of funds between currencies, notional cash pooling imposes an additional burden on firms with significantly increased disclosures of their liabilities.
Where currencies are managed separately but as part of a single master account, the liabilities associated with each currency position must be disclosed and an equity capital distribution set against them, typically ranging from 11% to 13%.
In the case of banks that offer notional cash pooling to clients (which are few), this would almost certainly have an impact on leverage and liquidity coverage ratios. The number of businesses that use this service is also small, but those that do are among the banks' most important clients.
Notional cash pooling for such customers may have a significant impact on a bank's balance sheet. The impact on leverage and the LCR would weaken the case for providing the service to specific clients in several cases. It would imply that some banks may withdraw from the market.
The regulation, on the other hand, does not change the fundamental requirement for firms to effectively manage their balance sheets.
Notional cash pooling would still be interesting for clients with large businesses where the treasurer wants a comprehensive assessment of group finances. It eliminates the need for the firm to manage FX positions in the market, which could be a significant cost in and of itself.
It also eliminates the need for inter-company loans and gives the group treasurer much greater control over cash inflows and outflows within the group.
It also provides a great deal of operational flexibility. Cash pooling enables businesses to operate in new jurisdictions without having to establish relationships with regional banks to obtain local currency.
Notional cash pooling is all about efficiency: where a large and diverse group might require several treasurers around the world, it allows the function to be efficiently centralized in a specific location, managed by a separate treasurer.
Certain banks may exit the business because it is difficult to profit from it; however, continued demand ensures that the product itself will survive. Firms must be prepared for a disruption. They should not be discouraged, however, if their initial discussions with banks do not go as planned.
""The nature of the product means that while a client's business may have a significantly negative impact on one bank's balance sheet, it may have a much smaller impact, or even a positive impact, on another bank,"" says Arnaud Pichon, international desk supervisor at Société Générale.
For example, a bank with a significant amount of USF but little GBP on its balance sheet may decline a client with the majority of the cash in USD but accept a client with the majority of the cash in GBP. A bank with reverse exposures may take a different stance. Treasurers must therefore communicate with as many banks as possible in order to identify the bank with the best plan.
Cash management has traditionally been a complicated business, and businesses have tended to stick with their providers if they are satisfied with the service provided. Changing providers requires significant effort, so many businesses would prefer to keep their current relationships.
Despite this, businesses must use the next two years to assess the viability of their current arrangements. Even if their business is currently appealing to their bank, any change in conditions, such as a large acquisition, could significantly alter the feasibility of that relationship.
According to experts, firms engaged in notional cash pooling currently require a backup plan. They must seek clarification from their banks as to whether the service will be repriced or terminated, as it is frequently one of the two.
Banks have previously exited the business, indicating how disruptive this could be for their clients. Firms should not wait for notification that the terms of service must be changed. Instead, they should look for a provider who is willing to provide the service at the lowest possible cost.
Notional pooling is expected to become more popular in the future. It would give businesses a better understanding of their financial situation, allowing them to manage their money more efficiently."""
