Concentrating Liquidity

The optimal concentration of as much of cash as possible, so that cash deficits and credit balances can be netted off to improve investment returns or minimise funding costs, is vital. The first step is to determine the actual available balances taking into account the un-reconciled transactions of previous value dates and the transactions with today's value date. Then these balances should be concentrated either by physically sweeping or pooling the cash, or a combination of both, depending upon the countries involved and the company's tax and legal infrastructure.

The main types of sweeps are Zero Balance, sweeping all cash in the account to a central location; Target Balance, sweeping all cash to or from a central pool to maintain a target balance; and Trigger Balance - sweeps which are initiated when the account balance reaches or exceeds a specified amount. Sweeps are mostly carried out at the end of the day, but this can be a problem as the exact total balance in each account is often only known at the start of the next day.

Banks provide two types of sweeping service: sweeps intra-bank group, and multi-bank sweeping.

Intra-Bank Group Sweeping
The sweeping of balances between banks' own branches is far easier than sweeping balances held in accounts with other banks. Intra-bank sweeps have the latest cutoff times. Operating a sweeping and pooling system within one bank group is the most efficient liquidity management solution. Most of the leading cash management banks offer intra-group overnight return sweeps and also intra-day sweeps, mostly available inter-region as well as intra-region. The intra-day sweeps are typically triggered either by balance or time, although some are triggered by transaction. 

Multi-bank Sweeping
For sweeping to take place between banks there have to be agreements between the participating banks on the reporting of account balance and transactions, and on the acceptance of SWIFT MT101 draw down messages. Most cash management banks now have 100s of these MT101 agreements. The cut-off times for multi-bank sweeps are generally significantly earlier than for intra-bank sweeps. Only a small number of banks offer the same cut-off times for sweeps from their own branches and from other banks.

Intra-day multi-bank sweeping is available from some cash management banks with cut-off times defined by currency.

With or Against the Sun Sweeping
Some of the cash management banks offer with and/or against the sun sweeping where the liquidity position is moved between the major financial centres as the trading day moves. The main differences between the sweeping services are cut-off times and the number of countries covered by the sweep.

Cash can be concentrated into either mixed fund pools in which the funds are concentrated in one account and the funds are mixed, or notional pools in which the funds are held in a separate bank accounts and are not inter-mingled. Typically banks pay some level of enhanced interest on the overall net balance of the participating accounts. Most pools are notional with no mixing of funds. Notional pools are mostly held in a single location, but some cover funds in multiple locations, particularly in Europe.

Pool Location
Companies choose the location for their cash pools depending on the nature of their business cash flows and legal and tax requirements. Banks now offer almost any location for corporate clients to hold the header or master accounts in their cash pools. Most of the cash management banks offer single currency cash pools in many countries. Multi-currency pools are mostly only supported in the major financial centres. The number of currencies supported in the multi-currency pools vary considerably, from two to around 50.

The main differences between the banks' pooling services include: the number of tiers supported in the pool which varies from three to over 10; pool based on partial or full set-off of funds; the number of countries where pool can be located; and whether there is automated interest allocation to pool participants.

Combined Sweeping and Pooling Solutions
Most companies now physically sweep their cash balances from their operating accounts to a central location and then use some form of the pooling to achieve the best return from their cash. Although there are still some multi-location notional pools in operation.

All leading cash management banks offer combined sweeping and pooling solutions which can also include overlay accounts if needed.

Combined Sweeping and Pooling Solutions
Copyright© 2011 J&W Associates

Key features in the current combined sweeping and notional pooling solutions include the functionality to offer notional multi-currency cross-border pools with enhanced interest rates across all currencies and to initiate all forms of domestic and cross-border transactions from the pool.

Since the liquidity crisis there has been an increasing use of sweeping cash to the large banks to minimise counter-party risk from the smaller, local banks. Companies have been moving from national to regional liquidity centres and even to fully automated, multi-currency global centres centres. Few companies are moving to a single global bank for all their cash concentration, as they do not want to expose themselves to the operational and financial counter-party risk of just one bank.

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