Global cash management using a notional pooling solution
The presentation’Global Cash Pooling’ at Association of Corporate Treasurers Cash Management conference last month by Royston Da Costa, Group Assistant Treasurer, Treasury Systems and Development at Wolseley Group Services showed how notional pooling can be a vital tool in taking charge of cash located in many countries. Wolseley is the world’s largest specialist trade distributor of plumbing and heating products to professional contractors and a leading supplier of building materials operating in 11 countries world-wide and has a turnover of some £13bn.
Objectives and functionality required
The global cash pooling was started in 2010 when Wolseley, as a result of the economic crisis, needed to:
- improve group liquidity by centralising cash and pay down external debt
- improve operational efficiency by eliminating the multiple banks involved in moving funds, and reduce payment transfers and FX swaps
- reduce bank charges, and lower interest charges
- achieve instant access to local captive cash around the group
Wolseley had very clear idea of the functionality required in the pool:
- access to all their territories and the ability to sweep balances from all their existing territories and potential new ones
- multi-currency covering their size main currencies
- notional pool with local entities retaining control over their deposits in their jurisdiction
- easy to use with minimal impact on local entity’s daily operations: as simple as opening another bank account, and the payments and drawdowns made online
- arms length rates - verifiable and acceptable (set by the bank) and FX rates set by ECB, with a margin applied to provide incentive for local entities to invest in the pool
- full transparency enabling payment tracking and value dating
- a two pool structure - European pool managed out of the UK and the North America pool managed out of the US.
After a thorough selection process Bank Mendes Gans was chosen as they were the only bank able to provide the complete solution. The key lessons from this selection process were that it is essential to maintain full communication with the banks and offer them a debriefing after the selection, get senior management sponsorship and engage internal departments including tax, company secretariat and group finance.
Challenges and benefits
A two pool structure was set up, see figure:
Source & Copyright©2014 - Wolseley Group Services
The accounts in the pool were based in the Netherlands with a pledge agreement rather than a cross-guarantee. The pledge agreement was set up so the BMG risk is the net pool balance, and it was simple for new entrants to join. Some of the operational challenges included, GBP & EUR cut-off times could not always be matched to the USD receipts; a new process was required for credit advices; the daylight overdraft limit, and ensuring all banks had the latest SSI.
The overall cost of the project was £50K and savings were double expectations at some £800K. Other benefits included:
- achieved competitive deposit rates and lower borrowing costs
- back valuations: useful and effective, and the corrections were helpful to back office
- static data was flexible and easy to manage via the online functionality
- the new bank accounts for new participants only required three documents.
CTMfile take: This is a classic example of how a multi-national, multi-currency notional pool can save time and resources whilst freeing up considerable amounts of trapped cash. However, in the longer-term, Basel III may have an impact on whether banks are able to offer such notional pools.
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