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Notional pooling is not dead, regulations have not killed notional pooling

Contrary to market musings, notional pooling is still viable in today’s low interest, highly regulated market. 

Amit Agarwal, Citi’s Head of EMEA Liquidity Management Services, says that in spite of recent regulatory changes that may have proved challenging for some pooling providers, Citi not only continues offering notional pooling solutions, but also makes further significant investments and rolls out pooling capabilities to new locations.

Agarwal believes that liquidity management products need to evolve as Corporate Clients are growing and becoming more sophisticated. New regions, new currencies, acquisitive behaviours and deployment of cash into their businesses require more complex solutions, increased level of customisation and better understanding of legal, regulatory and tax implications. Over the last 4-5 years Citi’s London cash pools have grown at impressive growth rates. This has been driven by a combination of strong client demand, especially for multi-currency notional pooling, and enhancement and expansion of liquidity product capabilities. In 2014, the momentum remains strong and he is confident that this growth will continue as they have many customers working out the best way to structure and pool their global liquidity. 

Regulatory impact

Although there have been many changes in the way banks are regulated, nothing has changed in the way Citi offer their notional pooling product. Frequent and thorough reviews of the regulatory environment and prompt assessments of new regulations’ impact on existing products, have safeguarded the continuity of notional pooling products. Some parameters of the product such as jurisdictions and currencies allowed to participate in a pooling structure may have changed during the years as a result of the dynamic environment; however the suite of both jurisdictions and currencies is expanding over time.

An additional element that impacts the way banks are doing business is Basel III, the Capital Requirements Directive IV and ratios that are forcing the banks to focus on the ‘right’ type of deposits. This is the operating liquidity which is anchored in core transactional processing flows which cannot be easily decoupled from the processing infrastructure of the client in the next 30 days, i.e. in a stress event they cannot be moved immediately, so ensuring the solvency of the bank. This is the type of liquidity that banks want and is exactly the ‘sticky’ liquidity that a notional pool provides. 

Future development

The notional pool is just a part of the cash management processing Citi provides for large MNCs across more than 70 countries integrating the liquidity management solutions with other services including Payments/Colelctions, FX, lending, etc. Agarwal commented, “It is not our intention to get out of notional pooling, on the contrary, we are investing on it because pooling is an essential part of the cash and liquidity management services we offer and delivers strong economic and operational efficiencies to our clients. Even in a low interest rate market, notional pooling still makes sense for the vast majority of MNCs.” 

CTMfile take: Citi are not getting out of notional pooling. Neither will most other banks, but notional pooling is only being offered to a few large MNCs. However, notional pooling will become more attractive when interest rates increase.

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