Optimising Treasury: Diving Into the Notional Pool

You might think that if your company has a direct connection to SWIFT, the messaging system used by most of the world’s banks, your treasury function has it made. Not really, says Brendan McGraw, Group Treasurer at financial services group CLSA Asia-Pacific Markets, which has operations across Asia.
 
“You could have everybody report SWIFT messages to you, but at the end of the day, it’s just information,” he says. Optimised treasury management “is not just about visibility,” he adds. “It’s about having the tools to actually control the cash.”
 
CLSA recently chose HSBC to provide it with a multi-currency virtual pooling arrangement on the bank’s global liquidity platform. McGraw spoke to CFO Innovation’s Cesar Bacani about ensuring visibility and control in the treasury function, monitoring and dealing with risks and other issues. Excerpts:
 
What does treasury management at CLSA look like?
Treasury management in CLSA looks like treasury management in a lot of organisations, with all the standard functions – look after the cash, look after the loans, try to coordinate things the best from a central position.
 
But obviously you have to improve tools to do things better, and that’s what we’ve done through the HSBC solution.
 
How exactly will this solution help CLSA do things better?
Obviously, visibility. If you have all of your balances within one system, it is much easier to track them and to know where you are on a real-time basis.
 
You also have more control as well. Because we have control of that functionality from the centre, we can help direct the traffic better. That also gives us more ability to detect financial risk, third party risks and so on. That helps us to manage those things a bit more closely because we can see the numbers quickly, we can do things more directly.
 
So previously your visibility was not real time?
It wasn’t as quick [for us] to be able to react as [it is when treasury is] online. But that’s not to say we weren’t monitoring financial risks, third party risks, investment risks, which are bread and butter to every treasury. Every treasury is normally monitoring [these risks].
 
And that was because you were dealing with many different banks and they would be reporting in at different times?
We actually are a member of SWIFT [because CLSA is a financial institution] and we have our own SWIFT address, so we were able to monitor most of our balances, not in real time, but by the next day.  
 
What the HSBC solution allows us to do is to have the information and actually do something about it in terms of being able to pool the cash and get a better rate of interest . . . It’s not just about visibility; it’s about having the tools to actually control the cash. You could have everybody report SWIFT messages to you, but at the end of the day, it’s just information.
 
Your decision to have notional pooling – I’m assuming that has to do with freeing trapped cash in Asian markets with restricted currencies such as China and India?
No, the notional pooling is what we have here in Hong Kong. It allows us to match the companies that have long cash balances with companies that have short cash balances.
 
In the past you would have had one company that had a lot of cash, but you wouldn’t be able to invest it, while another company may be a bit short of cash and may be borrowing.  Obviously we have to spend between borrowing and lending, just a waste of money.
 
If you can set up a pooling structure, you can have the companies that are long in cash have that money in their own accounts, but [those accounts are included in] the notional pooling. Then the companies on the other side draw from that pool, which also gives you interest.
 
This would cover just the HSBC accounts? It will not include cash outside HSBC?
Yes, that’s the case. That will always be the case because in every place I have worked in treasury, you will always find you do need local banks to provide some services.
 
Sometimes you can only pay taxes in some countries you’re using their local banks or something like that, so it will always be small residual balances held in local banks.
 
But if you do need to transfer money from HSBC into those accounts, because they are all part of SWIFT, it’s easy for you to do?
Yes, very much so.
 
What would be the outcomes you expect from this solution?
Definitely in terms of interest costs, as I mentioned before about people borrowing and other people depositing, you’re going to have savings there. It’s just a better use of your capital; you use your capital more efficiently.
 
It also improves your visibility and control over balances. That in itself is a comfort to shareholders and management.
 
Are there any upfront costs for you? Any new systems, new software, new hardware?
No, we are already using HSBCnet [HSBC’s online portal for transactional banking and other solutions], so we are utilising a system that we already have. For our accounts payable, we utilised an HSBC SAP adaptor that is able to access all optimised services.
 
So in terms of upfront costs, very, very low to zero. There may be some small costs, but nothing major. Yes, there are on-going fees from having pools, but the benefits from a locked-in interest margin [the HSBC solution comes with an enhanced deposit interest rate] and so on should make up for them.
 
Would there be other value-added services from this deal in terms of commercial lending, in terms of M&A and IPO and things like that? Or is this transaction separate from whatever else the company is doing with HSBC?
To be honest, it should be HSBC who would have to tell you. But logically, if you’re working with a client and that client has other needs, then that client’s probably going to approach you as partner to talk about those things.
 
When it comes to pricing [and whether CLSA might get preferential pricing because it is a transaction-banking customer], I can’t comment on that.
 
What are your expectations with regard to analytics and help with decision-making?
When you look at pooling solutions, one of the things you have to do quite closely is analyse your cash balances, analyse what can be pooled and what just cannot.
 
We actually learned a lot about our existing cash balances by going through this process. HSBC did a lot of analysis to help us identify what the benefits could be under various pooling structures. I think it’s very helpful and will help us on an ongoing basis to understand our cash balances better.
 
Will it also help with payables?
In many companies, centralising payables and [determining] what back office functions may be done more efficiently from one place . . . you’ve got to have the technology to do these efficiently. We find that, through the HSBCnet with the SAP adaptor – because SAP is the GL that we use – we can implement this.
 
So it is straight-through processing now, with the SAP ERP system plugged directly to HSBCnet?
Obviously there are control points. There’s a process in terms of the invoice being raised, put into SAP, approved, moved into SAP and then on to the other side into HSBCnet. There’s a process.
 
It’s standard operating procedure for companies to have several vendors undergo a ‘beauty contest’ to determine which one to go with. How did this particular vendor selection process go?
We spoke to quite a number of banks, both what I would call global banks and local banks in Asia that can offer liquidity and cash management solutions. We got quite an extensive comparison between these banks.
 
Did you need to hire a consultant?
No, we did it ourselves . . . You can do that but to be honest, me personally, I like to go through the details myself.
 
How long did the process last, from the request for proposal until you made a decision?
Start to finish, probably three or four months talking to people, and from there, implementation was actually quite quick. In total, probably six months before we were up and running and starting documentation.
 
Did you consider an agent bank solution, where the cash pooling bank coordinates with the other banking partners to put together all the banking statements, track transactions, provide visibility and so on?
That’s not a service that we desperately required. [Other companies] probably don’t have direct access to SWIFT like we do, so they are looking for someone to consolidate the entire picture for them. I can understand why people look at [agent-bank] solutions because half of their MT940 messages need to be reported back to that cash-pooling bank. But we already have those MT940s [via CLSA’s own SWIFT connection].
 
This is an enhancement, the next level that you’re looking at, because you already get access to MT940 messages.
Exactly.
 
In terms of FX, in terms of hedging and so on, is the liquidity solution going to help with those?
I definitely think so. We started off fairly vanilla, so we’ve got balances in Hong Kong dollars, Singapore dollars, British pounds. Definitely one of the next levels for us would be on the other currencies we want to bring into the pool.
 
We deliberately had a pool that’s multi-currency. That will be something we will look at to see if there’s any natural hedging benefits or anything we could hedge off the back of the pool that would reduce our costs.
 
I notice you didn’t mention the rupee and the RMB. You don’t have any operations in India or China?
We do. It’s just very difficult for the rupee because of the legal restrictions, so India is not within the pool; likewise for China. [Editor’s Note: Notional pooling is not allowed in India; only foreign-currency pooling is allowed in China, currently on a pilot programme basis].
 

Even if there’s no [physical movement of funds], some currencies are very difficult for cash pooling . . . Freely convertible currencies are much easier.  

 

Photo credit: shutterstock   

 

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