“Multi-currency notional pooling”
Multi-currency notional pooling is a variation of notional pooling consisting of a banking arrangement carried out by multinational companies to offset their balances in different currencies in order to optimise their cash and liquidity management.
Notional pooling for multinational businesses
Companies with subsidiaries in different countries tend to implement multi-currency notional pooling strategies due to their efficiency as a method to manage multi‑currency balances. The advantages include:
– A single liquidity position to address most cash-management issues.
– No need for inter-company loans and no effort of reporting them for tax purposes.
– Minimal cash transfer fees, as transfers between accounts are minimised.
– Higher interest income. Interests are higher on notional pooling accounts than smaller subsidiary accounts, as the higher the invested amount, the higher its return.
– Reduced foreign-exchange transactions: offsetting credit and debit balances through a multi-currency balance, the pool minimises the need for FX transactions and their costs.
Multi-currency notional pooling with IHBs
A suitable way to apply multi-currency notional pooling is through in-house bank (IHB) schemes. In-house banking is a form of financing that involves centralising all flows from the bank account of a single IHB entity. That entity will send payments and receive collections from the subsidiaries. As a result, those subsidiaries will hold balances with the IHB entity, instead of maintaining their balances in different bank accounts.
For optimal efficiency, the IHB’s intercompany bank account should be a multi-currency account. This arrangement allows each subsidiary to hold its own currency balance and pay or receive the pertinent interest rates within the intercompany balance.
When implemented as IHB structures, multi-currency accounts provide all the advantages of multi-currency notional pooling arrangements without the need to comply with regulations regarding offsetting rights, since there is nothing to offset.