NETTING
1
Bilateral Netting
GBP20
• A
B
GBP15
What will you do?
2
Bilateral Netting
• A will owe B GBP 5
• Save on one transfer fee
• Save on GBP30 of Float
3
Bilateral Netting
GBP20
A
B
USD30
What will you do?
4
Bilateral Netting
GBP/USD 2.00
A will owe B GBP20
B will owe A GBP15
A will owe B GBP5
Save one transfer
Save float
Save GBP30 FX
5
? Netting
USD30
A
B
EUR30
GBP 20
USD40
C
6
Benefits of Multilateral Netting
Quantitative
•
•
•
•
•
•
•
Reduced number of transfers
Reduced FX trading volumes
Reduced FX margins
Reduced transfer costs
Guaranteed payment dates (Float benefit)
Centralised management
Reduced banking costs
7
Pre Netting
Source: Coprocess SA
8
Post Netting
Source: Coprocess SA
9
Multilateral Netting
• A multinational company has the following
typical monthly inter-company flows
Figures in Thousands
Co A UK
GBP 2,000
Co B France
GBP 1,275
USD 1,750
EUR 3,500
Co C USA
Peso 3,250
Co D Argentina
10
Multilateral Netting
• First Step. Put flows, in currency, into the
matrix.
• Note. Normally this step would be skipped
11
Payor
Co A
GBP
Co B
EUR
Co C
USD
Co D
Peso
Receiver
Co A
GBP
Co B
EUR
Co C
USD
Co D
Peso
-
-
-
12
Multilateral Netting
Rates
• GBP/USD 1.8467
EUR/GBP .6931
• GBP/Peso 5.6949
• Float: pre netting 3 days, post netting zero.
• Transfer costs GBP20 per transfer
• FX costs 0.1 of one percent
• Interest rate in GBP 4.75%
• Undertake a netting in GBP and calculate
what the annual savings would be to the
company of introducing a centralised netting13
system assuming this is an average month.
Multilateral Netting
Next step
• Now convert into GBP terms
14
Payor
Co A
GBP
Co B
EUR
Co C
USD
Co D
Peso
Total
Receiver
Co A
GBP
Co B
EUR
Co C
USD
Co D
Peso
Total
-
-
-
15
Multilateral Netting
• Next step
• Now take the information and fill in the
next matrix
16
Multilateral Netting
Country
Pays
Receives
Net
Flows
Eliminated
A GBP
B EUR
C USD
D Peso
Total
17
Multilateral Netting
Now work out the savings
Savings
• Transactions
• Float
• Fx
=
=
=
18
Benefits of Multilateral Netting
Qualitative
•
•
•
•
•
•
•
•
Introduces discipline
Standardisation of procedures
Better quality and more timely information
Clear time frames
Reduced administration
Inter- company dispute resolution
Centralisation of exposures
Other liquidity management activities
19
Typical Netting Cycle
5th
6th
Cash F,cast
Collection
due
of data
7th
Trial net
10th
Adjustments
11th
13th
Final
Transactions
netting
settled
14th
Problem resolution
20
Multilateral Netting
Items
•
•
•
•
•
Inter-company payables
Inter-company receivables
Third party payables
Third party receivables
Financial flows
21
Multilateral Netting
Structural Issues
• Country level
• Regional or global level
Basically, who to include, what is allowed
22
Multilateral Netting
Policy Issues
•
•
•
•
•
Billing currencies
Credit period
Settlement dates
Exchange rates
Conflict resolution
23
Multilateral Netting
Forms
• Bank Managed – Fully
- Partially
• Company managed
• Internet- based
24
Multilateral Netting
Variations
• FX Matching
• Leading and Lagging
25
FX Matching
Sub 1
Sub 2
Sub 3
USD for sale
GBP for sale
EUR for sale
Net FX Sales
Matching Services
Net FX purchases
GBP required
EUR required
USD required
Sub 2
Sub 3
Sub 1
26
Payors
Co A
GBP
Co B
EUR
Co C
USD
Co D
Peso
Total
Receiver
Co A
GBP
-
Co B
EUR
2,000,000
Co C
USD
1,275,000
947,636
2,947,636
570,686
1,845,686
-
Co D
Peso
2,425,850
Total
3,275,000 2,425,850 947,636
2,425,850
570,686
7,219,172
27
Country
Pays
Receives
Net
Flows
Eliminated
A GBP
(3,275,000)
0
(3,275,000)
0
B EUR
(2,425,850)
2,947,636
521,786
2,425,850
C USD
( 947,636)
1,845,686
898,050
947,636
D Peso
(570,686)
2,425,850
1,855,164
570,686
Total
(7,219,172)
7,219,172
(3,275,000)
3,944,172
3,275,000
28
Multilateral Netting
Savings
• 5 transactions at GBP20 to 4 saving 1 =
20
• Float 7,219,172 x .0475 x 3/365
= 2,818.44
• Fx 3,944,172 x .001
= 3,944.17
6,782.61
=81,391.32 pa
29