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NETTING

2

Bilateral Netting

GBP20

• A B

GBP15

What will you do?

3

Bilateral Netting

• A will owe B GBP 5

• Save on one transfer fee

• Save on GBP30 of Float

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Bilateral Netting

GBP20

A B

USD30

What will you do?

5

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

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? Netting

USD30

A B

EUR30

GBP 20 USD40

C

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Benefits of Multilateral NettingQuantitative

• Reduced number of transfers

• Reduced FX trading volumes

• Reduced FX margins

• Reduced transfer costs

• Guaranteed payment dates (Float benefit)

• Centralised management

• Reduced banking costs

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Pre NettingSource: Coprocess SA

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Post NettingSource: Coprocess SA

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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

Multilateral Netting

• First Step. Put flows, in currency, into the matrix.

• Note. Normally this step would be skipped

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12

Payor Co AGBP

Co B EUR

Co C USD

Co DPeso

Receiver

Co AGBP -

Co B EUR -

Co C USD -

Co DPeso -

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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 netting system assuming this is an average month.

Multilateral Netting

Next step

•Now convert into GBP terms

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Payor Co AGBP

Co B EUR

Co C USD

Co DPeso

Total

Receiver

Co AGBP -

Co B EUR

-

Co C USD

-

Co DPeso

-

Total

Multilateral Netting

• Next step

• Now take the information and fill in the next matrix

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Multilateral Netting

Country Pays Receives Net Flows Eliminated

A GBP

B EUR

C USD

D Peso

Total

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Multilateral Netting

Now work out the savings

Savings • Transactions =

• Float =• Fx = 

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Benefits of Multilateral NettingQualitative

• 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

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Typical Netting Cycle

5th 6th 7th 10th 11th 13th 14th

Cash F,cast Collection Trial net Adjustments Final Transactions Problem resolution

due of data netting settled

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Multilateral NettingItems

• Inter-company payables

• Inter-company receivables

• Third party payables

• Third party receivables

• Financial flows

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Multilateral NettingStructural Issues

• Country level

• Regional or global level

Basically, who to include, what is allowed

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Multilateral NettingPolicy Issues

• Billing currencies

• Credit period

• Settlement dates

• Exchange rates

• Conflict resolution

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Multilateral NettingForms

• Bank Managed – Fully

- Partially

• Company managed

• Internet- based

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Multilateral NettingVariations

• FX Matching

• Leading and Lagging

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FX Matching

Sub 1 Sub 2 Sub 3

Net FX Sales Net FX purchases

Sub 2 Sub 3 Sub 1

USD for sale GBP for sale EUR for sale

EUR requiredUSD required

GBP required

Matching Services

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Payors Co AGBP

Co B EUR

Co C USD

Co DPeso

Total

Receiver

Co AGBP - -

Co B EUR

2,000,000

-947,636 2,947,636

Co C USD

1,275,000

-570,686 1,845,686

Co DPeso

2,425,850

-2,425,850

Total 3,275,000 2,425,850 947,636 570,686 7,219,172

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

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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