Hedging FX

Commentary

Cash pooling and sweeping is one of the most basic and widespread tools in modern cash management. To the extent allowed under exchange controls and regulations, it is important to bring all the liquidity into a central entity, and avoid having cash balances earning little to no interest, while some entities are borrowing and paying spreads. 

By definition, this central entity performs the functions of a bank: it is taking deposits and making loans - for tax reasons, it needs to pay and charge interest on the balances. This also means it faces a lot of the challenges banks have: it needs good systems to track the loan balances and calculate and post the interest, and it also needs to ensure any FX exposures are properly identified and managed. Of course, it also needs to have access to sufficient group funding to meet the group’s net cash needs.

Unsurprisingly, once they have set up the relevant structures, many treasurers find they can be used to provide additional functions: POBO (Payment On Behalf Of) is quite common; ROBO (Receive On Behalf Of) exists but is less frequent. Some, but not all, have used their in-house banks to eliminate intercompany netting: any transaction between group companies gives rise to a debit or a credit to their accounts with the IHB, which will be cash settled or not in accordance with regulations and cash management policies. The central entity can also be used for FX management, executing trades with the market and doing back-to-back intercompany hedges. 

In this call, peers went through the systems they use, and gave a frank assessment of the benefits and drawbacks of IHBs – it is not all plain sailing. 

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Log in / Register to read the latest CompleXCountries (CXC) commentary on Corporate Treasury & Banking in China has now been published. It adds to a growing archive of corporate treasury knowledge relating to China - Browse 18 commentaries with associated reports here - all sourced from detailed confidential peer discussions between the treasurers of multinational companies with operations in China - the report  includes approaches and experiences with:

• Regulatory environment and regulatory uncertainty
• Engagement with regulators and regional variation
• Cross-border cash pooling frameworks (SAFE and PBOC)
• Cash repatriation methods (dividends, pooling, intercompany loans)
• Trapped cash and liquidity management
• Use and limitations of cross-border and back-to-back loans
• Decisions not to implement pooling and alternative structures (notional pooling)
• Relationships with local Chinese banks versus international banks
• Service quality and challenges with Chinese banks
• Role and performance of international banks
• Domestic cash pooling and cash reporting
• FX management, interest rates, and bank competition
• Onshore (CNY) versus offshore (CNH) renminbi markets
• Short-term investments 
• Funding structures (equity, intercompany loans, onshore bank loans)
• Supplier financing programmes and associated regulatory/KYC issues

International banks discussed in the report include: HSBC, Standard Chartered, JP Morgan, Deutsche Bank, Mizuho, Commerzbank and Citi

Chinese Banks include ICBC &  Bank of China

The full report covers current practices in relation to the list below. To read our commentary (analysis and key findings)  please Log In or Register

• Foreign exchange regulations and practices
• Use and management of Letters of Credit (LCs)
• FX availability 
• Methods of managing foreign currency flows
• Payment terms in the market
• Funding structures and intercompany financing
• Cash management and liquidity
• Exchange-rate exposure and losses
• Corporate legal structures in Egypt
• Local vs. imported manufacturing setups
• Bank relationships and banking landscape
• Geopolitical context and external investments
• Overall business environment and operating conditions

Service providers discussed  in the full report: HSBC, Citi, Standard Chartered

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CXC reports are based on confidential peer discussions between senior corporate treasurers sharing their solutions to complex treasury challenges.

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Topics covered in this report include:

• Turkey’s recent economic conditions and inflation trends
• Currency depreciation and exchange rate developments
• Business and regulatory environment in Turkey
• Tax structure and compliance challenges
• Funding options and financing practices for companies
• Use and impact of the Resource Utilisation Support Fund (RUSF)
• Stamp duty and its implications for loans
• Inter-company loans and cash management strategies
• Hedging approaches and accounting under hyperinflation
• Treatment of interest and foreign exchange transactions
• Equity funding and capital management in subsidiaries
• Cash pooling arrangements and restrictions
• Role of international and local banks in Turkey
• Bureaucracy and documentation requirements
• Payment processing and local PSP requirements
• Overall outlook and long-term confidence in the Turkish market

Banks discussed in this report include: Bank Mendes Gans, JP Morgan, Garanti, TEB, Citi, and ING