Are notional pools going the way of the airplane smoking section? At a recent NeuGroup Global Cash and Banking Group meeting, members discussed how new regulations are impacting the long-standing use of global cash pooling structures. In discussion, the group discussed what treasurers should be doing to ensure their existing pooling structures will survive longer term. One member company began the conversation with an update on the challenges of managing its notional-pooling structure in the current environment and its plans for the future.
According to this company, the best pooling structure for a company depends on its particular circumstances. For this company, there are many benefits of pooling cash, including (1) ability to leverage credit and debit positions across multiple entities and currencies; (2) greater visibility to cash balances; (3) funding flexibility; (4) increased interest income; and (5) decreased interest expense.
Having said that, deciding between a notional or a physical pool depends on the particular circumstances of the company. Notional pooling is ideal for companies with decentralized treasury organizations and no TMS in place. The management of the pool is transferred to the bank, which allows the company to obtain the benefits of pooling without having the infrastructure to support it.
Still, the benefits of notional pooling don’t come for free. There are costs associated with running a notional pool. Besides the obvious costs associated with interest rates and FX spreads, there is the internal cost of providing the cash forecast needed to manage the pool. This is especially onerous when the company has not developed the systems and processes to automate and standardize the data collection. In addition, there is the added risk of relying on a single banking partner to support the pool.
As circumstances change, the pooling structure needs to be reassessed. As either internal or market circumstances change, the costs of running a notional pool might outweigh the benefits and a new solution might need to be put in place. In the wake of Basel III, banks might require updated customer legal documentation regarding the right of offset and cross-guarantees; increase the cost to pool notionally; reduce the sizes of debit and/or credit positions; and limit availability of this product based on creditworthiness of customers. Also, RBS retreating from Europe has left some members looking for a new partner to take over their notional pool. In this environment, many companies have decided to reassess their need for a notional pool.
As the presenting company and other members reassess their notional pools and decide their future, there will be many decisions to be made if they decide to move away from their structures. Treasury managers will need to have a clearly laid out plan to execute the move successfully.