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Context: The gross magnitude of inter- and intracompany payables and receivables at multinational companies has made intercompany netting processes essential for efficient global cash operations. With proper setup, an effective netting program will reduce foreign exchange and payment costs, simplify transaction and reconciliation processes and optimize cash concentration.
- Similarly, the practice of centralizing the buying and selling of currency amounts, set to a specific calendar, increases operational efficiencies and may consolidate FX exposure reporting onto a single platform.
- Matching intercompany netting dates to hedge maturity dates further streamlines settlements and accounting treatment at the business unit level. One member company recently questioned if benefits would be amplified by creating more netting cycles.
Member question. “Does anyone make frequent netting payments? We are doing monthly netting and associated monthly FX trading and wondering about the pros and cons of doing more frequent netting.
- “Monthly netting is a process where we make intercompany payments in one payment per month to avoid multiple payments. As we are accumulating AR and AP until the netting day, we naturally have a higher FX balance sheet that we need to hedge. Increasing netting frequency seems to be a lot of extra work.
- “The background for my question is that one of our finance risk committee members is concerned about the growing size of the FX balance sheet hedge amount. They said, ‘What if we do daily netting? Then we will have close to zero FX balance sheets and save hedging costs. Do we have any new tech or service?’”
Peer answer: “We have two trading cycles a month for our balance sheet program. For years, we had one trading cycle; however, due to the development of analytical tools in our cash management area, we have more visibility and have introduced the second trading cycle. During both cycles, we net our payments to deliver operational efficiencies while minimizing settlement risk.
- “We are performing two as there are many countries that receive excess cash (after our main cycle), from client receipts, and the second cycle allows us to manage our cash balances more effectively and efficiently.
- “With regards to netting, to avoid additional costs you always want to be in a position where you minimize the number of wires or ACHs your cash management team has to perform—while effectively minimizing your settlement risk as well. From a hedging cost perspective, I am of the mindset that the more frequently you are hedging (and in the market), the more costs you incur externally and operationally.”
NeuGroup Insights reached out to the member who posed the question to learn whether his company has decided to do more frequent netting. He said, “We are sticking to a monthly netting schedule as I expected. The reasons for not doing more frequent netting:
- “No technology allows us to avoid daily netting wire fees that can multiply by daily vs. monthly.
- “Hedging cost for FX balance is about one to two basis points. For our size, savings are around $200K annually if we do daily netting; the additional costs for wires and a potential head count increase are not worth saving $200K.
- “The FX balance will never be close to zero. To move to daily netting, we will have to pay down AP when the local team is still waiting for the customers to pay them. We will have to issue the intercompany loans in FX, and still must hedge them. Not a big saving on hedging costs and FX volume.”