1 netting. 2 bilateral netting gbp20 a b gbp15 what will you do?
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1
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?
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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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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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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 =
19
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
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