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Multi-currency cash pool/multi-product structures with cash pool facility

Question

Please clarify the reporting of multi-currency cash pools, such as a balance netting type cash pooling. A balance netting cash pool has the following features: only one counterparty (typically, the parent company) is contractually liable vis-à-vis the banks. There are several currency sub-accounts, which represent instruments, via which the bank provides funds to the group’s participants in specific currencies. The top account shows the aggregated balance and there is often a cross-currency limit attached that can be utilised from any of the currency sub-accounts.

Answer

Banks offer other products that have characteristics similar to cash pools but which are less complex. The primary distinction lies in the fact that there is just one debtor, and there is no lending across debtors involved. For instance, balance netting may apply in cases where there is just one debtor with two instruments – one in debit and one in credit – and the interest is charged/paid on the basis of the net amount. In such cases, the instrument in credit is subject to AnaCredit reporting while the account in deposit is reported as protection securing the debit instrument insofar as the bank can use these assets to secure the loan.

So, typically, a balance netting type cash pooling constitutes a multi-product structure rather than a cash pool. Please refer to Cash pooling under AnaCredit for general guidance on the reporting of cash pooling to AnaCredit.

The features of the specific case referred to in the question indicate that the currency accounts connected in a system of balancing accounts are an example of a multi-product structure, where the positions of these accounts are netted for the purpose of improving credit and/or achieving lower borrowing costs.

Consider the following example of a credit cross-limit structure with multi-currency balance netting cash pool, where the currency of the cross-currency limit is euro and the balancing of the respective bank balances takes place only in euro and virtually, and the individual accounts in currencies are managed in the context of physical multi-product credit cross-limits.

The bank and Company A agree on a multi-currency credit cross-limit of €2 million, where the debtor may take out loans and place deposits in any of the four currencies, where interest of x% is charged to the company based on the netted position across the accounts if it is positive (i.e. the company owes money to the bank). The netting is done on a top account which is a virtual account. As at 31 March 2019 the positions of the currency accounts are as follows (the currency exchange rates against the euro are assumed to be 1):

  • USD, outstanding balance of €0.8 million (credit – Company A owes the bank)
  • EUR, outstanding balance of €0.7 million (credit – Company A owes the bank)
  • GBP, outstanding balance of minus €0.9 million (deposit – the bank owes Company A)
  • SEK, outstanding balance of minus €0.2 million (deposit – the bank owes Company A)

The individual accounts are instruments subject to AnaCredit reporting insofar as the client owes money to the bank or the client can, at its own discretion, draw funds under them. Accordingly, all the accounts are subject to AnaCredit reporting, although the outstanding nominal amount is larger than zero only in relation to US dollars and euro. Notably, the extent to which the company can draw additional funds depends on whether the bank also applies the netting to compute the amount of available credit at the level of the credit cross-limit. In this regard, Table 1 shows the balance netting on the basis of the financial dataset.

Table 1 Indication of the financial dataset for the balance netting

Reporting reference date

Contract
identifier

Instrument identifier

Type of instrument

Outstanding nominal amount

Off-balance-sheet amount

31/03/2019

CL-CP#1

ACCNT#1#USD

Overdrafts

800,000.00

125,000.00

31/03/2019

CL-CP#1

ACCNT#2#EUR

Overdrafts

700,000.00

125,000.00

31/03/2019

CL-CP#1

ACCNT#3#GBP

Overdrafts

0.00

125,000.00

31/03/2019

CL-CP#1

ACCNT#4#SEK

Overdrafts

0.00

125,000.00

In this case, the bank calculates the off-balance-sheet amount for the instruments considering the amount of funds lent to the company (i.e. €1.5 million) and the total limit that the bank committed to lend at the level of the credit cross-limit (i.e. €2 million). The available funds of €0.5 million are subsequently allocated to the individual instruments on an equal basis.

Please note that the credit accounts are not netted against the deposit accounts when reported to AnaCredit. Instead, the deposit balances are items of protection reportable to AnaCredit. Only the virtual netting applies (for example for the calculation of interest to be charged). Instead, the accounts in deposit may serve as protection against losses in the event of default. Consequently, the deposit accounts are reported in the protection dataset – this is illustrated in Table 2, where the protection value is equal to €1.1 million.

Table 2 Indication of the protection received dataset for the cash-pool accounts

Reporting reference date

Contract
identifier

Instrument identifier

Protection identifier

Protection provider identifier

Type of protection

Protection value

31/03/2019

CL-CP#1

ACCNT#1#USD

CL-CP#1#PRTC

CMPNY#A

Cash

1,100,000.00

Related questions

See also Cash pooling under AnaCredit