In brief
A look back at the AFTE Commission on international notional cash pooling. Find out how this multi-currency cash management solution enables international groups to optimize their liquidity, reduce banking costs and strengthen their financial performance, despite complex legal and regulatory challenges.
In an environment marked by market volatility and the growing complexity of international financial flows, finance departments are constantly seeking ways to optimize their liquidity management.
Notional cash pooling has emerged as one of the most structuring responses to these challenges, and one of the key levers in a high-performance cash management strategy.
The AFTE “Cash Management International” Commission focused on just such a topic, in a session dedicated to the benefits of notional cash pooling. JP Morgan and several major groups shared their practices and concrete feedback.
What is notional cash pooling?
To put it simply: in physical cash pooling, the cash balances of a group’s various entities are actually moved to a centralized account.
In notional cash pooling, nothing physically moves. The credit and debit balances of each entity are offset virtually, a process also known as merging of interest scales, enabling the group to benefit from a consolidated net position without any actual movement of funds.
The advantage? As soon as the group’s overall position is in credit, it can access other currencies, drastically limiting the often very high overdraft charges at local banks. A single debit rate and a single credit rate apply to all participating currencies.
The result: simplified multi-currency management, with a consolidated view of liquidity at group level.
Cash pooling: which structure to choose?
Notional cash pooling can take several forms, depending on the degree of centralization required:
- Single entity: a single entity holds all notional accounts. It is the sole signatory of the banking documentation and the sole contact for the bank.
- Multi-entity: each subsidiary participates directly in the mechanism and benefits more directly from the Group’s cash surpluses.
- Hybrid model: for groups wishing to retain a degree of local autonomy, a central treasury entity can participate in the pool without directly exposing all subsidiaries.
The choice of model depends above all on the maturity of the treasury function, the legal structure of the group and country-by-country regulatory constraints. An in-depth diagnosis of your treasury processes is often the essential starting point for identifying the most appropriate cash pooling structure.
Governance, legal and regulatory issues?
Beyond the financial mechanics, the implementation of notional cash pooling raises fundamental questions that should not be underestimated:
- The distribution of interests between entities included in the pool, which requires a clear, documented internal policy.
- Contractual complexity, which tends to increase over time as the pool’s scope evolves.
- The bank’s ability to demonstrate to the regulator, in the event of difficulty, the effective offsetting of all balances and the return to a net position.
Furthermore, some countries outright prohibit this type of cash pooling structure, as do certain banks, particularly when the JSL (Joint and Several Liability) mechanism is not applicable. In-depth regulatory analysis is therefore essential, country by country, before any implementation.
It‘s also worth noting that inter-company flows, where they exist, are based exclusively on physical movements, in a logic of inhouse banking, and not on notional amounts. This is an important distinction that needs to be integrated into the governance of the system.
Feedback: what major companies are saying
The testimonies gathered during the AFTE Commission illustrate in concrete terms the added value of notional cash pooling:
- Fabienne Léon (Head of Group Cash Liquidity & Settlements) described a group operating with 3 main currencies, 19 exotic currencies and 16 banking partners. In 2023, the implementation of a multi-currency notional cash pooling solution to complement the existing physical cash pooling provided significant operational flexibility on a day-to-day basis.
- Hervé Toukara (Head of Treasury, ESG) presented a structure built around two pools: a classic euro cash pool and a notional multi-currency cash pool, to cover distinct needs.
- Olivier Salmon (Head of Treasury, Edenred), a fervent supporter of notional cash pooling, is piloting a scheme involving some twenty currencies and around 120 accounts, with clear governance over entity participation.
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The concrete benefits of notional cash pooling
The gains identified by stakeholders converge in several areas:
- Reduced overdraft fees and better return on credit balances
- Fewer FX transactions (especially swaps), which eases the operational burden on teams
- Smoother payments and fewer payment incidents
- Reduce manual tasks, freeing up time for higher value-added activities
- Significant cash flow to the holding company, while respecting local constraints
Financial gains are quickly realized, even if setting up a cash pooling system requires a substantial initial investment.
Setting up notional cash pooling: key prerequisites
Notional cash pooling is not a turnkey solution. Its success depends on several conditions:
- Well-anticipated IS integration: TMS, ERP, accounting interfaces – IT plays a key role, particularly for flows between systems.Assistance in choosing and implementing a TMS is often a project in its own right.
- A well-chosen banking partner, considered essential by all concerned.
- Accurate, reliable reporting, a guarantee of confidence and effective management.
- Structured change management, as the interdependence between entities and the need for a strong cash culture within the group should not be underestimated.
Team training, limits and prospects
Increasing the skills of treasury teams is a challenge in its own right. It is based above all on clear, educational reporting, as well as on mastery of concepts specific to notional cash pooling: ZBA (Zero Balance Account), interest calculation, balance valuation. Concepts which may seem technical, but which quickly become reflexes once the system is in place.
In terms of operational limitations, speakers pointed to a number of points to watch out for: bank cutoffs, certain local technical constraints, and the documentary and tax complexity of countries such as Brazil, India, Turkey and Canada.
As for the medium-term outlook, expectations focus more on improved interbank cooperation and smoother processes than on artificial intelligence, which is judged to be still too immature to provide significant added value in these areas. This pragmatic stance contrasts with the sometimes excessive enthusiasm surrounding AI in other areas of finance.
Notional cash pooling: a governance choice first and foremost
Notional cash pooling is not a technological revolution. It is above all a choice of governance, which requires rigor, cross-functionality and a long-term vision. It is naturally aimed at groups with a structured treasury function and sufficient maturity in cash management issues.
When properly designed and managed, it makes a lasting contribution to financial performance, operational resilience and theoverall efficiency of liquidity management– three issues at the heart of today’s financial management priorities.
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FAQ – Notional cash pooling
What's the difference between physical cash pooling and notional cash pooling?
Physical cash pooling involves actual transfers of funds between subsidiary accounts and a central account. Notional cash pooling, on the other hand, virtually offsets balances without any cash movement: interest is calculated on the group's consolidated net position.
Is notional cash pooling right for international groups?
In fact, it's one of its key strengths. It makes it possible to manage several currencies simultaneously without multiplying FX transactions, while preserving the operational autonomy of local subsidiaries. Beware, however, of regulatory restrictions specific to certain countries.
What tools are needed to set up notional cash pooling?
A Treasury Management System (TMS) is generally at the heart of the system, complemented by interfaces with ERP and accounting systems. The choice and implementation of these tools are key stages in the project.
What are the main risks of notional cash pooling?
The main risks relate to legal and fiscal complexity (particularly in international markets), interdependence between entities, and the need for reliable reporting to effectively manage the system. In-depth upstream analysis and expert support are highly recommended.
