Case study: multi-currency notional pooling solution for a leading telecom group

A leading telecom group (“the company”) has been looking for a cash centralisation solution that would allow its treasury centre in Hong Kong to utilise funds collected from its subsidiaries worldwide, but with minimal comingling of funds. The company has issued a request for proposal to its banking partners for a centralised cash management structure, with three key objectives in mind:

1. To combat the challenge of currency mismatch - receivables in local markets are in local currencies and payables are in USD;
2. To minimize accounting burdens - physical cross-border cash pool is not an optimal solution;
3. To support multiple locations and currencies.

The mandate was finally awarded to Bank of China (Hong Kong) Limited’s proposal to set up a bespoke notional pooling structure in Hong Kong that supports the use of funds from multiple locations and in multiple currencies.

Multinational Multi-currency Notional Pool

A multi-currency notional pool solution was proposed for the telecom firm’s treasury centre in Hong Kong to manage funds with a special account structure, such that its overseas group subsidiaries can work across the borders and participate in the notional pool. Under this structure, the company has achieved flexibility in liquidity, saved transaction costs and centralised funds management across multiple entities in different locations.

1. Flexible liquidity: One of the functions of the treasury centre is to centralize payment operations for the group from its account in Hong Kong. After setting up the cash pool, whenever there is insufficient USD funds for payment, the company can use the notional pool to draw USD funds against the equivalent amount of idle cash in other currencies in the notional pool. In cases where there is a time gap before sufficient USD funds are received, or the foreign exchange rate does not fall within a preferred range, the cash pool will provide immediate liquidity of USD funds. The cash pool thus gives an additional option for the company to fulfill payment obligations.
2. Cost savings: The notional cash pool does not require physical transfer of funds between entities which incurs transaction costs and management costs. As foreign exchange conversions are no longer required to fill up time gaps, fees and costs are also reduced. Conversions can also be executed at a preferable rate at a later date after the payment obligation is fulfilled.
3. Funds centralisation: A bespoke account structure has allowed funds from entities in overseas markets to be concentrated in this cash pool structure in Hong Kong. Funds collection and payment operations of the foreign entities can then be centralised. Under the notional pool arrangement, funds in multiple currencies can be utilised across multiple entities without physical movement. With internal financing built-in in the notional cash pool, temporary external funding requirement would be significantly reduced.

Implementation in phases

One of the challenges in implementation was the tight deadline imposed by the company’s group headquarters. As the solution involves multiple locations worldwide, the implementation involves relatively complicated legal documentation, company internal procedures and new financial processes for the company. BOCHK suggested a phase-by-phase approach – to only select pilot entities and regions to participate in the pooling structure in the first phase to meet the deadline. With the updated implementation schedule, the first phase of the project successfully went live within the scheduled timeframe, which brought positive feedback from the company.

Breakthrough in liquidity management

Multi-currency notional pooling is not a new product for international banks, but setting up a bespoke structure to achieve multi-market multi-currency notional pooling is a breakthrough in the liquidity management space. This solution has fulfilled the company’s goals to alleviate currency mismatch, minimize funds movements and support multiple currencies in multiple markets. Through thoroughly understanding customers’ real needs and requirements, BOCHK has delivered a bespoke solution that greatly enhanced customers’ cross-border cashflow management in Hong Kong. Together with this multinational telecom giant, BOCHK has demonstrated its commitment in helping customers realise their objectives through the continuous enhancement in its cash management products and services.