Netting - University of Bathpeople.bath.ac.uk/mnsanb/MN30067NettingSimplicityatitsbest.pdf · Netting substantially reduces the number and the associated cost of payments and foreign

Netting simplicity at its best

January 2013

2 Bank Mendes Gans | Netting, simplicity at its best

Nettingsimplicity at its best

Netting substantially reduces the number and the associated cost of payments and foreign currency trades. The number of international payments can be cut from thousands to just one per subsidiary per month. There is a double benefit in FX deals here. Netting not only reduces the amount of currencies and FX deals, it also consolidates them into larger trades that often receive better pricing. Furthermore, Netting increases the visibility of net FX exposures at the corporate level and functions as a powerful tool for hedging these exposures.

Other advantages of Netting are less quantifiable and therefore often underestimated. Unjustifiably so! The increased control, standardization and group discipline are essential benefits too. They seriously diminish administration time spent on transaction processing, reconciliation and problem resolution. A well-executed netting system allows your treasury to free valuable staff time.

BMG’s Netting is not limited to invoices resulting from inter-company and vendor trade transactions. You may also include payments that are financial in nature. Netting is a sophisticated payment vehicle you can use for all kinds of international payments: inter-company loans, interest, royalties, dividends, fees, expat salaries, tax payments and foreign exchange deals closed between banks and your subsidiaries. Of course payment identifiers can be added to easily track the nature of payments.

The simplicity of our product is the essential key to a smooth implementation and advantageous operation of a truly global netting system.


The basics of Netting

With BMG’s Netting in place, your company evolves from randomly settling inter-company transactions on various due dates, to combining all payable and receivable transactions into just one netted amount per subsidiary. In addition, you may include repetitive international vendor payments. The entire netting process takes no more than 4 – 5 days.

How does it work?• Yoursubsidiariesinputtheirinvoicetransactions,payableorreceivable.

Manual input is facilitated by our user-friendly browser-based system. Unattended input is either host-to-host or via SWIFTNet FileAct. We settle in 37 different currencies. Invoices in other currencies can also be settled in one of these 37 currencies.

• Assoonasyourtransactionsaresenttoustheyarevisiblereal-time.Approval levels can be administered to comply with your company’s practices and policies.

• Oncealltransactionsarefedintothesystemandproperlyapproved,wewillbegin a preliminary round of calculations to determine the net position for each subsidiary.

• Ifnecessaryyoucanchangetransactionsafterreviewingthepreliminarynetting results.

• Oncetransactionsarefinalized,theauthorizersatyourcompanylockthesystem to prevent further changes. Then they approve the netting for final calculation and FX dealing.

• TheresidualFXspotdealsareexecutedinthemarketandnettingratesarefixed for all transactions. A final calculation round is made to fix the net position for each subsidiary.

• Allsettlementsareexecutedwiththesamenettingvaluedate.• Wedeliverallinvoicetransactionstoyourcompanyforreconciliation

purposes, either host-to-host, via SWIFT or through our browser-based system.


Applying Netting to the full

Some people see netting as just a simple commodity product. BMG’s Netting is much more powerful in its application than first meets the eye. Applying Netting to the full, it is a valuable tool for treasurers who want to take control of international invoice obligations and to improve liquidity management.

Add your vendorsWith Netting in place you may simply include the vendors your company pays on a regular basis. Especially when certain vendors are paid by multiple subsidiaries and in multiple currencies. Since the netting payment calendar is established in advance, your vendors will know when to expect payment. This allows them to streamline their own cash management. Invoice details can be e-mailed to your vendors directly or included in the outgoing payment transfer.


Hedge netted exposuresAn additional benefit of Netting is that it shows netted exposures resulting from inter-company payments in the past. Many of our clients use this information to hedge netted exposures and improve currency risk management. Furthermore, you may choose to settle deliverable FX transactions via Netting.

Solve liquidity dips; add a cash poolAny company with a large volume of inter-company payments knows that a liquidity dip epidemic breaks out across subsidiaries on the payment date. This is not surprising as customer receivables typically lag behind the inter-company obligations. Using local borrowing lines or providing short-term inter-company loans are both costly methods to resolve funding needs. With BMG’s Cash Pool in place all affiliated accounts are automatically debited to satisfy the funding requirements of the paying subsidiaries. In doing so borrowing cost at centralized interest rates is more advantageous and no inter-company loans are needed. An added bonus is that foreign exchange on multi-currency loans can be fully eliminated.

Flexibility of useOnce Netting is implemented, you can use it as often as necessary. Though most of our clients typically run their netting operation once a month, many use Netting on a weekly basis. Occasional extra use of the system is possible at just a moment’s notice.

In-house bankTo adequately support Netting we provide you with a full-fledged banking platform that can be linked to any treasury workstation or ERP system. We are proud that many of our clients use it as their proprietary banking platform – not only for Netting, but also for cash pooling, global reporting, administering inter-company loans, and routing international payments and receivables for vendors, customers and FX transactions. Furthermore, M&A transactions can be executed using the different legal entity tax jurisdictions already embedded in Netting. If you choose to combine Netting with Cash Pool and Exposures & Cash Flows, the total application may serve as a full-swing in-house bank for your company.

‘BMG’s Netting is much more powerful in its application than first meets the eye’


Myths about netting dispelled

There are several misconceptions in the market regarding the mechanics of netting. In this section we clarify the main misunderstandings and show how BMG’s Netting actually works.

1. Netting in an in-house bank is simple to doOn the contrary. We have operated netting solutions for global companies for over 40 years. We now know that netting in an in-house bank is not as straightforward as it sounds. For very large corporations with substantial payments each day, it could make sense to net daily or monthly by way of bilateral settlements. But it is essential to acknowledge that these corporations have to manage thousands of internal bank accounts, and this comes with a hefty price tag. This includes the workload involved in managing the connectivity in general and problem resolution in particular. Moreover, the bilateral settlements create FX deals with amounts that are not always worth shopping around for.

2. Outsourcing Netting is costlyIn fact, the opposite is true. It’s a common myth that outsourcing Netting is costly and that the only alternative is to do it yourself. You may weigh the cost of internal operations versus the fees to be paid to an external provider. More often than not, companies look only at the apparent cost and ignore the hidden cost of dealing with global invoice transactions. These hidden costs are usually very difficult to quantify. They include time spent on processing payments, on investigating and resolving missing transactions, and costs associated with maintaining internal expertise, system maintenance and enhancements. Outsourcing netting means outsourcing all the internal hassle at the same time.

3. Netting requires opening new bank accountsNot with BMG. Many other solutions in the market require you to open accounts in all of the netting currencies. In some cases you’ll even be obliged to open accounts at branches of the provider. This of course creates an unwanted and unnecessary influx of accounts. With BMG’s Netting there is no need whatsoever to open additional bank accounts.

4. Netting only makes sense if payments and receipts can be off-setMany companies are misled by the product’s name. In essence it seems to imply that netting is advantageous only if and when there are payments and receipts to be netted. In fact this is not true. Netting works very well as a one-way payment system that allows your subsidiaries to settle their obligations to the parent company in any currency. By using Netting in this fashion actual payment reduction is not achieved. But there are significant other benefits. The parent company receives just one lump sum amount, payment cost is greatly reduced, and substantial gains are made by centralizing foreign exchange execution and reconciliation.


5. Outsourcing netting means handing over foreign exchangeThis is not how we operate Netting at BMG. Without a doubt, the FX deals that result from your netting operation are what most banks pitch for. In many instances, those banks offer the entire netting without fixed fees on the condition that you hand over the foreign exchange. And that is where it gets sticky and FX cost is swept under the carpet. At BMG we are transparent in our pricing and we help you obtain true cost savings. On the topic of FX deals, our specialized services for over 230 global companies enable us to combine foreign exchange transactions for all our clients on any given day. If a company operates netting internally it will never benefit from other companies’ FX positions.

Naam Functieomschrijving

‘Ehenis estotat usda dit a dolupta tiora tur? Quis volup tae perum, quamas’


‘Having operated netting for over 40 years, we know that an in-house solution is not as straightforward as it sounds’


How Netting meets corporate objectives

The key objectives for treasurers responsible for global netting operations are:• Asingleglobalconcept• Off-settingandsavingspotential• Simplicityatitsbest• Noadditionalaccounts,automatedsettlements• Top-notchsecurity• Unattendeddataexchange

A single global conceptOur clients preach to one and all that a single global concept, covering all currencies and countries, is a must have. Centralized control and visibility of payments and receipts brings about a company wide standardization of information. The fact that any currency can be paid at the transactional level and that 37 currencies can be traded is a tantalizing prospect for any corporate treasury. For subsidiaries in countries with restrictions concerning real off-setting of transactions there are numerous work-around alternatives available to make participation possible. Our browser-based system provides a single point of entry for all subsidiaries to enter, view and approve transactions.

Off-setting and savings potentialMany of our clients have been able to realize very sizable reductions in both payments and foreign exchange cost. The average reduction lies between 55% and 80%, but in some companies 95% and higher was obtained. Your reduction potential will depend on what transactions are settled through the system and whether there is off-setting between payables and receivables of the participants.

Simplicity at its bestMany companies have stumbled on the complexities of other platforms and the amounts of system knowledge, IT resources and personnel they require. BMG’s Netting is an elegant solution that provides a single window to the corporate world of international transactions, both inter-company and for vendors. The hassle associated with internal netting operations, compliance, risk and continuity concerns fades as we take over these matters for your company. Real simplicity ensues, allowing you to focus on more strategic decision-making.


No additional accounts, automated settlementsThe definite bonus for our clients is that they don’t need to open extra bank accounts to realize a global netting solution. Typically, most other providers require that interest bearing currency accounts be opened for all subsidiaries to pay and receive the netting results. Not only do these accounts pose an administrative headache, but also, when a subsidiary fails to settle on the value date, interest is charged and treasury has to resolve the issue. At BMG we have taken a different approach. As we plug into the banks used by your local subsidiaries, we have artfully removed the need for additional accounts. We are able to automatically push and pull the netting results to and from your current banks.

Top-notch securityCompanies are often discouraged about the hassle of manually maintaining the netting database, which contains the vital subsidiary details. Also the lack of automated security administration capabilities may be daunting. Our solution includes a highly sophisticated on-line self-service maintenance portal. Your system administrators can easily manage authorizations of subsidiaries and other trusted parties. At internal audit’s request a complete user authorization report can be readily produced.

Unattended data exchangeIn today’s changing markets an increasing number of companies are connected to the SWIFT Network or need to be able to send netting transactions directly from the treasury workstation or ERP systems. If you choose to put unattended channels in place, we will enable fully automated two-way exchange of payment data. Alternatively you may upload your invoice files via our browser-based banking platform.


Why our Netting is superior

Netting is an ideal solution for companies with a large number of subsidiaries facing significant inter-company transactions, ranging from manufacturing, sales, distribution and internal financial transactions. Netting – in all its simplicity – can be hugely complex from an operational perspective, which means that a proper execution is critical to the payment processing success.

The market offers a wide range of netting solutions including off-the-shelf software, ERP systems, treasury workstation functionalities and banking solutions. And many companies have built their own netting spreadsheets. It is safe to say that netting, in and by itself, is not just a nice to have solution, but a fundamental tool for any global company with substantial inter-company payment traffic.

In the early sixties we developed our Netting together with one of our clients and launched the solution in 1965. Since then we have improved Netting time and time again, listening very closely to the wishes of our growing client base. Our clients have enabled us to continually perfect our system these past 45 years. We owe our track record reputation and level of expertise to them.

All our netting clients agree on one main aspect: keep it simple! Complexity just sidesteps the much sought after benefits. We are often used as the hub for worldwide inter-company transactions where netting is achieved globally and multilaterally, and settled in 37 different currencies and over 70 countries. Netting can be a fully automated process starting with unattended data exchange and ending with fully automated settlements and reconciliation in the ERP systems. For companies that have different ERP systems in their global operations, a browser-based system is available to enter or upload transactions. To top it off, Netting is able to handle international vendor payments as well as transactions resulting from internal financial deals or obligations.

Our solution is based on full outsourcing. This relieves our clients from the many and heavy resource, operational and financial burdens. There is no more need for hiring, for keeping up expertise, for continuity concerns, or for investments to home grow the system or implement software. We enable you to focus on strategic decision-making as you leave the netting operations to us.



About us

Bank Mendes Gans (BMG), a member of the ING Group, was founded in Amsterdam in 1883. We have built an excellent reputation as a market leader in the field of liquidity and information management services. We provide highly flexible and customized solutions for corporate treasuries around the world. With a strong corporate genetic imprint we are an extension of any corporate treasury providing hands-on service, expertise and innovation each day. We are not a standard bank by any means, as we do not offer traditional banking services such as lending, local banking or derivative transactions. We pride ourselves on providing banking services for our customers in the most pure and prudent form. We continue to differentiate ourselves in the market without compromising our own traditions and values. In doing so, we successfully compete in the market and continue to deliver a superior level of customer service which has become the hallmark of our international banking reputation. We currently service over 230 global companies.

Selecting a strong partner to supply you with high-end liquidity management services means an in-depth assessment is essential. We are all about best practices in treasury processes with transparency in all our areas of expertise. We are looking forward to make your acquaintance.

‘We are an extension of any corporate treasury providing hands-on service, expertise and innovation each day’


About the author

Karen Kombrink, Executive Vice President, started her career at Bank Mendes Gans mid 1978 at the financial department. In the years after she headed up the Netting department before she became responsible for global liquidity management solutions for corporate companies worldwide. In this position she learned to understand the challenges multinational companies face and developed in-depth knowledge and vast expertise about netting, physical and notional cash pooling, forecasting, exposure management systems, inter-company loan portfolios, international payments and receivables and foreign exchange. In 1997 she became officer of the bank. She is known for her client-centric attitude and has over 33 years of experience in global markets, consultancy, product development and marketing and sales. She can be reached at [email protected].

Contact

Telephone+31 20 523 5311

[email protected]

Internetwww.mendesgans.com

Office addressHerengracht 6191017 CE AmsterdamThe Netherlands

Postal addressP.O. Box 1981000 AD AmsterdamThe Netherlands

Documents

Netting - University of Bathpeople.bath.ac.uk/mnsanb/MN30067NettingSimplicityatitsbest.pdf · Netting substantially reduces the number and the associated cost of payments and foreign