GLM supports notional pooling of accounts for cash concentration benefits. Under notional pooling, balances remain on participating accounts. The bank charges or credits interest on net balance of the pooled accounts thereby mitigating the cost of overdrafts on participant accounts.
Notional Pooling of is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds. It is ideal for companies with decentralized organizations that want to allow some autonomy to their subsidiaries, including their control over bank accounts.
Pool participant accounts are aggregated for interest compensation purposes. Funds are not physically moved, but are notionally combined. There is no commingling of funds, and the integrity of the individual account position is maintained.
Notional Pooling can be combined within the framework of a global cash concentration structure to provide comprehensive overlay structures to meet even the most complex organization’s needs
Notional pooling can have multi-layered overlays like in country pools sweeping into regional pools which in turn sweep into global pools. This type of structure is provided to mirror the corporate’s regional treasury arrangements.
Once a company earns interest on the funds in a notional pooling account, interest income is usually allocated back to each of the accounts comprising the pool. For tax management reasons the corporate parent usually charges the subsidiaries participating in the pool for some cash concentration administration expenses related to management of the pool. This scenario works best if the corporate subsidiaries are located in high-tax regions where reduced reportable income will result in reduced taxes.
The main downside of notional pooling is that it is not allowed in some countries. It is difficult to find anything but a large multi-national bank that offers cross-currency notional pooling. Instead, it is most common to have a separate notional cash pool for each currency area.
Notional pooling is normally done within one branch so that the bank gets the right of offset on its balance sheet (from the regulators and clients). Else bank has to set aside capital to cover the gross pooled balances
This chapter contains the following sections:
● Section 4.1, "Benefits of Notional Pooling"
● Section 4.2, "Notional Pooling Structures"
● Section 4.3, "Interest Calculation Methods"
● Section 4.4, "Interest Allocation Methods"
● Section 4.5, "Interest Reallocation"
● Section 4.5, "Interest Reallocation"
4.1 Benefits of Notional Pooling
The benefit of notional pooling can be listed as below:
● Minimizes interest expense and improves balance sheet for corporate by off-setting debit and credit positions
● Single liquidity position without commingling of funds
● Allows each subsidiary company to take advantage of a single, centralized liquidity position, while still retaining daily cash management privileges
● Preserves autonomy, control and record-keeping
● Benefit from off-setting without movement of funds and saving on administrative costs by avoiding foreign exchange costs
● Avoids inter company loans by avoiding the use of cash transfers to a central pooling account
● Automation of interest reallocation
● Reduction in operating expenses by reducing short term borrowings
● Concentration of balances
● Largely eliminates the need to arrange overdraft lines with local banks
4.2 Notional Pooling Structures
Notional Pooling can take any of the following structures:
● Single currency, Single country
● Single currency, Cross border
● Multi-currency, Single country
● Multi-currency, Cross border
4.3 Interest Calculation Methods
Interest on pool participants can be calculated in the following ways:
● Replacement Interest Payment Method/ Interest Method - System will have interest suppressed at the participant accounts and will make a single payment/charge as required based on the pool header balance
● Advantage Method - Interest is initially calculated without taking the pooling arrangement into account and then a rebate is paid to the group
● Interest Optimization Method (Top up interest payment) - Bank arranges preferential interest rates for participating accounts without fully offsetting credit and debit balances. This option will be used in jurisdictions where full notional pooling is not permitted.Here dual interest rates are applied i.e. Balance of the account is segregated into compensated and non compensated balances and interest rates applied accordingly
● Interest Enhancement Method - This method works by applying preferential pricing across a group of accounts on the basis of predetermined criteria that are typically based on a net aggregate balance threshold.
4.4 Interest Allocation Methods
The interest calculated for notional pooling has to be distributed to the participant accounts. The different allocation models which are supported by LM are as below:
● Central Distribution Model
● Even Distribution Model
● Even Direct Distribution Model
● Percentage Distribution Model
● Fair Share Model
● Reverse Fair Share Model
● Absolute Pro-Rata Model
4.4.1 Central Distribution Model
In this method, the interest\ advantage interest arrived is credited to one central account which can be one of the participant accounts or any other account
System will allow payment of this interest/charge to a particular/nominated account which can be done in two ways:
● Set off Method- Cr/Dr interest is paid to nominated accounts
● Non Set Off Method - Net interest is paid to nominated account
Set off method
Here Credit interest is calculated on aggregated daily credit balances and Debit interest is calculated on aggregated daily debit balances. The Debit and credit interests are posted separately to the nominated accounts.
Non-Set off method
Here the net interest position is calculated on the net balance of the pool and paid or charged to the master account.
In this method, the interest\ advantage arrived is evenly distributed amongst the participant accounts
4.4.3 Even Direct Distribution Model
In this method the Interest reward is evenly spread across all accounts with positive balances.
4.4.4 Percentage Distribution Model
In this method, pre-defined percentage of the interest\ advantage arrived is distributed amongst the participant accounts.
In this method, If the net pool position is positive, the interest/advantage interest arrived is distributed amongst the positive contributors in the ratio of their contribution (Both in Interest and Advantage models).
If the net pool position is negative the interest amount is distributed amongst the negative contributors in the ratio of their contribution (Interest model)
If the net pool position is negative, the advantage interest amount is distributed amongst the negative contributors in the ratio of their contribution. For example, the interest calculated at the account level is @10% but the interest calculated at pool level is @8% taking into consideration few positive account contributors (Advantage model)
4.4.6 Reverse Fair Share Model
In this method, if the new pool position is positive, the interest/advantage interest arrived is distributed amongst the negative contributors in the ratio of their contribution (Both in Interest and advantage models)
If the net pool position is negative, the interest amount is distributed amongst the positive contributors in the ratio of their contribution (Interest model)
If the net pool position is negative, the advantage interest amount is distributed amongst the positive contributors in the ratio of their contribution (Advantage model)
4.4.7 Absolute Pro -Rata Model
In this method, absolute balances of all accounts would be considered and interest would be shared proportionately to all accounts.
Interest reallocation is applicable only to central distribution model of interest allocation. The interest/ advantage interest credited to the central account which would be a treasury account is re-distributed amongst the participant accounts using any of the above discussed allocation models.
In allocation models the debit was to the Bank GL, In re-allocation model the debit will be to the central treasury.
Note
– Interest for the pool is calculated in the base currency of the pool header
– Interest reallocation from the header accounts will be in the account currency
– If the beneficiary account of a notional pool is in a different currency to that of the pool header, the interest amount posted is converted from the header account currency to the beneficiary account currency using the agreed FX rate between the two currencies