Basic International Cash Management Tools (2)
February 24, 2009 – 7:07 amIn the past, in order to be able to initiate transfers, a company had to subscribe to the proprietary electronic banking platforms of all their banks. These multiple subscriptions were not always convenient and posed additional access-security risks for the company. The SWIFT MT 101 message (see Appendix C) provides a solution by allowing a chosen “host” electronic banking platform to act as the conduit to transmit wire transfer messages to other banks.
The MT 101 is a message sent through an initial bank but destined for action by another financial institution. It can be used not only to pay funds but also to defund an account and consolidate balances with the concentration bank. Exhibit 7.2 illustrates how the MT 101 works, enabling a single electronic platform to manage an entire banking structure.
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The MT 101 message type will prove to be very beneficial to treasurers. However, before it can be implemented, an agreement has to be in place between the customer and the “host” bank, and the host bank must also have executed a bilateral agreement (known as a bilat) with all the prospective recipient banks. The bilats are important because they define responsibilities and service levels between the parties. Some banks are even insisting on bilats with their own branches. Over the last few years, the major banks have been steadily increasing the number of bilats that are in place. A corporate customer with banking arrangements not covered by the existing agreements will have to wait until a new bilat Is negotiated, which can require considerable time.
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Foreign Currency Accounts
There are various options in establishing foreign currency accounts. The two major ones are:
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Centralized. One of the simplest ways to manage foreign currency accounts is to maintain subaccounts in the branch of a single bank, often called a multicurrency account. Centralized currency accounts are easy to set up and maintain: there is one set of account-opening documentation, lower maintenance fees, and a single point of contact for customer service. The disadvantage is that a currency handled in a country other than that of its domicile is subject to availability delays upon deposit and up to two days delay on transfer. Cross-border currency transfers are usually done on a spot basis, that is, with two business days’ notice.
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Decentralized. The alternative way to maintain foreign currency accounts is to open accounts for each currency in its country of domicile. However, this may require opening up accounts with new banks; it can prove to be more labor-intensive to manage and monitor; and it may be more difficult to resolve customer service issues due to language and time zone differences. The advantages are that a currency in its own currency center will have better local deadlines, faster availability, and lower domestic pricing.
Taken From : Essentials of Managing Corporate Cash
