Matt Blogs!

The decision whether to hold centralized or decentralized accounts will depend on the following:

• Volumes and amounts of individual currencies collected and disbursed

• The cash manager’s ability to measure, monitor, and manage both currency exposure and multiple overseas banking relationships

• Sensitivity to administrative costs versus transaction costs

Each option carries trade-offs in terms of price, convenience, availability, and timing.

Most companies make a currency-by-currency decision as to whether to centralize or decentralize the location of the account, based on the nature, value, and volume of the flows. The resulting configuration will be a mix of both. Often, even though a currency might be held in a currency center account, there may also be an additional, second, centralized account for that currency as the top layer in a liquidity management structure.

International Lockboxes

The concept of a lockbox is valid anywhere in the world where payments are still being made by check, across a wide geographical area, and where there is a potential for mail, processing, and availability delays. Although the precise mechanics may not be the same as in the United States, the effect of an international lockbox (also known as an intercept point) is to collect a check close to point of mailing, preferably in the same currency center, and to deposit the check into the local banking system as quickly as possible.

Collecting checks on a regional basis has value over transcontinental mailing and the subsequent collection process. Not only does an international lockbox reduce mail, processing, and availability float, it also minimizes transaction exposure by reducing the time it takes to collect a foreign currency. These services are beginning to be available in both Europe and Asia.

In the Real World: Collecting Foreign Currency Checks in the United States

A number of foreign currency checks still find their way into the hands of cash managers in the United States. The collection process can be long, and there are no international regulations on how quickly such items have to be handled. In addition to lost availability, the delay increases foreign exchange exposure.

Many banks offer to negotiate the check and provide immediate availability at a discount to the face value of the item, depending on the amount, the currency, and the importance of the corporate customer. The discount will reflect the bank’s past experience on the length of time it takes to collect and will normally be on a recourse basis. Most importantly, however, the cash manager will have limited the transaction exposure.

Taken From : Essentials of Managing Corporate Cash