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Cross-border Concentration

Cross-border concentration is used when notional pooling is not available or when the cash manager wants to consolidate the surplus positions in currency accounts. Because funds are concentrated into cash pools, there is often a confusion between notional pooling and concentration. Some banks use the terms interchangeably, especially when referring to cross-border pooling, when describing cross-border concentration into cash pools, rather than cross-border notional pooling.

Because cash concentration involves a physical movement of funds, often from a resident account to a nonresident concentration account, there are additional costs for the transfers, the possibility of availability delays, and increased administrative and reporting burdens.

Some banks offer an automated service by which they will draw down balances to a concentration account both for balances within their network and third-party banks. More often, however, the cash manager has to initiate the transfers manually, based on the balance reports and cash forecasts. The SWIFT MT 101 message type is becoming a valuable tool for effecting cross-border concentration.

Concentration is the technique most often used by companies that want to concentrate different currencies cross-border, as it allows maximum flexibility in managing liquidity. That said, concentration also entails a number of the tax and legal issues associated with intercompany lending, such as withholding taxes and thin capitalization.

Netting

Netting is a process that allows entities to offset total receivables against total payables. The concept has already been discussed in the context of clearing and settlement systems. Each entity either receives or pays a single net amount to the netting center in its local currency. Exhibit 7.3 illustrates the process.

Taken From : Essentials of Managing Corporate Cash