Foreign Currency Accounts
June 17, 2009 – 2:48 amThere are various options in establishing foreign currency accounts. The two major ones are:
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.
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.
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.
Taken From : Essentials of Managing Corporate Cash
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