Swept Away, Thanks to Rising Rates

Best practices for structuring cross-border cash sweeps in the current interest rate environment.

Cash sweeps have been available for decades. “Solutions such as notional pooling and zero-balance pooling have been around for 20-plus years and continue to be effective ways of concentrating cash throughout an organization to a single entity,” notes Erik Smolders from Deloitte Risk & Financial Advisory’s treasury management practice.

“Using cash globally through various sweeping mechanisms reduces borrowing costs and eliminates some transaction fees—and can increase investment income as interest rates move off of the floor,” adds Strategic Treasurer managing partner Craig Jeffery.

Cross-border cash sweeps are becoming increasingly important as interest rates begin to rise, but optimizing a sweeping infrastructure is not easy. Achieving the prospective benefits may involve a tough slog for global treasury functions that manage hundreds of bank accounts in dozens of banks across many different countries.

Before the Covid-19 pandemic, many improvement-minded treasury functions standardized and automated cash sweeping processes. The work involved comprehensive current-state analyses, designation of oversight responsibility to a treasury manager, collaborations with banking partners (and changes to operating and master accounts), establishment of new credit and overdraft facilities, and implementation of new automation tools or new functionality within their existing treasury management systems.

Today, treasury groups should reconsider whether that pre-pandemic approach is still ideal. Cash sweeping capabilities and tools have evolved over the past few years. For example, since the pandemic began, banks and treasury technology providers have worked together to jointly develop new solutions. These offerings tend to streamline the movement of cash, both domestically and internationally, while lowering costs and offering more competitive foreign exchange rates. Some solutions also bundle cash sweeping with integration to money-market providers.

Next Steps for Better Cash Sweeps

Liquidity management specialists focused on improving cross-border cash sweeps should consider taking the following steps to optimize their global cash management processes:

Take inventory.  Cash sweep mechanisms should be part of a larger liquidity management strategy geared toward optimizing all the company’s cash. “Before any optimization can begin, it is important to spend some time really thinking about how much cash you have, where that cash is located, and when that cash will be required for use in the business,” explains Stephen Fowler, director of liquidity and investment management for Corning Inc. “Planning and forecasting will help treasury teams better understand not only how much cash is available currently, but how that cash will move across geographies and the timing of those cash movements, as well as how much cash the business will generate or burn over a given time horizon. This process will allow you to identify any potential constraints that will affect your investment-decision process.”

Brush up on recent advancements.  Smolders says that many financial institutions have streamlined their pooling structures and related offerings in recent years. This is especially true for rules around interest calculations and the need for intercompany guarantees, which have been simplified to make the overall structure easier to implement. Treasury leaders need to understand how all their different options have changed.

Consider all options.  In addition to physical and notional pooling, liquidity managers may consider ways to simplify the management of intercompany accounts payable and receivables. “Netting continues to be popular, and it can be an efficient tool to reduce idle cash and keep cash within the organization,” Smolders notes. “We see that some banks are offering netting solutions as part of their electronic banking portal offerings, but netting solutions are also embedded in most treasury management systems. More sophisticated treasury organizations further keep cash centralized by payment-on-behalf-of [POBO] and collections-on-behalf-of [COBO] tools.”

These practices are designed to enhance what is likely the most important driver of cross-border cash sweep success: “All companies should have daily global visibility of their cash,” Jeffery asserts.

See also:

Eric Krell’s work has appeared previously in Treasury & Risk, as well as Consulting Magazine. He is based in Austin, Texas.

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