Multinational treasury operations - Netting, pooling, and in...

Learning Outcomes

By the end of this article, you will be able to explain the role of multinational treasury in optimising cash flows, evaluate netting and pooling techniques to minimise transaction costs and exposure, and assess the benefits and challenges of in-house banking structures. You will understand how these methods support group liquidity, reduce foreign exchange risks, and align with ACCA AFM requirements.

ACCA Advanced Financial Management (AFM) Syllabus

For ACCA Advanced Financial Management (AFM), you are required to understand how multinational treasury operations manage and optimise a group's financial resources. You should focus revision on the following syllabus areas:

• The purpose and benefits of netting, pooling, and in-house banking in multinational cash management
• Techniques for reducing foreign exchange transaction costs and minimising FX risk exposure
• Centralisation vs decentralisation of treasury functions within international groups
• The impact of netting and pooling on internal and external financial flows
• The operational, legal, and tax considerations for implementing in-house banking and related centralised structures

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which treasury technique involves offsetting intercompany payables and receivables to reduce the volume of foreign exchange transactions?
   1. Centralised treasury
   2. Netting
   3. Invoice discounting
   4. Factoring

2. True or false? Cash pooling always requires the transfer of physical cash between subsidiaries at the end of each period.

3. Give one advantage and one potential drawback of using an in-house bank in a multinational group.

4. List two reasons why tax and regulatory considerations must be examined before establishing a cash pooling arrangement.

Introduction

Efficient treasury management is central to maximising financial resources in large multinational groups. When operating across multiple countries and currencies, a group faces complex challenges: multiple bank accounts, trapped cash, high transaction costs, and unpredictable exchange rates.

Modern treasury departments apply advanced techniques to address these issues, notably netting, pooling, and in-house banking. These tools help concentrate liquidity, minimise costs, optimise internal funding, and manage FX and interest rate risks, all under the growing scrutiny of tax and regulatory authorities.

Key Term: netting
An arrangement in which group companies offset mutual payables and receivables so that only net amounts are settled, reducing the number and value of cross-border transactions.

Key Term: pooling
A cash management structure where multiple entities' balances are combined—physically or notionally—to maximise group liquidity and optimise interest earned or paid.

Key Term: in-house bank
An internal treasury entity within a group acting as a central counterparty for subsidiaries, managing payments, collections, funding, and often acting as the hub for netting and pooling activities.

NETTING: SIMPLIFYING INTERCOMPANY SETTLEMENTS

Netting arrangements allow group companies to set off intra-group payables and receivables so that only net balances are settled in cash. This reduces the volume and value of actual payments, lowering both FX transaction costs and cross-border payment fees.

Types of Netting

1. Bilateral netting: Two companies offset their mutual transactions, with only the net amount paid or received.
2. Multilateral netting: Multiple subsidiaries submit transaction data to a central treasury, which calculates net positions for each company, so each makes or receives a single net payment.

Main Benefits

• Fewer cross-border transactions and related fees
• Lower exposure to foreign exchange risk, as smaller net principal amounts are converted
• Reduced risk of error and improved efficiency of reconciliation
• Better visibility and control of intercompany exposures

Worked Example 1.1

Three companies in different countries have the following intercompany payables for the month:

After netting, each company settles only a single net amount rather than making multiple payments.

Answer:
The central treasury calculates net receivable/payable positions for each company in the relevant currency. Each makes or receives one net payment per currency, reducing the total number of transactions and exposure.

Exam Warning: Netting

Netting is only effective for intercompany flows. Payments to third parties outside the group cannot be netted and still require separate settlement.

POOLING: ENHANCING GROUP LIQUIDITY

Pooling centres on maximising the use of group cash balances. Two main forms exist:

• Physical (cash concentration) pooling: Actual funds are swept from operating accounts to a central primary account, usually daily. Overdrafts and surpluses across the group offset each other physically, reducing group borrowing costs.
• Notional pooling: Bank accounts remain separate, but the bank calculates interest on the net group position as if the balances were combined. No funds are actually moved, but the group gets interest benefits on the net balance.

Key Term: physical pooling
A cash management method where funds are physically transferred from subsidiary accounts to a central primary account, optimising interest and centralising liquidity.

Key Term: notional pooling
A structure where balances remain in separate accounts but are offset notionally by the bank for interest calculation purposes, allowing the group to benefit from aggregate balances without physical transfers.

Benefits of Pooling

• Maximises group interest income by offsetting cash balances against overdrafts
• Concentrates cash, reducing external financing needs
• Improves short-term liquidity forecasting and investing

Key Considerations

• Notional pooling may face regulatory or tax restrictions in some jurisdictions and often requires all accounts to be held with the same bank.
• Physical pooling may require complex legal agreements and can trigger withholding tax or transfer pricing issues.
• Both types depend on local currency controls and banking laws.

Worked Example 1.2

A multinational group has four subsidiaries. Two have cash surpluses of $300k and $150k, two require overdrafts of $200k each.

Answer:
Under pooling (physical or notional), the group's net cash position is a $50k surplus. The group could earn interest on the net surplus, reducing overall borrowing costs, instead of one subsidiary earning interest and the others paying overdraft charges.

Revision Tip

Always check legal and tax constraints before proposing pooling. Some countries limit cash concentration or restrict cross-border cash movement.

IN-HOUSE BANKING: CENTRALISING TREASURY SERVICES

An in-house bank is a central treasury unit within the group which acts as a bank for subsidiaries, managing payments, collections, foreign exchange, and funding. Subsidiaries route internal and often some external payments through the in-house bank, which can also run netting and pooling arrangements.

Advantages

• Improved group-wide liquidity management and lower external borrowing
• Tighter FX risk management by netting internal flows and centralising hedging
• Optimised cash deployment—overseas surpluses can fund group needs
• Reduced banking fees as fewer external transactions are made

Challenges

• Complex to implement; may face local regulatory, tax, or legal hurdles
• Transfer pricing must be robust to satisfy tax authorities
• Risks of non-arm's length rates or inadvertently providing unlicensed financial services

Worked Example 1.3

A subsidiary requires additional funds. Instead of borrowing from an external bank, it draws from the in-house bank at a group-set rate.

Answer:
Group cash surpluses are used to fund this need, minimising external borrowing. The in-house bank administers the loan, charges interest, and records the transaction, providing full group visibility over internal funding flows.

Exam Warning – In-House Banking

Operating an in-house bank in some countries can create regulatory risks, such as being required to obtain a banking licence or triggering unexpected tax liabilities. Always check local requirements.

Summary

Netting, pooling, and in-house banking are core tools for multinational treasury operations. They increase efficiency, cut costs, concentrate liquidity, and improve FX risk and interest management. However, successful implementation depends on careful consideration of local law, tax, and operational constraints. These approaches support group-wide financial strategy and are highly examinable at ACCA AFM level.

Key Point Checklist

This article has covered the following key knowledge points:

• Explain the purpose of netting, pooling, and in-house banking in multinational treasury management
• Differentiate between bilateral and multilateral netting, and physical vs notional pooling
• Identify the benefits and risks of centralising treasury functions using pooling and in-house banking
• Recognise the legal, tax, and regulatory factors affecting netting, pooling, and in-house bank implementation
• Apply these techniques to reduce group transaction costs, optimise liquidity, and manage risk

Key Terms and Concepts

• netting
• pooling
• in-house bank
• physical pooling
• notional pooling