Optimised liquidity management -- a West-to-East sweep

For more than a decade, the buzzword in many industries has been globalisation. How has this trend impacted corporate treasuries?

Are treasuries moving from a local or regional operating model to one that is applied globally? How do we reflect the global nature of business and the need for full visibility and control over an increasingly complex and challenging web of transactions? What differences do we see between regions? Is there a global template applied across the regions or does every region have its own model?

Focus on centralisation

Treasurers are now seeking standardised automated solutions that:

  • Streamline processes;
  • Give greater control over dispersed cash positions and ultimate cash position; and
  • Unlock liquidity from the working capital cycle for investment, more efficient inter-company funding or for debt payment.

What emerges is in effect a two-stage approach to centralisation.

The first step taken by many companies is to adopt an “arm’s length” approach to centralising liquidity. This model involves some internal transactions. For example, a subsidiary might choose to place excess cash with the central treasury, using it as an internal bank, but this only takes place when funding is required. Some companies may use this model because their subsidiaries need or want to vary the length of time to place funds centrally. This model allows the subsidiaries to play the yield curve internally and so may be essential if they are assessed on how much interest they can achieve. With risk management taking priority over interest rates in more companies, fewer local treasuries are handling their own position in this way.

For companies that have taken the first step towards the arm's length model, it would be interesting to investigate the kind of benefits full centralisation would bring - this would in effect be a global multi-currency centre in which daily cash balances are swept via a fully automated process into one global liquidity position, without any action by individual operating companies.

In our experience, this model has been adopted by only a few companies. But because of the strong drivers for centralisation, such as the current market turmoil, the available liquidity techniques and the change of the regulatory environment due to the introduction of the Single Euro Payment Area (SEPA) in Europe, we believe that this is a good time for companies to investigate the level of centralisation they require.

Key drivers for centralisation

First, the banking crisis and global credit crunch are weighing heavily on some corporates. Making cash work harder for the global organisation is vital at the best of times but current conditions are constraining corporates' funding like never before. As liquidity has tightened in the market, corporates are forced to look for ways to reduce their dependency on external funding. Where yield enhancement was one of the key treasury objects in the past, treasurers now need to mobilise the cash available in their organisation to gain greater control and to improve internal funding. The opportunity cost of idle cash has increased dramatically while, at the same time, external funding has become much more expensive. Leaving cash on local balances while the central treasury has a funding need is simply too expensive with the rising cost of working capital.

These factors have often positively impacted the outcome of business cases on centralised liquidity models. What is clear is that the current financial crisis has urged corporate treasurers to develop a view on centralisation.

Second, the introduction of SEPA and its accompanying payments instruments will further accelerate the centralisation of transaction processes in Europe. When the SEPA initiatives have been fully rolled out (scheduled for 2011), the European payment landscape will look completely different from today. Corporates can have remote access to any European market through one account located in the SEPA-zone. Shared services centres have been processing centralised payments for a number of years but, with the introduction of the SEPA Direct Debit in November 2009, there will be the opportunity to centralise the accounts receivable side of the business. Centralisation in Europe is poised to enter its final phase, which means in theory that corporates would need only one account for all their SEPA collections and payments.

Lastly, advances in global banking technology now allow the automation, outsourcing and centralisation of cash and liquidity management. Such technologies are improving the visibility and control of the net cash position and are enabling treasuries to invest surplus cash centrally, to reduce their dependence on local bank finance, or to improve the group debt management considerably. Today's automated liquidity management tools make it possible to move positions across a group of accounts and locations into a regional or global cash position.

The main tools for the next level of liquidity centralisation are:

  • Global cross-border sweeping: End-of-day, same-day value automated sweeps to optimise internal funding and minimise credit needs.
  • Multi-bank cash concentration: Automated sweeps that read the local accounts held with local banking partners and include any excess cash into the centralised liquidity overlay.
  • Cross-currency notional pooling: A notional overlay, which allows companies to manage their multi-currency positions without executing labour-intensive or costly foreign exchange swaps, as a single position, in their home currency. This provides the benefits of a cross-currency set-off and automated inter-company interest allocation.

Case study: Optimised liquidity in the West for an Asian multinational

Konica Minolta Business Solutions (KM) is a leading provider of advanced imaging and networking technologies, headquartered in Tokyo, Japan. With 25 subsidiaries operating across Europe, each with its own profit centre, the company had identified a need to improve its existing cash management structure.

The challenge: Achieving greater visibility and control over Europe-wide balances

KM's European business is headquartered in Germany, with subsidiaries across the region. Whereas some subsidiaries were cash-rich, others required local bank financing. Its key priorities were to gain central oversight of cash positions and to mobilise cash across the region. The company sought a "lean and mean" cash management structure, with a centralised approach to liquidity management across Europe. KM's main goals were to:

  • Increase the transparency, control and centralisation of cash positions.
  • Reduce interest costs through better use of internal funds and reductions in local borrowing; and
  • Reduce banking costs (administrative costs, banking fees, systems).

By being able to pay down debt in one part of the organisation with idle cash lying elsewhere, KM could maximise internal cash to reduce interest charges. In addition, a Europe-wide rationalisation of its banking relationships would help to reduce banking fees and administrative costs.

The solution: Regionally centralised liquidity management

The resulting cross-border European liquidity management solution has been rolled out to 19 countries in Europe and covers all 25 KM subsidiaries in the region. The solution centralises cash positions automatically, netting cash balances against debts to reduce interest costs and to enhance the balance sheet.

Balances from the local accounts are swept via cross-border zero-balancing to a cross-currency notional overlay. This notional overlay involves mirror accounts in the Netherlands for each in-country local currency account.

Where KM needs to retain accounts with other local banks, these third-party balances are incorporated into the overall structure through a multi-bank cash concentration solution. This tool generates an automatic request to transfer surplus funds from third-party accounts into the overlay.

Overall, the solution delivers regionally centralised liquidity, enabling KM to use consolidated currency positions to mobilise working capital to pay down debt or to send to other parts of the group, optimising group liquidity. The solution includes the roll out of an online cash management portal, enabling bank account reporting and payment initiation at both a group and subsidiary level. By providing a consolidated view of group transactions flows, including third-party balances, the portal was instrumental in supporting KM's goal of achieving greater transparency for its treasury operations.


In addition to the tremendous efficiencies that KM has achieved through group cash pooling, the solution managed to reduce EUR45m of interest-bearing debt for the company. There is also less administrative burden on local subsidiaries, and treasury representatives have reduced their administrative work by an average of 20%.

KM is one of an increasing number of companies that are adopting a regionally centralised liquidity management structure, and it needed a bank with the geographical reach and advanced solutions to help it achieve this goal.

Ken Osuga, chief financial officer, Konica Minolta Business Solutions Europe, said of RBS's solution implementations: “We are extremely satisfied with the relationship [with RBS]. The bank’s systems capability and geographic reach met our requirements. We were impressed with the partnership approach, which helped us develop an ideal solution and, just as importantly, roll it out successfully across Europe and gain the support of everyone involved. We look forward to working together to further optimise and extend our liquidity management arrangements in future.”

Optimising liquidity from West to East

New liquidity tools are vital to the successful realisation of one central liquidity position regionally, as the KM case study illustrates. But what about the next phase - global control over liquidity?

Global zero-balancing is one of the key enablers of a global treasury centre (GTC) because it guarantees same-day value, end-of-day sweeps and connects regional treasury centres to the GTC located in Asia. Without this kind of automated West-to-East sweep, problematic cut-off times or lost value days could cancel out the benefits of a GTC.

A West-to-East sweep mobilises Western liquidity in Europe and North America and includes regional positions in the GTC at the end of the Asian business day with the same value day. It provides Asian multinational companies with the perfect solution to optimising Western liquidity, especially during the current financial crisis.


It is clearer than ever that liquidity management is undergoing continuous change. With banking technology now available to fully integrate liquidity positions across countries and regions, and even mobilise liquidity against the day and night with same-day value from the West at the end of the Asian business day, companies now have the opportunity to increase the efficiency and performance of their liquidity operations.

A few of the key global banks with extensive branch networks in Europe can deliver comprehensive liquidity management solutions across all regions, enabling companies to realise their goals. These solutions are fully automated and can be set up to meet the specific needs of treasurers, enabling them to reduce or eliminate manual processing, achieve visibility and control over global liquidity and focus on the strategic aspects of global financial management - core funding and cash and working capital optimisation in Asian working hours.

As the current financial environment is putting pressure on corporates to increase their liquidity management efficiencies, they might be relieved to find out that achieving these targets is not a challenge they need face on their own.


First published in HSBC's Guide to Cash, Supply Chain and Treasury Management in Asia-Pacific 2010. PPP Company Limited and The Hongkong and Shanghai Banking Corporation Limited. All rights reserved. Published with the kind permission of RBS and PPP Company Limited.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media