Global Cash Management with Crypto-assets and XRP

A new use case beyond payments

tl;dr: The world of financial DLT business and digital assets is focused on payments. But corporate cash management is not only payments. Multinational companies have been using a variety of treasury processes to optimize their global liquidity. Some of these processes are costly or impractical due to the current cross-border funds transfer model. Utilizing a crypto-asset, such as the XRP, in a regulated and resilient market, could result in significant benefits for the global cash management business by lowering treasuries’ costs, bringing operational efficiencies to corporate clients, and maintaining the market position of treasury services at investment banks.

Intro

In the previous post (Ripple and XRP for the Corporate Treasurer) we presented an analysis of Ripple’s solutions functionality from the corporate treasury’s point of view. We saw that, while discussions on distributed ledger technology (DLT) payments applications are mostly centred around financial institutions’ use cases, the widespread adoption of these solutions could bring tremendous benefits to corporate treasuries as well.

But payments processing is only one piece of the treasury’s cash management puzzle. Could there be anything else — beyond payments — for XRP and DLT-based liquidity solutions in general?

This paper introduces the possibility of utilizing crypto-assets for treasury services and corporate cash management.

Corporate Cash Management in a nutshell

The intended audience of this post is both crypto and treasury professionals, so it is appropriate to begin with some definitions. The article is not intending to be a treasury or a cash management guide. For the purpose of the presented case study we will use the following breakdown of corporate cash management processes:

Flows management (payments and collections)

Balances management (bank balances originating from flows)

In a nutshell, corporate treasurers use flows and balances management tools to ensure that (a) the company will have enough money to fund its operations, (b) the company’s excess cash will be utilized in the most efficient way and (c) the above tasks will be executed with the minimum possible credit, market and operational risk.

These tools can be either in-house strategies deployed with the use of technology (ERP and TMS), or processes provided as a service (treasury services) by major financial institutions, such as JP Morgan, HSBC, and Citi.

The tools range from simple cash pooling strategies and intercompany loans to highly sophisticated structures involving the set-up of one or more in-house banks. There is no “one-size-fits-all” tool because the availability of each one of them varies from country to country. And as each corporate faces a unique set of challenges, it is no surprise that most global treasuries choose to apply a combination of cash management tools in an overlay structure.

The Problem

In order to describe the problem and to identify the pain points where the suggested solution could find its application, a simple example of a hypothetical company operating in multiple jurisdictions will be used. It should be noted though, that global treasuries face far more complex situations than the one presented here and a single example is not enough to describe all the issues.

Let’s assume the scenario of a multinational real estate development company with headquarters in the UK (UK_HQ, group currency GBP), two subsidiaries in Dubai (DB_DEV and “DB_INV”, currency: UAE Dirham — AED) and two in Singapore (SG_INV and SG_DEV, currency Singapore Dollar — SGD). Due to the nature of real estate development business, companies’ finances run on cycles: As long as a project is being developed, funding needs are high and revenues are low. The opposite happens when projects complete: Sales and rental proceeds boost revenues and funding needs fall. For this example, *DEV refers to development subsidiaries while *INV refers to the investment subsidiaries which manage the completed projects.

The CFO and the Treasurer face the following situation:

DB_DEV has a deficit of 1,000 AED and needs immediate funding to continue its operations

DB_INV accounts have a positive balance of 1,200 AED

SG_INV has a positive balance of 640 SGD

SG_DEV runs on a deficit of 100 SGD

The Solution(s)

The most common strategy deployed by corporate treasuries in such cases is cash pooling. Cash pooling can be either physical (i.e. actual movement of cash) or notional. With physical pooling, the bank “sweeps” cash from sub-accounts (turned zero balance accounts — ZBA) to a master account. These sweeps can take place end-of-day and master accounts can be set up on multiple hierarchy levels (entity, country, bank, currency). Subsequently, the master account provides funding to the entities with a deficit and invests the excess cash. All movements of funds between accounts belonging to different entities trigger intercompany loans.

The diagram below shows how a cash pooling structure could be applied:

Master accounts are set on a country/currency level. Excess cash from DB_INV is swept into the AED master account which then provides funding to DB_DEV. Similarly, SG_INV balances are swept into a master SGD account which provides funding to SG_DEV. Any excess cash in master accounts is invested locally.

When sweeps are completed, the balances are set as pictured below:

Sub accounts have now zero balance (ZBA) and the remaining cash in the master accounts is available for investment. By covering the funding needs of the *DEV companies internally (in the form of intercompany loans), the group has managed to lower its borrowing costs.

What happens next? The management would normally want to repatriate the available funds in the UK. This is desirable for a number of reasons: First, having a larger pool of cash, the company will be offered preferential investment terms by their main banking partner in the UK. Secondly, by concentrating the cash in the parent company, group treasury will have much more control over it, being able to provide funding to other subsidiaries if conditions change. Third, trapped liquidity in various currencies and jurisdictions incurs significant FX, credit and operational risk.

The company could apply the same sweeping strategy described above but on a group level this time. After local sweeps are completed, a second pooling process starts and local balances are transferred into the UK and converted to GBP.

Cross-border Cash Pooling. Local master accounts are pooled into UK accounts.

However, where permitted, cross-border cash pooling is often a costly and inefficient process. It is costly because it involves currency conversions and SWIFT cross-border transfers (besides any withholding tax levied on intercompany loans interest). And it is often inefficient because it usually involves multiple banks and foreign currency cut-off times.

A solution to some of these inefficiencies is notional pooling. The group’s main banking partner would agree to notionally aggregate (net) the regional currency balances into a group currency pool and to apply the same terms. However, the commercial future of multi-entity notional pooling is not looking bright under Basel III regulations as banks will probably be required to hold more capital for their ratios. Alternative structures, such as virtual account management (VAM) and in-house banking (IHB) can also provide solutions to these problems but they will not be examined in this post.