What is notional cash pooling?

Notional pooling is an arrangement whereby the bank offsets the corporate’s balances to reduce the interest spread (the difference between credit and debit interest rates) charged by the bank. In order to achieve this, the bank needs to be able to report the net balance for regulatory capital purposes.

What are the different types of cash pooling?

There are two main types of cash pooling arrangements: notional cash pooling and physical cash pooling. A notional cash pool allows the multinational group to net off the balances of various bank accounts across jurisdictions. The cash is not physically transferred to a cash pool leader’s bank account.

What is cash pooling with example?

Cash pooling in practice: an example A group consists of a holding company and three companies. Their bank balances change daily as a result of their business activities. Strong fluctuations in turnover are not uncommon in the market the group operates in.

What is the difference between account sweeping and notional pooling?

What’s the difference between Notional Pooling and Cash Concentration? Cash Sweeping involves the physical movement of funds into a master account. While in Notional Pooling, there is no physical movement of funds as account balances are notionally set-off.

What is notional cash?

The notional value is the total amount of a security’s underlying asset at its spot price. The notional value distinguishes between the amount of money invested and the amount of money associated with the whole transaction. The notional value is calculated by multiplying the units in one contract by the spot price.

What is the purpose of cash pooling?

The cash pooling (or cashpooling) is a centralized cash management strategy to balance the accounts of a group’s subsidiaries. The final goal is to optimize the condition and the management of the treasury by overcoming the imperfections of the financial markets with less financial costs.

What is the main downside of notional pooling?

The main downside of notional pooling is that it is not allowed in some countries. It is difficult to find anything but a large multi-national bank that offers cross-currency notional pooling. Instead, it is most common to have a separate notional cash pool for each currency area.

What is a cash pooling structure?

Cash pooling is an arrangement to facilitate the management of daily working capital fluctuations between related subsidiaries—it is not used to keep large cash profits offshore.

Why cash pooling is important?

Benefits of Cash-Pooling Reduction of banking costs. Reduction of financing needs by offsetting debit account with credit account avoiding over-financing. Optimization of financial resources: greater availability of funds is avoided with dispersed balances across accounts. Greater bargaining power with banks.

Is notional pooling allowed in the US?

The reason for the prohibition of notional pooling is that some governments believe that such pooling constitutes a co-mingling of funds from different entities. Notional pooling is allowed in most European countries, but is not allowed in the United States.

Why is notional pooling not allowed?