The Value of In-House Banking for TreasuryKaren Willis, CTP & Partner

Elire Inc.

Agenda

• Elire Introduction & Industry Experience

• In-House Banking Overview

• In-House Banking Implementationo Considerationso Goals & Challengeso Implementation Strategies

• Post Implementation Benefits

• S 385 Final Regulation Highlights

• Q&A

About Elire

• Elire is the industry leader in ERP Treasury solutions

• 150+ Treasury workstation implementations

• Elire Partners with 20 years in Finance & Treasury

• Elire Consultants average 7 to 12 years experience

• Published as a thought leader in the industry

• A SWIFT Ready consulting partner for 10 years

• Key Consulting Practices

o Treasury Advisory Strategic Services

o TMS RFP & Implementation Services

o Bank Services RFP & Selection

o Bank KPI Scorecard Assessments

o End User Adoption and Change Enablement

150+ Clients

30+ Fortune 500 Clients

30+ Financial Services Clients

Elire In-House Banking (IHB) – Industry Experience

US-based Utilities

US-based Insurance Companies

US-based Healthcare Companies

Global Hotel Chains

Global Auto Manufacturers

Global Securities Firms

Global Real Estate Leaders

Elire Delivers Success

IHB - Regional Treasury Center Model

NYCTO / LUXTO

Regional Treasury Center

Bank Account Locations

In-House Banking – Organizational Structure

Corporate Treasury

• CFO Global Cash Management

• Corporate Credit Facility

• EBIDA & Covenants

• Bank Relationship Mgmt

• Macro FX Hedging

• Risk / Insurance

• Treasury Technology

Regional Treasury

• In-country Cash Position / Liquidity Oversight

• In-country Operations Cash Forecast Planning

• Regional Vendor POBO

International Treasury

• Implement IHB Cash Pools

• Intl Liquidity & Investments

• Pool FX Hedge Mgmt

• Supervise Cash Pools

o Transactions

o Statutory / Legal / Audit

o Market Rates

o Global Intercompany Settlement

• Intl Cash Forecast

• POBO – 3rd Party vendor

• I/CO Multi-Lateral Netting

• Intl M&A due diligence

Corporate Scenarios for Internal Loans

• IHB - Cash Pool Loan/Overnight Loan/Revolver Loan o Overnight loans offered to business unit (BU) by the

Cash Pool o Loans are denominated in the business unit’s Functional

Currency o All entities have Deposit/Loan Agreements with the IHBo Benchmark Rates are used to accrue interest daily

• Intercompany Loan from Corporate to Business Unito Executed as a Term Loan if O/N loans from IHB

cannot be placed--specific Term Loan agreements

• Intercompany Loan between Business Units o Loans between two individual business units are

minimized--replaced by overnight loans from IHBs

IHB – Core Terms

Term Definition

Internal BankA counterparty that is an internal business entity in your organization and is acting as a nominal pooling/funding unit

External BankAn outside organization that represents a physical (“brick and mortar”) financial institution

Internal Bank AccountAn account that exists solely within your organization and is used to transfer “nominal” funds between entities

External Bank AccountAn actual physical account at a financial institution with which you maintain a banking relationship

Current Account

Financial term that references the external physical bank account owned by a business entity and used for short term funding of operations/payments. Can also be used in an IHB scenario to reference the primary nominal internal account relationship

IHB – Nominal to Physical Pool Structure

In-House Banking – Cash Pools

• Nominal Pool Structureo IHBs are typically in USD, EUR, & GBP currencies; can be multiples

o Nominal netting of intercompany A/R & A/P is naturally achieved

o IHB nominal daily position reflects cash needs of pool participants

o FX trading for funding purposes is performed at IHB Pool level

o Non-deliverable functional (NDF) currency positions are still tracked

o Regulatory restrictions in some countries (i.e. Italy, Poland)

o Significantly reduces number of daily payments and related fees

• Physical Pool Structureo Daily ZBA transfers for excess of participating cash (less reserves)

o IT Technology should support automated sweep transfers

o Some physical currency holdings must remain in-country

o Entities with NDF currencies will not participate in physical cash sweeps to minimize local FX trades to deliver funds to IHB bank accounts

IHB – Internal vs External Cash Flows

IHB – Mirrored Account Structures

IHB Sweep Example – Current State

• BU Canada’s operating cash cannot be managed effectively due to time zone different between Canada and Frankfurt

• CAD cut-off time at Deutsche Bank (DB) Frankfurt is 3:00 PM CET (9:00 AM EST)

• BU Canada must request cash before 9:00 AM EST to receive same day delivery

• BU Canada currently makes USD term deposit at Corp for excess cash

• BU Canada enters into local FX trades to deliver USD to Corp

• Must enter into another USD trade to convert back

IHB Sweep Example – Future State

• Corp Entity will open CAD account at Deutsche Bank Toronto location

• Cash needs requested from BU Canada by 5:00 PM EST

• Fewer FX trades as BU Canada will maintain CAD at Corp cash pool for operating needs and continue to be USD functional

• Corp will manage relationship with Deutsche Bank Toronto office

• In addition to USD investments, Corp pool could also invest in CAD

IHB - Implementation Considerations

Policy Changes• Corporate to revise internal agreements to allow sweep and zero-balance account (ZBA) • New policy redefines minimum operating cash to allow cash sweep between BUs and IHBs• Change Corporate investment policy required to invest in multiple currencies

Resource Requirements• Regional Treasury Centers (RTC) satellite offices needed to sweep BU bank accounts to zero • BUs and IHBs need to work in same time zone • Need to define resources, system requirements, etc.

Bank Account Locations• Implementing sweep globally will require changes to bank account locations • Open accounts in strategic country locations with a global bank to resolve time zone issues• Ideally Company and BU’s hold accounts in the same bank to minimize wire fees

Daylight Credit Arrangements• Intra-day credit is recommended for BU’s bank accounts• Negotiation with bank eased by opening regional BU accounts with Company’s main bank

IHB - Implementation Considerations

Sweep/Bank Account Architecture• All cash above target balance is swept into the cash pool. Target balance will be defined

for each entity IHB position• Entities with deliverable functional currencies but time zone issues should implement

sweep construct by changing bank account structure• Entities with time zone issue or non-deliverable functional (NDF) currency will not sweep

cash to IHBs (i.e., South America, Middle East/Africa, Asia)

Multi-Lateral Netting Account Architecture• ML Netting is best practice within an IHB pooling structure• IHB nominal balances achieve a natural daily netting function• Can occur at summary level or by individual transactions depending on IHB policy and

system technology capabilities• BUs typically require review and pre-approval of their netting so a user online interface

or reporting process is needed• ERP software provides a natural integration for intercompany A/R & A/P

In-House Banking – Goals / Challenges

• Maximize actively invested funds in preferred currencies

• Streamline International Banks, Currencies, # of Accounts

• May require combination with existing localized pool structures

• Optimize global FX management of currency holdings

o Consolidated long positions used to fill short needs

o Global FX hedging vs regional/local hedge positions

• Corporate Tax & Advisors must validate the IHB country/entity structure—i.e., dedicated physical presence in Luxembourg with in-house administration

• Complex Regulatory / Legal / Audit documentation

• Complex configuration for technology solutions—limited options with all necessary capabilities

• Centralized vs decentralized International CM for different entities

IHB – Implementation Strategies

• A European In-House bank (IHB) is typically established as a Luxembourg legal entity with a functional (base) currency of USD or EUR

• The USD-Domestic IHB is separate from the European IHB

• IHB cash pools in EUR, USD, and GBP; other currencies such as CAD depending on nature/physical location of prominent business units

• BU entities will hold IHB internal accounts in their local in-country currencies, but transactions are allowed in multiple currencies

• Actual external cash should only move from IHB to/from entity for funding and concentration purposes

• Some Entities (i.e., US) may not borrow from a foreign IHB…may only lend

• Asia-PAC is often not in the scope of Phase 1 implementations due to regulatory complexity and NDFs

IHB – Implementation Strategies

• The IHB internal Pool Banks handle FX trading for their respective pool structure

• Pre-netting of the intercompany AP/AR obligations will occur before entering the IHB only if volumes are excessive

• IHB accounting transactions will be recorded in multiple ledger structures—i.e., ACTUALS, REPORTING, and INTERNATIONAL (local)

• Internal nominal transfers should use the same corporate daily FX spot rate used for general ledger revaluations to avoid unexpected gains/losses

• External transfers will utilize externally negotiated rates negotiated with FX banks/counterparties

• Automation is critical—identify Treasury Mgmt Software to support the complexity

IHB – Impact & Benefits

IHB – Impact & Benefits (Continued)

Current Process New Process Impact/Benefit

Intercompany Loan

• Loans are placed between entities including BU levels and approvals

• Interest rates are set during the negotiation process

• Overnight loans will be offered to BUs from their respective cash pool to the extent possible

• Streamline the loan approval process and standardize interest rates, maturity, etc

Interest Rate

• LIBOR + applicable spread for non-deliverable currency deposits

• Company cash traders use excel to set interest rates and book trades in TMS

• Currency benchmark rate × consistent factor• Interest accrues on a daily basis • Interest rates will be determined by

automatic rate feed from Bloomberg or Reuters

• Standardized and simplified process for interest rate calculation and maintenance

Internal Credit limit

• Limit set for BU on an ad-hoc basis • BU’s internal credit limit/revolving facilities will be approved on an annual basis in conjunction with annual budget

• Streamline the BU’s credit setup process

Accounting

• TMS provides accounting entries for Company per US GAAP

• Entities make manual adjustment

• All accounting rules will be per US GAAP in the system

• Provide BU’s ledger per US GAAP

IHB Technology - ERP Solution Example (PeopleSoft)

IHB & USTD/S385 Some Key Considerations

• Limited to U.S. borrowers and instruments

• Exclusion of certain short-term debt—i.e., O/N loan/deposit in cash pool

• Documentation Rule - must be satisfied (on or after January 01, 2018)

• Recharacterization Rule – a tainted debt instrument becomes stock (after Apr-04-2016)

• Single, annual credit analysis for debt instruments

• Netting of payables/receivables are allowed

• Issuer’s Expanded Group (EG) now excludes S-Corps, RICs, & REITs

Important Note: This material should not be relied upon as accounting, tax, or other professional advice. Consult your own advisors.

Thank You!