Most organizations are familiar with notional pooling, a service offered through commercial banks that pools all participants’ account balances into one account with a single lump sum of funds for ease of access. This header account redistributes the collected funds to negative balance accounts for immediate relief. By doing so, costs associated with short-term balance fluctuations are mitigated and debit interest rates from negative accounts are eliminated. Positive balances linked to this account can be moved to offset the negative balances, resulting in more efficient cash utilization. Notional pooling is offered through external, commercial banks, and often comes with inflexible regulations and high monthly fees. A rapidly evolving system, known as the In-House Bank (IHB), has created a streamlined version of notional pooling that helps eliminate the need for external banks for effectively managing their account balances. This IHB feature is known as nominal pooling and is often offered through a Treasury Management System (TMS).
Nominal Pooling operates the same as notional pooling, in that it pools all the funds of all accounts within the designated pool group to a singular overarching account. These funds are distributed as needed, the only major difference is that everything is done internally, or in-house. Through a TMS, treasurers can create distinct account groups for the major market currencies they operate in, as well as multi-currency accounts if offered through the TMS. They can set target balance amounts for each account in the pool, as well as the header account. For example, Zero Balance Accounts are commonly used pooling, where the accounts that sweep funds into the header account are balanced at a value of zero, so there is no positive or negative balance at the end of the close period. Even though the ending balance may be zero, the accounts are still considered to be in either surplus or deficit from a transactional perspective. ZBAs avoid any debit interest rates that may be tagged on to accounts that would have ended in a negative balance. It is important to note that these account groupings do not affect the accounts themselves, only the ending account balances and associated debit/credit interest rates.
Utilizing a nominal pooling structure for major market currency accounts means that organizations are in control of their money movement, rather than relinquishing control to external banks and restrictive contracts. It allows the In-House Bank to perform its natural netting process of inner-company accounts receivable and payable, through the automated clearing of inter-entity non-physical cash flows. This significantly reduces all daily cash movements and associated fees.
Since the account balances are managed in-house, it provides treasurers with heightened tracking and managing capabilities. It provides nominal daily cash positions that reflect the funds needs of pool participants, as well as tracking for all non-deliverable functional (NDF) currency positions, which can both be utilized in risk management opportunities. Nominal pooling allows for all FX trading (for funding purposes) to be performed at this aggregated pool level within the In-House Bank. Additionally, nominal pooling provides organizations with a single liquidity position, allowing each subsidiary within the pool to take advantage of it while still retaining their own cash management privileges.
Though nominal pooling can provide significant benefits to organizations, it is important to note that there are some regulatory restrictions that may be in place, depending on where the organization is located. In locations like Italy, organizations are required to disallow debt positions. In Poland, complex tracking such as first-in-first-out (FIFO) is required. Treasurers should also research any tax rates that apply and if they differ based on where the accounts or IHB structure is set up in.
For more information on Nominal Pooling, In-House Banking, and Treasury Technology, check out our In-House Banking Whitepaper and library of session recordings and content from the 2020 Elire Treasury Experience. Access to session recordings is password protected. To request access, please reach out to [email protected].
