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Notional Pooling

Notional pooling is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds. This approach allows each subsidiary company to take advantage of a single, centralized liquidity position, while still retaining daily cash management privileges. Also, since it avoids the use of cash transfers to a central pooling account, there is no need to create or monitor inter-company loans, nor are there any bank fees related to cash transfers (since there are no transfers). In addition, it largely eliminates the need to arrange overdraft lines with local banks.  Further, interest earnings tend to be higher than if investments were made separately for the smaller individual accounts. Also, it offers a solution for partially-owned subsidiaries whose other owners may balk at the prospect of physically transferring  funds to an account controlled by another entity. And finally, the use of notional pooling is not a long-term commitment; on the contrary, it is relatively easy to back out of the arrangement.

Where global notional pooling is offered (usually where all participating accounts are held within a single bank), the pool offsets credit and debit balances on a multi-currency basis without the need to engage in any foreign exchange transactions. An additional benefit of global notional pooling lies in the area of inter-company cash flows; for example, if there are charges for administrative services, the transaction can be accomplished with no net movement of cash.

Once a company earns interest on the funds in a notional account, interest income is usually allocated back to each of the accounts comprising the pool.  For tax management reasons, it may be useful for the corporate parent to charge the subsidiaries participating in the pool for some cash concentration administration expenses related to management of the pool.  This scenario works best if the corporate subsidiaries are located in high-tax regions where reduced reportable income will result in reduced taxes.

The main downside of notional pooling is that it is not allowed in some countries, especially in portions of Africa, Asia, and Latin America (though it is very common in Europe). In these excluded areas, physical cash sweeping is the most common alternative. Also, the precise form of the notional pooling arrangement will vary according to local laws, so that some countries allow cross-border pooling, while others do not.

In addition to the prohibition against notional pooling 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.

Related Topics

Bank overlay structure
Cash sweeping