Multilateral Netting Reloaded
By Eleanor Hill, Editor
Multilateral netting is one of the most underestimated ways to optimise intercompany payments and group performance. In this Executive Interview, Eleanor Hill, Editor, asks Martin Bellin, Founder and CEO of the BELLIN Group, to explain why multilateral netting deserves a little more attention, and how treasurers can make the most of it.
Eleanor Hill (EH): First things first: what exactly is multilateral netting and why should treasurers be interested?
Martin Bellin (MB): In simple terms, multilateral netting is the evolution of bilateral netting – and involves group treasury running a netting centre to handle all intercompany payments. This acts as a reconciliation hub across the entire group: information about payables and receivables is delivered by the respective group companies to the netting centre and settled for the eligible subsidiaries by the netting centre. This avoids direct payments between the different subsidiaries, increases transparency and visibility and vastly reduces the number of intercompany payments within the group.
EH: So, is multilateral netting an accounting topic or a treasury topic?
MB: That’s a good question, because any process that begins with the reconciliation of every single invoice issued within the corporate group is an accounting procedure. But as a result of that reconciliation, it is possible to run a multilateral netting process straight away, which is a treasury responsibility, because treasury has to cover the interest on any positions caused by unreconciled and unpaid invoices as well as the associated FX risk.
As such, multilateral netting is a cross-functional effort – and seeing it this way is one of the key ingredients for success. So, if the treasury function wants to implement a multilateral netting process, they should get accounting on board. Buy-in from both sides is essential and both accounting and treasury stand to benefit.
Interestingly, the fact that multilateral netting is a cross-functional challenge is also a factor in why netting is not always considered important. Treasury tends not to see the value in optimised reconciliation; and accounting often won't mind the unfair interest allocation and the associated FX risk because there is nothing for them to book.
Furthermore, because multilateral netting primarily serves to reduce the number of bilateral payments between subsidiaries, groups that have an insignificant volume of such intercompany payments often don’t see the value of multilateral netting. But intercompany netting is merely one step in a longer process chain – and, when implemented successfully, it can lead to optimisation opportunities across the entire chain.
EH: With that in mind, what are the potential benefits of performing multilateral netting? What efficiencies might treasurers see?
MB: If implemented successfully, there are benefits on many different levels. But to give you an idea, I always say that a company which is not performing multilateral netting must be able to afford it!
On the foreign exchange (FX) side, one benefit sits with subsidiaries’ sales organisations. Often, they are supposed to buy their products at the group level and then sell them in the local markets. As a result of this activity, they are frequently exposed to FX risk because they are invoiced in foreign currency. And understandably, these subsidiaries are typically unequipped with the resources or knowledge to mitigate that risk effectively.
This leads to a tremendous uncontrolled risk within the group, which is the last thing a CFO wants. To address this, there are two choices a company can make: either change the invoicing currency, or implement netting. Implementing netting is arguably much easier as it does not require any change in invoicing procedures. In addition, multilateral netting allows for the FX risk to be transferred from the subsidiaries to the group company, which is in a far better position to manage this risk. In fact, in many corporates, it is the netting centre itself that manages the entire FX risk of the group.
Another benefit of multilateral netting can be found in intercompany invoicing and the level of visibility over cash flows. Subsidiaries tend to make bulk payments at regular intervals to settle intercompany invoices – and for each payment day in every company, the treasurer has to check if there are any intercompany financing issues, because many companies are funded by the central treasury.
But when these bulk payments are concentrated into one or two days a month, it is not easy to predict when cash is available, or when cash is needed, at a subsidiary level. With multilateral netting in place, the treasurer can check the status of each subsidiary every single day – and the financing of the subsidiaries becomes much more efficient for both sides.
In short, multilateral netting can significantly reduce treasury’s workload around intercompany financing, improve cash visibility, and lead to more effective management of FX risk. And there are also benefits for accounting, such as automated posting for intercompany invoices.