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Explaining the cash pooling and cash concentration models/methods

Moderator

Cash Pooling/Single Legal Account Pooling:

DNB's Group Account Systems/Cash Pools are based on a balance netting principle, often called "Single Legal Account Pooling” or Nordic Balance Netting Model. This is a method commonly used among Nordic banks and it implies that legally only one single bank account, “The Group Account”, is opened per currency. These are the contractual accounts between the Bank and the Cash Pool Owner where the Bank charges and pays its interests.

 

The Sub-Accounts, or the Operational Accounts (OPRs), are the current accounts of each pool member/participant linked to the Group Account, and the terms and conditions on these accounts are set by the Cash Pool Owner, in most cases the parent company/the treasury unit. These terms and conditions (interest margins and limits) are defined as inter-company terms and conditions and the bank only calculates and capitalises interest on behalf of the Pool Owner. 

 

It is relevant to mention that DNB’s cash pools work in a way whereby the balance netting (offsetting debit and credit balances by “sweeps”), do not impose a direct physical transfer of funds between the participant and parent company/cash pool holder. The sweeps are carried out to "report" a net balance in each currency and hence calculate interest on that net balance and accordingly improving the net interest position. The balance is as such "reported", and not permanently moved to/from each OPR account, to/from the parent company. It is immediately posted back to the individual OPR account. The balance on each OPR is as such the pool member’s funds, reflecting the inter-company position (loan or deposit), and it will be available for the pool member at the start of business the next morning.

 

DNB offers a wide range of systems within this segment, from the single currency account/single entity systems at the lower end of the scale, to the more complex cross-border multiple currency/multiple legal entity systems at the upper end of the scale, classified as DNB’s International Cash Pool, the “ICP” concept.  

 

Cash Concentration (ZBA):

Bank accounts in a cash concentration structure are, as opposed to the OPR accounts in the pooling model, all physical accounts owned by each individual entity, with the bank as the contractual counterparty. The basic principle is to consolidate/concentrate end of day balances on the current accounts against one common "Master Account" per currency for the group, either based on a zero balance principle or on a target balance principle. This is achieved by physically transferring the end of day true value dated balance to or from the respective current accounts – meaning end-of-day surplus cash balances will be swept from the current account to the Master Account and end of day negative cash balances on the current accounts will be covered by a transfer from the Master Account to the actual current account. 

 

As in a pooling arrangement, the swept end-of-day balance on each current account reflects the inter-company position against the parent company.

 

Comparing the two models:

In total, the cash pooling (CP) concept and the cash concentration (CC) concept is quite similar as they are both balance netting methods with co-mingling of funds that both leads to inter-company positions between the header account an each member of the account structure. The one main difference is that funds are not returned to the member account in a CC structure while they are returned in the CP model. This implies that in order to process transactions one needs to allocate intra-day limits granted by the bank in a CC structure while in a CP model the swept funds are returned and available at the pool member account. If there are still not sufficient funds after the return sweep has taken place, the account can be funded by applying an inter-company limit (overdraft), granted by the Cash Pool Owner.      

 

Notional pooling:

In a notional pool, the netting is done without establishing a physical account structure, and as such no funds are moved from a sub-level to a group level on a day-by-day basis, and accordingly, there will be no inter-company positions to report or book. A recalculation is instead performed after the end of each capitalisation period (monthly/quarterly), as if the account balances were “notionally” pooled, and this netting benefit is then paid/compensated back to the "pool holder".

 

Based on the above, notional pooling is in most cases an interest optimisation tool for maximising interest income and minimising interest expenses only. Notional pooling is also called interest compensation or interest enhancement.

 

There are usually no features in a notional pool that support working capital optimisation in the sense that there are no possibility to utilise group liquidity, e.g. by one member in a deficit position to utilise the surplus funds provided by another member of the pool. Likewise there is no option to allocate inter-company limits by the pool owner, like in an ICP solution.