• Question ID: 2020/0014
• Date of publication: 31/01/2020
• Subject matter: Cash pooling

Question

Banks may provide financing to groups of companies under cash pooling contracts. Could you therefore clarify the reporting to AnaCredit in the case of financing provided to companies connected in a system of cash pooling? In particular, could you please clarify whether (and how) deposits should be taken into account when the off-balance sheet amount of the cash pool is calculated?

Answer

Cash pooling and cash pooling categories^[1]

Cash pooling is a technique used to balance funds within a group of companies. The main advantage of this system is to centralise the cash to obtain better interest rates.

When companies in a group invest in a cash pool, they collate their bank accounts and have them managed via a master account. As a result, liquidity is bundled, which means that the participating companies can make significant use of capital procurement and capital investment. Cash pooling is possible both at national level with subsidiaries within a country and across borders.

Cash pooling is usually used whenever a group wants to pool its liquidity in order to save costs. This cost saving is achieved either through lower borrowing costs or through higher interest income. Receivables and payables are exclusively settled internally: the companies paying in the money have a repayment claim against a master account, while the borrower has a repayment obligation. External funds (for example, a bank’s loan) are only used if the group’s internal liquidity balance is insufficient to cover capital requirements.

The prerequisite for cash pooling is always a corresponding contract concluded between the participating companies. It contains the conditions under which the balances of the companies are offset against the master account. For example, it determines how high an interest rate is paid within the cash pool by the companies with negative balances to the companies with credit balances.

In order for cash pooling to be legally compliant and fair, the following rules must be adhered to:

• Balance: the contract required for the pooling of liquidity should be balanced for the participating companies. This applies both to the relationship of the contractual partners to the bank and to that between the individual companies of the cash pool.
• Transparency: the cash pool must be kept transparent for all involved. This includes regular reports and insight into the numbers by all companies in the cash pool.
• Limits: all companies involved in the cash pool require fixed credit limits and fixed loan conditions, which are continuously adjusted to their needs.

There are different categories of cash pooling arrangements, depending on the legal circumstances of the contract between the bank and the group of counterparties. These include:

• Effective or physical cash pooling

In effective or physical cash pooling, the balance of each participating company is transferred to a “master account”. This account is usually managed by a holding company. If a company from the cash pool then requires liquid funds, it can receive these from the master account. The balance on the master account is usually covered by loans. If there are claims against the cash pool, the holding company is responsible.

• Virtual or notional cash pooling

In the case of virtual or improper cash pooling, the balances between the holding company with a master account and the cash pool participants are only calculated on a fictitious basis. This virtual account determines the net pool position and represents the basis for calculating the interest to be paid by or charged to the bank that operates the cash pool. This interest is then distributed among the participants in accordance with the conditions specified in the agreement concluded by the members of the pool.

• Hybrid cash pooling

Under hybrid cash pooling, the participating actors combine effective and virtual cash pooling. This method is mainly adopted when different currencies are used within the cash pool. For example, balancing of the respective bank balances takes place only in euro and physically, while original accounts in other currencies are managed only in the context of virtual cash pooling.

Reporting to AnaCredit

Below we provide guidance on the reporting of instruments lent out by AnaCredit banks to companies that are connected in a system of cash pooling. We give examples and an explanation of the AnaCredit reporting logic.

General rules for reporting cash pools to AnaCredit

The dual role of the observed agent (the bank) that operates the cash pool:

• The bank is the creditor and the servicer vis-à-vis the funds that it provides to members of the cash pool (i.e. if the cash pool has a credit facility provided by the bank).
• The bank acts as the servicer vis-à-vis balances that are put into the cash pool by the cash pool participants, regardless of whether the cash pool has a credit facility attached.

The scope of reporting by the observed agent:

• Only credit facilities provided by the bank are subject to AnaCredit reporting.
• Balances that are put into the cash pool by the cash pool participants do not constitute instruments subject to AnaCredit reporting.
• Funds lent out by the observed agent are reported without netting with funds provided by the cash pool participants.
• The reportable off-balance-sheet amount (if applicable) of the credit facility extended by the bank does not depend on the funds/deposits of the cash pool participants; it exclusively reflects the difference between what the bank committed to and the amount of outstanding funds provided by the bank.
• Balances put into the cash pool constitute protection of the credit facility extended by the observed agent and are accordingly reported to AnaCredit.
• If the credit facility is also secured by property and property rights described in the contract, such property and property rights constitute protection and are reported to AnaCredit accordingly.

Importantly, balances that are put into the cash pool by the cash pool participants are not reported by the bank as AnaCredit instruments,^[2] because any such balances cannot be considered to be instruments that give rise to credit risk for deposit-taking corporations, financial corporations other than deposit-taking corporations or asset management vehicles, despite the fact that the bank acts as the servicer thereof. In particular, intragroup loans between companies from the non-financial sector connected in a system of cash pooling are not considered to be such instruments, i.e. the companies participating in the cash pool are not financial corporations engaged in lending on a significant scale (see Fiduciary deposits on behalf of non-financial corporations or natural persons). In other words, it is not the purpose of AnaCredit to collect either non-financial corporation (NFC) deposits held with credit institutions or any intra-NFC loans.

With regard to lines of credit under a cash pool, the reporting to AnaCredit follows the general guidance, in particular the guidance on multi-debtor/multi-product structures. This is because the credit facility is typically available to multiple debtors and the credit limit structure may contain several levels and may encompass different types of instrument. Please refer to Section 3 in Part III of the Reporting Manual, which deals specifically with instruments under a multi-debtor/product structure.

The question regarding whether the credit facility attached to a cash pool is a single instrument and which counterparties are to be reported depends on (i) the legally binding agreement between the bank and the cash pool participants, (ii) the format in which the cash pooling is carried out, and (iii) the cash pooling contract between the participants which determines their mutual rights and obligations.

Specific rules for reporting cash pools to AnaCredit

As clarified above, the reporting of credit facilities attached to cash pools depends on the specificities of a cash pool in a given case. In particular, the reporting requirements depend on the type of cash pooling, where different entities of a group may or may not have any contractual obligations vis-à-vis the bank in a cash-pool transaction.

Accordingly, for the purpose of illustrating the reporting of credit extended by observed agents to counterparties connected in a system of cash pooling, two broad cases of physical and notional cash pooling are distinguished.^[3]

Irrespective of the type of cash pool, however, only credit balances outstanding on cash pooling accounts which are held by the observed agent are subject to AnaCredit reporting. Whether there is one or more debtors liable for the balances depends on the provisions of the legally binding agreement between the bank and the cash pool participants. This specifies which participants are unconditionally obliged vis-à-vis the observed agent to make repayments arising under the (cash pool) agreement.

The following guidance is applied by banks reporting to AnaCredit depending on the nature of the specific cash pool case.

Physical cash pooling

• Instruments: only the accounts that can have negative balances in accordance with the contract are subject to AnaCredit reporting. Typically, only the master account is subject to AnaCredit reporting as, in practice, individual accounts are not supposed to have a negative balance.
• Counterparties: only the pool leader (typically, the parent company) is considered to act as debtor – because only the parent company is a signatory to the contractual relationship with the bank and has obligations to repay outstanding amounts to the bank vis-à-vis the contract – irrespective of the fact that the funds available may be pooled by several entities of the group, which thereby provide protection.

The master account must be reported if the contract implies a credit limit for the group of companies, regardless of whether any funds made available by the bank have been drawn down. An instrument becomes subject to reporting when the observed agent creditor enables the debtor to draw funds after entering into a legally binding agreement with the debtor. In cases where this is not the case, i.e. the bank does not provide any financing, but is simply servicing a zero-balance account, such accounts are not required to be reported to AnaCredit, even if these are serviced by AnaCredit banks.

While the group’s funds are netted with the funds provided by the bank (for example, to determine the applicable interest rate), the reporting is such that no netting of the bank’s funds against any funds of entities of the group is applied. In other words, as only funds lent out by the bank are in the scope, the calculation of undrawn credit lines committed by the banks is not affected by the amount of funds in the cash pool made available by the cash pool participants. However, any funds of entities of the group constitute collateral (i.e. cash collateral) and must be reported to AnaCredit as protection securing the funds made available to the group by the bank. This is line with the requirement that protection in AnaCredit is reported separately from instruments.

Notional cash pooling

• Instruments: the individual accounts are reported, as these are the actual instruments vis-à-vis which the lines of credit are made available to the participants. However, the notional account itself is not subject to AnaCredit reporting.
• Counterparties: the individual participants are reported as debtors vis-à-vis the individual accounts insofar as they are contractually obliged to repay to the bank any funds outstanding under the cash pool.

The following diagram shows a possible structure of notional cash pooling, where the parent company and other entities of the group have independent individual accounts (light orange) and are liable for debt incurred, while the notional account (light blue) is only the group’s internal account and has no legal status in this case.

Notably, the group’s internal account (light blue) does not constitute an instrument in accordance with Article 1(23) of the AnaCredit Regulation and is therefore not subject to AnaCredit reporting. Meanwhile, the individual accounts, each reflecting the contractual relationship between the creditor and the debtor, are instruments subject to AnaCredit reporting. AnaCredit captures credit granted by credit institutions on the basis of a legally binding agreement, where the debtor – a legal entity or a part of a legal entity – has the unconditional obligation to make repayments arising under the agreement. Moreover, following the direct contractual link for the purposes of cash pooling activities between the bank and the cash pool participants, the bank acts as the creditor to all of them, regardless of whether or not they utilise the funds that the banks make available to them. This also implies that the individual instruments are subject to AnaCredit reporting, even if no funds are drawn down.

Furthermore, as the pooling is performed by the bank by means of creating a notional top account that virtually consolidates the positions of the pool participants, but does not represent itself a resource or an obligation of the bank, the notional top account is not subject to reporting to AnaCredit.

Related questions

See also Reporting in the case of notional cash pooling