ACCA AFM Syllabus E. Treasury And Advanced Risk Management Techniques - Netting - Notes 12 / 13
Netting is settling the debtors and creditors in the group resulting in the net amount either paid or received.
There are two types of netting:
Bilateral Netting
In the case of bilateral netting, only two companies are involved.
The lower balance is netted against the higher balance and the difference is the amount remaining to be paid.
Multilateral Netting
Multilateral netting is a more complex procedure in which the debts of more than two group companies are netted off against each other.
Example - June 2013 extract
Kenduri Co is considering whether or not to manage the foreign exchange exposure using multilateral netting from the UK, with the Sterling Pound (£) as the base currency.
If multilateral netting is undertaken, spot mid-rates would be used.
The following cash flows are due in three months between Kenduri Co and three of its subsidiary companies.
The subsidiary companies are Lakama Co, based in the United States (currency US$), Jaia Co, based in Canada (currency CAD) and Gochiso Co, based in Japan (currency JPY).
| Owed by | Owed to | Amount |
|---|---|---|
| Kenduri Co | Lakama Co | US$ 4.5 million |
| Kenduri Co | Jaia Co | CAD 1.1 million |
| Gochiso Co | Jaia Co | CAD 3.2 million |
| Gochiso Co | Lakama Co | US$ 1.4 million |
| Jaia Co | Lakama Co | US$ 1.5 million |
| Jaia Co | Kenduri Co | CAD 3.4 million |
| Lakama Co | Gochiso Co | JPY 320 million |
| Lakama Co | Kenduri Co | US$ 2.1 million |
Exchange rates available to Kenduri Co
| US$/£1 | CAD/£1 | JPY/£1 | |
|---|---|---|---|
| spot | 1.5938-1.5962 | 1.5690-1.5710 | 131.91-133.59 |
Required:
Calculate the impact of undertaking multilateral netting by Kenduri Co and its three subsidiary companies for the cash flows due in three months.
Solution
Based on spot mid-rates: US$1·5950/£1; CAD1·5700/£1; JPY132·75/£1
Multilateral netting involves minimising the number of transactions taking place through each country’s banks.
This would limit the fees that these banks would receive for undertaking the transactions.
It disadvantages may include:
The central treasury may have difficulties in exercising control that the procedure demands.
Subsidiary company’s result may be distorted if the base currency is weaken in the sustained period.