Adam Smith Awards Asia 2018

Overall Winner Best Liquidity Management Solution General Electric Singapore Manu Taneja, Director, Banking & Liquidity Leader, APAC Operating in approximately 175 countries, General Electric (GE) is a diversified American industrial company with businesses across power, healthcare, aviation and oil and gas. Tax and ‘regtech’ liquidity solution for USD and KRW in South Korea The challenge Having previously addressed the liberal markets and currencies across the APAC region, General Electric’s (GE) attention turned to the more restricted markets in 2017; its efforts focusing on Vietnam, India, Korea, Malaysia and the Philippines. GE’s Korean operations are one of the largest in the region, with a top line of US$1.1bn. Its current liquidity solution was sub-optimal to support the growing needs of the business. • Legal entity level working capital – though the overall country level position is long, there are working capital gaps between individual entities that lead to short positions and related cost inefficiencies. • Korean regulations – on inter-company lending and borrowing are highly restricted and cost prohibitive, with a local rate of 4.6% for any intercompany transfers. Furthermore, local rules restrict overdrafts in onshore foreign currency accounts. • Cash flow forecasting and sub-optimal yield – liquidity is spread across multiple legal entities and mostly untapped for internal working capital. This severely affects treasury’s ability to forecast, leading to large buffers which discouraged short tenor investments. The solution GE and Citi collaborated on a first-ever tax efficient structure in Korea. The components resulted in a multi-tier liquidity structure for USD and KRW that enabled true end-of-day entity level cash concentration. This in turn delivered funding efficiency between multiple entities on pre-defined priorities and conditions. This bespoke structure caters to GE’s operational needs in Korea. This redefined cash pooling possibilities in a market like Korea, compliant with local regulations and optimal liquidity efficiency. KRW solution ƒ ƒ GE account structures enabled funding for negative positions only, to avoid any inter-company lending cost on positive positions when balances are co-mingled. Thus, sweeps are set up only on a needs basis from header to sub, funding only those sub-accounts that are in a negative position at end-of-day. If a sub-account is positive at end-of-day, funds are kept in its own account. ƒ ƒ If the header and the direct participant is net negative, then it triggers a sweep in an order of priority to be set up (as per the cash positions) with other participants in a pre-defined ranking order. ƒ ƒ This cycle repeats itself, until the header is net positive, to ensure funding for each subsidiary account. USD solution ƒ ƒ Similar to the KRW solution, the structure is need-based from header to participants. (Note – overdraft is not allowed as per local regulations.) ƒ ƒ The solution involved an automated earmarking of funds across participant accounts on a real-time intraday basis for facilitating the fund flows. This was an innovative virtual solution, which allowed real-time liquidity sharing without creating inter-company positions. Best practice and innovation GE treasury has demonstrated market leadership by being the first MNC to deliver a solution of this nature and scale. The art in stitching multiple components of cash pools and layering it up with tax efficient sweeps compliant with local restrictions on intercompany lending and overdrafts, set a new paradigm in liquidity management. This has been a need for large MNCs operating in Korea. Key benefits • KRW pool covered nine entities. The pool consolidation resolved working capital mismatches, resulting in cost savings of KRW equivalent to US$2.4m annually. • USD pool covered seven entities. The pool consolidation resolved working capital mismatches, resulting in cost savings of US$2m. • Improved cash flow forecasting. • Minimised intercompany positions. “It was a great combination of managing regulations driven by technological innovation, akin to “regtech”. Our structure allowed liquidity management of in-country cash and has ensured discipline in using funds by pre-defined borrowing limits and ranking order by entity, in accordance with our policies”, concludes Manu Taneja, Director, Banking & Liquidity Leader, APAC. Manu Taneja, General Electric and Saurabh Gupta, Citi 14 | treasurytodayasia Adam Smith Awards Asia © February 2019