Multi-currency Pooling

I've attempted to sell the concept of multi-currency pooling to my parent company with no such luck for the past 3 years. I'd appreciate the assistance of the community in approaching this from a different angle. The Situation - My firm receives multiple currencies as part of our revenue stream and we convert the funds to USD as soon as the funds hit our bank account. My firm has no use to leave them in the originating currency since we don't pay any of our operating expenses outside of USD. My parent company has significant operating expenses in the same multiple currencies and doesn't generate enough revenue in those currencies to support the expenses. They find themselves converting funds from USD into the local currencies in order to meet their operating needs. I've attempted to propose that we look at structuring a multiple currency pooling structure and handle the accounting transactions between companies on the backend. I'm most interested in setting up a process where we essentially generate a natural hedge and eliminate our FX risk exposure.

Answers

Mark Stokes CFO • October 26, 2009

It sounds like a great idea, but sometimes a parent has no interest in or even people available to marshal this kind of collaborative effort among subsidiaries. It takes tight project management and close coordination to pull off any reasonable hedge and maybe they are not equipped to do so. Do they have Treasury personnel at the parent level whom you could engage? If not then perhaps you could take it on, but I only suggest doing this if you have extensive treasury background and resources and the full support of the organization and the individual subs.

Also, could there be strategic reasons for their not wanting to have their subs become too intertwined? If they like the flexibility of being able, for instance, to spin off a sub at any time, creating operating entanglements amongst the subs would make that tougher.

Fiona McKenzie Accountant • October 26, 2009

Sounds like a good idea and would save money for the Group as a whole. How about a pilot project? The Parent must have an idea of what foreign currency expenses are coming up, treat the currency retained as 'loan to parent' which they can draw down, for accounting purposes you will be converting to USD so will be able to calculate exchange gains and losses and evaluate any saving although the important aspect is removing exchange risk.

Linda Markin CFO • October 26, 2009

If you persuade the parent to go for it, be sure to look into transfer pricing ramifications. I'm not sure,but I think this could be considered a "service contract" between parent and sub and require a written contract and possibly some payment from one to the other.

Fiona McKenzie Accountant • November 2, 2009

I'm commenting from the UK so don't know what the tax rules are in the US. However my understanding of transfer pricing rules are that transactions should be shown to be at open market value. If you ensure transfers of currency (both ways) is at the bank rate at that time, and document that should demonstrate no transfer pricing problem?

Remember that, apart from currency risk, banks always make a margin on the currency rates so unless you want to help prop up the banks' profits at the expense of that of your own company it makes sense to pool unless the amounts involved are too small for the extra admin.

Peter Lyons, MBA, CMA Finance and Technology Enthusiast • November 2, 2009

Thank you all for some great suggestions.

I was able to get in touch with someone at my parent company that understands the basic treasury function and I'll be working with him to implement this type of structure.

Thanks again for all of the suggestions!!

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