Global Liquidity Speaker Series

Global Liquidity Speaker Series

Techniques to Manage Liquidity Challenges

6OCT20

 

Speakers

Ryan Donovan, Global Liquidity Specialist, Bank of America

Henrik Lang, Managing Director, Head of Global Liquidity, Bank of America

Sam Bones, Vice President, Liquidity Product Manager, Bank of America

 

Title of Meeting:

Bank of America 2021 Global Liquidity Speaker Series – Techniques to Manage Liquidity Challenges

 

[Coordinator]

Good day, everyone, and welcome to the Bank of America Global Liquidity Speaker Series. This week’s call is Techniques to Manage Liquidity Challenges hosted by Ryan Donovan. My name’s Elaine, and I’m your event manager. During the presentation your lines will remain on listen-only. [Operator instructions]. I’d like to advise all parties that the call is being recorded for replay purposes.

 

And now I’d like to hand over to Ryan. Please go ahead.

 

[Ryan]

Hello, everyone. Good morning, good afternoon. Thank you for making the time to attend today’s call. Before we start, like to say we hope that you and your families are staying safe, staying well, making the best of the current environment.

 

So, again, thank you, and welcome to the second session within our Global Liquidity Speaker Series. We received great feedback on the first session, and we will like to continue that momentum today.

 

Our first session that took place a couple weeks ago was hosted by my colleague John Pazdan. He brought on panelists Ian White and Mark Cabana, and they had a great conversation around negative interest rates in the US, the different considerations and implications of what that might mean for our clients.

 

For those of you that missed that conversation, no need to be alarmed. The consensus from the panel was that we would not see negative interest rates in the US. So, given that we really do not expect the Fed to implement negative interest rates, we did want to spend today’s session to talk about a couple more timely, more present challenges that you and your organization might be facing.

 

Before we get into those challenges, let’s do some quick introductions. First of all, my name is Ryan Donovan. I’m a member of the Global Liquidity Specialist Team here at Bank of America, helping clients design and build custom liquidity solutions and structures for managing our cash. Before coming to the bank, I did the same thing, but as a client of the bank for a large multinational institution, helping them design, implement, and run global cash management structures. 

 

I am pleased today to be joined by Henrik Lang. He is the Head of Global Liquidity for Bank of America. He has oversight over our complete liquidity strategy, as well as product development. 

 

The third member of our crew today is Sam Bones. He’s a Product Manager within Liquidity, and shares some unique experience, having just transferred back to New York after spending some time in our London office. Sam has held several roles within the organization, and will be able to give us some key insight into utilizing different Bank of America products and tools.

 

So, with introductions out of the way, I’d like to spend a minute kind of describing today’s conversation and how we’ll work through the different points. Like I mentioned, today’s call we’re going to discuss Techniques for Managing Liquidity Challenges. Those two challenges that we’ll focus on today are, one, responding to a crisis, and then second, how to manage cash in a low-rate environment. 

 

These challenges might be different for each organization, but within the first challenge of responding to a crisis, we have developed a fairly simple, straightforward framework that can be applied by everyone on the line here today.

 

Like I said, we’ll move through the first challenge of responding to a crisis. We’ll move through the three steps in the framework before moving on to our second challenge.

 

So, in terms of responding to a crisis, this three-step framework that I’ve mentioned a couple times starts with, one, evaluating your cash position, and then consolidating your cash for safekeeping, and then third, strategically deploying that cash. We’ll work through some insight there on all three steps of the process, and provide some real-life case studies and ways that you can learn from what clients have been doing, and then share some insight as to how Bank of America can assist within that three-step process. 

 

So, that’s enough for me. I think everyone would like to hear from our panelists. I think I will start with Henrik. I will start with you, and begin directing some questions your way.

 

So, in the first step of the process of evaluating your cash position, Henrik, you were out there talking to a lot of our clients this spring, hearing feedback from a lot of them. As they were faced with an unknown global pandemic, and they were trying to evaluate their position, what were some of the key themes and topics that you heard? What was top of mind for our clients as they were heading into an unknown pandemic? 

 

[Henrik]

Thank you, Ryan, and I really appreciate being able to speak with you, speak with Sam, speak with our clients here.

 

So, really from my perspective, there were a number of things. Shortly after the market’s disruption in March, one of the most important things for clients when they were evaluating that cash position was having the ability to access liquidity. That was the number one priority. I think that was through their revolver credit facility drawdowns that happened very shortly after the March market disruption. That’s where we have seen significant corporate activity. 

 

I think every treasurer [ph] out there really wants to make sure that they have access to cash, it’s sitting in their bank accounts, and they are prepared for any sort of market uncertainty. So, their revolver drawdowns were definitely a key factor. 

 

Interestingly, we received many feedbacks from corporates at a time to open bank accounts with great speed, as they were trying to place those reward drawers into different places which they deemed safe. So, speed, and the ability to open bank accounts very quickly was also critical. So, all the new digital solutions that we have rolled out over the years came very handy in this new remote and touchless world. Leveraging digital signatures, for example, on client contracts, and being able to open accounts with great speed was very useful for treasurers [ph], as they were responding to the market uncertainty. 

 

I would say the second point, in addition to access their liquidity, was safety and soundness. So, that was also on everybody’s mind. Whenever there is market uncertainty, there is a level of flight to quality, and treasurers [ph] really want to make sure that whatever happens, they had their cash balances in a safe place, and we definitely have seen an influx of balances related to flight to quality.

 

I know it’s a cliché, but it’s true more than ever. When market disruption happens, the return of capital is a lot more important than return on capital for treasurers [ph]. I think that was really evident in, again, some of the [indiscernible - 8:06] experience of clients who really started to diversify their risk.

 

The third kind of key theme, as clients were evaluating their cash position flow in the market disruption, was flexibility. So, a lot of the large corporations, smaller corporations, pretty much regardless size, I have spoken with, working to retain as much flexibility as possible. If you think back to March, no one really knew how wide the market disruption was going to be and how long it’s going to be, so they really wanted to make sure that whatever happened, they are prepared, and they have flexible solutions in place to deploy cash balances.

 

So, if, for example, the market disruption disappears very quickly, they wanted to be able to repay their revolving credit facilities very quickly, and maybe replace it with other debt insurances or excess government stimulus. So, I think flexibility was also key. So, they moved away from [indiscernible - 9:14] investment options, for example, or investment options that tire [ph] at cash for a certain period of time, and kept their portfolios very, very short. 

 

So, again, if I need to summarize, probably these are the three key themes when evaluating cash position post-crisis, or immediately after market disruption. One was access to liquidity, the second one was safety and soundness, and then the third one is retaining flexibility.

 

[Ryan]

All right, thank you. Sam, with that in mind, with the understanding that speed and flexibility are extremely important in terms of responding to a crisis, what kind of tools and Bank of America capabilities did you see our clients using as they tried to maintain that flexibility, or have speedy access to their cash balances?

 

[Sam]

Thank you, Ryan, and hello to everybody. Thanks for having me on. To answer your question and to sort of continue on two of the themes Henrik mentioned, both are innovation and sort of the digital space, as well as our ability to let clients have flexibility with, information with data, over 2020, we’ve progressively launched eight new Excel-based cash management reports. So, when you’re addressing the forecasting and position management needs in a real-time manner, you’ll have that data, so as you need it and when you need it, in a format that’s easy to use and flexible for whatever purpose it serves your needs.

 

Placing that data in the hands of our clients is one of our biggest focuses at the moment, and when we think about our development from a product perspective, and really is focusing our shift towards a liquidity digital experience. So, with the reports that are available now, both through standard statements, but also through CashPro information reporting and through our CashPro balance dashboards within your CashPro digital experience, we’re really, again, focusing on how that information gets into client’s hands and keeps it at a way that they can use and manipulate the information, to see whatever needs come along. 

 

[Ryan]

So, maybe those needs are creating a forecast with real-time data starting with real-time balances, or maybe those needs are generating a report that can be viewed by your CFO or your treasurer, because in a crisis, everyone wants to know where their cash is, they want to know that it’s secure, and they want that real-time access to that information.

 

One piece of advice that we give our clients is, utilize Bank of America’s digital capability to build an automated report for your CM management. Give them a daily report of, here’s where my cash is. It can be as simple or as complex as you need. I’ve certainly done this in my prior role. It made everyone’s life easier. The CFO wasn’t calling to say how much cash we have, where is it located, am I safe, am I exposed to currency fluctuation? All those questions can be easily answered with a simple report that can be automated either through CashPro or your TMS system.

 

Another case might be providing that report, gives everyone a feeling of security knowing where their cash is and how much they have. 

 

So, if we move on to kind of the second step of responding to a crisis, now that you’ve evaluated your cash position, our clients have gone out to the markets and raised debt, drew down on their revolver loan, maybe upsized the size of their revolver loan, or maybe they took advantage of a stimulus program. We saw large-scale usage of the PPP program. Medicare Advance program certainly helped our healthcare clients. And then we also saw some clients take advantage of some commercial paper programs in the UK.

 

After you’ve done all that work, gotten your hands on some cash, kind of the next step that we recommend is to consolidate that cash. 

 

So, Henrik, when it comes to taking a few key strategic relationship banks and placing your cash with them, how do you think about that process, and that process of consolidating your cash into a few banks or a few entities; is that a process we have seen increase as clients have reacted to this pandemic?

 

[Henrik]

Yes, absolutely. So, again, clients tend to have a number of credit facilities in place, and also, they filed [ph] their excess cash in several distant [ph] investment options. But again, when you are facing market uncertainty, your ability to react is critical. So, we’ve seen a lot of our clients reevaluate where they keep their excess cash. Many of them decided to actually consolidate their cash balances, but because they’re still very mindful of local currency and regulatory restrictions to move currency around, or balances around, tax requirements, accounting requirements, those are all still top of mind, but to the extent it was permissible by the local regulations, what we’ve seen that many of our clients actually run through a process of consolidation shortly after the crisis, because this allowed them to react a lot more quickly. 

 

Again, when you’re facing uncertainty, you don’t know what’s going to happen next, and if you still need to spend time getting your cash positions into one location, often there is no time for that. So, a lot of our clients, as a contingency, straight after the market crisis hit in March, started to consolidate their cash balances with key bank providers they have in their bank group [ph], making sure their cash is readily available [audio muffled - 16:15] where it’s most needed. 

 

What was very interesting to me, that a very good portion of our client base already utilizes automated solutions [indiscernible - 16:30] solutions to consolidate cash, so they either used automated suite [ph] functionality, or they leverage [indiscernible - 16:37] in key locations across London, Hong Kong, Singapore. Many of our clients, they often benefit from further automation. And that I think was clearly highlighted, and we have many of our clients add further suite [ph] structures and further automated solutions [audio muffled - 17:01]. That was just interesting to see, that there is definitely even more room to automate and be more efficient. 

 

[Ryan]

There’s always room for automation. Obviously, automation allows, especially in a crisis, automating your cash consolidation process gives you the time to spend less time setting up a manual wire transfer, and more time to focus on the forecasting, risk management, cash deployment strategies.

 

So, Sam, what are some of those specific tools that clients can use to automate their cash consolidation? 

 

[Sam]

Yes, and Henrik mentioned a few, but we see a lot of clients leverage cash management overlay structures, often to complement their needs or desire to maintain those multiple banking relationships. And we also see this as a way to speed up and simplify treasury integrations, when we see clients that acquire a new entity or participate in a merger.

 

And the way that the clients do that is through an offering we have for fully-automated multibank sweeps, which connect to local bank accounts within the cash management overlay, and allow clients to then move funds daily, weekly, or monthly, based on their predefined target balances. And so, automating the sweep and movement of those funds, so that they can participate in an overlay structure, again, creating some of the instability of those balances, as well as the visibility into the overall structure.

 

And a really great example of this was one of the multinational media companies we work with based in Latin America, who set up a multibank sweep structure across of their Brazilian banks. I believe they had some instances where they needed to maintain individual accounts in those jurisdictions for tax payments. But what this enabled them to do was to consolidate their funds within a single bank, Bank of America in Brazil, and to then ultimately move some of those funds into the US to improve their visibility and efficiency.

 

Number of different examples like this where clients benefit from an overlay. Ryan, actually, I’m sort of curious in your past experience, did you ever have any situations where you saw that happen, or where you guys used that type of functionality?

 

[Ryan]

Yes, we did. We used it in many situations, but kind of one of the first ones that comes to mind, from my old company, is a situation where we were going through an M&A transaction, a large, global, complex M&A transaction, with acquisitions going on in every country. Through our due diligence process, we notices that the M&A target had a large amount of cash in France. We, in the short term, would love to get that cash into our overall liquidity structure, but in order to truly work that [indiscernible - 20:20], it would take an ERP implementation and accounting transition to our software, which we would do in full time. 

 

But in the short term, two days after closing the acquisition, we set up a multibank sweep, set them up with a target balance of only $5 million, and we were able to sweep everything out of that French entity, bring it into our overall structure. And so, quickly got access to that cash, and was able to utilize it very quickly there. 

 

We’ve gone through a couple examples here of cash consolidation, and we realize that during the crisis, consolidating your cash can be a manual process that we can help automate. And really, this automation, it is not a large amount of work. In order to kind of automate some of your cash consolidation efforts, you don’t need to go through a large-scale treasury transformation. You can quickly set up sweeps, and then save the large-scale treasury transformation for times of more stability. 

 

But in the interim, there are a couple quick techniques and tools and solutions that can provide benefits to your innovation. 

 

If we now move on to this third step of responding to a crisis, the third step is strategically deploying your cash. You consolidated your cash, you’ve gone through all of your forecasting analysis process to find where you would like to place cash, and now you’d like to deploy that cash as needed. Most likely, deploying that cash is going to create an intercompany loan for you. We recommend intercompany loans because they’re the most flexible instrument in terms of moving cash between your different entities. 

 

Next, we do have a call coming up in two weeks, where our advisory team can give you some more insights on intercompany loan documentation, how to use those, how to interact with your tax and legal teams on intercompany loans. But Bank of America also has some tools to help with intercompany loans, as you deploy that cash strategically.

 

Sam, can you touch on that a little bit? 

 

[Sam]

Yes, happy to. As you mentioned, our global cash management services are essentially moving funds across entities and across regions, and across different countries. And so, there are a lot of considerations, and our advisory team will—it sounds like they’re speaking next week, to really dive into some of those implications.

 

But from a truly operational perspective, as we’re using target balances to determine those sweeps and moving them around the world, we’re often creating intercompany loans in the structures that we set up. And with that, we also offer services to then track and settle the intercompany rates. A treasurer would essentially otherwise manage, either manually, or possibly within a TMS system. 

 

And so, setting your intercompany rates within your structure can generate operational efficiencies by automating the interest calculation, but also, automating the physical settlement. So, as your sweeps are occurring, we would settle the interest that is generated on your behalf, and provide that reporting back in, again, a detail where you’re able to then reconcile and provide evidence to both your internal teams and to potentially audit partners or tax regulators.

 

We also offer a function called Net Cash Position. And so, clients can use our Net Cash Position feature as a way to enforce intercompany loan terms, and also does help you adhere to your internal risk and exposure limits across those entities. So, where we’ve seen clients leverage that is, if they only want a certain amount of exposure to an entity, you would set that limit, and once that limit’s hit, the sweeps would stop for the period of time that’s been determined.

 

So, it’s a really great way for treasurers to continue to, again, maintain their own internal risk and exposure framework, while continuing to move funds in an automated fashion.

 

[Ryan]

All right, thank you, Sam. In the interest of time, let’s move on to the last topic, which is the second challenge that we wanted to talk about today, which is how to manage cash in a low-rate environment. 

 

Henrik, I’ll come back to you here. Two weeks ago, we heard from Mark Cabana on this series call that rates would not go negative, but we also heard the phrase from him that we’re probably all too familiar with, which is, rates will be lower for longer.  

 

So, with that in mind, Henrik, how do you recommend clients maximize their excess cash balances?

 

[Henrik]

Great question. Thank you, Ryan. Maybe others don’t share my view, but I actually find the lower interest rate environments quite exciting. I think there is a lot of value that banks [audio muffled - 26:04] to highlight a few. I see this question shift from treasury departments creating interest income, and it’s all about efficiency, it’s all about cost reduction, interest expense reduction. I think with innovation over the last few years, there are so many great tools available to help treasurers to make their operations a lot more efficient.

 

To give you a few example, domestically, we’re seeing great utilization in our earnings credit rate products. I think most of our audience is familiar with the concept, but essentially, using your core operating balances to offset your treasury fees is a fantastic way of maximizing the value of your cash balances. If you were to look to invest the same balances in money market funds or other short-term fixed-income instruments, you would be struggling to get any [audio muffled - 27:17] moving to more risky asset classes, but leaving it in your bank account and allowing those balances to help you offset some of your core treasury fees could be a very efficient way of leveraging cash. 

 

Another example, which I find, again, very prevalent in a low-interest rate environment is overdraft. Cost of overdrafts, because they are unsecured, uncommitted lines, tend to be quite high across the industry. So, the best thing you can do as a treasurer [audio muffled - 27:55] overdraft costs across your bank providers, and trying to minimize those. You will find that the interest expense savings you’ve achieved through minimizing overdraft is probably far greater than what you can achieve just by earning a basis point or two on your excess cash.

 

And when you’re trying to minimize overdraft costs, again, there are great solutions in place that can make that even more automated for you. So, fee structures, [audio muffled - 28:27], all of those are techniques that you can easily, relatively easily implement, and can really make a huge difference to your treasurer P&L, and really can help you with these interest expenses and costs within your operation.

 

Those are just two techniques, but there are many more [audio muffled - 28:50] in this current rate environment.

 

[Ryan]

One quick follow-up to that, Henrik, before we wrap up here. You’re recommending that the clients keep a relative amount of safety with their current cash balances, they don’t go out and reach for yield. They take this time in this environment to look at their own internal structures, and identify efficiencies. Is it fair to say that the bank internally is also taking a similar approach? 

 

[Henrik]

Yes, I think that’s right, yes, 100%.

 

[Ryan]

Okay. Well, thank you, Henrik, thank you, Sam, and thanks again, everyone, for joining. We hope you enjoyed today’s call, and we look forward to speaking with you in a couple weeks.

 

As always, if you would like to have a continuation of today’s conversation, reach out to your Treasury Officer or Global Liquidity Specialist, and we are happy to continue discussing the themes that we were talking about today.

 

Again, thank you, and everyone, enjoy the rest of your day. 

 

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TRANSCRIPT

 

Title of Meeting:

Bank of America 2021 Global Liquidity Speaker Series

Building a sustainable working model - the new normal of cash management post-COVID

 

Date:

20APR21

 

Speakers:

Karen Ly, Head of Global Liquidity Solution Specialist, GTS, Bank of America

Ayeesha Sachedina, Chief Transformation Officer, GTS, Bank of America

 

[Coordinator]

Good day everyone and welcome to the 2021 Global Liquidity Speaker Series, Building a Sustainable Working Model, the New Normal of Cash Management Post-COVID. My name is Agnes and I’m your event manager. During this presentation your lines will remain on listen-only. I would like to advise all parties that this conference is being recorded for replay and transcription purposes. 

 

And now, I’m handing the call over to Karen Ly. Please go ahead.

 

[Karen]

Thank you, Agnes. Thank you everyone for joining our Global Liquidity Speaker Series today and thank you for joining to listen about a topic that’s getting a ton of focus right now.

 

So as all of us continue to navigate our way back to some sense of normalcy, many companies are working on defining what exactly normalcy is post-COVID. For those of you who are regular to our series, you might recall in our forecasting session a few weeks ago that we spoke about the abrupt lockdown and how that left many finance and treasury teams working remotely almost overnight.

 

But at various speeds, businesses and people got access to tools that they needed to continue to do business and by doing business I mean the ability to move cash, to monitor cash, and eventually also the ability to continue to set cash strategies. This week I’m talking to Ayeesha Sachedina, our newly appointed Chief Transformation Officer in Global Transaction Services. We’ll talk about why so many businesses are reviewing their working environment and get her views on what to consider if you are thinking or going through a review in your own business. 

 

So, Ayeesha, your role, Chief Transformation Officer is a new role for GTS. Can you tell us about how it came about and what the scope of the role is for those of us who don’t have a Chief Transformation Officer in our business? 

 

[Ayeesha]

Yes. Thank you, Karen and thank you for having me today. So absolutely, in my role as Chief Transformation Officer it really is about taking a step back and thinking about our organization and evaluating the organization as a whole in the context of the future of work, right?

 

So it’s a journey very similar to the journey that a lot of our clients are going through and it really is about thinking about the broader environment that we are all in and thinking about how that affects the organization on our associates as well as our clients and how do we bring that together in a cohesive strategy so that we can plan effectively for the future?

 

I think that this came about in a few ways and this role actually is a new role. It came about because of COVID. So if we think about COVID was really the impetus then to be able to take a step back and say how has COVID changed the way we work? How has it changed the way we interact with each other as associates? How has it changed the way we interact with our clients? How has it pushing some of the processes and tools we use on a day-to-day basis? So I think that has been a very important kind of reason why this role came about. 

 

Another aspect of it is digitization and we talk about digitization and we have talked about it for I would say a few years now. I know I’ve been in several client meetings in my old role as Head of Innovation too where a lot of clients were interested in their digitization journey and what that means to them.

 

So COVID has only exacerbated that process for a lot of people and then it has caused a lot of organizations to reevaluate what being digital means to them and how they can quickly adopt new tools, new technologies, new processes to ensure that they can be effectively digital and they are removing paper from the system.

 

I think this started off like I said as remaining flexible. So how do we set up an organization that allows us to be flexible going forward and allows for that scalability regardless of what scalability means to you? So is that being ready as you said for another immediate lockdown if we need to be? Is that having the processes to ensure that when we are ready to go back to in-person meetings we are ensuring equity as experience?

 

That’s another interesting thing that I would love to get into, but it’s a very kind of almost philosophical topic about how do we ensure that we’re not going back to the old way of those people dialing in on the conference call are on the line whereas everybody else is in the meeting and you kind of have that experience. So a lot of different things like that, but flexibility and scalability are very important as well.
Then finally I think is just ensuring productivity of the workforce. It’s really interesting because I think you can talk to so many of our associates and they’ve said they’ve been so productive working at home. So how do we ensure that without burn out of our associates and ensure that they have the support that they need?

 

[Karen]

Thank for that very comprehensive overview. I definitely did not realize all of the different layers and complexity of what a Chief Transformation Officer does. 

 

I just have a follow-up question just in relation to that. You were talking about COVID and then you also talked about technology. A question I have is do you think that the working environment change is simply because of COVID or would technology have eventually driven this type of change anyway but maybe was just quickened by the onset of COVID and the shutdown?

 

[Ayeesha]

Yes, I think kind of really the latter. I think becoming more digital was something we’ve talked about frequently with clients and something we continue to talk about. But I think what COVID did is really kind of press down the pedal on that momentum and it really allowed us to say we need this faster than we thought we did or a lot of our clients went through that where we can’t use paper anymore. If that no longer becomes an option you’re forced to become digital, right? And if that no longer becomes a way your associates can accept paper, accept invoices, review those on a desk in person in an office, what are the technology tools/products even going to put in place in order to ensure that my business continues? So those are the questions that really came to the forefront because of COVID. 

 

So I think people were going there anyways. People were slowly adopting these tools anyways because I don’t think anyone did not see the value of becoming digital. I think it’s just about prioritization. What the pandemic has done has just made it a priority for everybody across the board which is why you’re seeing such a rapid change in a lot of business models of our clients. 

 

[Karen]

Just the fact that you talk about paper, from a cash management perspective I think about there are still a ton of businesses that get their statements by mail. So thinking about when COVID hit and nobody was in the office, who was around to actually collect those statements? If we think about trade, a lot of the confirmations are done by paper as well. 

 

So since we’ve started to come back to a sense of normalcy, I do hear a lot of clients reaching out and talking about well how do I shutdown statements? How do I now automate the process of confirmations? How do I make it digital? I think that’s going to be something that we continue to hear from clients about over the course of this year and into next year as people become more digital. 

 

Your previous role—sorry, were you going to say something?

 

[Ayeesha]

No, no. I was just going to agree with you. It is a journey and I think this is just the beginning. So absolutely. 

 

[Karen]

So in your previous role as you mentioned you were leading the Global Treasury Innovation Strategy. I just wanted to know whether you think that the new working environment will impact or change innovation strategies for cash management. What are your thoughts on what technology or new products do you see getting prioritized in cash management given all of the changes in the work environment?

 

[Ayeesha]

Yes, that’s a great question, Karen. I think it’s interesting because when right at the beginning of the pandemic we saw was a focus on I would say real time. So transactions becoming more real time, more and more kind of a request for real time capabilities mitigating fraud. So any types of solutions that helped to either identify counterparties on both ends helped to track payments, helped to monitor fraud using AI, things like that definitely were very much in demand as well as kind of what we talked about earlier which is anything that helps to convert paper to electronic. 

 

So those were the themes that really came into light during the pandemic. Those will definitely continue but I think one other one that has also come to the forefront that will come more so in my opinion in data. So how do we think about the usage of data in all of these aspects? Because as transactions become more real time as we need more real time reporting as all the invoices turn digital, the wealth of data that that affords us and the ability to analyze that data and provide meaningful insights to our clients becomes so much more robust.

 

So how do we help our clients on their working capital journey, on their digitization journey using some of this data? So I think that is really kind of where we’re headed and what we’re really excited about going forward from an innovation perspective.

 

[Karen]

Yes. No, that data piece was very much at the crux of what we were talking about on the forecasting session as well using the data, using your past behaviors in order to help predict it and forecast out. I definitely see how many companies would benefit from the use of data going forward.

 

The next part of the call, I would love to get some of your perspectives on what you’ve already done and maybe some of the considerations to share with the participants on today’s call. So if a client wishes to review their working environment regardless of the size of the business, what are some of the considerations you would share? Maybe you can take it from the experience that you had when you started in this new role. 

 

[Ayeesha]

Yes, absolutely. Thanks. It’s an interesting—there are so many different places you can start with this type of role. It’s what you make of it. So projects and your transformation journey can be as small or as large as you choose. But I think there are a number of key questions that I would suggest starting from.

 

One is, who are your stakeholders? So who are you actually doing this for? Is it your associates? Is it your clients? Is it the organization more broadly? In that, what are their pain points? 

 

So if you break down each one of those stakeholders and think about what are their pain points today and what you have learned over the past year or so from COVID and beyond actually, what are their pain points? Those pain points could be related to COVID and the way they’ve worked previously versus now or they could just be organizational more broadly. 

 

So it’s really important to—and we’ve spent a lot of time kind of digging into what those are. I think there is always variability based on where people are based or what type of clients they serve and all of those different kind of dynamics. But I think it’s important to tease out those themes of pain points. It’s really how you—it mirrors how you approach innovation really. 

 

I like to call my role organizational innovation because it’s the same process. Who are your stakeholders? What are the pain points? Then the next is how are you going to solve those pain points and what is the experience that you want to provide your stakeholders?

 

So it really is about approaching it in that very systematic way so that at the end of that and when you define that experience that you want to provide your stakeholders, you’re able to target yourself towards specific goals and specific things whether it’s tools, whether it’s organizational shifts, whether it’s processes that you want to stand up in order to achieve your goals. 

 

I think that it’s then about how do you execute that and that is about really identifying what those goals are and then putting in the tools, the processes, the people in order to help do that. So it really is exactly like approaching creating a new solution on the product side. It’s just doing it for the organization more broadly. 

 

[Karen]

So just on the point around goals I think that’s a very important piece because without defining what you’re actually trying to achieve, the projects can take many different directions and become much more complex than it might necessarily need to be. But in terms of goals, do you feel like there is a right time to start measuring against these goals? Any insight as to when companies should start tracking against goals so that, one, they obviously have some progress, but a good checkpoint to make sure that they’re staying within what they’re trying to achieve?

 

[Ayeesha]

Yes. You know, Karen, I think this really depends for organization to organization. For us/me, we have been very clear that this is not a headcount exercise. This is not a rationalization exercise.

 

This really is about productivity and future opportunities in our organization to ensure that we provide the best services we can to our clients and the best experience available to our associates. That is our guiding principle. So but other organizations might be different and they might have specific targets in terms of more tangible metrics that they want to achieve. 

 

So it really varies from organization to organization but I would say regardless what your broad goals are, being able to measure your success is very important. So thinking about things like tools and what they provide and the insights they provide is really important in helping to guide your strategy. 

 

So I know one company for example talking about employee scorecards. Can you institute something where people come back into the office and say—so associates when they come back from the office can rate their experience? Based on whether they’re in an office or working remotely, you kind of rate how they’re performing and how they progress over time. So there’s very interesting things you can do with data and with being able to track some progress with that. So that’s on the associate side. 

 

Then there’s also in terms of the products and services we offer as an organization and the metrics against that and how those are coming along, things like time to market, things like speed to execution, whether it’s client servicing or auditors. So the metrics really vary depending on your goals, but yes it’s absolutely critical that once you’ve identified what you want to do and what you want to achieve and you start the implementation you track towards sub-quantifiable metrics.

 

[Karen]

Yes. No, all very good hints and tips there in terms of tracking goals which I think is very important. I want to come back to a question as your response earlier in relation to sort of stakeholders and then challenges. Have you got any views yet on what the potential challenges are when you embark on a project like this? You know maybe it would be good for our audience to hear some of the things that they can expect and that you’ve had to deal with. 

 

[Ayeesha]

Yes, absolutely. I think it’s interesting because again everybody comes at this from a different perspective. So I would say one, it’s driving consensus about section. I think that’s probably the most obvious one. I think that everybody has their own opinion on what their pain points are and how you should solve them. So I think that being able to drive that consensus and really help prioritize what you need to get done, I think that is very important. 

 

I would also say technology more broadly. When you work for a regulated financial institution it’s a very different dynamic than a small FinTech, right? So we may want to institute things like employee scorecards or client sentiment or even employee sentiment. You know we need to be very careful about things like data privacy, about security, about how we respect everybody’s boundaries and how do we take all of those things into consideration. 

 

So we’re learning a lot as we go through this process too about some of the tools. You may think about collaboration tools and a few may come to your mind as being best-in-class, but they all have different ramifications from a security perspective. So we have to think about that aspect. 

 

Because what we don’t want to do is open up our institution or our clients to increased risk. So there’s a lot of different elements to how we approach it and what the best approach is. But I would say those are a couple of the challenges that I would see many people who are going on a similar journey encounter. 

 

[Karen]

Yes. And based on that I think it’s very important when you talk about stakeholders that stakeholders aren’t just senior people or people within a certain line of business. It really does depending on what your business if we think about ours, it really should be people both front office, back office, operational given that everybody is impacted. So making sure that you have a wide diversity in terms of experience and opinion in your stakeholders is probably going to be very key to the success of any sort of transformation.

 

[Ayeesha]

Yes and I think that the other thing I would add to that, Karen, is something you and I were talking about earlier which is communication, right? It’s really important because you want to make sure that everybody comes on the journey with you. 

 

So it’s part of driving consensus but it’s also about ensuring that this isn’t something that’s being done in a vacuum and that you’re listening to all of your stakeholders. So how do you bring people along the journey with you? Because if it is not tangible for your stakeholders and if they don’t feel like they have a part in that outcome, then regardless of what change you’re trying to drive it won’t take hold. 

 

[Karen]

Yes. No, absolutely agree. I think it’s so important and we talk about this in various cash management projects all the time whether you’re implementing a new ARP, whether you’re implementing a new TMS making sure you have stakeholders across the whole experience to give their feedback and get their buy-in. So very much same approach when it comes to this as well; getting different voices, having a seat at the table to get the buy-in early on.

 

I don’t know if this is a question that you can answer, but what is an expected timeframe to do something like this? Maybe there isn’t one, but I’m just curious. Should corporate be trying to set an objective around timeframe? 

 

[Ayeesha]

Fairly interesting question that we’ve thought about ourselves. It really I would say varies. I don’t think there is a one-size-fits-all in terms of timeframe. I think it one, depends on a few things.

 

How creative you want to be. How much into the future are you looking with your strategy? So the more future work you are, the longer your timeframe will be. 

 

The second I think is also depending on your own company’s budget cycle. So how often are you revisiting your budgets and your requirements in order to implement some of these technologies? So budgets like also something that goes along with that is implementation cycle.

 

So in order to implement some of these new technologies and tools, how long does it usually take you? Perhaps that in itself is a goal that you want to finish; but how long? We need to be realistic about that. So you may say my strategy for future work needs to be implemented in a year but is that realistic?

 

Then I would also take into consideration your priorities and then your different stakeholders and how those stack up against each other. So you may have something short-term that you can implement for your associates as they return to work, but some of your organizational events are longer-term or vice-versa. 

 

Something you can do for your clients immediately is your priority and then some of the associate tools a little bit longer-term. It could really be either way. So I think ensuring that when you’ve identified the solutions and how you want your goals for each of your stakeholders, it’s usually about prioritization and then being realistic about it. 

 

[Karen]

Yes. I think that’s some great advice. Prioritization is probably more important than actually setting a timeline, because there are many things that could potentially impact timelines that are outside of your control as well.

 

If you’re in a city or a state or a country that is still under certain guidance from the government, then you may not be able to set realistic timeframes but you can definitely prioritize and see what you can achieve in the short-term, medium-term and long-term in terms of what you want the transformation to look like. So prioritization sounds like it’s key. 

 

We really only have time left for one question and it’s a word that I’ve been seeing a lot. You know this topic very much is in the media. A lot of companies are talking about it. I’m reading about it.

 

Reskilling seems to be a buzzword that I read about a lot and I just wanted to know whether to what extent do you think reskilling will be a factor as we, as any other company evaluates their future working model?

 

[Ayeesha]

I think this is going to be a huge factor. I think this isn’t something we take lightly. I think this is really going to be a large part of every company’s transformation journey over time. Skills like if I take the bank as an example, when I was an analyst everyone needed to learn how to use Excel and that was a baseline requirement for all analysts coming into the bank. 

 

I would argue that the new baseline requirement is going to be coding in Python, right? So it’s things like that that will really shift the way our teams work. It will shift the rules and responsibilities of our teams as we know them today.

 

It will happen over time. It’s not going to be immediate, but it will really change kind of what we’re able to do and how we’re able to do it and the speed at which we’re able to do it based on some of these new skills that are coming into the marketplace on a more readily available basis I would say on a more wide known basis.

 

It’s interesting also some of the shifts between what is traditionally known as a line of business function and a technology function are blurring and we see that with things like data. We see that with things like some of the reskilling. So it’s interesting to see how that will change over time as well. I can already see those two sides of our business getting closer and closer together which is really exciting because what leads to is the ability to respond faster, the ability to collaborate better and ultimately have better solutions for our clients. So I think that that’s something definitely a watch item and something that all companies should consider going forward.

 

[Karen]

Yes and I think depending on your business you need to determine what skills you sort of need to reevaluate. I can definitely say that a big part of banking and probably for many businesses, reskilling was the ability to learn how to use Zoom and Webex at the onset of COVID. Trust me, that does take some skill to be able to operate. 

 

[Ayeesha]

Oh, of course. Yes. 

 

[Karen]

So that’s probably going to be the baseline for any new person regardless of what level joining any corporate going forward.

 

[Ayeesha]

Yes, it’s a challenge I think in two ways if you think about it. It’s a challenge from the associate perspective to be able to learn but it’s also a challenge for the companies themselves and the HR and the learning development parts of the company to be able to provide adequate resources to ensure that their employees are able to do so effectively. So it will be interesting.

 

[Karen]

Yes. Well thank you so much for your time today, Ayeesha. I really feel like you’ve given us some great context to think about if we are starting to embark on our own journey as well. I’m very excited to see what our future of work is going to look like. For everyone on the call, Ayeesha was talking about bank technology. 

 

If you do have any follow-up questions please do reach out to your Bank of America representative. You know they would be more than happy to share some of the things that we’re doing on our innovation roadmap in relation to digitization. I know we are a minute over so I want to thank everyone for their time today and we really look forward to the next session. Have a great day.

 

[Coordinator]

Thank you very much. Everyone that concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

 

[END OF CALL]

 

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TRANSCRIPT

 

Title of Meeting:

Bank of America 2021 Global Liquidity Speaker Series

A new era in cash forecasting - Leveraging machine learning to make better decisions

 

Date: 

16MAR21

 

Speakers:

Karen Ly, Head of Global Liquidity Solution Specialist GTS, Bank of America

Paul Smithwood, Head of Data & AI Product Development GTS, Bank of America

 

[Coordinator]

Welcome, everyone, to the Bank of America 2021 Global Liquidity Speaker Series: A New Era in Cash Forecasting, Leveraging Machine Learning to Make Better Decisions. Your conference is hosted by Karen Lee. My name is Stephane, and I’m your event manager. During the presentation, your lines will remain on listen-only. I would like to advise all parties that this call is being recorded for replay and transcription purposes.

 

Now, I’d like to hand your conference over to Karen.

 

[Karen]

Thank you for that. Good morning and good afternoon, everyone. Thank you for joining today’s Liquidity Speaker Series Call on Cash Forecasting. My name is Karen Lee, and I’m the Head of Global Liquidity Specialists here at Bank of America. On today’s call, I will be speaking to Paul Smithwood, Head of Data and AI Product Development in Global Transaction Solutions. Together, we will discuss the challenges of traditional cash forecasting, as well as recent technology development in this space. 

 

Now, cash forecasting is not a new liquidity priority for many clients, but when COVID hit last year, many companies were exposed to the fact that they did not have comprehensive or accurate cash forecasting processes. For those that did, the new challenge of working from home made it difficult for businesses to ensure that they had enough cash on hand to meet vendor, staffing, and funding obligations. 

 

At Bank of America, we saw this translate to many companies sitting on higher than normal cash balances by treasury change for most of 2020, and while absolutely necessary, it probably wasn’t considered by many as the optimal use of working capital.

 

Paul, maybe we can start with understanding some of the traditional challenges that clients face when it comes to cash forecasting. 

 

[Paul]

Sure. Thanks, Karen, and thanks for having me. To quickly elaborate on my role here before we dive into these questions, my name is Paul Smithwood. 

 

I am the Director of Product Development within the Data and Artificial Intelligence Group here in Global Transaction Services. Prior to that role, I was a client of the bank and was a Treasury Manager for a global private equity company. Cash forecasting really was my day-to-day then and continues to be so now. 

 

In answer to your question, Karen, about the challenges that corporates are facing, there are many. We could spend the whole time talking about them, but if I really had to hone in on some of the ones that I see and hear most often when talking with treasury teams, there are three main ones, the first being the amount of manual effort. 

 

Many clients are spending a significant amount of time not analyzing their forecast but simply updating and maintaining it, so pulling data from different systems consolidating it typically in a spreadsheet. It’s a lot of manual effort before you can actually get to the analysis and decisions based on it. 

 

That’s one; two, I would say, is poor visibility. What I mean by that is obviously, this probably isn’t news to most, but before you can create a good forecast, you have to have access to the requisite data, right? You need to be able to have a global view of your balances, of your pending transactions, of your booked invoices. Many teams have partial views and are missing significant cash flows for a variety of reasons and then have an incomplete forecast due to poor visibility. 

 

Then, lastly, I would say in addition to poor visibility is poor analytics, right? Given the fact that many teams are forced to consolidate data in a spreadsheet or some other homegrown process, I oftentimes see clients that are creating forecasts either simply by rolling forward prior balances; maybe they are looking up pending payment runs or booked invoices and plugging them directly in the forecast. For a variety of reasons, a lot of times they don’t have the time or technology to apply better analytics to start analyzing historical data to do scenario analysis and ultimately produce a better forecast. I’d say those are the three main ones, manual effort, poor visibility, and poor analytics.

 

[Karen]

Thanks, Paul. I know definitely from talking to a lot of clients that visibility challenge isn’t just technology. A number of clients have multiple banking relationships, so you then also have to layer on top of that different data dumps that different banks are also potentially giving you as well. I know that also adds into some of the complexity around visibility, and probably manual effort as well, from a client’s perspective.

 

Today, there are many options for clients to leverage when it comes to cash forecasting solutions. Technology companies do specialize in applications for this. I know that many ERP systems also have their own module. There’s also banks that have their own solutions, and then many companies may also consider building something in-house. 

 

Paul, as companies think about evaluating some of the various options to them, what are some of the considerations that you could recommend they take into account? 

 

[Paul]

Sure. You’re right, Karen. There’s so many forecasting providers out there now. Really, more than ever in the last couple of years, and especially the recent pandemic, most ERPs, treasury management systems are beginning to build forecasting modules. There is dozens and dozens of typically FinTechs and other specific forecasting-based providers. There’s a lot out there, and it’s difficult to evaluate them side by side.

 

I would say there are several things that you should consider when looking to adopt a new forecasting technology. First and foremost, I would say capabilities. Before you even go and start looking across the market, you want to be able to know what capabilities are critical based on your forecasting needs versus nice to have.

 

We all know many nice to have capabilities, and I would say don’t over-complicate or make a list too long. For example, if you need to forecast at the company level versus at a subsidiary or account level, if you have a need to be able to forecast by a cash pool or a currency, or to be able to break out and forecast your cash flows by individual cash flow types, things like AP, AR, depending on what your forecasting needs are, there’s going to be some supporting capabilities behind how you need to forecast. Make sure you know those, and the forecasting provider is able to do that.

 

Two, this hits on the first question, analytics, right? Every good forecasting tool should have good, embedded analytics. Some of them are now adopting more advanced forecasting technologies like machine learning. Even at a basic sense, can they do embedded scenario analysis, allow you to plug in assumptions such as growth rates, quickly take trailing averages? Making the analytics piece is automated and advanced as possible is another key piece to it, and every forecasting technology should do a good job of that.

 

Third, I would say data integration is a big one. In order to achieve your forecasting needs, you should certainly know what data you need to support that, and where the best source of that data is within your organization. When you go out and look at a forecasting technology, if you need bank data, for example, to pull in historical transactional activity to update your balances; if you need ERP data to be able to pull in book invoices; other working capital data from a variety of payroll systems, invoice management systems, whatever it is that you need to create your forecast, make sure you know what that data is, where it’s located, who owns it and ask those forecasting providers how easily can they integrate to each.

 

A lot of forecasting providers, if it is something like an ERP or a treasury management system they should be able to automatically integrate with data within that ERP or within that TMS. For any technology that’s pulling that data outside of it, make sure you ask what that process looks like and how difficult it is. 

 

Then, that would lead into probably the fourth thing, is time to implementation. Depending on what your data integration needs are and what your given setup requirements need to be, make sure that you get a good estimation of what the implementation timeline looks like. I’ve seen many forecasting providers say that they can integrate with any system out there, and theoretically that could be very true, sure, they can.

 

When you get under the hood and say how difficult is it; is it something that’s as seamless as an API connection versus a file-based connection? You can really figure out whether or not it is an easy implementation or not. I’ve talked to many treasury teams that have engaged a technology provider, signed a contract, and then found out after the fact that it’s a six-month implementation. Make sure that you ask those questions and know what that time to implementation is.

 

Then, lastly, I would say ease of use. Every good forecasting technology should also be simple to use and not require a 100-page user manual. I’ve talked to many treasury teams that have been sold on very good forecasting technology with lots of capabilities. 

 

Ultimately, we all know there’s treasury teams who wear lots of hats. They have to spend a lot of time doing things other than forecasting, so when it takes you several weeks in webinars to learn a new forecasting technology, then I’ve seen many situations where treasury teams stop halfway through, and then they revert back to their manual process because they know it and it’s easy. Make sure it’s easy to use as well. 

 

Again, to recap those capabilities, know what capabilities you need and make sure the forecasting provider can meet them. Analytics, make sure the forecasting provider provides good, embedded analytics that are easy to use within the application and that they are able to provide some sort of measurement on how good those analytics are. Data integration, how easy is it to integrate the data sources that you need in your forecast? Time to implementation, how long is it going to take you to implement this forecasting technology. Ease of use, make sure you see a demo, make sure it’s intuitive, make sure anyone in your treasury team can quickly pick up and start using it.

 

[Karen]

Thanks, Paul. I think that’s really great advice, especially around making sure that you are able to see a demo. And, to add to that, make sure it’s the end-users that are involved in that demonstration. I think a lot of times when we get third-parties coming to pitch applications, it’s really done at a senior level. Not to obviously discredit their opinion, but having the end-user as part of that demo and part of the feedback process, I think, is very important [indiscernible - 55:00] that ease of usability.

 

One other one that you didn’t mention, which I think is a real factor for every company, is going to be cost as well. Depending on the size of the party that you’re going with for the solution or how comprehensive the application is, I think the cost can very much vary [indiscernible –n 55:24] across all of the different options available. 

 

Obviously you need to also take into consideration of not just the initial purchase but what is the ongoing maintenance going to cost the business as well, because I think that really becomes a factor in any company trying to make a decision on what solution to go with. 

 

[Paul]

Yes. Karen, that’s a really good point. Just before your next question—I know this is getting long—I’m glad you brought that up. I would say cost and overall ROI.

 

It’s essential that you can make sure that the benefits of the new forecasting technology justify the cost. Just because a solution is capable of integrating with every potential data point and has all the bells and whistles, that can have the highest potential return, but oftentimes, treasury teams find out that the costs outweigh those benefits. It takes six months to implement; they need a team of consultants, there’s ongoing maintenance.

 

Ultimately, many treasury teams are simply looking for if forecasting technology that improves or streamlines their existing process or just looking for a good tool to help them start forecasting, then just make sure you don’t get oversold. 

 

[Karen]

Maybe I’ll add to that. I know this is a very complex question, but it’s something else in terms of getting oversold. I would say though, you should take into account any growth plans that your business already has.

 

If you already know that you have certain growth plans that have been forecasted for the next 12, 18 months, those requirements should also be taken into consideration when you make these decisions because you don’t want to need to reinvest or find that the application or solution you have decided on maybe is not going to be comprehensive or grow with the business if you have growth plans as well.

 

Paul, depending on the size of the business, and the footprint of the company, and potentially the complexity of the legal structure, I know that establishing a forecasting strategy and implementing and maintaining a solution can be very time-consuming. I know that Bank of America through your team is working on something exciting to assist clients that potentially may help alleviate some of the time aspects that a company needs to invest. 

 

Can you provide some details on Bank of America’s Cash Forecasting IQ solution? Given the title of our topic today, maybe explain how it leverages machine learning to help improve forecast accuracy. 

 

[Paul]

Absolutely. This has been a multiple-year journey. It’s one that we’ve spent a lot of time working with our clients with. As part of a pilot and a proof of concept, we’ve engaged a FinTech company that specializes in machine learning and cash forecasting.

 

Ultimately, when we set on this journey two, three years ago to create a forecasting application for CashPro, our online banking portal, we wanted to solve this pain point that we talked about in the very beginning. We wanted it to be as seamless as possible with minimal manual effort, automated wherever possible. We wanted to improve visibility, and we wanted to ultimately, from a machine learning point, provide robust analytics. 

 

Talking about that last piece first, what we did is basically created a machine learning component to this application whereby all of the historical data that is housed within CashPro, within Bank of America, it’s automatically brought into the application and analyzed through several different algorithms. Ultimately, it’s looking at several years of historical cash flows and balance activity, and it’s picking up variables that you would never identify within something like an Excel spreadsheet. 

 

It’s able to identify patterns in if your cash flows or balances increase on the first of every month, if you’re making payroll on the 15^th of every month, it picks up a lot of those insights and is able to identify the most accurate model out of about a dozen or so that fits each of your accounts. It’s only going to use it when an accurate forecast is possible because, again, I’ll say machine learning cannot solve everything. You could have opened an account yesterday, or you could have an account that makes two transactions a year; machine learning will do a very bad job of predicting that. 

 

 

Wherever it can provide a high level of accuracy, it’s going to analyze all of the historical cash flows, pick the most accurate model for every account based on historical performance, and use that to forecast going forward. 

 

In addition to that, we know that not everybody is either comfortable with machine learning or wants [indiscernible - 60:30] to set and forget their forecast. We’ve also looked at and have included the ability to do a variety of different scenario analyses. A lot of times, it’s used to compare against the machine learning, and then ultimately take the best way to do your forecast.

 

We’ve created different ways to derive your forecast based on taking things like trailing averages, assigning growth rates, pegging your forecast to a prior period, for example, and ultimately enabling a user to quickly and without much complexity at all, create a forecast based on the assumptions that they want to make. Ultimately, the machine learning may very well prove to be the most accurate option. 

 

So we’re very excited about it. It is scheduled to have a soft launch later next month. We’re opening it to about 200 companies. Then, later this year, it’s scheduled to be available for all CashPro companies within CashPro. 

 

[Karen]

Paul, just to make sure my understanding is correct when you say through CashPro, this means that any clients that are existing users of CashPro, according to the timeline, will have this solution available to them?

 

[Paul]

That’s right, and that also brings up another good point. It is within CashPro, and as such, any user who uses CashPro and has access to information reporting—which is basically where all of your historical information lives, almost all of our clients use it—they will have the ability to use Forecasting IQ.

 

Being part of CashPro, there’s no implementation. It automatically knows which accounts each user can see because that’s already entitled when you’re set up to CashPro. It already has direct integration with the data because it’s integrated in the CashPro, so there’s no setup; there’s no IT requirement. Everything is sourced directly from CashPro, which also has the ability to receive multi-bank files, so you can get multibank information sent to CashPro and included in the tool. Again, it’s automating a lot of that manual forecasting update-type of work that many treasury teams are doing today. 

 

[Karen]

Okay. Thank you for clarifying that. I just want to maybe ask a clarifying question on a point that you made around AI or machine learning not being accurate when it comes to some new information. Am I correct in the understanding that as time goes on, the accuracy will improve for new information that comes in? Is that how machine learning works? 

 

[Paul]

Yes. In a nutshell, yes, that is very accurate. Ultimately, the more data machine learning or a given machine learning model sees, the more it learns, the more accurate it ultimately becomes. When it comes to forecasting, the more transactions that flow through an account, the longer of history that an account has, ultimately the more accurate a forecast it will result in. 

 

It does more heavily weight more recent cash activity because obviously, trends change. The recent year is a perfect example of that where machine learning cannot anticipate something like a pandemic, right. But, as soon as something like a pandemic happens and clients are stockpiling cash balances in their accounts, machine learning picks up on those trends and will begin more heavily weighting that sort of activity that it began seeing. It’s continuously learning and continuously changing, but obviously always retroactively as those trends begin to occur.

 

[Karen]

Okay. Thanks for the additional information. It all sounds like the machine learning will lead to a great time saver. It should, over time, reduce the number of errors and also help eliminate manual effort throughout the companies.

 

I’m wondering, to what extent can forecasting be measurably improved by new technology? Do you see a danger that it becomes more complex than traditional manual methods such as spreadsheets?

 

[Paul]

There’s certainly the danger. I would say, for one, good forecasting technology helps you to actually measure the performance of your forecast. I would say that the majority of treasury teams of our clients do not have an effective way to even measure forecast performance in their current process.

 

If it’s something like Excel or if it’s a manual process, it’s tough to gauge how good your forecast is. Good forecasting technology should help you measure what your forecast variance is, where your forecast is going off the rails, and help give insight into how you can begin to improve your forecast. 

 

Certainly, as technologies like machine learning and artificial intelligence get introduced, there is a lot of potential for improvement, but there’s also a lot of potential for analysis paralysis, as I like to say. Again, good forecasting technology should use these sort of technologies to provide a better, more accurate forecast, but it shouldn’t do it in an overly-complicated way because, at the end of the day, the machine learning is doing the work of the analysis anyway. That part is simple. 

 

As long as the technology can give you some insight and explainability into how it’s working and how the machine learning is weighting the different variables in providing the forecast to give you the comfort that you need as a user to be able to explain this to different stakeholders, and not just say the model came up with this number, but be able to validate that based on past performance and what it is weighting as far as the variables in your forecast, then it should not be that different. 

 

But again, not all forecasting technologies are making it that seamless. 

 

[Karen]

Okay. I know we only have a couple of minutes left, but I’m going to sneak in another question. It really segues from the question that you just answered with so much about this new technology and what it can deliver, many of our clients vary in terms of sophistication, in terms of size of operation. 

 

Are there any prerequisites that we should be mindful of in terms of adopting new technology, or is it really available to your business regardless of size and complexity?

 

[Paul]

With everything in forecasting, it depends a little bit. I would say something that’s pretty universally true is that before you adopt new forecasting technology, you have to have good data quality. We talked about this a little bit before, but if you have no idea where your cash flow information lives, and how its formatted, and how to get access to it, and who owns those systems, make sure that you figure that out before you talk to a forecast provider.

 

I would say the biggest things, yes, make sure you know where the data is, make sure that the quality of that data is good. Obviously, there’s always the garbage in/garbage out factor. Technology can’t fix that. If you’re getting incorrect feeds into your TMS or it errors out, and you’re not getting daily cash flows, that’s something that needs to be fixed first. Technology only can work off of the data that you’re feeding it. Make sure the data is good quality, and make sure you know how to access it. 

 

Then, ultimately when you do talk to forecasting providers, make sure you have an understanding of what your budget is, what IT resources you have available, if they’re needed. Ultimately most forecasting technologies have some sort of implementation, so make sure you have the right stakeholders involved. I think, Karen, you made a very good point earlier; make sure the end-users are sitting at the table when you are seeing the demos, when you’re talking to the providers, and are part of that evaluation process. 

 

[Karen]

It sounds like it isn’t really about the size of your business, but really understanding what you’re looking to achieve and understanding your source of data are really going to be the key drivers for any client looking to leverage new technology to do cash forecasting. Thank you, Paul, for the insight. It definitely was great for me to understand this as well. 

 

That’s all the time that we have for today. If anybody does have any questions about today’s topic, please reach out to your Bank of America representative to organize a follow-up discussion. I know that cash forecasting is very much front of mind since the pandemic, so it is a win with Bank of America’s solution coming out over the next month or so. It’s perfect timing for us to be talking about this topic.

 

Thank you, Paul, again for your time. Thank you, everyone, for joining. We look forward to your participation on our next Liquidity Speaker Series Call. Thank you.

 

[Coordinator]

Thank you. That concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day. 

 

[END OF CALL]

 

“Bank of America” is the marketing name used by certain of the Global Banking and Global Markets businesses of Bank of America Corporation. Lending, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. © 2021 Bank of America Corporation. All rights reserved. | 3496524

TRANSCRIPT

 

Title of Meeting:

Bank of America 2021 Global Liquidity Speaker Series

Building a sustainable future –the growing focus on ESG

 

Date:

27APR21

 

Speakers:

Amy Watson, Global Liquidity Solution Specialist, GTS Bank of America

Henrik Lang, Managing Director, Head of Global Liquidity, GTS Bank of America

Ashwani Chowdary, ESG Program Director, Global Environment Group, Bank of America

 

[Coordinator]

Good day and welcome to the 2021 Global Liquidity Speaker Series titled “Building a Sustainable Future as a Growing Focus on ESG.” My name is Esther and I am your event manager. During the presentation your lines will remain on listen-only. I would like to advise that this conference is being recorded. 

 

And with that, let me hand it over to our host. Please go ahead.

 

[Amy]

Thank you. Hello. My name is Amy Watson, a Global Liquidity Solutions Specialist in Global Transaction Services at Bank of America, and I’m delighted to be hosting this session today on ESG.

 

I’m looking forward to an interesting discussion alongside guest speakers Henrik Lang, Managing Director and Head of Global Liquidity and Global Transaction Services; and Ashwani Chowdary, ESG Program Director in the Global Environmental Group at Bank of America. 

 

As companies increasingly seek ways to have a positive impact environmentally, socially, and ethically, drawing attention to ESG-oriented investment opportunities, we will discuss today the concept, evolution, and trends of ESG in the corporate environment. But what is ESG? ESG stands for environmental, social, and governance. Environmental, relating to how the business performs as [indiscernible - 36:40]. We often hear this also referred to as being green. Social being a firm’s relationship with or ethical impact on society, including employees, suppliers, clients, etc. And governance, covering for example, an organization’s leadership, audit and internal processes or controls. 

 

Today, it’s certainly apparent that ESG compliance is becoming increasingly important for a number of reasons, as the effects of climate change are progressively felt and accepted, as we look to sustainably rebuild society following the pandemic, and as demand grows for company policies that result in performance led by purpose, to give a few examples. Ashwani, it would be great to hear from you what ESG means from a Bank of America perspective. 

 

[Ashwani]

Thanks, Amy, and thanks, everyone, for joining today. For us at Bank of America ESG is really a core part of our responsible growth strategy, to be able to deliver for our customers, our employees, our shareholders, as well as our community and the broader society in which we operate. So for us, that means that in order for our own company to be sustainable and to grow, we have to focus on the needs of this broader set of stakeholders. This is becoming increasingly known as a concept called stakeholder capitalism, which many companies and CEOs are adopting, and you’re probably hearing about as you read about ESG. 

 

So for us, sustainable finance is one of the ways that we’re embedding ESG across the enterprise. As part of a series of business goals that we’ve had for the past 15 years or so we just recently announced a new ten year, $1.5 trillion goal to mobilize and deploy capital towards environmental transition, so addressing climate change, as Amy just mentioned, as well as inclusive development. And that activity is all aligned with the sustainable development goals.

 

We recognize two of the biggest challenges as a society that we face today are climate change as well as inequality, and so addressing both of these has been a priority of ours for years. So that’s one of the ways we’re kind of operationalizing ESG at the bank. 

 

[Amy]

Oh that’s great to hear about some of the impacts on work going on. Over the years I think we’ve really seen a lot of development in the market, since ESG was essentially conceptualized. Ashwani, could you give us some insight as to how ESG has evolved and what some of the key milestones have been?

 

[Ashwani]

Sure. Yes, so if you go back maybe a decade or so, even farther back, the initial focus really for companies was on corporate social responsibility. So it was a little more localized and thinking about philanthropy, volunteerism, supporting local community institutions like arts or supporting arts and culture, all of which is still very important, but it has evolved into the broader stakeholder approach that I mentioned. 

 

ESG is really about taking into account and managing the opportunities and the risks from an environmental and social perspective that could be associated with all of those stakeholders. So it could be thinking about human rights issues within your value chain, the affordability of your products, diversity and inclusion, both internally as well as externally. And then similarly, you’ve seen this growth in investment in ESG assets and the growth of the products to be able to meet that demand. 

 

I think a turning point was—I mean, there have been several, but one key milestone I think was in 2013 when the Green Bond Principles were published. This gave a market standard for how a company should issue a green bond and what are the eligible agreed-upon criteria for what would qualify as a green asset or a green investment, and so that lent a lot of credibility and comfort to investors to be able to invest in these bonds. 

 

And so you really started to see that market kind of take off after the Green Bond Principles were published. At the bank we’ve issued five green bonds of our own, two social bonds, and we just issued a sustainability bond as well last year, so we’re definitely supporting the market in that way as well as underwriting on behalf of our clients. 

 

So along with green bonds, then came social bonds, and thesocial bond principles which outlined the various kinds of social activities, whether it’s affordable housing or access to healthcare and education. Again, that companies could use these proceeds to invest in those types of products. And you’re seeing now sustainability bonds, sustainability linked loans in bonds as well, so there are all of these products and opportunities for investors to access. 

 

And then of course now we have sustainability deposits, and I don’t know, Henrik, if you wanted to touch upon that a little bit?

 

[Henrik]

Yes. I just wanted to agree with Ashwani. We’re definitely seeing what really started on the green finance and the sustainable finance front really take hold in the corporate treasury world as well, not just on the financing side but also going into either digital strategies, into trade finance, particularly as sustainable trade finance and also in the liquidity space.

 

[Amy]

Thanks for that. Yes, it’s really useful, and based on a kind of evolution. I think we’re also seeing a lot of developments in the regulatory aspect. Ashwani, would you be able to talk about the possible impact of any new regulations?

 

[Ashwani]

Sure. Yes, things started in terms of regulation in Europe, I think with the EU taxonomy that was published last year, and that’s really designed to align a company’s activities with the goals of the Paris Climate Accord to achieve certain temperature alignments in order to address climate change. And the EU taxonomy is one strategy in regulation that’s attempting to do that; I know there’s other regulations in Europe and in other jurisdictions as well. 

 

Here in the US, with the change of administration we’re starting to see a lot more focus on regulatory policy mechanisms that will encourage investment in low carbon technologies, and we’re also seeing lots of countries make net zero commitments. The US made a commitment last week as part of the president’s climate summit, I think 50 or 70 countries have made these types of commitments, and what’s going to come next are the policy and regulatory mechanisms in order to be able to encourage and incentivize industries to be able to achieve those goals. 

 

[Amy]

Yes, so there’s definitely I think a lot more focus on ESG from a market perspective. Henrik, I know that your team works a lot with companies of all sizes. What are we seeing corporates doing in relation to ESG, and how are they looking to invest in the ESG agenda? 

 

[Henrik]

Good question, Amy, and again, thank you for having me on this call today. We’re seeing a lot more corporates approaching ESG strategically. Dependent on the size of the company, increasingly there is board level oversight of ESG objectives and ESG metrics oftentimes. 

 

We also see that ESG is getting integrated throughout the entire organization. And what do I mean by that? That could be policies. That could be corporate goals and objectives that incorporate all of those ESG compliance measures that the corporation has as an objective. It could relate to, for example, bringing this closer to the transaction services side of the business. It could be related to how they set financing terms for suppliers. It could be offering maybe more preferential financing terms for certain suppliers. For example, if they are mining suppliers, forest service suppliers that meet certain ESG criteria. It could—I don’t know— lead to having specific guidelines within the [audio drops - 47:03] policy the company is operating under, allocating certain portions of their investments to ESG-friendly tech investment options. 

 

So again, it takes all sorts of shapes and sizes. I’ve seen, for example, vendor selection criteria incorporating ESG-specific questions. In fact, when we work together with our clients, you often see requests for a proposal include several questions asking about how Bank of America is approaching ESG and what the ethos around ESG is within the firm. 

 

Again, depending on the size of the company, it does take different shapes and different forms. But one thing is consistent, which is it’s pretty much across the board now, a mainstream discussion topic with our corporate clients.

 

[Amy]

Yes. Definitely things very important for companies to set a clear approach or goal. So in that process what would be the key considerations when they’re creating an ESG strategy? 

 

[Henrik]

Right. This could include many different things. For example, corporates typically have an enterprise level ESG strategy defined, and then the various businesses and departments would be asked to contribute to those corporate level ESG causes. Where I spend most of my time is speaking with treasurers and CFOs of corporations, so I often get the question, “Okay, Henrik, we have our own corporate enterprise ESG policy here as a company. I’m being asked by the board or by the CFO how my treasury or finance operation can contribute to those ESG goals.”

 

And then what we typically do, together with thoughts from Ashwani’s team, for example, is sit down with corporate and then really try and dissect their own corporate ESG goals, and we’re trying to align with our goals. For example, if they have specific goals around how much they would like to invest in—I don’t know— an environmental project, then we can structure or help them come up with solutions to, for example, move away from paper and leverage more electronics or digital services. 

 

We could also help them get more exposure to environmental type assets or investments. Or if they have, again, the objective of investing with minority depository institutions or if they would like to support minority suppliers, as I mentioned, we also have different layered solutions that we can help the treasurers achieve those goals. 

 

It’s very important, and I don’t know, maybe Ashwani would like to just touch on that briefly, that ESG disclosures are also becoming a hot topic, and dependent on the jurisdiction there are different approaches. But I think across the board we’re seeing many, many corporates making public disclosures with regard to their progress on ESG. So I think all of these initiatives are ultimately leading to the enterprise level regular ESG disclosures that they often publish on their website and make available to investors. 

 

[Amy]

Thanks, Henrik. And yes, Ashwani, it would be great to hear your views on that as well.

 

[Ashwani]

Sure. Yes. There are a number of different voluntary ESG disclosure frameworks out there. There’s a Global Reporting Initiative, the Sustainability Accounting Standards Board. There are some that are more specifically focused on climate, like the Task Force on Climate-Related Financial Disclosures and CDP as well. And these are all great, and they definitely help companies to be able to structure and identify what are the key indicators that they should be measuring and managing and disclosing. I think there is this move to convergence of all of these different reporting frameworks because there’s a recognition that there are quite a few out there and they might be causing some confusion amongst various stakeholders that look for this information. So there is this movement right now towards convergence of these different standards. 

 

And then I think there are various entities, like the IFRS, that have stated their intention to create a sustainability standards board, so that we could be moving toward more of a mandated type of a disclosure, which is a direction I think in terms of integrating ESG and looking at the financial disclosures that companies are required to provide, and then layering that in integrating into various sustainability disclosures. 

 

And then you’re seeing in the US the SEC has also issued a consultation, they have a feedback period that’s going on right now to get input on what types of disclosures and what the approach should be. So a lot of companies are engaging in that process as well. 

 

So there’s definitely been a lot of movement on the disclosure front. And I think we’ll continue to see some convergence and possibly mandated disclosure sometime in the future. 

 

[Amy]

Yes. I think the market seems to definitely have taken note of the increasing requirements and variety of methods, and which companies can utilize to assist in contributing to their ESG goals. Ashwani, you touched earlier, but what are the types of products and tools available that companies can use in this respect?

 

[Ashwani]

I think in terms of determining your goals, what a lot of companies are focusing on are the sustainable development goals because that really was developed with the input of governments, of the NGO, civil society, as well as the corporate sector in terms of these are the 17 global challenges that the world faces. And these are the goals and the various targets that we need to achieve in order to address those goals. So it provides a good sustainable framework for companies to look at and to be able to align their own objectives and their goals towards. 

 

I think also, to Henrik’s point earlier, it’s looking at your own business activity and your own core values and what are the issues as a company that you would like that most integrate and align with your business and that you’d like to address? And establishing goals around those.

 

[Amy]

Thanks for that. Henrik, when thinking about the various different options for investment, we touched on the sustainability deposit earlier, but how do you think the ESG deposit offerings fit into a corporate’s approach to liquidity or cash management?

 

[Henrik]

Yes, good question. We actually spend a lot of time with our clients talking about how they can incorporate ESG within their own liquidity strategy. There are a number of solutions available that are readily accessible to corporates. There are various off balance sheet or money market fund type solutions, either in the fixed NAV or in the floating net asset value space that allow corporates to invest in ESG-friendly money market funds.

 

There are also solutions that are available that banks offer. In fact, we are currently working on a new solution that will be available next month where clients can benefit from having exposure to the Bank of America sustainable asset portfolio, and we have a very broad portfolio of sustainable assets across education, affordable housing, health, economic inclusion, energy efficiency, renewable energy, and a whole range of sustainable development goal-aligned assets. 

 

And that’s another way for corporates to reallocate all of their cash or excess cash to ESG-friendly quarters.

 

And as we know, currently many of the corporate clients are running high cash positions on their balance sheet, so we’re definitely getting more and more inquiries about that and having more conversations with clients. 

 

One of the things that we thought about when we were designing or coming up with ideas for corporates, is we really wanted to come up with a solution that allows corporates to maintain access to liquidity. We think it’s very important, especially given the current volatility and dynamic macro-environment, so the solution we have is for sustainability deposits that allows clients to invest or take money out of those accounts just as they would from their normal operating accounts, there’s no restriction on taking money out, or there are no term commitments that they need to make. And that’s again based on data feedback from our corporate clients.

 

The other important point was that increasingly hearing our clients wanting to have exposure, not just to green or environmentally focused assets, but they’re looking at having a broader basket of SDGs that they would like exposure to. What do I mean by that? Because the assets that these deposits get allocated to go well beyond just the environmental space. As I mentioned, there are categories in there around education, affordable housing, health, economic inclusion, and especially given some of the events last year, we feel like there is an increasing sensitivity to the social aspect of that. 

 

So it was very important for us to also recognize and include asset classes in this product that will satisfy clients’ desire to get access to, not just environmental or green initiatives but also to use their all-cash to help social initiatives as well.

 

[Amy]

Thanks, Henrik. Yes, that sounds like a really good opportunity for clients to put their short-term funds. Ashwani, would you have any final closing comments on what the future of ESG looks like before we close the call in a couple of minutes? 

 

[Ashwani]

Sure. Yes, I think that as more plans and more details are issued from, as we talked about earlier, various governments around their net zero goals, from companies that have issued their goals as well, and then I think this focus on inequality, I mean, there’s a convergence between those two issues. But I think that you’re going to see more companies focus on these areas and build programs and policies to address these issues, and you’re going to see more government action and incentives to help companies achieve these goals. 

 

And I think, again, the Sustainable Development Goals are a good framework for that, but I just think we’re going to see a lot more activity in this space going forward. 

 

[Amy]

Yes. Thanks so much for that, and thanks for joining the call today. And then just back to Henrik for any closing comments. 

 

[Henrik]

Yes. Thank you, Amy, and thanks, Ashwani, for the very thoughtful comments. I would just want to say that one of the reasons why I’m passionate about ESG, especially when it comes to delivering solutions for our clients in this space, because we recognize how our efforts can really amplify if they start delivering solutions to our clients, right? So rather than just focusing on it ourselves, it really becomes a very powerful initiative if we can deliver solutions to our clients and we can help them and empower them to turn their own treasury departments into more sustainable operations. So that’s why I think it’s important that clients and bank providers work together to focus on these initiatives.

 

We have [indiscernible - 61:49], again, as you heard from Ashwani, internally, so I’d just encourage everybody on the call to reach out either to your country [ph.] sales offices, or to Amy, to myself if you would like to have a discussion about your own corporate ESG goals. And if you just need some advice in that respect or if you would like to talk about the various solutions that we have, not just within our global transaction services business, but really across our global banking and markets businesses, we have a whole range of interesting solutions that might help you run a more sustainable business. 

 

So with that, I’ll pass it back to Amy. Thank you.

 

[Amy]

Thank you, Henrik. And thanks again, Ashwani, for your time today. And thank you to everyone for joining the call. This is the end of the session, so we’ll close now. Thanks. 

 

[Coordinator]

Thank you very much. That concludes your conference call for today. You may now disconnect. Thanks for joining and have a very nice rest of the day. 

 

[END OF CALL]

 

“Bank of America” and “BofA Securities” are the marketing names used by the Global Banking and Global Markets divisions of Bank of America Corporation. Lending, other commercial banking activities, and trading in certain financial instruments are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., Member FDIC. Trading in securities and financial instruments, and strategic advisory, and other investment banking activities, are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, BofA Securities, Inc. and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and Members of SIPC, and, in other jurisdictions, by locally registered entities. BofA Securities, Inc. and Merrill Lynch Professional Clearing Corp. are registered as futures commission merchants with the CFTC and are members of the NFA.

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Bank of America 2021 Global Liquidity Speaker Series

Notional Pooling

 

Speakers:

Ryan Donovan, Vice President, Global Liquidity Specialist - Bank of America
Will Davis, Associate, Global Liquidity Specialist – Bank of America
Allison LaFranca, Director, Treasury Sales Officer – Bank of America

 

START OF RECORDING

 

[Ryan]

Hello and thank you for your interest in Bank of America’s notional pooling solution. In today’s session we hope to deepen your understanding of notional pooling. 

 

My name is Ryan Donovan. I’m a Global Liquidity Specialist here at the bank. And I’m joined by another Global Liquidity Specialist, Will Davis, and then we also have Allison LaFranca, who is a Treasury Sales Officer. 

 

Will is going to start us off with an overview of the product fundamentals. I will then provide an interpretation/explanation of notional pooling and how our clients actually run notional pools. And then for some more practical real-life insight, I have a couple questions for Allison that we will go into, to really give you a better understanding of how clients actually implement notional pools. 

 

So with that being said, Will, let’s dive in. Please start us off with the fundamentals of the notional pooling product.

 

[Will]

Yes. Thanks so much, Ryan. Yes, I will quickly now walk us through notional pooling and how the product works. 

 

Notional pooling is a short-term working capital tool where individual bank accounts are grouped together and the interest earned and paid on those accounts is determined by the combined total balances of all of the accounts in the notional pool group. 

 

A notional pool is a mechanism for calculating interest across a variety of currencies and participants to minimize the debit interest expense on combined credit and debit balances. The calculation for interest earned or paid on pool accounts is a two-step process. 

 

First, each individual account will earn or pay interest to the bank based on their negative or positive balance. If the entire pool has a net positive balance, the bank will issue a pool benefit credit, returning some of the interest paid by the negative balance accounts. 

 

There are several options on how this pool benefit credit can be distributed to the participating accounts. One way is all credit to one single account of the client’s choice. We can evenly distribute it across all participating accounts. We can distribute based on the custom percentages provided by the client. We also distribute based on the individual account balances in the pool. A notional pool structure can reduce intercompany lending and FX exposures, and funds are never truly physically moved.

 

A few considerations we have to consider when talking about notional pooling. Each group of accounts will need to be opened in either London, Amsterdam, Singapore, or Hong Kong. These accounts can be opened in the name of one legal entity or multiple legal entities. The accounts can be denominated in one currency or multiple currencies. 

 

All entities that are participating in the notional pool will need to sign a customer liquidity agreement, where those cross guarantees are there for all participating entities. In a word or two, in order for an entity to participate in the notional pool, that entity must be incorporated in a jurisdiction where the bank has a positive legal opinion. 

 

Notional pooling does have internal credit and risk considerations for the bank, so notional pooling will not be available to all clients. But please feel free to contact your treasury sales officer about notional pooling to better understand if this could be a fit for your organization. 

 

Ryan, back to you.

 

[Ryan]

Yes. Thanks, Will. Thanks for describing the mechanics of how the pool works, where the accounts can be located, how interest is calculated. All very important. But practically speaking, what does all of this mean for our clients? How do they actually use notional pools? And to put it simply, I would say that companies with large global footprints use notional pools as their organization’s site of cash centralization, or as a very important centralization hub in their broader liquidity structure. 

 

Cash consolidation and centralization are core components of any cash and liquidity management strategy. Centralizing cash offers the control the organization is often looking for and also the opportunity for strategic deployment. And the main advantage of using a notional pool as your cash concentration hub is it allows you to share cash across accounts and entities without having to physically move cash between the participating accounts. 

 

So in a multi-entity, multi-currency pool, each participating entity or account is sharing cash with the other participants. And they’re doing so without an inter-company loan, without any physical currency conversion, which means that you’re probably also avoiding balance sheet FX exposure that can come from those transactions or those inter-company ones. 

 

And then obviously minimizing a number of loans in a repetitive transaction is a huge win for your treasury team and your accounting team, and the amount of repetitive reconciliation they need to perform. This reduction of inter-company loans and the reduction of possible balance sheet FX exposure are some of the most powerful benefits of notional pooling. 

 

And once cash is centralized into a notional pool, then clients will strategically deploy that cash. Some will automatically drain the pool every day, overdrawing one account to bring the net pool balance down to zero. And then they’ll use that cash to pay down debt, as a common example. Other clients will drain the pool more strategically, let’s say maybe via a quarterly dividend pay-out. Clients often find that notional pools help them develop a flexible tax and repatriation strategy. 

 

And there are some other use cases for notional pooling, but generally speaking, the lack of repetitive transactions and the lack of inter-company movement means that notional pools are the cleanest and most efficient way for clients to consolidate their excess cash balances. 

 

So with that being said, we’ll now shift over to Allison. Allison, I have a couple questions for you, hopefully taking a deeper dive into some of your experiences with clients and what it actually takes to build and implement a notional pool. 

 

The first question here, Allison, in your experience, what is the most common motivating factor for clients to explore notional pooling? What are the most commonly used statements that you see? 

 

[Allison]

Yes, sure. No, thank you. I think you covered a lot of the benefits. And alongside those are the reasons why clients implement notional pooling. So when we have a client who’s analysing and/or moving toward the implementation of a notional pool structure, some of their objectives may include just the optimization of a global cash position and visibility of that cash, as you’ve said, often in turn to be able to repatriate funds or pay down debt. 

 

They may also just be looking to address short-term working capital gaps. They have a short position in one [indiscernible - 7:24] currency and a long position in another, and they’re able to facilitate funding that short entity without actually going to an external funding market or anything of that nature. 

 

They may also just be looking at their FX exposures and looking to minimize the risk that they foresee if they’re sensitive to that, depending on their currency mix and balance position. 

 

[Ryan]

Great. Yes, so lots of use cases out there and clients are probably going to find either a combination of these use cases or one that’s most important to them.

 

So we’ve laid out all the benefits, but when is really the right time for a client to actually go ahead and implement a notional pool?

 

[Allison]

I think one key element that I often find with clients who have successfully implemented a notional pooling program is that they already have an in-house banking structure in place and have a rationalized and optimized account structure. So starting with a physical account structure that is clean and lean, is a great way to start because the liquidity of the notional pooling structure is going to lie especially on top of that. So important to have a good base. 

 

Also, that you want to take into consideration the strategic objectives of the organization to understand if there’s any near-term or medium-term changes to your cash structure that may affect the liquidity structure that you’re looking to put in place. So M&A activity, divestiture activity that may really change the currency or balance deposit mix are key considerations to think of before actually moving forward with the implementation. 

 

[Ryan]

Let’s say all that scoping and due diligence has been done, what kind of timeline can we expect for implementation to actually occur?

 

[Allison]

Well that’s a good point. The planning and scoping is often the longest part, and wanting to get buy-ins from all parties, including legal and tax. So as mentioned, if you have an in-house banking structure, you likely have some of that already comfortable with within your organization and with your external auditors as well. 

 

Once that’s defined, the actual mechanics of implementing the structure might involve some additional account openings, particularly at that higher level. And then also you’re going to consider as a part of the scope the participants in the pool and keeping in mind what those tax consultants are comfortable with from a jurisdictional standpoint and who can participate and where. 

 

So it’s hard to set an exact timeline on it, but it’s key to be well prepared and have comfort from all of your partners, whether that’s tax, accounting, and legal. 

 

[Ryan]

Okay. I think that is an important thing to call out here, is that it does take a considerable amount of coordination between tax, legal and your treasury organization. 

 

On the client side, Allison, are there any other teams that you’ve worked with that have been brought into the project plan?

 

[Allison]

Sure. Yes, in all cases I would say that our clients leverage their external auditors, legal team, and accounting team. But I’d say this, obviously Bank of America cannot offer tax advice, which is why we recommend that you work with them to ensure they’re comfortable with things like cross guarantees, participants based on jurisdiction, as mentioned, those types of things.

 

I will say that Bank of America has partnered with EY and does have some material that we can share, along with discussions with our GTS advisory partners which can help your internal partners as well as external partners regularly evaluate and get comfort around the liquidity structure you’re looking to implement. 

 

[Ryan]

Definitely. Yes. Thank you for calling out all of that. I think it is important to mention that these are resource intensive pools to set up, they can take some time and some dedication in order to get them in place. But hopefully today, if you’re looking to this, you now understand that going through those hurdles and engaging those resources is worthwhile because you will be building a pool and a structure that has long-term benefits for your organization. And obviously Bank of America is always here to help and be one of those resources within the journey. 

 

So, Allison and Will, thank you for your time today. We will finish up there. Again, thank you, and enjoy the rest of your day. 

 

[END OF CALL]

TRANSCRIPT

 

Title of Meeting:

Bank of America 2021 Global Liquidity Speaker Series

Utilizing Notional Pooling and FX Netting to Drive Down Operating Costs

 

Date:

2MAR21

 

Speakers:

Warren Bolton, Global Liquidity Solution Specialist, Bank of America

Elizabeth Rowella, FX Product Solution Specialist, Bank of America

 

[Coordinator]

Hello and welcome to the Bank of America 2021 Global Liquidity Speaker Series for Utilizing Notional Pooling and FX Netting to Drive Down Operating Costs. My name is Lisa and I’m your event manager. During the presentation the lines will be on listen-only. [Operator instructions]. I’d like to advise all parties that the conference today is being recorded. 

 

And now I’d like to hand the call over to your host, Warren Bolton. Please go ahead.

 

[Warren]

Thank you, Lisa, and a very warm welcome, and good morning and good afternoon to everyone. Welcome to today’s liquidity series discussion. The agenda for today’s topics will be starting with notional pooling. Then we will look to move on to FX and netting and we’ll look to share some ideas with you on how best to minimize costs and to maximize efficiency.

 

Let’s move on without any further delay and give you an update on notional pooling. So without trying to sound too basic about the actual structures and what pooling is, notional pooling, in its simplest terms, is the ability to offset short and long positions. Those short and long positions can either be offset in a single currency or they can be offset across multiple currencies, whereby you would notionally convert balances in the different currencies to a base currency so that you have a single position across each of those participating currencies to understand what the position of any pool would be. 

 

Firstly, when it comes to constructing a notional pool you need to choose a location of choice. The preferred choice of location will depend where in the world you’re based. When it comes to EMEA, the long established pooling locations have traditionally been London and Amsterdam, although of late we have also seen quite a few new jurisdictions entering the market.

 

And I guess the major difference between those and the established ones will come back to the double taxation treaties, which are London and Amsterdam, certainly have the primary driver over. When we look at the other parts of the world that also employ notional pooling, or certainly allow notional pooling, we’re looking at places like Australia, Hong Kong, and Singapore, as in Asia Pacific.

 

A lot of the notional pooling is driven by the regulations within the respective jurisdiction, so this is why notional pooling isn’t available in every jurisdiction around the world. And it needs to be understood by the local regulator, the local central bank, and supported by the financial industry there in turn.

 

When it comes to creating the notional pool, once you’ve decided upon your location you would also need to then understand whether or not you would wish to run the notional pool operating as a single entity, or whether it would be a multiple entity notional pool. The difference between the two is quite simply if you’re operating a single notional pooling structure, then that single entity is most likely to be a treasury-driven entity, whereby you would look to consolidate all of the balances from the group at the treasury entity level and then across the multiple currencies that the treasury would operate they would wrap that up as part of a multi-currency pool. 

 

However, if the single entity wasn’t appropriate because the participants in a multi-currency pool by multiple entities required for the multiple entities to have autonomy over their own balances, then this is where the multi-entity pool would take precedent. So this would allow for each entity to participate within a pool, it would have full autonomy over its balances within that pool and there would be no commingling of funds, which is very important, as one of the constructs of the notional pool is really to try and avoid intercompany lending arrangements where at all possible.

 

So depending on the approach of having that single or multi-entity notional pool, the first element that needs to be addressed once the location has been decided upon is how to get the funds from the participating jurisdiction to the centralized location. Because it needs to be clear that the notional pool needs to be centred on one central location, it cannot be over multiple jurisdictions. 

 

So in order to address this, you really need to start by having a degree of cash concentration which wouldn’t physically move funds and entities’ balances cross-border to the centralized location. This would require any participating entity to open up a mirror account, which would be a non-resident account, at the pooling centre, and this would allow them to therefore participate in the notional pool. Their balances would also contribute to the aggregate balance of the pool, and any of the long balances that were brought into the pool would also help to mitigate some of the very short positions from the jurisdiction, and therefore achieve the reduction in debit interest, which is the primary element of running the notional pool in the first place. 

 

But as we look at the ability to bring the individual balances of all of the participants to a central location, once they are at the central location then you have the ability to choose a base currency. And that base currency is simply there so that when there is a virtual or a notional conversion from the respective currency that is participating, and if we were to say, for example, in Europe that we were using a base currency of euros, if participating currencies in sterling, dollars, Polish zloty, or Swedish krona were within the pool there would be a notional conversion from those currencies to arrive at a euro equivalent. And therefore, you could aggregate the individual positions to a euro base, and that net position across all of those balances would give you that single position in euros.

 

The one aim of the pool would be to always have 100% coverage, and by that we mean that the long balances will always exceed the short balances. And therefore that’s where the benefit would be returned to you in terms of the reduction in debit interest which would be accrued from those short positions. 

 

Other considerations that should be thought about when setting up the single entity versus the multi-entity pooling arrangements is with the multi-entity notional pool you would have to have cross guarantees set up for each of the individual parties that participate within the pool. And this is effectively enabling the banks to offset the positions between the participating entities, but also it ensures that should something happen to one of the participating entities, then any short positions when something happens can be covered by the longer positions across the remaining entities within the pool. 

 

So slightly different to how a physical cash concentration works, which were typically as the individual participant counts zero balance there. But it is important that all of the balances are located at the central location and therefore all of these can be offset accordingly. Importantly, there is no intercompany loans created within the pool, and that’s important for the participating accounts. It ensures that the autonomy of those balances remain with the participant.

 

But also when we look at the overall construct of the pool, and as we talk about the benefits from the cost savings from debit interest, when it comes to returning the net benefit of those debit interest reductions back to the notional pool participant, it needs to be passed back in what is a very transparent way. Typically, a lot of the benefit has been passed back to a nominated pool leader, but there are options whereby the benefit can also be passed back to the individual participant at the base on a percentage, an equal split, or it can be done on a contribution base.

 

As there’s more reviews going on by the OECD regarding debt and the first pillar and soon to pillar two coming into focus during the quarter of 2021, the transfer pricing is very much front and centre for the authorities. So it’s very important when constructing a notional pool and returning any benefit to its participant that it does adhere to these very important pillars because these will have a major impact for future accounting positions. 

 

At this point I’m just going to do an introduction to my colleague, Elizabeth, who will take us through the FX and netting as the next part of the agenda. But what’s important from a notional pooling perspective, and it also touches on the FX and netting, is very much around the jurisdictional elements of the notional pooling participant. Not every jurisdiction has a legal right of opinion in order to participate within the pool, and the same can be said also for netting as well. 

 

And I will use this opportunity now to pass over to Elizabeth, who will take you through some FX and netting overviews as well. Elizabeth?

 

[Elizabeth]

Sure. Thanks, Warren. Good morning and good afternoon, everyone. We tend to pair pooling and netting together, and that’s really because if it makes sense for an organisation to explore pooling it also makes sense to have a discussion on netting as well.

 

While notional pooling is about interest rate optimization, multi-currency netting is really a transactional solution designed to streamline the intercompany settlements that take place within the company. Without a netting program, various global entities will make intercompany payment to related entities in different currencies on different timelines, and so all of those payments occur kind of ad hoc, either as needed or based on their different payment terms.

 

With a netting program, the company establishes a netting centre entity, which essentially serves as a clearinghouse for all of the intercompany AR and AP. And typically the jurisdiction of that netting centre is similar to where you would house your pool, you know, the UK, Ireland, Amsterdam are the most common jurisdictions that we see. 

 

Every global legal entity that is included in the netting program is called a participant. What the participants do is they submit all of their intercompany transactions to the netting centre, which then analyses all of those flows to determine a single payment or receipt per participant in that participant’s home currency.

 

So instead of each legal entity making multiple intercompany payments, they only have one single payment or receipt in their own currency. And this process is run regularly, usually monthly, to clear all of the intercompany AR and AP. 
Why establish netting? It’s about creating a routine around these transactions, providing full visibility into those flows. It demands regular settlement, so you would have a more harmonized set of payment terms across the organisation. It’s a centralised, efficient process to clear all of these transactions. 

 

And it leads to cost savings, right? So because you’re reducing the number of payments that you have to initiate, track, settle, reconcile, there’s cost savings that come along with that. When we work with clients, we help to quantify what is that reduction in the number of payments that you have to make, and typically it’s in the 70% to 90% range. So a really meaningful reduction in how many payments you actually need to execute each period.

 

There’s additional cost savings because you’re reducing your FX exposure. Essentially what you’re doing is taking all of the intercompany exposure that your legal entities face and aggregating it with the netting centre entity. You fully utilize any natural hedges that exist within the company when you run that netting analysis and so you end up trading a much reduced FX notional amount, and that produces the cost savings that I referenced.

 

When we run this analysis for clients, that notional reduction is typically in the 60% to 80% range. So again, a very meaningful reduction in the FX amount traded when you move from a gross intercompany settlement scheme to a net intercompany settlement scheme.

 

When you talk about the routine that you establish, the process, typically this is a very automated process for a company to administer. You couple that with cost savings, the other piece of savings is just time savings, right? Instead of having multiple potentially finance managers or treasury managers involved in again initiating tracking, reconciling all these intercompany payments, you’ve made it a much easier process to administer, much greater visibility. And that results in time savings typically for the treasury team or the shared service centre who is administering these payments. 

 

One note, because Warren did bring this up, in terms of the participants, there are local regulations per jurisdiction that affect what countries can be included and what can’t. And again, that’s based on local currency restrictions as well as netting restrictions by the central bank and other local authorities.

 

And so at the outset you need to determine the scope of your program and look at, based on your footprint, what entities are eligible to participate in netting. That’s part of the scoping exercise that would take place once you embark on establishing a netting program. 
How does Bank of America support netting? We’ve developed a suite of solutions to support our clients’ netting programs on an end-to-end basis. As you can imagine, there are plenty of banking solutions that are core to administering netting, right? You have netting centre accounts, payments FX. And that’s a big piece of the picture, but the other piece is the netting administration.

 

And to help with netting administration, we’ve partnered with a market-leading netting software provider to deliver this capability to our clients, which means that we can provide a one-stop shop to gather your AR and AP, perform the netting analysis, book the FX trades, and execute the payments that come off of the back of your netting program. So a really powerful tool, and really speaks to the objective of netting, of automating your intercompany process and making it as streamlined as possible.

 

No matter where you are in the netting process, as you’re embarking on an initial setup or you have a wellestablished program, we can take the different tools from our netting tool belt and plug in different ways to automate and streamline. Specifically, one solution that we work with clients on is what we call a guaranteed rate. A guaranteed rate is simply a spot rate that’s held for a period of time, a spot FX rate that we hold. It’s typically a couple hours up to a full day that we hold the guaranteed rate for when it comes to netting. 

 

And what that allows companies to do is match the rate that you calculate your net positions on to the rate that you execute. So without a guarantee rate you’re using two different rates. Your calculation rate could be a plug rate, an accounting rate, and just a bank rate that you pull at the moment that you’re calculating versus your execution rate, which is a live rate. The mismatch between those two means that you could hold residual balances in your netting centre accounts or you could be asking your bank to amend the FX trades after they’re booked.

 

So there is this nuisance step once you close your netting to go back and make those changes based on the final rate that you receive. We can clear all of that up with a guaranteed rate, again, because we’re matching our calculation rate to your execution rate, it makes your FX execution process very smooth and eliminates a nuisance reconciliation step once the cycle is closed.

 

So with that, I will go ahead and wrap up a bit. Thank you, everyone, for the time this morning and this afternoon. I hope it was helpful to hear a quick overview of notional pooling and multi-currency netting. Certainly Bank of America is here to help if either of those solutions are of interest to you. Please feel free to reach out to your treasury sales officer to learn more. 

 

I will give it back to Lisa to go ahead and close the call.

 

[Coordinator]

Thank you, Elizabeth. That concludes your conference for today. You may now disconnect. Thank you for joining and enjoy the rest of your day. 

 

[END OF CALL]

 

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