Other Aspects of Multilateral Netting

In exchange control, multilateral netting requires express permission from the exchange control authorities in several European countries in which foreign transactions are officially regulated.

The request for permission is usually accompanied by relevant data concerning amounts, currencies, and participants.

Netting has no essential impact on the external position of the country involved, and if the underlying export or import transaction is acceptable, or permissible, the exchange controls of such countries as the United Kingdom, Belgium, and Italy, typically will not offer substantial objections.

Latin American countries, on the other hand, rarely allow netting, in general; exchange controls are restrictive, and must be seen as the most important difficulty in establishing any type of clearing.

Even so, strict adherence to the formalities of documentation, centralization of documents, and payments at a single bank (which prepares the gross and net entities) may permit participation. In any case, the usual export and import documents that substantiate foreign receipts and payments must be submitted regularly; the paperwork is not saved by netting, nor is it increased.

As far as flexibility is concerned, by requiring a tighter structure of reporting intercompany receivables, multilateral netting will increase management's flexibility in handling the liquidity position of the group.

Group payment obligations are known in advance, and sometimes they can be delayed or accelerated, at the instigation of the central control entity, to provide temporary working capital (within the permitted range of the relevant exchange control regulations). That type of flexible control, or manipulation, becomes a related benefit, or the netting system.

Borrowing is also to be considered, as is local financing of trade receivables from affiliated companies. Actual discounting of trade drafts may preclude the participation of a discounting company to an extent, because the payment at maturity must go to the banks holding the discounted paper. Open account sales, even if finance is based on pledged receivables, do not create the same problem.

In costs, few are involved in the establishment of the control system per se. Some additional personnel time will be required, but the costs are likely to be small, relative to expected savings,if the total volume of transfers is substantial. Increased communications may foster marginal extra costs.

However, in exchange exposure, when a number of currencies are used for internal invoicing, different exchange exposures may occur. For instance, a company that buys from the United Kingdom, and is traditionally billed in pounds, may be asked to pay dollars to a net recipient in the United States, which will significantly change its exchange exposure.

A solution is to have all intercompany payments in a single currency, essentially that or the parent. In such cases, centralized control allows a better, and more concise, analysis, or internal exchange exposures, and possible anomalies.