1. Inter-company Netting
Rocky Mountain AFP
May 2017
2017 ROCKY MOUNTAIN SUMMIT

2. Goals of today’s session
Gain an understanding of when a multi-currency inter-company netting system may be needed and how it works
Learn the benefits and savings of a multi-currency inter-company netting system
Hear about limitations of a netting system and tips for a successful implementation
2017 ROCKY MOUNTAIN SUMMIT

3. What creates a need for inter-company netting?
For multi-national corporations, services and/or products sold among affiliated entities can create inter-company balances across many countries and currencies
Inter-company balances can also be generated from transfer pricing, cost sharing and intellectual property allocation
For treasury, tax, accounting and legal reasons, these inter-company balances should be paid periodically (monthly/quarterly), much like any other arms-length transaction
Avoid Section 956 tax risk and potential deemed dividend issues
Once the number of inter-company balances and transactions reach a certain scale it can become difficult to manage the settlement of these transactions separately
An inter-company netting system or solution can help efficiently settle multiple inter-company transactions at the same time
2017 ROCKY MOUNTAIN SUMMIT

4. Address Global Challenges
Small/numerous/costly FX transactions at subsidiaries
Lots of payments with high bank charges
Uncertainty on the payment date
Difficult/costly to hedge
Time consuming reconciliation work
Big mismatch on intercompany bookings
Considerable manual workload at the parent and every subsidiary
No overview on volume
Netting Goals
Less payments – ideally, one per participant
Fewer transactions resulting in lower costs
Simplified payment procedures across the group
Visibility of intercompany exposures
Brings structure and discipline to intercompany procedures
Uses same exchange rate for related payables/receivables
Central storage of all AR and AP data
Access to historical data improves forecasting
2017 ROCKY MOUNTAIN SUMMIT

5. Multilateral Netting Overview
Description
Multilateral netting facilitates cross-border settlements among affiliates, increases productivity, and simplifies and reduces the cost of settling inter-company transactions
Uses/Goals of Netting
Consolidate payables and receivables between international entities within an organization
Gain control, efficiency, and visibility in foreign exchange transactions across the globe
Reduce exposure to foreign exchange fluctuations by taking advantage of natural offsets
Simplify reconcilement and transfer pricing
Typical Transactions
Intercompany: trade payments, interest payments, royalties, dividends, internal/external hedge contracts, service-fees, management fees, loan repayments, investments
Third party supplier payments
Surplus cash (participants can offer or request it within a netting cycle)
2017 ROCKY MOUNTAIN SUMMIT

6. Multilateral Netting: How it Works1
Decide on the type of netting methodology to use within the organization 2
Determine the underlying driver (payables, receivables, or both) 3
Establish a platform (treasury platform, bank provider, or a manual spreadsheet) 4
Define the schedule for the organization 5
Enter and collect payment information 6
Perform netting calculations: determine the net settlements for your participants 7
Execute foreign exchange trades 8
Effect payments for delivery on the settlement date 9
Accounting and reconciliation
2017 ROCKY MOUNTAIN SUMMIT

7. Multilateral Netting: How it Works
2017 ROCKY MOUNTAIN SUMMIT

8. Case Study – IHS Markit
IHS Markit implemented a multi-lateral netting system in 2013
IHS Markit runs one netting cycle each month
Over 50 entities are set up for netting
Typically have ~ 30 entities/month having some settlement
12 – 15 different currencies
~ 150 separate payments are included in monthly netting cycle
Benefits
Able to reduce 150 separate transactions into one FX trade per currency and outgoing payments
Reduces foreign currency fluctuations on inter-company balances, avoiding FX risks
Assists accounting in reconciliation and tax for transfer pricing policies
Limitations
Some currencies and entities cannot participate, such as India, Brazil, Korea, China
Still need to maintain some spreadsheets to manage, causing some risk for errors
2017 ROCKY MOUNTAIN SUMMIT

9. Trade amount prior to netting
Case Study – IHS Markit
Trade amount prior to netting
Gross FX Traded
Net FX Traded
Difference in
Estimated price
Savings in USD
Currency
# of entities
# of transactions
FX Need to Buy
FX Need to Sell
without netting
with netting
Gross vs. Net
on fx trade in bps
from netting
AED 1 6
2,129,215
0.0005
AUD
1,163,787
229,476
1,393,264
934,311
458,953
229
CAD 2 10
1,312,535
1,596,908
2,909,444
284,373
2,625,071
1,313
EUR 8 26
5,532,396
518,816
6,051,212
5,013,579
1,037,633
519
GBP
3,752,074
2,033,891
5,785,965
1,718,183
4,067,782
2,034
HKD 4
3,011,126
1,573,011
4,584,136
1,438,115
3,146,021
1,573
JPY
33,642,392
50,612,367
84,254,759
16,969,975
67,284,784
3,364
MXN 5
1,313,543
4,615,030
5,928,573
3,301,487
2,627,086
1,314
NOK
2,947,875
6,337
2,954,212
2,941,538
12,674
QAR
88,705
SEK 7
3,769,819
2,711,931
6,481,750
1,057,888
5,423,862
2,712
SGD
4,000,000
USD 19 47
28,380,920
36,602,720
64,983,640
8,221,800
Total 40
127
13,064
With multi-lateral netting, IHS Markit has taken ~130 separate inter-company balances among 40 entities in 13 currencies:
If settled bi-laterally, then would have bought/sold currency amounts in gross column
With netting, was able to reduce amount bought/sold to net column
The difference column is the reduction in the notional amount of currency that was needed to be bought/sold
The savings is the spread on the reduction in the notional amount of FX that did not have to buy/sell
Instead of 127 separate wires to initiate, would only need to send ~ 10 wires
2017 ROCKY MOUNTAIN SUMMIT

10. Case Study – IHS Markit Net Aust Co. Net Receipt of 1M AUD
Intercompany
Payables:
200K AUD to Swiss Co. (converted to Swiss Franc)
Payer of 200K AUD
Aust Co.
Intercompany Receivables:
150K AUD from Mexican Co. (converted from MXN)
170K AUD from UK Co. (converted from GBP)
300K AUD from Swedish Co. (converted from SEK)
250K AUD from German Co. (converted from EUR)
330K AUD from Japanese Co. (converted from JPY)
Receiver of 1.2M AUD
Intercompany Billings: 6 Transactions
Netting System Determines
Payer of 200K AUD
Netting System Determines
Receiver of 1.2M AUD
Net
Net Receipt of 1M AUD
1 Transaction to Settle Per Participant
2017 ROCKY MOUNTAIN SUMMIT

11. Benefits of Netting
INTER-COMPANY NETTING integrates payables and receivables from all international entities in one global structure. The benefits of netting include:
Organizes and streamlines settlement of intercompany payments to ensure all parties are paid/have paid
Reduces transactional FX needs by allowing one exchange rate to be applied to the payable and receivable
Provides better visibility to intercompany FX exposures and cash balances
Can set-up interface capabilities for import and export to ERP systems such as SAP and Oracle
Lowers transaction costs by reducing the number of payments
Can include vendor payments with your intercompany activity
2017 ROCKY MOUNTAIN SUMMIT

12. Limitations and Restrictions
There are currently over 50 countries that permit full netting with no restrictions. About 30 countries permit netting in some form, but have restrictions and policies regarding its use. Some countries prohibit netting.
Country restrictions may be accommodated within your inter-company netting program by adjusting the calculation method for the participant according to the policy of the country.
Unless there is an automatic interface with an ERP system, some keying in of data will still be required to populate the invoice/payment amounts into the netting system. This keying of data does have risk of error.
2017 ROCKY MOUNTAIN SUMMIT

13. Implementation Tips Coordinate with accounting and tax teams
Establish roles and responsibilities
Define deadlines and due dates
Have a consistent process across entities
Automate where possible
Develop program with limited entities and expand scope with experience
2017 ROCKY MOUNTAIN SUMMIT

14. Questions? Doug Thompson – Director of Treasury at IHS Markit
Doug has worked at IHS Markit since 2009 and has served in corporate treasury roles for 3 public companies over the past 20 years.
IHS Markit is a world leader in critical information, analytics and expertise for the major industries and markets that drive economies worldwide.
IHS Markit has revenue of ~$3.5B and is a global company that operates in over 40 countries.
Heather Alger – Managing Director at PNC Bank
Heather has worked at PNC Bank in Chicago since 2011, providing FX risk management services for multinational corporations. She has worked in financial markets for 20 years.
PNC Financial Services group is one of the largest diversified financial services institutions in the United States. PNC offers specialized services for corporations and government entities as well as offering full retail, wealth management and business banking services.
2017 ROCKY MOUNTAIN SUMMIT