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Advanced Training in Banking & Financial Markets

Case Study International Cash Management

Contents
1 EXECUTIVE SUMMARY...............................................................................................................................3 2 GOAL..................................................................................................................................................................3 3 PRODUCTS........................................................................................................................................................4 3.1 CROSS BORDER CASH OPIMISATION (CBCO) ...............................................................................................4 3.1.1 Requirements..................................................................................................................................4
3.1.1.1 3.1.1.2 3.1.1.3 3.1.1.4 3.1.1.5 Product Example....................................................................................................................................... 5 Bonus Margins.......................................................................................................................................... 8 Management Fee Payment...................................................................................................................... 10 Calculation, Reporting & Corrections.................................................................................................... 11 Relations with other systems................................................................................................................... 12

1 Executive Summary
This case study involves detailed analysis and understanding of high level requirements provided by a MNC bank with regards to its cash management product namely, cross border cash optimisation. Over last couple of years there is windfall change in the way huge corporates having global presence manage their cash across locations. This in turn has put forth tremendous challenges on banks IT team for providing optimum solution to aforementioned corporates for efficient management of their ideal cash. Furthermore, the solution being proposed and developed should be configurable/flexible enough to meet future requirements of banks on cash management services front.

2 Goal
The primary aim of this case study is to understand the requirements provided for the product Cross Border Cash Optimisation. In addition, the participants are suppose to provide high level technical solution definition for above mentioned requirements. The participants are suppose to make a presentation and provide the following in the form of deliverables-

1. Presentation slides (two in numbers) showing their understanding of


requirements. 2. Presentation slides (two in numbers) showing the architecture and logical data model of the proposed solution. 3. High level plan (two slides) to implement this solution. No effort estimation is required. Above deliverables serve as an indicative guideline for the participants. As a result of working on various projects and experience gained over a period of time, the participants can make appropriate enhancements to above deliverables. Additionally, participants can make suitable assumptions while preparing the above deliverables and state those assumptions upfront while making the presentation.

3 Products
3.1 Cross Border Cash Opimisation (CBCO)
The intention of Cross Border Cash Optimisation will be to motivate clients for keeping large credit balances at the Bank by paying management fee to clients that have these large balances divided over different Bank accounts. As bank can reward clients to leave larger balances by paying higher interest rates on current accounts (e.g. by using a High Yield Current Account or Investment Account), CBCO is mostly suitable to include one or more accounts in regulated countries and it will serve as a critical product as part of notional pooling requirement initiatives. The accounts will be set up in a Cross Border Cash Optimisation Pool and every account may be located in a different country with a different currency. The bonus (interest) amount/management fee will be paid in the currency of the appointed benefit settlement account in any selected country. The management fee is related to the total credit balance of the pool and depending on the level of these credit balances.

3.1.1 Requirements
1. Automated solution for an optimisation scheme whereby a management fee is paid to the client over a total portfolio of credit balances when balance levels qualify. 2. Initial countries and (local) currencies supported: CN China CNY Chinese Yuan HK Hong Kong HKD Hong Kong Dollars ID Indonesia IDR Indonesian Rupees IN India INR Indian Rupees JP Japan JPY Japanese Yens KR Korea KRW Korean Wons MY Malaysia MYR Malaysian Ringgits PH Philippines PHP Philippine Pesos PK Pakistan PKR Pakistan Rupees SG Singapore SGD Singapore Dollars TW Taiwan TWD Taiwan Dollars VN Vietnam VND Vietnamese Dongs 3. The ability to pay out the management fee in Singapore or Hong Kong but with the flexibility of paying out the management fee to any other location if possible. 4. The ability to pay out the management fee in the base currency EUR or USD but with the flexibility of paying out the management fee in any currency if possible. 5. The management fee needs to be paid as lump sum payment on a dedicated account no more than 5 days after month-end. 6. Bonus margins are client specific. 7. 5 levels of tiering for bonus margins are needed. 8. Bonus margins are per account.

9. Bonus margins are determined using a Qualifying balance which is the sum of the (credit) balances denominated in the Base Currency and is based on end-of-day value balances. 10. Management fees need to be calculated on individual currency level (using bonus margins) 11. The notional Foreign exchange rate would be used to convert daily value balances to the Base currency 12. Calculation of management fee and bonus margins needs to be shown to the client on a monthly CBCO statement.

13. System needs to account for the scheduled and unscheduled holidays during benefit calculation process. In addition, there should be a provision to account for late debit and credits.

3.1.1.1

Product Example

Step 1: Determine notional FX and convert daily value balances Daily value balances for all the accounts that are included in the CBCO scheme are converted to the base currency using a notional FX rate for the day.
China, CNY Balance Date 1-Jul 2-Jul 3-Jul 4-Jul 30-Jul 31-Jul Taiwan, TWD Balance Date 1-Jul 2-Jul 3-Jul 4-Jul 30-Jul 31-Jul 25,000,000.00 -100,000.00 25,000,000.00 -1,500,000.00 2,500,000.00 200,000.00 notional FX rate 0.0318 0.0317 0.0319 0.0319 0.0321 0.032 Balance (USD eq) 795,000.00 -3,170.00 797,500.00 -47,850.00 80,250.00 6,400.00 15,000,000.00 0.00 25,000,000.00 1,500,000.00 -1,500,000.00 200,000.00 notional FX rate 0.1208 0.1277 0.1276 0.1276 0.1279 0.1279 Balance (USD eq) 1,812,000.00 0.00 3,190,000.00 191,400.00 -191,850.00 25,580.00

Step 2: Total balances The converted balances of the different accounts are added per day.
Balances (USD Eq) Date 1-Jul 2-Jul 3-Jul China 1,812,000.00 0.00 3,190,000.00 Taiwan 795,000.00 -3,170.00 797,500.00 Hong Kong -15,000.00 -3,170.00 7,975,000.00 India -15,000.00 -3,170.00 -1,005,000.00 Indonesia 3,185,000.00 -3,170.00 797,500.00 Total 5,762,000.00 -12,680.00 11,755,000.00

4-Jul 30-Jul 31-Jul

191,400.00 -191,850.00 25,580.00

-47,850.00 80,250.00 6,400.00

557,850.00 5,155,150.00 6,400.00

97,850.00 125,000.00 6,400.00

817,850.00 1,155,000.00 6,400.00

1,617,100.00 6,323,550.00 51,180.00

Note: Alternatively only the converted credit balances can be used here (and in the next step) to get the total. CBCO will allow for both approaches.

Step 3: determine bonus margins The daily total balance is compared to the tiered pricing which has been agreed with the customer.
Current bonus margins: Total balance ranges (USD) 5-10m 10-20m 20-30m 30m+

CNY 0.025% 0.050% 0.075% 0.100%

TWD 0.125% 0.250% 0.375% 0.500%

HKD 0.125% 0.250% 0.375% 0.500%

INR 0.500% 1.000% 1.500% 2.000%

IDR 0.125% 0.250% 0.375% 0.500%

If the total balance is large enough and falls within a certain tier, each currency gets a bonus margin that applies for that tier. The higher the total balances, the higher the bonus margins (per currency). For currencies which are more attractive to the bank, usually currencies where banks net margin is wide, bigger bonus margins can be given.
Bonus Margin China, CNY Taiwan, TWD Hong Kong, HKD India, INR Indonesia, IDR 1-Jul 0.025% 0.125% 0.125% 0.500% 0.125% 2-Jul 3-Jul 0.050% 0.250% 0.250% 1.000% 0.250% 4-Jul 30-Jul 0.025% 0.125% 0.125% 0.500% 0.125% 31-Jul -

Step 4: determine management fee The credit balances on the accounts will get CR interest paid locally as per normal. This will be either a regulated rate if in a regulated market, which could also be 0% fixed, or a rate as agreed with ABN AMRO. Besides the local interest rate, the client will receive the bonus margin per currency on the balances in that currency. This will result into a management fee per currency, the level of which depends on the balance and the bonus margin of that currency.
China, CNY Balance Date 1-Jul 2-Jul 3-Jul 4-Jul 30-Jul 31-Jul (USD eq) 1,812,000.00 0.00 3,190,000.00 191,400.00 -191,850.00 25,580.00 Bonus Margin 0.025% 0.050% 0.025% Bonus Payment 1.24 4.37 5.61 Date 1-Jul 2-Jul 3-Jul 4-Jul 30-Jul 31-Jul Taiwan, TWD Balance (USD eq) 795,000.00 -3,170.00 797,500.00 -47,850.00 80,250.00 6,400.00 Bonus Margin 0.125% 0.250% 0.125% Bonus Payment 2.72 5.46 0.27 8.46

Step 5: pay and report management fee All management fees are totalled and paid out to the client after month-end in a lump sum. The calculation of this management fee will be shown to the client on a monthly CBCO statement.
Bonus Payment (USD eq) China, CNY Taiwan, TWD Honk Kong, HKD India, INR Indonesia, IDR 5.61 8.46 10.12 22.35 6.08 52.62

3.1.1.2

Bonus Margins

Starting-point is the assumption that bonus margins always have the same relative margin ratios for all currencies in the pool. Having this assumption, only the maximum bonus margin needs to be set up per account which will reduce manual maintenance and risk or failures. On CBCO pool level an option will be created to define the relative pricing tiers for the benefit margins valid for all accounts participating in the pool. The relative tiers will contain per tier a percentage of the maximum bonus margin of total balance amount that will be paid to the client. Example of bonus margins (bps); Tiers (USD) 5.0 10.0m 10.0 - 20.0m 20.0 30.0m 30.m + Hong (HKD) 12.50 25.00 37.50 50.00 Kong India (INR) 50.00 100.00 150.00 200.00 Indonesia (IDR) 12.50 25.00 37.50 50.00

The bonus margins are client-specific and need to be updated or reviewed periodically by the sales and product management contact person. There is no direct relationship to a base rate or any other static data, so maintaining the bonus margins cannot be incorporated into an automated solution.

The above bonus margin table will be set up as follows in the CBCO administration; On pool level: Tiers (USD) 5.0 10.0m 10.0 20.0m 20.0 30.0m 30.m + Percentage 25% 50% 75% 100%

The percentages will normally be static data for a CBCO pool, although the system will give an opportunity to modify it and make new percentages active from the start date of any interest period (can vary for different interest periods but are constant during any interest period). Per account: Account Currency HKD Accounts INR Accounts IDR Accounts Maximum bonus margin (bps) 50.00 200.00 50.00

The maximum bonus margins are subject to change and need to be maintained by the operations team on request of the sales and product management contact person. New bonus margins can be changed per day. (can vary for different interest periods and can vary during any interest period). This also allows for the option to change bonus margins only per start of a new interest period. Based on the above example numbers, when a client has a total balance of USD 15m and the end-of-day value balance of the HKD account is HKD 1.000.000 (assume this is equal to USD 2.000.000), the management fee (on yearly base) will be; Value Balance * Bonus margin * Bonus tier % = 1.000.000 HKD * 0,5000% * 50% = 2.500 HKD As the management fee will be paid out as lump sum in the base currency (USD in this example) to a dedicated account, the management fee needs to be converted to the base currency. Management fee in base currency = Management fee in account currency * Fx rate Management fee in base currency = 2 * 2.500 HKD = 5.000 USD = 2 * 1.000.000 HKD * 0,5000% * 50% = (Fx rate * Value Balance) * Bonus margin * Bonus tier % = Value Balance in base currency * Bonus margin * Bonus tier % The number of days per year that will be used for calculating the management fee will always be 365 days per year.

3.1.1.3

Management Fee Payment

1. Profit & Loss Account For paying the management fee a counter account is required, the Profit & Loss account. In order to be able to pay the management fee to a dedicated account in Singapore or Hong Kong or any other location for CBCO, the administration needs to be enhanced with a P&L account on pool level (contract/service level) with which the management fee can be settled with the dedicated payment account. Both the P&L account and the dedicated payment account will be located in the same country, i.e. no cross-border management fee payments will be used. 2. Back Office For CBCO it should be possible pay the management fee on a dedicated account in Singapore or Hong Kong or any other location (USD, EUR or other currency accounts). This could be accomplished by generating a management fee payment and sending it as urgent payment to the Routing and Settlement system in a standard format. Once the posting interface with routing system has been established, CBCO will be able to book the management fee in the countries and currencies in scope. Moreover the same interface could also be used to pay the management fee to the dedicated account in other countries, including both UK and US. 3. Value Date Although the management fee payment will be an urgent payment routed via the Routing system, it cannot be guaranteed that the value date of the transaction will be equal to the sending date. This is depending on the send time and the branch. 4. Monitoring Monitoring of payments sent to Routing system from within CBCO will only be possible as far as successful delivery to the Routing system is concerned as Routing system might not be capable of providing information on the actual booking in the back-office systems.

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5. Netting In CBCO it is required always one, netted, benefit posting to be created that includes the calculated benefit amount and any correctional amounts caused by recalculation of previous periods. 6. Allocation The CBCO system will not use any allocation of management fee to any of the sub accounts in the CBCO pool. In order to pay out the management fee as lump sum to the dedicated payment account, for CBCO pools the administration therefore needs to be adjusted such that allocation % for participating accounts are set implicitly to 0 % (in case the dedicated payment account is participating as sub account this is 100%). Moreover the option to maintain the allocation % in the CBCO administration needs to be disabled. 7. Security The connection between CBCO and Routing system will be a C-BUS/ MQ connection secured with ICSSv3.

3.1.1.4
1.

Calculation, Reporting & Corrections

Calculation

The current CBCO system should calculate and report over monthly, quarterly or at any manually defined period. For monthly and quarterly periods the following types are available:

1st day month last day month last day month 2nd last day month 1st day year quarter last day year quarter last day year quarter 2nd last day year quarter

Benefit calculation, reporting and payments takes place after a pre-defined number of calculation days after the period has elapsed. This is defined as the number of book days for the country in which the benefit settlement account is located. Prerequisite for calculation and reporting is that all end-of-day statements (MT940s) have been received in time for the interest period. 2. Recalculation

Recalculation always takes place after a period has elapsed and will be executed for the last six months. In case anywhere in the past 6 months contract settings were changed or back valued transactions took place, the change for the management fee will be reported and a correctional amount will be booked (management fee and management

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fee corrections are netted and subsequently booked as one amount). Any corrections made will be reported on the CBCO statement. The CBCO system should allow contract setting changes to be made for periods in the past, giving the flexibility to correct any errors made during contract set up. It should be possible for Operations to request an intermediate recalculation with or without correction booking of the benefit amount. Furthermore it should be possible to initiate a benefit payment again in case of any failure. This functionality should be implemented using the 4-eyes principle. Note: When resubmitting benefit payments, amounts can not be changed due to the fact that calculation, reporting and payments need to be kept consistent. The amount as result of any calculation or recalculation is the amount used in any resubmitted benefit payment. 3. Reporting

CBCO statement needs to be developed, reporting the management fee payment calculation and bonus margins applied. In addition, the statement should contain a Summary, Settlement & Allocation, Recalculation and Account sheets. The format of the CBCO statement will be the Excel format and must be available through intranet.

3.1.1.5 Relations with other systems


1. Balance Maintenance & Reporting system - to maintain interest models used for
defining the spread margin conditions, for receiving MT940 messages used to obtain value balance information. (For the missing dates in the past, value balances can be entered using front-end. The manually entered value balances will act as the real value balance for calculations in CBCO).

2. Security system - used for authentication of users for Shadow Reporting and CrossBorder Cash Optimisation.

3. Common Database used for accessing customer and account related information. 4. Middle layer - used as middleware to send pool benefit postings and in-house
interest postings.

5. Interface system - used to book the pool benefit between (benefit settlement)
accounts held in various countries setup for the Cross-Border Cash Optimisation system.

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