From the November 2009 issue of Treasury & Risk magazine

Silver AHA Winner in Cash Management

Honeywell overcame another obstacle to effective liquidity management in China by creating a first-of-its-kind pooled account for its U.S. dollar cash balances in that country.

The USD cash pool complements a pool created earlier for its growing renminbi cash balances in China. By partnering with Citigroup, Honeywell was able to move 60% of its U.S. dollar cash into the pool. Today, USD balances in the cash pool are earning competitive USD Libor-linked rates, making the money more productive than when much of it was scattered and earning only regulated interest rates.

Pooling also allows cash to be more efficiently distributed among cash-positive and cash-negative operations in China, thereby reducing borrowing and interest expenses for the cash-negative businesses. USD cash pools are exceptions to standard banking practices in China and have to be approved individually. No previously approved USD cash pool could serve as a template because none met Honeywell's needs, so its treasury invented one from scratch and shepherded it through the regulatory process. Honeywell treasury can now pass through better investment returns and lower borrowing costs to the subsidiaries. Honeywell was also able to get better bank pricing and service. Moreover, by automating the formerly manual process for setting up entrustment loans in U.S. dollars, it achieved time savings and stronger regulatory compliance. In China, separate bank accounts have to be set up for specific purposes, and commingling monies is prohibited even when they belong to the same legal entity. To address these regulatory requirements, Honeywell set up a three-tiered structure. All operational accounts for the various legal entities are on the first tier. All loan accounts are on the second tier. The pool header loan account makes up the third tier. "The three-tier account structure clearly segregates and isolates the automated entrustment loan operations so that a one-to-one relationship is established between each participant and the pool header, using the tier two and three accounts. This prevents any commingling of funds across participants and assures regulatory compliance," explains treasury manager Linlin Wu. "It also simplifies the cash pool interest allocation process."
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