One of the big—and costly—hassles for treasurers of global companies that operate in many different currencies has always been the need to hedge payables and receivables to minimize the risk of a significant shift in exchange rates.

For example, if a U.S.-based company had a subsidiary in Italy that expected to have to pay in euros in six months for an expansion, the parent company would enter into a transaction to hedge the anticipated payable amount out to the payment date at a set exchange rate. That meant paying a bank or dealer for a forward euro contract and tying up the money for six months.

Ferdinand Jahnel, treasurer at global medical, dental and veterinary supplies distributor Henry Schein Inc., says his company rarely needs to do such transactions. Instead, his company and others that operate in multiple currencies can set up a notional multicurrency cash pool, which allows the treasury to hedge both payables and receivables without ever having to enter into an FX contract.

Melville, N.Y.-based Henry Schein uses Amsterdam-based Bank Mendes Gans, a specialty institution that offers cash management, forex and cash pooling services, to oversee its notional multicurrency pool.

In a traditional cash pooling operation, a company sweeps the bank accounts of subsidiary operations periodically, moving their cash to a single centralized bank account where it's held in one currency. Cash can be moved from a subsidiary with a surplus to one that needs cash.

Typically, this kind of operation is done in only a single currency. This is a major drawback because it requires “a lot of daily accounting activity” and many intercompany transfers of cash, as well as currency exchanging and forex hedging, says Jahnel, pictured at right. A notional cash pool gives companies the ability to avoid those chores.

For example, Henry Schein, with $8.5 billion in 2011 revenue, operates in 24 countries and deals in U.S. dollars, Canadian dollars, euros, Swiss francs and other currencies. The company's treasury creates notional positions for each unit's cash holdings, but because it does not actually physically shift money between the separate subsidiaries' bank accounts, it doesn't have to exchange currencies..

“There is no need for sweeping accounts with a notional pool,” Jahnel explains. “All we have to do is manage the total balance of the accounts.”

“We manage the individual subsidiaries' accounts in terms of setting limits on their overdrafts,” he adds. “Obviously if they're draining cash beyond what is planned, we would have to look into what is happening.” Henry Schein uses cash balances at some subsidiaries in the pool, notionally, to balance against FX liabilities of other units, and it can also use FX accounts receivable notionally to offset FX accounts payable.

“It's a huge reduction in hedging exposure,” says Jahnel, who recently explained his operation in a presentation at the EuroFinance Conference in Miami. “It also eliminates a lot of paperwork, because hedging contracts require a lot of documentation.”

Notional pooling, Jahnel says, reduces liquidity concerns, collateral requirements, administrative costs, counterparty risk and financial reporting demands.

At Henry Schein, the whole pooling operation is handled by Jahnel and another 2½ staff positions in his 15-member treasury. “We monitor forex exposure and deal with that manually, on a spreadsheet basis,” he says. “We're working on automating that, but we're not there yet.”

While notional pooling is admittedly still a work-in-progress, Jahnel predicts that in another two years, it will be the company's main tool for liquidity and forex management.

Notional cash pooling is not permitted in the U.S. or Germany, so the company uses traditional cash pooling in those countries. This restriction explains the popularity of Bank Mendes Gans with American companies (half the clients of the bank, according to Jahnel, are U.S. corporations).

Jahnel adds that larger international financial institutions “typically don't like notional pooling.”

“They have vast footprints around the globe and need to rationalize them,” he explains. “They want the underlying local business of the subsidiaries in all the countries in the pool. But [Bank Mendes Gans] doesn't care about all that. They don't have any branches—just one location in Amsterdam.”

For an earlier look at notional pooling, read Cashing in on Technology.

Instant Insights /

Henry Schein Swims in Notional Pool

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