Could Multicurrency Accounts Improve U.S. Corporate Competitiveness?
April 24, 2016
By Deborah Rifken, Bloomberg Treasury Risk Management (TRM) Solutions
The total value of U.S. trading activity with foreign countries exceeded $3.9 Trillion USD in 2014, according to data compiled by the International Monetary Fund and Bloomberg. As such a large trading nation, it is particularly important for U.S. corporations to conduct those trade operations in the most efficient manner possible. One such step towards creating these efficiencies could be if multi-national corporations headquartered in the U.S. were able to hold multiple currencies and consolidate their corporate accounts within U.S. borders.
Currently, it is not common practice in the U.S for corporations to hold multicurrency accounts at U.S.-based banks. As a result, American financial institutions must use international branches to provide multicurrency accounts to corporations so they can conduct business abroad in local currency. In other regions across Europe and Asia Pacific, however, a corporation can set up a single, multicurrency bank account to enable the receipt of, and payment in, a multitude of foreign currencies.
The lack of infrastructure to hold multicurrency bank accounts stateside could be putting U.S. companies at a competitive disadvantage. It reduces a company’s flexibility to do business with foreign corporations, creates costly administrative burdens and hampers the ability to proactively hedge foreign exchange rate risk.
Is there an opportunity to streamline global cash management operations?
Allowing multicurrency accounts would eliminate expensive and even potentially unnecessary currency conversions. This provides major benefits, especially for small and medium sized businesses (SMEs) that conduct transactions overseas.
SMEs in the U.S. could compete more prominently on a global level if it were easier to transact with foreign trading partners in local currency from a central U.S. bank account.
The need to satisfy account minimums with banks across the world results in the lock-up of millions, or perhaps billions, in corporate capital. Consolidating currencies into a single account allows a corporation to hold very little currency that is not in demand for the business without any penalties, provided the overall balance has the required minimum amount. A dramatic reduction in idle cash could enhance a corporate’s working capital position.
Complex rules are creating costly administrative burdens.
For American companies operating in non-U.S. currencies, the need to open and manage accounts specific to each currency also means building elaborate cash management operations in order to facilitate payments and receivables in non-USD. To accomplish this, corporates must establish treasury teams across time zones to manage the day-to-day transactional activities. By instituting multicurrency accounts in the U.S., even the biggest companies, which operate in multiple jurisdictions, would be offered new administrative efficiencies and provided with additional options for managing their risk.
Take Coca-Cola, for example, which operates in more than 200 countries across the globe. The nature of its business is such that it must establish hundreds of local entities in order to support local operationssuch as its franchise bottlers. As a result, Coca-Cola has cash balances in many locations around the world. According to Coca-Cola’s Director of International Treasury Services, Jim Aschmeyer, “While holding accounts abroad is the reality based on many different constraints, the ability to hold foreign currencies in U.S. accounts could provide some opportunities to simplify pieces of our company’s overall cash management approach.”
Beyond the significant paperwork and due diligence U.S. corporations must do to open foreign accounts, there are IRS requirements that must be met annually. According to the Bank Secrecy Act, both corporations and individuals with holdings in foreign financial accounts that surpass $10,000 in a calendar year must file a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).
An improved forex hedging ability provides greater control over corporate assets.
Under the current set-up, U.S. corporations are further hamstrung when it comes to FX hedging. European companies operating with multicurrency accounts are able to curtail conversion fees and view their assets holistically. Meanwhile, American firms without international accounts are taking an unnecessary hit on currency conversion fees every time they attempt to revise their FX hedge and reallocate across all of their cross-border accounts. They have to pay an additional spread and have a harder time managing risk because they receive foreign-denominated payments at a time not of their choosing at a rate they can’t control.
An investment by U.S. banks in developing this capability presents a significant opportunity for the banking sector, but most importantly it opens up U.S. businesses to the global markets in an unprecedented way, enhancing our competitive edge in the global economy and ensuring that we are competing on a level playing field with the rest of the world.
It’s important that we have a conversation about what needs to happen in order to hold non-USD cash within the U.S. banking system. Doing this could reduce the risk, operational cost and administrative burden our multi-national organizations face. It also will give our small and mid-sized corporations a level playing field when working with international vendors and suppliers, who would like to receive payments in local currencies.
Deborah Rifken is part of the Derivatives product group at Bloomberg where her focus is on developing and implementing Treasury Risk Management (TRM) solutions. She has more than 15 years’ experience working with treasury and cash management software solutions across the financial services industry.
This article appeared first on the Association of Financial Professionals website, AFPonline.org.