Question

DIAGRAMS THE MECHANICS OF A MULTILATERAL NETTING SYSTEM AND DEFINES THE BENEFITS OVER A PAYMENT SYSTEM WITHOUT NETTING. YOUR EXAMPLE SHOULD UTILIZE AT LEAST FOUR CURRENCIES.

Answer 1

Ans:

Multilateral netting is the off-setting of payables against receivables between multiple group companies. The resulting payments due are paid to the netting center from group companies, and monies owed are paid from the netting center to group companies.Payment will be made to or from the netting center on a precise date,and often in the currency of the subsidiary.

Few benefits of netting system are:

1. One cashflow per subsidiary per payment tenure- bank transaction costs are drastically reduced

2.Reconciliation of balances becomes easier due to lesser transactions and mismatch chances are also reduced.

3. FX exposure and costs are reduced

Mechanism with example:

There are 3 different ways to run the netting mostly through software solutions:

1. Payable driven netting - Payer suggests what is to be settled.

2. Receivable driven netting- Payee inputs what is to be settled.

3. Settle only matched is a hybrid between payable driven and receivable driven. It settles only the invoices where the Accounts Payable and the Accounts Receivable match.

Payment Without Netting(Multiple payments and interactions amongst subsidiaries)

Payment with netting (Only interacting with netting center