Cash management in the restrictive regulatory environment across LATAM Liba Saiovici Managing Director Head of Latin America Product Management for Global Treasury Services Bank of America, Miami (USA)

Today’s Discussion Regulations remain the biggest concern in cash management

Europe versus LATAM and US versus LATAM in cash management regulations

How to overcome the regulatory differences between international and domestic transactions

The importance of managing cash flows in an interconnected world

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We live in an increasingly interconnected world

2014 Intra- and Inter-Regional Merchandise Trade Flows: $18.5 Trillion

Internal Trade

External Trade

50% 50%

26%

74%

69% 32%

18%

82%

9%

91% 52% 48%

18%

82% North America: $2.5

Latin America: $0.7

Europe: $6.8

Middle East: $1.3

Africa: $0.5

Asia: $5.9

Source: World Trade Organization Statistics (1)Represents total for Commonwealth of Independent States

Russia(1): $0.7

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Drivers in the changing regulatory landscape

Increase Consumer Protection

Ensure firms have an adequate capital cushion and sufficient

Ensure that firms do not take excessive risks which pose systemic risks.

Improve Transparency and Accountability

Improve Corporate Governance

Decrease risk of fraud, money laundering

Ensure compliance with global tax regulations

Basel III

EMIR

Foreign Account Tax Compliance Act (FATCA)

Dodd Frank Act

Volcker Reporting

Proposed Regulation 385

Brazil New Collections

Mexico SPID

Mexico 24x7

UK Crown and Dependencies & Other Territories (UKCDOT)

Asia deregulation

SEPA

Multiple industry surveys highlight the belief that the pace of regulation will continue to increase

Process of rule-making and drafting of regulations is still somewhat vague

Multiple regulations and provisions are being drafted/ modified in parallel

This uncertainty creates challenges for the industry as a whole

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Increased regulation is driving organizational change and increasing costs

Impact of regulation

BUDGET STRATEGY STRUCTURE

▪ Rise of the standalone compliance function and Chief Compliance Officer

▪ Organizations may need to rethink governance structures

▪ Transformation of reporting functions

▪ Increased need for working capital strategies

▪ May need to reexamine product offerings and/or limit certain types of activities

▪ May require that an organization reevaluate its resource needs, skill sets

▪ Need to automate processes is driving increased IT costs

▪ Transformation of data tracking and gathering systems

▪ Increased staffing costs as regulatory compliance necessitates more human capital

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Regulatory Observations

US Regulations are extremely strict post-crisis Regulatory environment evolving at a very

rapid pace challenging industry participants to keep pace Focus on KYC and KYCC – impact on

corresponding banking Sanction screening getting more restrictive Heavy fines for non compliance

Latin America Latin America is “regulated”, but not

standardized. Regulation is increasing. Latin America cash concentration has limitations

because cross-border transfers are hindered by: – Currency Control/Regulation – Convertibility of currency – Transaction tax (debit and credit) – Less dollarization

There are very few cash management standards in the region Improvements in technology and bank software

offset hassle of increased regulation. Banks have standardized but few banks have full

regional coverage Several non convertible currencies in the region

Europe Cross European border capital flows are

normally unrestricted, particularly within the EU Despite overall convergence of regulatory

environment, local in country banking operations still dominate on the retail and therefore consumer side. Organizations who maintain an offshore cash

pool structure will need to be careful of FATCA and other tax legislation when looking at intercompany cross border flows Region is very much in recovery mode after the

financial crisis, and regulatory reform reflects voter sentiment in regards to taxation and corporations Trapped cash considerations become significant

when looking at countries with high levels of cross border capital controls

Asia Payments infrastructure changes RMB regulatory changes Some larger countries liberalizing and easing

FX regulations to support growth Trapped cash due to regulatory and tax

regimes, e.g., China, India, Taiwan, Malaysia

In addition to regional challenges, industry participants must contend with global directives, e.g. Basel III, and their impacts as well as local implementation nuances

Managing Liquidity

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Trends impacting liquidity management

Working capital efficiency gains ▪ Increased need to

gain control over internal liquidity

▪ Decreased dependency on external funding

Regulation and market changes ▪ Basel III

▪ EMIR

▪ FATCA

▪ Dodd Frank

▪ Asia deregulation

▪ SEPA

Global banking technology ▪ Increased automation

▪ Multibank visibility

▪ Cash centralization

▪ Liquidity management

▪ Forecasting tools

Low rate environment ▪ Historically low interest rate

environment

▪ Corporates becoming more bullish about yield

▪ Review and refine investment policies

Geopolitical risk ▪ Take positive steps to reduce FX

exposure and counterparty risk

Globalization

▪ Corporates moving toward global operating models

▪ Ready access to information

▪ Consolidated cash balances

▪ Counterparty exposure

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Corporate culture and philosophy will drive the technique used

Regulatory restrictions will play a large part in the choice

Cash concentration structures used predominately in the U.S. and LATAM

Post the financial crisis, cash concentration is the technique of choice as it provides immediate access to group funds

Notional pools and hybrid structures used mostly in EMEA and Asia

Where companies cite autonomy as of paramount importance a notional pool and hybrid structure is used

What are Treasurers doing?

Internal data, 2016

Techniques used in cash consolidation

70.4% Physical concentration 15.7% Notional pooling 13.9% Hybrid

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Understanding and unlocking the world

Physical cash concentration Notional pooling Interest optimization

Multibank Domestic Intra

region, global

Single currency

Multi currency

Cross currency enhancement

Liquidity management techniques

No movement of cash Physical movement of cash

Country with minimal restrictions

Country with some restrictions

Country with high restrictions

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Ease of liquidity management by market

GERMANY MEXICO

NEW ZEALAND HONG KONG

Liqu

idity

flow

s Ch

alle

nged

Fr

ee fl

owin

g

Highly restricted Minimally restricted Regulatory environment

Liquidity focused to in-country solutions

Availability to centralize some FCY liquidity

Freedom to move LCY and FCY liquidity

USA

CANADA

UK

Key: Asia Europe, Middle East & Africa Latin America USA/Canada

ARGENTINA

BRAZIL

TAIWAN

CHINA* INDIA

THAILAND

PHILIPPINES

MALAYSIA

SOUTH KOREA

PERU

PANAMA

INDONESIA

FRANCE

SPAIN JAPAN

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Managing Liquidity in Latin America

Consider which cash pooling techniques can be used – Cash concentration – companies can physically concentrate the balances on a number of accounts into a single header

account

– Notional pooling (where allowed) – positive and negative balances on different accounts are offset without any transfer of funds

Notional pooling tends to be less widely available

Most countries, and trade flows, are dollarized with many companies adopting a strategy of concentrating USD offshore

Physical cash concentration structures are becoming more common within Latin America

Optimize

For international companies doing business in the region, repatriation of cash is a priority

Once liquidity is optimized at an entity or country level, additional regional efficiencies may be possible by using offshore pooling to centralize cash offshore though local regulatory considerations need to be taken into account when setting up this type of structure

Due to the diverse regulatory landscape in Latin America, the most effective approach is to build a liquidity structure from the bottom up starting at the country level, before focusing on additional efficiencies across the region

Mobilize

Companies looking to manage their liquidity in Latin America need to employ a flexible approach

Each country has its own set of rules regarding the types of accounts that can be held, and way in which liquidity can be pooled or optimized

First step is rationalizing banking relationships in each country

Companies can typically reduce bank fees by reducing the number of relationships to concentrate more business with fewer banks

Rationalize

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Zero-balancing onshore is possible in the same currency

No specific regulations nor restrictions forbidding notional pooling, there are some tax considerations regarding joint debtor status and thin capitalization rules

Sweeping or physical cash concentration within the same local entity is allowed in Brazil (neither is typically permitted among different resident entities or among resident and nonresident entities)

Zero-balancing is commonly used among subsidiaries of the same resident entities

Sweeping transactions may be treated as intercompany loans, while also being liable to tax charges

Cross-border pooling is not permitted Zero- balancing between companies within the same

group is permitted, although the range of suitable investment instruments is not extensive

No overnight deposit market but interest-bearing savings accounts and term deposit certificates are available, along with bank commercial paper

Sweeping and cash pooling are unrestricted within a single entity, between resident entities and between resident and non-resident entities

In-Country Liquidity Considerations

MEXICO

BRAZIL

CHILE

PERU

COLOMBIA Financial transaction tax affecting zero-balancing activity if accounts do not belong to same legal entity

Cross-border liquidity structures involving resident and non-resident entities are possible but tax planning is necessary

ARGENTINA

Notional pooling is not allowed

Zero-balancing onshore is permitted within a single entity

Best Practices

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Best practices in managing regulatory change

LINK TO THE SOURCE

TAP INTO A NETWORK

UNDERSTAND THE RIPPLE EFFECT

IDENTIFY OPPORTUNITIES

MONITOR ONGOING DEVELOPMENTS

LOOK BEYOND REGULATION

Go directly to the source of any regulatory change and continue to monitor the source information in order to stay abreast of any changes

Tap into a wider industry network — such as a treasury association, practitioner network or third-party consulting firm — to access different ideas and solutions

As part of any regulatory exercise, look not only at the regulations that affect you directly, but also at the wider ripple effect that may arise from regulations

While regulatory change brings challenges, it is important not to lose sight of the opportunities that may arise. In many cases, you may be able to leverage these opportunities to increase efficiency, centralize information and decrease risk within the business

Addressing external change is not a one-off effort but an ongoing process. As new regulations are introduced, regulations already in the pipeline may be amended Continually monitor upcoming changes and keep on top of new developments.

Regulation should not be addressed in a silo but should be considered alongside the wider Business strategy. Upcoming changes could impact your strategic plans

Questions