Netting simplicity at its best

Netting
simplicity at its best
January 2013

Netting
simplicity at its best
Netting substantially reduces the number and the associated cost of payments
and foreign currency trades. The number of international payments can be
cut from thousands to just one per subsidiary per month. There is a double
benefit in FX deals here. Netting not only reduces the amount of currencies
and FX deals, it also consolidates them into larger trades that often receive
better pricing. Furthermore, Netting increases the visibility of net FX
exposures at the corporate level and functions as a powerful tool for hedging
these exposures.
Other advantages of Netting are less quantifiable and therefore often
underestimated. Unjustifiably so! The increased control, standardization
and group discipline are essential benefits too. They seriously diminish
administration time spent on transaction processing, reconciliation and problem
resolution. A well-executed netting system allows your treasury to free valuable
staff time.
BMG’s Netting is not limited to invoices resulting from inter-company and
vendor trade transactions. You may also include payments that are financial in
nature. Netting is a sophisticated payment vehicle you can use for all kinds of
international payments: inter-company loans, interest, royalties, dividends, fees,
expat salaries, tax payments and foreign exchange deals closed between banks
and your subsidiaries. Of course payment identifiers can be added to easily track
the nature of payments.
The simplicity of our product is the essential key to a smooth implementation
and advantageous operation of a truly global netting system.
2 Bank Mendes Gans | Netting, simplicity at its best

The basics of Netting
With BMG’s Netting in place, your company evolves from randomly settling
inter-company transactions on various due dates, to combining all payable and
receivable transactions into just one netted amount per subsidiary. In addition,
you may include repetitive international vendor payments. The entire netting
process takes no more than 4 – 5 days.
How does it work?
• Your subsidiaries input their invoice transactions, payable or receivable.
Manual input is facilitated by our user-friendly browser-based system.
Unattended input is either host-to-host or via SWIFTNet FileAct. We settle in
37 different currencies. Invoices in other currencies can also be settled in one
of these 37 currencies.
• As soon as your transactions are sent to us they are visible real-time.
Approval levels can be administered to comply with your company’s practices
and policies.
• Once all transactions are fed into the system and properly approved, we will
begin a preliminary round of calculations to determine the net position for
each subsidiary.
• If necessary you can change transactions after reviewing the preliminary
netting results.
• Once transactions are finalized, the authorizers at your company lock the
system to prevent further changes. Then they approve the netting for final
calculation and FX dealing.
• The residual FX spot deals are executed in the market and netting rates are
fixed for all transactions. A final calculation round is made to fix the net
position for each subsidiary.
• All settlements are executed with the same netting value date.
• We deliver all invoice transactions to your company for reconciliation
purposes, either host-to-host, via SWIFT or through our browser-based
system.
3 Bank Mendes Gans | Netting, simplicity at its best

Applying Netting to the full
Some people see netting as just a simple commodity product. BMG’s Netting
is much more powerful in its application than first meets the eye. Applying
Netting to the full, it is a valuable tool for treasurers who want to take control
of international invoice obligations and to improve liquidity management.
Add your vendors
With Netting in place you may simply include the vendors your company
pays on a regular basis. Especially when certain vendors are paid by multiple
subsidiaries and in multiple currencies. Since the netting payment calendar is
established in advance, your vendors will know when to expect payment. This
allows them to streamline their own cash management. Invoice details can be
e-mailed to your vendors directly or included in the outgoing payment transfer.
4 Bank Mendes Gans | Netting, simplicity at its best

Hedge netted exposures
An additional benefit of Netting is that it shows netted exposures resulting from
inter-company payments in the past. Many of our clients use this information to
hedge netted exposures and improve currency risk management. Furthermore,
you may choose to settle deliverable FX transactions via Netting.
Solve liquidity dips; add a cash pool
Any company with a large volume of inter-company payments knows that a
liquidity dip epidemic breaks out across subsidiaries on the payment date. This
is not surprising as customer receivables typically lag behind the inter-company
obligations. Using local borrowing lines or providing short-term inter-company
loans are both costly methods to resolve funding needs. With BMG’s Cash
Pool in place all affiliated accounts are automatically debited to satisfy the
funding requirements of the paying subsidiaries. In doing so borrowing cost at
centralized interest rates is more advantageous and no inter-company loans are
needed. An added bonus is that foreign exchange on multi-currency loans can be
fully eliminated.
Flexibility of use
Once Netting is implemented, you can use it as often as necessary. Though most
of our clients typically run their netting operation once a month, many use
Netting on a weekly basis. Occasional extra use of the system is possible at just a
moment’s notice.
In-house bank
To adequately support Netting we provide you with a full-fledged banking
platform that can be linked to any treasury workstation or ERP system. We are
proud that many of our clients use it as their proprietary banking platform – not
only for Netting, but also for cash pooling, global reporting, administering intercompany
loans, and routing international payments and receivables for vendors,
customers and FX transactions. Furthermore, M&A transactions can be executed
using the different legal entity tax jurisdictions already embedded in Netting. If
you choose to combine Netting with Cash Pool and Exposures & Cash Flows, the
total application may serve as a full-swing in-house bank for your company.
‘BMG’s Netting is much more
powerful in its application
than first meets the eye’
5 Bank Mendes Gans | Netting, simplicity at its best

Myths about netting dispelled
There are several misconceptions in the market regarding the mechanics
of netting. In this section we clarify the main misunderstandings and show
how BMG’s Netting actually works.
1. Netting in an in-house bank is simple to do
On the contrary. We have operated netting solutions for global companies
for over 40 years. We now know that netting in an in-house bank is not as
straightforward as it sounds. For very large corporations with substantial
payments each day, it could make sense to net daily or monthly by way of
bilateral settlements. But it is essential to acknowledge that these corporations
have to manage thousands of internal bank accounts, and this comes with
a hefty price tag. This includes the workload involved in managing the
connectivity in general and problem resolution in particular. Moreover, the
bilateral settlements create FX deals with amounts that are not always worth
shopping around for.
2. Outsourcing Netting is costly
In fact, the opposite is true. It’s a common myth that outsourcing Netting is
costly and that the only alternative is to do it yourself. You may weigh the cost
of internal operations versus the fees to be paid to an external provider. More
often than not, companies look only at the apparent cost and ignore the hidden
cost of dealing with global invoice transactions. These hidden costs are usually
very difficult to quantify. They include time spent on processing payments, on
investigating and resolving missing transactions, and costs associated with
maintaining internal expertise, system maintenance and enhancements.
Outsourcing netting means outsourcing all the internal hassle at the same time.
3. Netting requires opening new bank accounts
Not with BMG. Many other solutions in the market require you to open accounts
in all of the netting currencies. In some cases you’ll even be obliged to open
accounts at branches of the provider. This of course creates an unwanted and
unnecessary influx of accounts. With BMG’s Netting there is no need whatsoever
to open additional bank accounts.
4. Netting only makes sense if payments and receipts can be off-set
Many companies are misled by the product’s name. In essence it seems to
imply that netting is advantageous only if and when there are payments and
receipts to be netted. In fact this is not true. Netting works very well as a oneway
payment system that allows your subsidiaries to settle their obligations
to the parent company in any currency. By using Netting in this fashion actual
payment reduction is not achieved. But there are significant other benefits. The
parent company receives just one lump sum amount, payment cost is greatly
reduced, and substantial gains are made by centralizing foreign exchange
execution and reconciliation.
6 Bank Mendes Gans | Netting, simplicity at its best

5. Outsourcing netting means handing over foreign exchange
This is not how we operate Netting at BMG. Without a doubt, the FX deals
that result from your netting operation are what most banks pitch for. In
many instances, those banks offer the entire netting without fixed fees on the
condition that you hand over the foreign exchange. And that is where it gets
sticky and FX cost is swept under the carpet. At BMG we are transparent in our
pricing and we help you obtain true cost savings. On the topic of FX deals, our
specialized services for over 230 global companies enable us to combine foreign
exchange transactions for all our clients on any given day. If a company operates
netting internally it will never benefit from other companies’ FX positions.
‘Having operated netting for
‘Ehenis over 40 estotat years, usda we know that
dit an a in-house dolupta tiora solution is not as
tur? straightforward Quis volup tae as it sounds’
perum, quamas’
Naam Functieomschrijving
7 Bank Mendes Gans | Netting, simplicity at its best

How Netting meets
corporate objectives
The key objectives for treasurers responsible for global netting operations are:
• A single global concept
• Off-setting and savings potential
• Simplicity at its best
• No additional accounts, automated settlements
• Top-notch security
• Unattended data exchange
A single global concept
Our clients preach to one and all that a single global concept, covering all
currencies and countries, is a must have. Centralized control and visibility
of payments and receipts brings about a company wide standardization of
information. The fact that any currency can be paid at the transactional level
and that 37 currencies can be traded is a tantalizing prospect for any corporate
treasury. For subsidiaries in countries with restrictions concerning real offsetting
of transactions there are numerous work-around alternatives available to
make participation possible. Our browser-based system provides a single point of
entry for all subsidiaries to enter, view and approve transactions.
Off-setting and savings potential
Many of our clients have been able to realize very sizable reductions in both
payments and foreign exchange cost. The average reduction lies between 55%
and 80%, but in some companies 95% and higher was obtained. Your reduction
potential will depend on what transactions are settled through the system
and whether there is off-setting between payables and receivables of the
participants.
Simplicity at its best
Many companies have stumbled on the complexities of other platforms and the
amounts of system knowledge, IT resources and personnel they require. BMG’s
Netting is an elegant solution that provides a single window to the corporate
world of international transactions, both inter-company and for vendors.
The hassle associated with internal netting operations, compliance, risk and
continuity concerns fades as we take over these matters for your company. Real
simplicity ensues, allowing you to focus on more strategic decision-making.
8 Bank Mendes Gans | Netting, simplicity at its best

No additional accounts, automated settlements
The definite bonus for our clients is that they don’t need to open extra bank
accounts to realize a global netting solution. Typically, most other providers
require that interest bearing currency accounts be opened for all subsidiaries
to pay and receive the netting results. Not only do these accounts pose an
administrative headache, but also, when a subsidiary fails to settle on the
value date, interest is charged and treasury has to resolve the issue. At BMG we
have taken a different approach. As we plug into the banks used by your local
subsidiaries, we have artfully removed the need for additional accounts. We are
able to automatically push and pull the netting results to and from your current
banks.
Top-notch security
Companies are often discouraged about the hassle of manually maintaining the
netting database, which contains the vital subsidiary details. Also the lack of
automated security administration capabilities may be daunting. Our solution
includes a highly sophisticated on-line self-service maintenance portal. Your
system administrators can easily manage authorizations of subsidiaries and
other trusted parties. At internal audit’s request a complete user authorization
report can be readily produced.
Unattended data exchange
In today’s changing markets an increasing number of companies are connected
to the SWIFT Network or need to be able to send netting transactions directly
from the treasury workstation or ERP systems. If you choose to put unattended
channels in place, we will enable fully automated two-way exchange of payment
data. Alternatively you may upload your invoice files via our browser-based
banking platform.
9 Bank Mendes Gans | Netting, simplicity at its best

Why our Netting is superior
Netting is an ideal solution for companies with a large number of subsidiaries
facing significant inter-company transactions, ranging from manufacturing,
sales, distribution and internal financial transactions. Netting – in all its
simplicity – can be hugely complex from an operational perspective, which
means that a proper execution is critical to the payment processing success.
The market offers a wide range of netting solutions including off-the-shelf
software, ERP systems, treasury workstation functionalities and banking
solutions. And many companies have built their own netting spreadsheets. It is
safe to say that netting, in and by itself, is not just a nice to have solution, but
a fundamental tool for any global company with substantial inter-company
payment traffic.
In the early sixties we developed our Netting together with one of our clients and
launched the solution in 1965. Since then we have improved Netting time and
time again, listening very closely to the wishes of our growing client base. Our
clients have enabled us to continually perfect our system these past 45 years.
We owe our track record reputation and level of expertise to them.
All our netting clients agree on one main aspect: keep it simple! Complexity
just sidesteps the much sought after benefits. We are often used as the hub
for worldwide inter-company transactions where netting is achieved globally
and multilaterally, and settled in 37 different currencies and over 70 countries.
Netting can be a fully automated process starting with unattended data
exchange and ending with fully automated settlements and reconciliation in
the ERP systems. For companies that have different ERP systems in their global
operations, a browser-based system is available to enter or upload transactions.
To top it off, Netting is able to handle international vendor payments as well as
transactions resulting from internal financial deals or obligations.
Our solution is based on full outsourcing. This relieves our clients from the many
and heavy resource, operational and financial burdens. There is no more need
for hiring, for keeping up expertise, for continuity concerns, or for investments
to home grow the system or implement software. We enable you to focus on
strategic decision-making as you leave the netting operations to us.
10 Bank Mendes Gans | Netting, simplicity at its best

About us
‘We are an extension of any corporate
treasury providing hands-on service,
expertise and innovation each day’
Bank Mendes Gans (BMG), a member of the ING Group, was founded in
Amsterdam in 1883. We have built an excellent reputation as a market leader in
the field of liquidity and information management services. We provide highly
flexible and customized solutions for corporate treasuries around the world.
With a strong corporate genetic imprint we are an extension of any corporate
treasury providing hands-on service, expertise and innovation each day. We
are not a standard bank by any means, as we do not offer traditional banking
services such as lending, local banking or derivative transactions. We pride
ourselves on providing banking services for our customers in the most pure
and prudent form. We continue to differentiate ourselves in the market without
compromising our own traditions and values. In doing so, we successfully
compete in the market and continue to deliver a superior level of customer
service which has become the hallmark of our international banking reputation.
We currently service over 230 global companies.
Selecting a strong partner to supply you with high-end liquidity management
services means an in-depth assessment is essential. We are all about best
practices in treasury processes with transparency in all our areas of expertise.
We are looking forward to make your acquaintance.
Naam Functieomschrijving
11 Bank Mendes Gans | Netting, simplicity at its best

About the author
Karen Kombrink, Executive Vice President, started her career at Bank Mendes
Gans mid 1978 at the financial department. In the years after she headed up
the Netting department before she became responsible for global liquidity
management solutions for corporate companies worldwide. In this position
she learned to understand the challenges multinational companies face and
developed in-depth knowledge and vast expertise about netting, physical
and notional cash pooling, forecasting, exposure management systems,
inter-company loan portfolios, international payments and receivables and
foreign exchange. In 1997 she became officer of the bank. She is known for her
client-centric attitude and has over 33 years of experience in global markets,
consultancy, product development and marketing and sales. She can be reached
at karen.kombrink@mendesgans.nl.
Contact
Telephone
+31 20 523 5311
E-mail
info@mendesgans.nl
Internet
www.mendesgans.com
Office address
Herengracht 619
1017 CE Amsterdam
The Netherlands
Postal address
P.O. Box 198
1000 AD Amsterdam
The Netherlands
12 Bank Mendes Gans | Netting, simplicity at its best