A common treasury goal is to sweep the funds in a number of bank accounts into a single account, where it can be used to obtain the most preferential invested rate of interest, or at least offset negative account balances in some accounts. However, this goal becomes much more difficult when cash is held in different currencies, in different countries, and/or in accounts held by different legal entities.
One way around these problems is to use notional pooling. This is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds. Once a company earns interest on the funds in this notional account, interest is usually allocated back to each of the accounts comprising the pool. For tax avoidance reasons, it is also sometimes useful for the corporate parent to charge the subsidiaries participating in the pool for some administrative services expenses related to management of the pool.
This approach allows each subsidiary company to take advantage of a single global liquidity position, while still retaining daily cash management privileges. Also, since it avoids the use of cash transfers to a central pooling account, there is no need to create or monitor inter-company loans, nor are there any bank fees related to cash transfers (since there are no transfers). Further, interest earnings tend to be higher than if investments were made separately from the smaller individual accounts. In addition, it offers a solution for partially-owned subsidiaries whose other owners may balk at the prospect of transferring actual funds to an account controlled by another entity. And finally, the use of notional pooling is not a long-term commitment; on the contrary, it is relatively easy to back out of the arrangement.
The main downside of notional pooling is that it is not allowed in some countries, especially the USA and parts of South America and Asia (though it is very common in Europe). In these areas, actual physical cash sweeping is the most common alternative. Also, the precise form of the notional pooling arrangement will vary according to local laws, so that some countries allow cross-border pooling, while others do not.
Notional pooling is offered by a number of the larger banks, including CitiBank, ABN AMRO, and HSBC.