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  • Items proposed for consideration at the next meeting of Dispute Settlement Body February 28, 2020
    The WTO Secretariat has circulated a meeting notice and list of items proposed for the next meeting, on 28 February 2020, of the Dispute Settlement Body, which consists of all WTO members and oversees legal disputes among them. The meeting notice is circulated in the form of a document officially called an “airgram”.
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  • US donates USD 600,000 to further developing countries’ trading capacities February 25, 2020
    The United States contributed USD 600,000 (CHF 590,000) in 2019 to help developing and least-developed countries (LCDs) participate effectively in global trade negotiations. This donation will finance training workshops for officials from WTO member governments to help them deepen their understanding of multilateral trade rules and strengthen their negotiating capacity.
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  • Lithuania donates EUR 50,000 to enhance developing countries’ trading capacity February 24, 2020
    Lithuania is contributing EUR 50,000 (CHF 53,000) to help developing and least-developed countries take an active part in global trade negotiations. The contribution was acknowledged by Director-General Roberto Azevêdo at a meeting with Lithuania’s Minister of Foreign Affairs, Linas Linkevičius, on 24 February 2020.
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  • Third anniversary of Trade Facilitation Agreement sees increasing implementation rate February 22, 2020
    Three years since the Trade Facilitation Agreement (TFA) entered into force on 22 February 2017, WTO members have continued to make steady progress in its implementation. Director-General Roberto Azevêdo, on the occasion of the TFA’s third anniversary, welcomed members’ efforts to ensure traders can reap the full benefits of the Agreement.
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Netting



 

Netting is a currency risk management method, which is adapted to multinational companies willing to reduce their currency hedging costs engendered by the transactions that take place between their subsidiaries.

 

Indeed multinational companies have to optimise on a regular basis financial flows that take place between their subsidiaries. This consists essentially in offsetting inverse positions, which could be bilateral or multilateral.

 

Bilateral Netting.

 

Let ‘s take the example of a Japanese multinational with a Spanish and Chinese subsidiary. Let’s consider that the Spanish subsidiary must pay 500 000 USD to the Chinese subsidiary while in turn, the Chinese subsidiary must pay 300 000 USD to the Spanish subsidiary at the same date. (See figure 1)

 

In this case, the Japanese multinational can reduce its hedging costs by offsetting the positions. Indeed, by hedging 200 000 USD (500 000 – 300 000) instead of 800 000 USD (500 000 + 300 000), the relative foreign exchange exposure is reduced.

 

Providing that 3% fees is necessary for hedging the foreign currency, we can see that in this example the associated cost would have been reduced from 24000 USD (800 000 * 3%) to 6000 USD (200 000 * 3%)

 

In other words, bilateral netting consists in covering net exposures instead of gross exposures.

 

Multilateral Netting with multiple currencies

 

Multilateral Netting is a cost-effective way to optimise global cash management and currency risks, especially when numerous subsidiaries operate with each other by using several foreign currencies.

Here, a Netting centre which will act, as an internal clearinghouse will be created. As a result, Multinational corporations can neutralise their foreign currency exposure by reducing their hedging costs.

 

Let’s take the example of a multinational, which has 4 subsidiaries operating in 4 currencies. (See figure 2 below)

Figure 2

 

Based on those figures the net position for each subsidiary is as follows :

 

Exchange rate adopted:

 

EUR / USD: 1.0524

EUR / GBP: 0.8559

EUR / JPY: 119.909

 

 Net exposure on Italian subsidiary: + 201.092 EUR

390+120+360 – (300/119.909+480/1.0524+180/0.8559)= + 201.092

 

Net exposure on Japanese Subsidiary: -100 296,7347 JPY

160+300+140-(390*119.909+180/1,0524*119.909+240/0.8559*119.909)=

-100 296,7347

 

Net exposure on U.S subsidiary: +433.9906 USD

180+480+400- (360*1.0524+140/119.909* 1.0524+200/0.8559*1.0524) =

+433.9906

 

Net exposure on UK subsidiary: +190.8363 GBP

200+240+180 – (120*0.8559+160/119.909*0.8559+400/1.0524*0.8559) =

+190.8363 GBP

 

 

 As we can see, the final currency exposure of this multinational becomes 0

201.092 EUR – (100 296,7347/119.909)+(433.9906 /1.0524)+ (190.8363/0.8559) = 0!!!!!!!

 

In this example, although each subsidiary does have an exposure to foreign currency risks, it is in the best interest of the multinational to centralise the risk management at the group level via a clearinghouse.

Indeed, by doing so the currency risks, the associated hedging costs as well as the duplicate purchases and sales of foreign currencies are avoided.

 

However it must be highlighted that netting requires a high level of coordination between subsidiaries since the foreign currency offsetting is only possible with payments, which have the same payment maturity. In other words, this method depends to a significant extent on technologies, which provide an access to financial information at the multinational level and as a result, enable subsidiaries to adjust and monitor payment maturities Internationally.

 

Please click on the links below for a detailed explanation of each technique