70 3 Reduction of External Funding Needs
A synthetic securitisation structure is funded, if the payment obligation of the
risk taker (protection seller) is discharged by the risk taker (protection seller) in
full at the start of the transaction, either by the purchase of credit-linked notes is-
sued directly by the risk taker or by providing collateral to secure the risk taker’s
(protection seller’s) obligation under a credit default swap.
A synthetic securitisation structure is unfunded, where the risk taker’s (protec-
tion seller’s) obligation is not paid in advance or collaterialised.
A synthetic securitisation structure can also be partially funded, where certain
tranches of the credit risk in respect of the reference portfolio are funded and oth-
ers are unfunded.
The decision whether or not to adopt a funded, unfunded or partially funded
structure depends on the objectives of the risk shedder (protection buyer). If the
purpose of the synthetic securitisation is to reduce regulatory capital costs, then a
funded structure might provide the maximum benefit.
3.4.5 Cash Management
Introduction
Section 3.3 and earlier parts of section 3.4 described ways to turn the firm’s assets
into cash. This section will discuss the management of cash. The firm can improve
its net interest position and reduce its working capital needs through cash man-
agement. Typical forms of cash management include cash pooling and netting. In
addition, the Payment Services Directive will enable firms to create so-called
“payment factories” in the EU.
Cash Pooling
Cash pooling is a form of cash management used by the parent company and its
subsidiaries.^166 The firm may prefer to introduce cash pooling for two main rea-
sons. (1) The firm may want to reduce its external financing needs and reduce its
balance sheet. Each company in a group usually has its own bank accounts. If the
bank accounts of group companies are managed as one net account (“pooled”), the
group needs less cash and can decrease its working capital. (2) The second reason
is that the firm may want to improve the group’s net interest position and pay less
for its external funding.
Master account and sub-accounts. The pool typically consists of a master ac-
count (the top account, called for example the Group Account) and sub-accounts
for each participant. Depending on the form of cash pooling, the top account can
(^166) Generally, see Cahn A, Kapitalaufbringung im Cash Pool, ZHR 166 (2002) pp 278–306;
Daccò A, Die Zentralisierung des Konzern-Cash-Managements in Italien. Johann Wolf-
gang Goethe-Universität Frankfurt am Main, Institut für Bankrecht, Arbeitspapiere Nr.
106 (2002); Vandsø Jacobsen S, Lindekilde Schmidt C, Cash Pooling i selskabsretlig
belysning, NTS 2002:4 pp 451–465.