When corporates set up a regional treasury center (RTC), they often focus on how their bank can support them, but is also crucial to put the right legal structure in place.
Establishing an RTC requires technology and banking partners, but one of the key constituents should also be a legal firm in order to help corporate treasuries understand the full legal implications of setting up an RTC. Whether the facility is to be in China, Africa, eastern Europe or elsewhere, the jurisdiction and scope of the RTC will impact its legal constitution and should be one of the first matters to be addressed, explained Lawrence Tondel and John Casanova, partners at law firm Sidley and Austin. Structuring the framework of an RTC is vital preparation work.
Tondel said that a corporate will usually start on the legal framework for a treasury center by setting up an umbrella agreement to use with its bank and listing the key legal issues to discuss. Casanova added that some corporates may pick different banks to support their treasury center in different regions, and the corporate may want to use the strongest bank or specialization skills in each region. The corporate can then negotiate with the bank to ensure an understanding of the key legal issues in whatever country the RTC is being formed, simultaneously establishing a structure for managing risk and itemizing the distinct responsibilities and “chain of command.”
While the umbrella agreement for a new RTC is designed to cover every jurisdiction, the corporate would need to make exceptions if the agreement is illegal or restricted in a specific jurisdiction—China, for instance, has certain currency restrictions and other peculiarities that need to be obeyed. A universal RTC establishment protocol is useful, but it will need to be tweaked to suit each specific region. Also, some restrictions may be based on practices, policies or procedures, rather than actual written law. Jurisdiction
The RTC umbrella agreement should specify the law to be used in the event of a dispute. Corporates should preferably choose a jurisdiction which is a major financial center and which is sophisticated, so that they will get a fair, equitable and expert hearing if need be. In Europe, for example, the Netherlands is often a preferred location. In countries where local practice or policy requires local law to prevail, Tondel said that the corporate may use a representation and warranty by the bank as an alternative, to make sure the RTC agreement is enforceable.
Once the structure of the RTC agreement is in place, the bank can work with its offices, affiliates, partners and joint ventures to explain the framework in each local location where the corporate will operate. Translations may also be required by local law and need to be started early so they can be completed in a timely fashion. Key legal issues
There are a variety of legal issues a corporate should make sure are covered in its agreements and RTC documentation. One of the most important is the daily netting of all balances so that the treasurer has one number summarizing the position at the end of the day, if this is allowed. Treasury may have a credit line to make sure it does not end up in an overdraft position.
A legal issue that varies between locations, depending where an RTC is sited, is how the bank and corporate deal with confidentiality and data protection—for instance, Europe is very strict about its Data Protection Act (DPA). There needs to be a clear, single agreement on the provisions for all parties involved in an RTC to adhere to.
Another important consideration is signing authorities. The corporate may need new bylaws or provisions, given the dozens of agreements that could be needed to support each jurisdiction. The corporate, bank and any technology or support agencies should all jointly work out what will be satisfactory for the involved parties, Tondel said, rather than wasting money on lawyers. Exit plans
Another legal and business issue to consider, advises Tondel, is how termination of an RTC would occur if need be. Corporates can terminate jurisdiction by jurisdiction, but they will need a transition period built into the agreement since they can’t simply stop banking on a day’s notice. The corporate will thus need to negotiate on the causes and processes so that they can transfer responsibilities to another bank, be covered during the transition and ensure a soft landing.
Another issue, explains Tondel, is how the RTC agreement affects the bank’s risk-weighted capital position. While the bank may enter into separate arrangements in any number of jurisdictions, it may also need to look at them as a whole when it calculates its risk-weighted capital, particularly in respect of any funding obligations that might arise in the context of the overall arrangements. The bank’s documents will often include security arrangements, such as set-off and pledging, to deal with risk-weighted capital. Liability
Given that there are multiple parties on each side, another issue to address is whether liability will be joint or several. The corporate would not want its liabilities in one country to affect its credits and assets in another country. To address the issue of liability, arrangements can be structured so that the liabilities of the corporate are several rather than joint. The bank will often require that the liabilities of its affiliated banks be several as well. In such situations Tondel said a corporate would seek a guarantee from the bank, which is not often practicable with most banks, or comfort letters.
Experienced corporates will usually have an experienced procurement officer negotiate interest rates, foreign exchange (FX) rates and other fees, as well as how long fee structures will stay in place so that they can leverage the larger scope of the RTC relationship with the bank to reduce costs. In one case, Tondel said, a corporate spent four months negotiating FX rates and ended up with more favorable fees.
Centralized communications and reporting is a key benefit of an RTC and creates efficiencies, continues Tondel. The treasurer may want a combination of daily, weekly or monthly reporting. The corporate should also have the capability for electronic posting of payments and expenses, with interest balances electronically posted by the bank in each of the regions it is using. The corporate will also need separate tax and fee reporting structures, which may require IT support. These requirements need to be discussed at the beginning of the relationship.
Another key consideration, according to Casanova, is for the corporate to understand exactly how the money will flow, since money flows drive wraps, warranties and service standards for the agreement. It needs to know what it is actually receiving, whether there is a real-time flow, and how the data entry and account sweeps will occur. The CFO should be able to see whether funds are in bank accounts or have been swept.
While setting up a regional treasury center can bring many benefits, it is also important to be clear from the beginning about the legal framework and documentation that will underpin the RTC. Along with looking at the banking and internal structures for the treasury center, corporates should also set up the legal structures effectively and manage expectations effectively to ensure that RTC is firmly rooted and launches successfully.This article originally appeared on gtnews.