Background on the

question

The CRR2, on paragraph 3c of the Art.429b, explicitly states that: “the institution charges or pay interest based on the combined balance of the original accounts”.

It’s market practice (for reference see “International Cash Management”, Riskmatrix, 4th edition, pp.319-323) to manage interests within a Notional Cash Pooling (NCP) in two phases:

1. accrual and settlement of interests to each single current account that is part of the NCP, based on the interest rates – floating rates, consisting of a “base rate” plus/minus a “spread” – agreed between Bank and Account Holders as if the accounts are not part of a NCP;
2. calculation, based on an algorithm that involves simultaneously all current accounts within a NCP, of a so called “Notional Benefit”, that is credited to the account held by the NCP Administrator or to each single Current Account; the Notional Benefit is classified as a “Return of Interests” and its value represents the excess of “spread” charged by the Bank in phase 1.; phase 2 is executed in order to produce a net interest effect consistent with current accounts being part of a NCP.

The reason for developing this methodology is both being a business demand and because in some Countries in Europe fiscal laws and regulations are highly uncertain with respect to an alternative, perhaps most known, NCP interest accrual methodology. This alternative option consists of the accrual and settlement of interests only in one account, based on a floating rate: the so called Notional/Virtual Account, held by the NCP Administrator, where the end-of-day balances of all NCP accounts are notionally moved.

It has to be noted the final net interest result for the Bank and the Group of Companies using the NCP is the same with both methodologies.

Shortly summing up, the algorithm mentioned above works this way: firstly, credit balances are notionally aggregated and used to offset notionally aggregated debit balances, involving all accounts of the NCP; secondly, the spreads previously retained by the bank on the compensated credit and debit balances are returned. This way, in our opinion, the requirement “combined balance of the original accounts” is respected.

We believe that the requirement is respected both in case 100% of the spread is returned and in case the return is less than 100%, as a consequence of business agreements, since the algorithm is anyway working using the “combined balance of the original accounts”.