With full compliance not mandatory for another half decade, Basel III remains an issue that demands only cursory interest of many treasurers in Asia. That contrasts with their financial services providers, particularly global ones, which have been engaging in detailed reviews of how the regulations will impact their portfolio of corporate clients since last year.

From cash and liquidity management perspectives, cor- porate deposits will play an important role in defining the corporate-bank relationship in the coming years. Too much surplus cash is at odds with Basel III's liquidity coverage and net stable funding ratios (NSFR), introduced to gauge a bank's access to short and long term financial resources.

Banks will be required to hold more liquidity buffers against non-operational (surplus) cash that their corporates deposit with them, compared to operational balances used on a regular basis for payments, receivables or custody business. That is because the regulator believes surplus cash is subject to faster withdrawal by corporates in the event of a crisis scenario (that is, the 'run-off' rate is higher). Surplus cash is also regarded less stable in the calculation of NSFR.

The expectation, then, is for banks to ask corporates to reduce their surplus cash balances with banks and put them to work with money market funds or long-term deposit accounts instead. In Asia, this should be a demand uttered particularly often, since a host of cash-rich corporates exist in the region. According to researchers at Société Générale, cash and short-term investments held by local companies were over 20% of the market capitalization in Japan, China and Singapore, and over 30% in Korea at the end of last year.

At Li & Fung, the iconic Hong Kong-based sourcing and logistics company with global operations in 40 countries, the impact of Basel III has been light so far, says Ed Lam, chief financial officer. "Because of the nature of our business as a supply chain manager, we have strong cash flows. We don't need a lot of capex; our funding requirements are more short-term on a working capital basis." Surplus surplus cash is mainly operating in nature and has not been raised as a concern from the relationship banks.

At Nokia, business needs are quite different and, with the acquisition of Alcatel-Lucent coming up, cash is regarded rather highly. Being headquartered in the Eurozone, however, brings its own sets of challenges, as negative interest rates weigh on Euro deposit yields. Nokia is exploring alternative investment avenues but the company fully hedges back investments in other currencies to euro, says Johnny Ho, head of Nokia's regional treasury centre for Greater China and Japan.

"For the corporate treasury policies, we will keep as much as of our assets in liquid form as possible so a lot will be cash or cash equivalent as well as available-for-sale market instruments, such as money market funds," he adds.

Panelists add that most local banks in Asia remain very keen to attracting deposits because of the vast funding requirements in the local economies. Basel III at this moment is more of a concern to European banks, because regulations there have already crystallized a lot further than elsewhere.

But European MNCs are not the only ones to feel the thumbscrews turning tighter.

Companies from around the world have chosen to centralize their multi-currency notional pool in the Netherlands, where the regulatory environment had been very favorable for such structures in the past. Now, however, the country's central bank, the Dutch National Bank (DNB), is playing a leading role in trying to regulate these structures ahead of Basel III. The institution has proposed to stop allowing banks to net the individual account balances within a pool into one relationship balance, which would vastly increase the capital requirements against such structures.

While still in discussion phases, some MNCs, have already begun formulating plans to relocate their notional pools. These companies are keenly aware though, that other jurisdictions may adopt the same approach just a few years down the road. The heydays of the notional pool seems to have come to an end.

Hyva, the Dutch hydraulic cylinder maker, runs a multicurrency notional pool in Europe. Rajan Gupta, group treasurer, explains the discussions he is facing with his relationship banks in Europe: "We feel the Dutch central bank has taken a position to implement the Basel III provisions as soon as possible, which is having a few effects on our notional cash pool structure. Banks are asking customers to reduce overdrafts in the cash pool with an objective to reduce the bank's capital requirements for running such business. A similar discussion is to reduce the short term surplus cash in the cash pool. Yet another discussion I am facing is to convert our notional pool to a physical cash pool or bear the higher cost of the notional pool."

The approach taken by the DNB foreshadows how Basel III will alter the viability of notional cash pools, which form the staple ingredient to most MNC cash management struc- tures. "I feel that in coming years, when we come closer to the full implementation of Basel III, the notional cash pool will have to change drastically to a physical cash pool," predicts Gupta. "For the moment, banks have to strike a balance. They can't just follow the regulation and lose the business so to some extent, banks are not passing on the full costs of the regulations to the customer but trying to absorb them as much as possible. That will become more difficult, though, and many customers will be forced to switch to a physical cash pool."

The notional cash pool might be the first victim of Basel III, but it is unlikely to be the last. For Lam at Li & Fung, which centralizes most of its cash in Hong Kong rather than in Europe, Basel III manifests itself less in liquidity and more in working capital management. Lam observes a polarization when looking at the entire supply chain.

"On the customer side, including the major retailers globally, everyone is trying to stretch their own supply chain, requesting longer payment terms. That is pushing through the entire supply chain, right down to the factory level, where the funding is becoming more difficult to obtain as a result. From a risk rate, banks will look at the higher grade corporates, but make it more difficult for some suppliers to obtain credit. They, in turn, will reflect that in their margins and other cost control measures."

Basel III regulations, if implemented exactly as outlined by the Basel Committee on Banking Supervision (BCBS), will incur both direct and indirect costs to corporates. For some, global liquidity management structures will be turned upside down. For others, more selective lending by banks will put pressure either on their own access to funding or that of their smaller suppliers and distributors.

With bad news from Europe mounting, treasurers are happy for any developments that allow them to save cost elsewhere. With the establishment of the Shanghai (Pilot) Free Trade Zone, Johnson Controls and Li & Fung have been able to do just that.

At Johnson Controls, an automated cross-border sweep between the company's Shanghai pilot zone entity and its Hong Kong regional treasury centre cut down reliance on domestic credit lines significantly. Explains Marc Vandiepenbeeck, regional treasurer, Asia Pacific and Middle Est at Johnson Controls: "My problem with the intercompany loans was that they are a medium to long-term solution with tenors of at least a few months, whereas I have been working capital requirements in China that change throughout the month. I wanted to use excess liquidity in other places in Asia to be able to finance the mid-month through in China, for example. Having a two-way sweep that can be done daily allowed us to achieve that. We reduced our credit line ten-fold and we are now able to finance the working capital via Hong Kong. The other benefit is that excess cash at the end of the month is swept out of China into Hong Kong, where we swap it to service our US-dollar debt."

Lam also notes that the SFTZ has been useful to Li & Fung from cash management and operational efficiency perspectives. "Over 50% of our sourcing is from China so with the set-up of the FTZ, we were able to make the sweeping in and out of China a lot more efficient. In terms of dealing with the authorities, they have been very accommodative and there haven't been any roadblocks."

"It was an interesting experience that involved a lot of work but I can now almost consider China to be a country without complex currency controls," agrees Vandiepenbeeck.

With Basel III set to introduce a host of new complexities, regulatory relief from China is most welcome to Asianbased treasurers and CFOs.