Treatment of reversal features in cash pooling arrangements

Is a reversal of the daily transfer from the original accounts to the target account, as contractually agreed with the customer, at the next business day compliant with the requirements for net reporting of cash pooling arrangements as set out in Article 429b (2) CRR?

Art. 429b (2) CRR specifies the requirements for cash pooling arrangements to be eligible for net reporting of assets and liabilities. Cash pooling is a service provided by banks to execute daily physical transfers of funds between customer accounts. As required by Art. 429b (2) (a), the bank transfers the credit and debit balances of several individual (source) accounts into a separate single (target) account and the balances of the original accounts are set to zero at the end of day. As contractually agreed with the customer in the cash pooling contract the transfer is conducted daily at the end of each business day and reversed the next morning. The purpose of the physical transfer at the end of each business day and the subsequent reversal in the morning of the next business day is to facilitate overnight intra group lending within the client`s corporate group as opposed to providing an overnight bank loan. From a client perspective, the intra group lending is more cost efficient than paying interests on overnight bank loans. Illustrative example: Client corporate group with two different accounts and a target account. Account A facing legal entity A and account B facing legal entity B within the same corporate group. Before the end of day transfer there is a deposit of 10 in account A and a drawing of 8 on account B. After the physical transfer at the end of the day to the target account, a deposit of 2 is left in the target account and there is neither a deposit in account A nor a drawing on account B. For IFRS purposes only the deposit in the amount of 2 is reported on the bank`s balance sheet as a liability. Hence legal entity A effectively provided an intercompany loan in the amount of 8 to legal entity B. The next morning, the intercompany loan is repaid via the reversal of the physical transfer resulting in a deposit of 10 in account A and a drawing of 8 in account B. In case entity B defaults during the day, the bank exercises its right to set off the drawing of 8 in account B with deposits of legal entity A available in account A.   We are seeking confirmation that for the purpose of the leverage exposure calculation the end of day balance in the single target account (after the physical transfer of the funds from the individual source accounts into the single target account) is the correct exposure measure. In the example above this results in a zero leverage exposure as the deposit of 2 left in the target account is from the bank`s point of view a liability and therefore not subject to leverage reporting.   Conceptually the same question can arise in the application of Art. 429b (3) CRR if the physical transfer does not happen on a daily basis, but any such transfer is reversed on the next business day. While in our example there is a daily transfer, the other requirements of Art. 429b (3) would also be fulfilled: There is a contractually agreed right for the bank to set off the credit and debit balances of the several individual (source) accounts of the different legal entities of the corporate group at any point in time. The legal enforceability of that contractually agreed right needs to be assessed separately for the different jurisdictions. The accounts are only current or saving accounts with overnight balances and no maturity mismatches. The bank charges or pays interest based on the combined balances of the account A and B.  The end of day balance should be the correct exposure irrespective of the application of Art. 429b (2) or (3) CRR as the reversal the next morning can be an additional feature in both physical (Art. 429b (2)) and notional (Art. 429b (3)) cash pooling arrangements.