CFM92540 - Debt cap: particular types of company: group treasury companies: treasury activities

This guidance applies to worldwide group periods of account ending before or straddling 1 April 2017.

Definition of ‘treasury activities’

TIOPA10/PT7/S316 (9) lists those activities which qualify as treasury activities. It is possible that a company which undertakes one of them to meet the condition in of ‘undertaking treasury activities’ - s316(2)(a) or, for periods of account beginning before 11 December 2012, S316(7). It must, however, undertake the activity or activities in relation to, or on behalf of, the worldwide group or any of its members. So, for example, a trading company which places its own surplus funds on deposit, solely for its own benefit, will not come within the condition. Equally, a company that solely borrows to fund its equity investments will not be undertaking treasury activities.

Similarly, if a company is funded through cash pooling arrangements or uses such arrangements to manage its own surplus funds, its participation in the pooling arrangement is merely a passive participant in the pool and such participation does not amount to entering to any of the listed activities on behalf of any other member of the worldwide group.

‘Treasury activities’ are defined as follows.

• Managing surplus deposits of money or overdrafts - for example, a company that manages a cash pooling arrangement, where surplus funds from other group companies are placed on short-term deposit or used to reduce an overdraft, will be undertaking treasury activities.
• Making or receiving deposits.
• Lending money - whether to other group companies, or external persons. This includes arrangements that have the economic effect of lending money such as Alternative Finance arrangements or creditor repos, provided that the arrangements are undertaken for the benefit of the group as a whole.
• Subscribing for or holding shares in another company, but only if this is a UK group company and a group treasury company. Thus a company which acts as the holding company for a group treasury company is likely itself to qualify as a group treasury company, provided that dividends paid up from the treasury company comprise more than 90% of its income.
• Investing in debt securities - section 316 (12) links the meaning of ‘debt security’ to the FSA handbook.
• Hedging assets, liabilities, income or expenses. This will include both acting as counterparty to intra-group derivatives, used to hedge the assets or liabilities of other group companies, and entering into hedges of assets, liabilities or transactions of the worldwide group or other members of the group (which will offset its net position as a counterparty to intra-group derivatives).

The activities listed at section 316 (9) are those that will, or may, generate income, since the tests for a group treasury company look primarily at the sources of the company’s income. Group treasury companies will normally also be undertaking activities that lead to an outflow, rather than an inflow, of funds - borrowing money externally as well as lending internally or depositing it. The existence of external liabilities does not prejudice a company’s status as a group treasury company, provided that it also undertakes at least one of the income-generating activities. For example, a company that issues securities into the market and on-lends the funds to other companies in the group, taking a small turn (and which has no other activities or income) will be a group treasury company. However, where the external liabilities are supporting its own investments, as against being a part of its group treasury function, TIOPA10/S316(5) will come into play and the resulting funding costs will be included in its financing expense amounts – see CFM92535.