M A N A G I N G G L O B A L L I Q U I D I T Y

April 28, 2015

M A N A G I N G G L O B A L L I Q U I D I T Y

MNAFP 33rd Annual Conference

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Adrian Perez, CTP, CertICM

Liquidity Solutions

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English_General

J.P. Morgan, JPMorgan, JPMorgan Chase and Chase are marketing name for certain businesses of JPMorgan Chase & Co. and its subsidiaries worldwide (collectively,

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entities irrespective of marketing name(s) used. Anything herein to the contrary, nothing in this presentation is intended to or shall be deemed to constitute a solicitation

by JPMC of any product or service the solicitation of which by the JPMC personnel providing and discussing this presentation with the Company would be unlawful under

any applicable United States, state, local or foreign law or regulation.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. JPMorgan believes the information contained in this material to

be reliable but do not warrant its accuracy or completeness. The investments and strategies discussed herein may not be suitable for all investors. This material is not

intended to provide, and should not be relied on for, accounting, legal or tax advice or investment recommendations. Please consult your own tax, legal, accounting or

investment advisor concerning such matters.

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The investments and strategies discussed herein may not be suitable for all investors. All services are subject to applicable laws and regulations and services terms. Any

proposal is subject to JPMorgan applicable internal and regulatory approvals and notifications, and therefore JPMorgan reserves the right to withdraw at any time.

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to change without notice.

© 2015 JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC.


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Overview

Global Liquidity Management Considerations

Managing Global Liquidity

Various exogenous factors, including an extended period of low interest rates and a dynamic regulatory environment, have

complicated the role of treasury teams. External pressures have prompted treasury teams to re-examine their liquidity structures

and investment policies.

Three pillars of effective liquidity management

Visibility

Control

Optimization

Basic techniques

Cash Concentration

Notional Pooling

Hybrids

Basel III impact on liquidity products/structures and new

product development

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Optimization

Optimizing liquidity requires innovative measures across various functions

Visibility

Visibility over cash positions is critical

to efficiently manage funding and

investment needs for any organization

Control

Access and control over cash flows

and balances enable ease of

deployment across the Company

Self funding and investment vehicles can then be leveraged to optimize

yields on balances depending on amount, currency, duration and location

Automated end of day investment of excess cash subject to pre-defined

parameters can keep cash fully employed

Three-step

Process for

Optimizing

Liquidity

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Centralized Regionalized

Organizational structure can influence liquidity management strategy

Regional staff, ERP/TWS and

pooling structures

Shared services for AP/AR,

investments, borrowing, FX

Reporting line into HQ

HQ managed; central FX,

investments, borrowing

In-house-bank (IHB)

Payment factory

Single ERP/TWS

Shared service centers

RTC, etc

Local staff

In-country P&L

Matrix reporting

(local and HQ)

Disparate ERP/TWS

Decentralized

What are your liquidity objectives?

Centralize cash for increased visibility and control

Enhance efficiency through fully automated processes

Reduce interest charges on bank credit

Retain balance ownership with operating companies

Prevent co-mingling of cash across legal entities

Maintain operating business with local banking partners

Improve FX management across currencies

Improve returns on excess cash

Increase ease of investing

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Improved Risk Management Reduced Credit Cost

Improved Investment Returns Increased Visibility & Control

Ensures right amount of liquidity is in the right place at the

right time

Improves performance of subsidiaries through centrally

managing borrowing/lending rates

Automated rules can ensure subsidiary funding needs are

met on just-in-time/ intraday basis

Manage sovereign risk through concentrating funds in

regional structure

Improve operational risk through automating transfer of

funds across subsidiaries

Eliminate or reduce external borrowings

Negotiate credit facility centrally with global/regional

banking partner

Fund shortfalls through cheaper sources of credit (e.g.

Commercial paper)

Reduced idle and un-invested cash

Higher yield through centrally managing cash surplus

Enhanced cash flow forecasting

Increased flexibility on investments (e.g. class,

counterparty, tenor)

Acct C

USD 0

Acct A

USD 0

Acct B

USD 0

Header

+1000

+ USD 2000

Interest on Header

Account = 1000*2% = +$20

Benefit of Sweeping = +$80

- USD 4000

+ USD 3000

Cash Concentration Illustration

Credit Interest: 2%1

Debit Interest: 4%

1 Rates are for illustrative purposes only

Physical Cash Concentration – Potential benefits

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Improved Investment Returns Increased Visibility & Efficiency

Improved Risk Management Reduced Credit Cost

Legal entities retain bank accounts and balances

No lost availability or transfer costs

Interest apportionment performed centrally and

automatically

Reduced administration of intercompany loans

Reduced counterparty credit exposure to banks and

restricting it to banks approved by treasury

Retained separation of balances by legal entity

Eliminating local borrowing facilities

Minimizes debit interest payment

Reducing the overall usage of funding facilities

Reduced idle and un-invested cash

Higher yield through centrally managing cash surplus

Enhanced cash flow forecasting

Increased flexibility on investments (e.g. class,

counterparty, tenor)

Notional Pooling Illustration

Interest applied to the Pool:

Net Pool Position = $1000

Account = 1000*2% = +$20

Benefit of Sweeping = +$80

Acct C Acct A Acct B

Acct C Acct A Acct B

+ USD 2000 - USD 4000 + USD 3000

Credit Interest: 2%1

Debit Interest: 4%

Notional movement

of funds

1 Rates are for illustrative purposes only

Notional Pooling – Potential benefits

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Understanding Physical Cash Concentration vs. Notional Pooling

Physical Cash Concentration Notional Pooling

Solutions Physically sweeps balances from multiple

accounts into a master account

Notionally aggregating all account balances for net

pool position

No physical movement of funds

Location

Within single country or cross-border

Within banking partner network or multi-bank

where available

Within single country

Within banking partner network

Currency Single currency structure Single currency structure or Multi-currency structure

Benefits

Ease of optimization for investment options

across subsidiaries

Leverage group funding to cover deficit positions

with surplus cash from other accounts

Enhance control over cash position of the group via

central pooling accounts, without creating inter-

company loans.

Retain local autonomy on the participating entities

Maintain access to underlying currencies, no FX

conversion

Consideration

Creates intercompany loans between

participating entities and header entity

Transfer pricing, tax expense business tax, etc

Participants provide guarantee/ incur joint and

several liability

Participants must be incorporated in jurisdiction

where there is positive legal opinion on

enforceability of set-off and several liability

Tax treatment unclear and may require extensive

validation

Availability Widely available except where currency

restrictions apply Restricted in many jurisdictions

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Advantages

Illustration

Overlay Structures

Description

UK

Local Bank

Account

FR

Local Bank

Account

DE

Local Bank

Account

Overlay Bank

London

In-country accounts

May provide greater visibility and control

Similar benefits to physical cash concentration

Allows your company to retain in-country, local bank relationships, while simultaneously optimizing liquidity management

May helps reduce financial costs by concentrating excess balances into a single consolidated position

Consolidates regional liquidity without interrupting local operations

Sweeping typically done through SWIFT messaging

Local, in-country operating accounts act independently and

manage day-to-day activity

Prior to close of business, funds are automatically swept to

“Overlay Bank”

Sweeps can be made to a mirror account structure or to a

single account in the name of central treasury on a per

currency basis

Overlay Bank (e.g. EUR in London)

Overlay Bank

London

Overlay Bank

London

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Local regulations must be considered when deciding on a liquidity structure

Commercial

Impact Liquidity

Implications

Foreign

Currency

Exchange

Control

Double

Treaty

Agreements Cost of

Operation

Tax

Implications

Transactions

between

resident &

non-resident

accounts

Cross-

border flow

of funds

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Impact of Current Environment on Banking Products

Stress of prolonged low interest rate environment

Need to utilize trapped cash

Regulations driving profound change in value of operating cash vis-á-vis

reserve cash or short-term investments

Continuing cost pressures and compressed margins

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Interest Income

Bank Profitability 101

Basel III has impacted interest income by requiring more capital to be held in reserve

Customer deposits Loans to customers

Reserves

Interest Expense Net Interest Margin

Balance

Sheet

Income

Statement

Assets Liabilities

A bank’s basic profitability goal is to earn more interest on its book of loans than it pays in interest on deposits

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Map US Basel III Components

Bank for International Settlements (BIS) established in 1930; goal is to help central banks with monetary and financial stability. Their

head office is in Basel, Switzerland (see map below)

Developed by the BIS’s Basel Committee on Banking Supervision (BCBS); continually reformed over time

Currently on Basel III – finalized in 2010 by BCBS, G-20 endorsed in November 2010

Intention is to raise resiliency of banks and the global financial system

Reforms are interpreted and implemented differently across various countries

In the US, the regulations are referred to as ‘US Basel III’. In some cases, the US rules and capital requirements are more restrictive

Implementation of US Basel III will continue through 2019, but key regulations have already begun to take effect

Pillar 1 – Capital

Leverage

Liquidity Coverage Ratio (LCR) – 30 days

Net Stable Funding Ratio (NSFR) – 1 year

Pillar 2 – Risk Management

Pillar 3 – Market Discipline

Basel History & Overview

History of the Basel Accords

Denmark

Austria France

Belgium

Netherlands

Luxembourg

Italy

Germany Czech

Republic

Geneva

Basel

Switzerland

Zurich

Basel I

1988

Basel II

2004

Basel II.5

2009

Basel III

2010

Liquidity

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Key Takeaways

Liquidity linked to operating services

Non-operating / Wholesale liquidity

For every $100MM in wholesale deposits:

All Institutions:

– 30 day run-off during a market event → 25%

– Required liquidity → $25MM

For every $100MM in deposits:

Corporates, Sovereigns, Central Banks

and Public Sector Entities (PSE):



Financial institution (FI) and correspondent banking

balances:



What are the key liquidity impacts of the Basel III framework?

Banks will carry significantly higher costs on non-operating balances vs. operating balances as the outflow assumptions will drive

the numerator in most cases.

There could be a disparity between how clients define operating balances and what the regulators will permit banks to

classify as operating balances.

Banks will likely channel wholesale / non-operating type funding to appropriate off–balance sheet vehicles, establish liquidity

programs and assess markets to transform the liquidity profile of the balance sheet.

Illustration of Liquidity ($MM)

25

40

100

75

60

100 100 100

WholesaleOperating

Non-OperatingNon-FI

Non-OperatingFI

Required Liquidity Deposits Available for Lending

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Liquidity Product Evolution

Global Earnings Credit Rate

Building upon the Earnings Credit Rate concept used in the

US, global banks are extending it to share excess earnings

credits across the globe to maximize the value of balances

May increase operating income and enhance operating

margin

May provide value for trapped balances

Global Liquidity Management Accounts

Banks offer different variations of accounts that essentially

reward stability of operating balances

Intraday use of funds does not impact balance value

May provide higher returns compared to short-term

investment alternatives

Aggregate global balances for higher yields without

comingling funds

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Key takeaways

Fundamental requirements for a “Best-in-class” liquidity structure remain the same

Visibility and control of global cash helps optimize balances, but the benefits of an optimal liquidity structure transcend

beyond yield

“The only thing that is constant is change”

Various regulatory changes are having a profound impact on our industry which in turn may affect your liquidity structure and

investment policy

Leveraging your strategic banking partners is key

In addition to global reach and capabilities, choosing the right banking partner will become even more important to help you

navigate through this changing regulatory environment and mitigate risk

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