JPM Roadshow Dec 2010

THE ROAD AHEAD J.P. Morgan Le Royal Hotel, Luxembourg

STRICTLY PRIVATE AND CONFIDENTIAL

December 2, 2010

English_Commercial Bank

This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered including such client‘s subsidiaries, (the ―Company‖) in order to assist the Company in evaluating, on a preliminary basis, c ertain products or services that may be provided by J.P. Morgan. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. It may not be copied, published or used, in whole or in part, for any purpose other than as expressly authorised by J.P. Morgan. The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to the Company or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. taxrelated penalties.
THE ROAD AHEAD

J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. In the United Kingdom, JPMorgan Chase Bank, N.A., London branch and J.P. Morgan Europe Limited are authorised and regulated by the Financial Services Authority JPMorgan Chase is licensed under US patent numbers 5, 910,988, and 6, 032 and 137 ©2006 JPMorgan Chase & Co. All rights reserved.

Agenda
14:00 Welcome address
Muriel Meers, Head of Financial Institutions Sales, Benelux, France, Greece & Cyprus

14:15

Regulatory and industry initiatives impacting Financial Institutions
James Barclay, Industry Issues Manager

15:00

Effective Liquidity management in today‘s market: Considerations for Liquidity buffers
Robert Bogusz, Executive Director, Treasury and Security Services Liquidity

AAA-rated Money Market Funds, a powerful tool to manage your liquidity
Julie Maquest, Vice President, Asset Management Sales Belgium & Luxembourg

16:00

Refreshment break

16:15

Recent developments in US Dollar Clearing: How to manage payment charges in the US advancements in US dollar Clearing & FX Update on MT202 Cover Payments
Peter Vernon, Executive Director, Product Specialist, Core Cash Management EMEA

17:00
THE ROAD AHEAD

Recent developments and emerging best practice in International Currency Clearing and Settlement
David Tudor, Vice President, Product Specialist, Core Cash Management EMEA

17:45

Closing remarks followed by refreshments

REGULATORY AND INDUSTRY
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL

INITIATIVES

IMPACTING

FINANCIAL James Barclay

INSTITUTIONS

Industry Issues Manager

INSTITUTIONS

Regulatory Capital
 Basel III, managing systemic risk and financing by using tax or levy on banks

United States Reform
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

European Reform

Asian Reform

 Expected to

 Likely to adopt Basel III

 No regional

incorporate Basel III.
 Dodd-Frank,

Comprehensive reform.
 Collins Amendment

requirements by revising its Capital Requirement Directive (CRD).
 The UK has already

consistency but each country expected to adopt global standards individually.
 Some countries in

imposes ‗minimum‘ capital requirements.
 Volcker rule prohibits

imposed stricter liquidity requirements on financial institutions.
 Consideration of ―living

banking entities from engaging in proprietary trading.
 Bank levy temporarily

wills‖ (recovery and resolution plans).
 Bank levies imposed or

Asia may play the moderating role in global discussions if aligned with domestic interests.

withdrawn

envisaged nationally.

Global capital and liquidity requirements

Driver
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Area of impact

Potential implications

Basel III

FIs:
 Interbank lending and wholesale

 Reduction of interbank lending

lending
 Trade financing may become less

(alternate sources of funding may be necessary)
 Higher cost of credit and reduced

profitable business
 Leverage and liquidity coverage

credit availability due to higher cost of capital
 Leverage ratio for trade and standby

rules
NBFI:
 Access to credit

letters of credit / competition for capital reserves
 Heavier burden on trade financing

Supervisory Structure

Driver
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Area of impact

Regional Regulatory environment

New compliance and reporting requirements

FIs and NBFIs:
 Enhanced prudential

US
 Financial Stability Oversight Council

standards
 Market discipline  Higher reporting burden  Limitations in trading in

(FSOC), Office of Financial Research (OFR), with the Federal Reserve EU
 European Systemic Risk Board and

risk instrument
 New levels of statutory

three new European Supervision Authorities (ESAs): ESMA, EBA , EIOPA, plus national changes
ASIA
 AMRO (ASEAN+3 Macro-Economic

authority

and Research Office)

Asian economies will pursue the ―Compliance to Global Regulatory Requirements‖ agenda and the ―Controlled Growth‖ agenda in tandem. RMB growth to be watched
Initiative
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Description
 Lessons learnt from Asian currency crisis.  Enhancing eligibility and cross border transfer of collateral  Enhancing safety as part of a BAU regulatory activity in

Enhancing Global Liquidity Emerging Market Infrastructures and Regional Initiatives

the region.
 Continuous ambition towards a regional settlement

/clearing facility carries the risk of fragmenting liquidity
 ASEAN+3 Bond Market Forum (ABMF)

Recent Policy and Regulatory Developments in the Peoples Republic of China

 June-2010, Peoples Bank of China (PBOC) signals

greater Yuan flexibility
 July-2010, Yuan settlement pilot program expanded  Hong Kong positioned to become a hub for off-shore

RMB activities

How much will it cost to stay in business?
Taxation and remuneration (no international consensus- BRIC+ opposition)
 US ‗Financial crisis responsibility fee‘ to be pushed for post reform bill (potentially
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

up from $19 billion to $90 billion, as a risk based liability fee over 10 years on all financial institutions with assets of more than $50 billion that were eligible for emergency assistance during the financial crisis)
 EU proposed tax on banks to finance national ex-ante resolution funds  UK levy on bank liabilities to raise £2.5 billion yearly  GER draft levy proposal on consolidated balance sheet minus liabilities (15%

profit cap)
 FR intended systemic risk levy and open to ex-ante resolution fund up to €1

billion
 Proposed financial activities tax (Tobin tax) – UK, GER, FR  Windfall taxes on bankers‘ bonuses

Going forward: an unprecedented level of international cooperation is necessary to achieve global regulatory reform.
In his testimony to the U.S. Senate, Federal Reserve Governor Daniel Tarullo enumerated the goals for international cooperation:
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

 Increase the stability of the financial system through adoption of strong,

common regulatory standards for large financial firms and important financial markets
 Prevent major competitive imbalances between U.S. and foreign financial

institutions – a core set of good, common standards will reduce opportunities for cross-border regulatory arbitrage
 Establish effective supervision of global financial institutions through a clear

understanding of home and host country responsibilities, and through adequate flows of information and analysis
 Exchange information and analysis to identify potential sources of financial

instability, and take action to mitigate the buildup of risks in the global financial markets

Are we out of the woods with recent EU payments legislation?
Update on 2010 regulatory issues
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Regulation for setting essential requirements for credit and debit transfers in euro through ISO20022 standards (two years for SCT end-date, three years for SDD) Teething issues for the PSD
 Charging issues ‗SHA‘ vs. ‗OUR‘/intermediary fees  Location of account/status of account holder (FIs can act as Payment Service

Users as well as through nostro/loro accounts)
 CHF transactions  Addressing deductions from principle amount

What are the new consumer protection obligations?
Update on 2010 pending legislation US Dodd-Frank permanently raises max deposit insurance to $250,000 EU DGS impact assessment proposals
 Eligible deposit protection rises to €100,000 at end 2010 (no inclusion of

Temporary High Balances–no advice obligation–Deposit account ‗capital‘ covered)
 Extended to all corporates (UK SCV only SMEs)  Fast payout to move to single digit days (UK 7 days)

EU pre-funding proposals (to cover small bank failure)
 75% ex-ante, 25% ex-post, with limit  Contribution proposals at 2% eligible deposits + risk based contributions

(estimated €150 billion pot)
 10 year transition period

Are we taking the right steps towards a harmonized EU market?
Update on potential industry changes Processing One-Leg-Out transactions
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

 SEPA Credit transfers Scheme CANNOT be used to process OLO transactions  Compliance with AML checking is an ongoing issue  Opening an Account in SEPA enables SCT payments  Significant charging differential between SCT and OLO transactions

And the future?
Update on 2010 hopes and expectations E-invoicing the way forward
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

 Cross border VAT obligations (equal treatment of paper and e-invoices)  Adoption of a cross industry e-invoice standard (UN/CEFACT CII V.2 plus ISO

version)
 Provision of interoperable services and integration of SMEs

J.P. Morgan Chase is supportive of sound reform, and well positioned to continue to offer market-leading products and services to our customers.
Supportive of sound reform
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Fortress balance sheet
 Strong capital base: 9.6% 2Q10

 Regulation was needed; however,

some will have unintended consequences  J.P. Morgan has 75+ existing work streams dedicated to implementing reform  We are committed to ensuring that regulatory reform implementation is in line with clients‘ needs Impact of Volcker rule

Tier 1 common ratio under Basel I (estimated 9% 4Q11 Tier 1 common under Basel III)  Very high level of reserves: $36.7B and loan loss reserves: 5.34%  Stable source of funding: $900B deposit base

 Does not limit the growth of our client business and our market-making activities  We can continue to sponsor client-only hedge funds (e.g., Highbridge)  We can continue to make permissible merchant banking investments in private

equity (e.g. One Equity Partners)  Remaining proprietary trading will transition to asset management

Where does that leave us?
Implications for Financial Institutions
 Increased compliance and cost of ‗doing business‘ (who takes the ‗hit‘?)
REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

 Fall in return on equity – compliance costs up 33%  Potentially ‗more attractive‘ less-regulated markets offshore

 Investments may be required in replacing legacy systems
 Post regulatory dialogue is dynamic and complex-

outcomes of many issues still in doubt

Appropriate regulatory change is needed

 Pending legislation could have unintended

consequences impacting products and pricing
 Size is no longer the issue- ability to wind down a

major player without disrupting the financial industry needs clear resolution authority
 Ongoing focus on consumer protection legislation

impacts both retail and corporate banking

REGULATORY AND INDUSTRY INITIATIVES IMPACTING FINANCIAL INSTITU TIONS

Questions

E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

Robert Bogusz Executive Director, Liquidity Solutions
STRICTLY PRIVATE AND CONFIDENTIAL

Agenda

Key regulatory changes re: liquidity
Considerations JP Morgan‘s readiness and Basel III

Regulatory changes: The industry is in this for the long-term – in the USA, there are 285 rulemaking requirements, 92 one-time studies and 44 periodic reports.
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

 Tier 1 capital to 6%  Common equity to 4.5%
Basel III

 Common equity to 7%

 Minimum leverage ratio  Liquidity coverage ratio  Net stable funding ratio

E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 Money market fund reform  Institutional framework
United States: DoddFrank

 Transaction account guarantee
 Derivatives regulation  Repeal of Regulation Q

 Volcker rule
 Collins amendment

EU

 Institutional framework

UK

 Liquidity buffers – ongoing on case by case basis

The Basel committee has agreed on new capital requirements as of Sept 13th and will continue to address further reforms to liquidity ratios.
Regulation
Basel III

Description
Agreed to changes as of Sept 13th, 2010:
 Tier 1 capital minimums from 4% to 6% of risk-weighted assets by

2015.
 Common equity minimum from 2% to 4.5% of risk-weighted assets by

2015; an additional buffer bringing the ratio to 7% will be required by 2019.
 Leverage ratio (tier 1 capital / adjusted assets) to be monitored
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

starting in 2011; minimum to be introduced in 2018. Minimum leverage ratio of 3% being tested during the parallel run period (20132017).
 Liquidity coverage ratio (liquid assets / 30 day cash outflow) to be

observed starting 2011; minimum to be introduced in 2015.
 Net stable funding ratio (available amount of stable funding / required

amount of stable funding) to be observed starting in 2012; minimum to be introduced in 2018.

Among the first countries to propose a new regulatory framework, the UK is awaiting final global rules before finalizing reforms.
Regulation
UK Changes

Description
 Banks are required to improve reporting and controls around liquidity,

and to maintain a ―buffer‖ of liquid assets. Timeline is flexible and contingent upon improvement of economic conditions.
 Stricter capital requirements have already been imposed on targeted

banks, but statutory requirements will be set in conjunction with global rules.
 A levy on bank wholesale liabilities will start at 4bps in Jan, 2011 and
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

rise to 7bps.
 A new institutional framework will have three regulatory bodies

responsible for (1) maintaining financial stability, (2) prudential regulation of systemically important firms, and (3) conduct of business for all firms, consumer protection, and supervision of smaller firms.

Implications: Reduced credit availability & increased funding costs.
Driver
Basel III

Area of impact
Banks: interbank lending and wholesale lending NBFI: access to credit

Potential implications
 Reduction of interbank lending.  Alternate sources of funding may be necessary for banks.  Higher cost of credit and reduced credit availability due to higher

cost of capital.
 Increased costs due to: – Opportunity cost as a higher percentage of assets are forced

E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

FSA Liquidity buffers

Banks and NBFI: self-funding options and internal costs

to be held in lower yielding government securities.
– Operational burden and costs of turning over the liquidity

buffer regularly.
 Reduced self-funding options due to requirement to hold a

prescribed amount of government securities as ―churn-able‖ liquid assets.

Credit and liquidity continued: more instrument choice. Money market reform will
change the profile of money market exposure.
Driver
U.S. Repeal of Reg. Q

Area of impact
Banks and NBFIs: more choice for short term cash.

Potential implications
 A new product suite will likely be created by most banks, including

interest bearing DDA‘s. Sweeps will no longer be necessary to earn interest.
 Some products will remain, such as ECR for clients who wish to

mitigate fees, and time deposits for companies who want to trade tenor and liquidity for rate.
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

U.S. Money market reform

Money market funds: Restricted pool of investment opportunities Banks: may benefit from lower funding cost of commercial paper. All Companies: changing exposure profile of money market funds.

 New limitations will put downward pressure on yields. This will put

money market funds at a disadvantage vis-à-vis bank deposits.
 Higher risk in money markets due to reduced diversification.

Some funds have begun to use non-government securities collateral for repos (which are usually backed by government bonds) in search for higher yields.
 Higher concentration of exposure in European bank paper as

investment options have become limited.
 New rules on suspension of redemptions may impact how liquid

you view money market funds.

Basel III: Liquidity Considerations
Proposal introduces two new liquidity ratios
 The Liquidity Coverage Ratio is designed to ensure that a bank has sufficient high

quality liquid resources to survive a combined idiosyncratic and market-wide shock, which would result in a three-notch downgrade of an institution‘s public credit rating, over 30 days
Liquidity Coverage Ratio: Stock of high quality liquid assets ≥100% Net cash outflows over a 30-day time period
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 The Net Stable Funding Ratio (―NSFR‖) measures the amount of longer-term, stable

sources of funding with maturities greater than or equal to one year, employed relative to the liquidity profiles of the assets funded and the potential for contingent calls of funding liquidity arising from off-balance sheet commitments and obligations

Net Stable Funding Ratio:

Amount of stable funding Required amount of stable funding

>100%

Basel III: Liquidity Considerations
Implications and considerations
 Liquidity Coverage Ratio  Definition of Liquid Assets is highly restrictive as only U.S. Treasuries and

OECD foreign government securities are considered as highly liquid assets, while Agencies and Agency MBS securities are not included
 Deposit outflow assumptions not synchronized with empirical evidence  Run-off factors linked to segment and operating based assumption
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 Competitive pricing pressure for deposit relationships deemed to have ‗long

term value‘
 Net Stable Funding Ratio  Financial and Sovereign deposit customers are not considered stable funding

components
 Agencies and Agency MBS securities (including dollar rolls) would require

100% funding greater than one year
 The availability factor for non-financial corporate maturing in < 1 year is 50%  The availability factor for other unsecured wholesales funding maturing in < 1

year is 0%

FSA Liquid Asset Buffer considerations

 If your firm does not have or only has limited access and the scale to maintain its own repo
capability or to hold large buffers of government bonds, our solution can help you to address the practical difficulties of managing the liquid asset buffer.

 Dependent on business, treasury and liquidity risk profile the following questions are important to
be considered before defining the right composition of the liquid asset buffer.

What is the ideal currency mix of the buffer?
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

EUR, USD, GBP or any other currency? What is the right mix of central bank reserves, directly held govt securities, reverse repos and qualifying MMFs? What should be the allocation to overnight vs. term positions? UK, US, EU member states or any supranational body?

What type of instruments should make up the buffer? What should be the maturity profile of the buffer? Which government‘s debt the buffer should use?

Where the buffer securities should be safekept?

Assets must be held in an account with one or more custodians. What level of diversification is required?

What can J.P. Morgan do to help?
J.P. Morgan offers a comprehensive end-to-end investment and reporting service enabling ILAS firms regulated by the FSA‘s Prudential Sourcebook to complement the composition of their liquid asset buffer by investing in qualifying money market funds or adding a portfolio of reverse repurchase offers backed by highquality government debt or the combination of both. The benefits of the solution include: GLOBAL TRADING ACCESS  An expert global multi-currency trading desk with extensive counterparty relationships .  Ready access to eligible securities in the three major currencies via reverse repurchase offers.
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 Active counterparty risk and collateral quality risk monitoring.
 Automated periodic turnover of your liquidity buffer as required by the FSA.  Dedicated trade confirmation, reconciliation, settlement and reporting services. SYSTEM SCALE & FLEXIBILITY  Accurate daily account sweeping for maximum balance investment using positioned as well as settled funds.  Customer-defined, system-controlled investment guidelines controlling maximum tenors, weighted average maturities, collateral quality, counterparties and ratings.

 For ―simplified‖ firms, the option of automated daily sweep access to USD Treasury, GBP Gilt and EUR Government funds from J.P. Morgan Asset Management.

Example: automated, Multi-Product Liquid Asset Buffer Structure
Daily Money Market Fund Subscriptions/Redemptions Client-Defined Investment Guidelines and Parameters
Fund 1

FSA Individual Liquidity Guidance (ILG)
Client Cash Operating or Collection Accounts
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

QUALIFYING MONEY MARKET FUNDS*

Fund 2 Fund 3 etc…

J.P. Morgan Chase Bank NA, London Branch

CREDIT RESEARCH TEAM

EUR Cash Account USD Cash Account GBP Cash Account

INVESTMENT ENGINE

TRADING DESKS & OPERATIONS TEAMS

Automated, daily 2-way sweep

Account Level Balance & Investment Records

DIRECT SECURITIES Counterparty 1 REVERSE REPOS Counterparty 2 Counterparty 3 etc…

FSA Liquidity Reporting (e.g. FSA 050)

Daily J.P. Morgan ACCESS & SWIFT Reporting

Daily Reverse Repo Investments

Cash Trade Execution Platform
Product Description
 Unique tailor-made investment solution that accommodates clients exact liquidity objectives and investment criteria with regard to eligible instruments, counterparties, cash or percentage concentration limits, liquidity, ratings, country exposure and investment tenors.  J.P. Morgan acts as agent on behalf of the client for the placing or purchase of third party Reverse Repurchase Agreements or direct investments.  Focus on principal protection, short term liquidity and competitive market returns, while considerably reducing counterparty risk and improving diversification.
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 Flexible tenor of underlying investments can accommodate objectives to withdraw money whether a portion is needed tactically or strategically.  Standard operating model includes 40+ financial institutions with minimum short-term Moody's/ Standard & Poor rating of A1/P1, J.P. Morgan Asset Management credit team monitors ratings and views of counterparties on a daily basis.  Clients can choose to limit exposure to certain, or to exclude entirely, counterparties, countries or instruments in order to structure their investments in line with regulatory requirements.  Managed through J.P. Morgan Securities Lending Platform which manages $300+ billion in assets.  Access to a wide range of qualifying money market funds.

Liquidity Buffer Considerations
Focus on a viable business & funding model: numerous on and off balance sheet exposures and positions ASSET SIDE  Ensure securities are BoE / ECB eligible and repo market eligible.  Eliminate delinquencies / Non Performing Loans.  Eliminate structured and non-strategic assets.  Increase pricing on lending products + committed credit lines. Watch ―shadow banking‖.

LIABILITY SIDE
E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

 Reduce S/T funding ; establish ECP / EMTN issuance programmes.  Increase L/T funding : issue unsecured senior debt, private placements, securitize.  Increase retail / HNWI deposits ; eliminate inter-bank transactions

 Minimize / review dependence on intra-group funding.
GENERAL     Harmonize with sister companies operating in other major jurisdictions. Review ISDAs / CSAs – all collateral arrangements. Use CLS and review all cross-currency swaps as sources of funding. Shift from OTC to more standardized derivatives + connect to a CCP.

Implications of Basel III liquidity proposal – Liquidity Coverage Ration
Preliminary view of J.P. Morgan Liquidity Coverage Ratio (LCR) – Estimate based on 2Q10 balances for illustrative purposes ($B)
Items included in LCR
 $72B: Cash & Central Bank reserves

Comments
Example of items not included in LCR

100% factor
 $83B: US Treasuries / Sovereigns

 Munis  Corp. securities below AA-

Liquid Asset Buffer

100% factor

186

53%

 $22B: Agency / Agency MBS

85% factor
 $7B: Public fund deposits collateral

 Sovereign guaranteed loans (i.e., EXIM)

25% factor
 $2B: Eligible Corp. Securities ( ≥AA- )  Fed Discount Window Eligible loans (~$80B)

85% factor
Historic experience during the financial crisis¹


$225B: Deposits (25% average factor)


$124B: Non-Operational Deposits 75-100% factor $101B: Wholesale Operational & Retail/SME Deposits – 5-25% factor

J.P. Morgan experienced net deposit inflows
 We understand banks under stress

Net Funding Outflow < 30 days

 

349

$100B: Unfunded commitments 48% average factor
 

$89B: Liquidity Commitments & FI Credit Commitments – 100% factor $11B: Wholesale Credit (ex FI) & Retail Commitment outflow – 5-10% factor

would have outflows / draw-downs; it is prudent to be prepared J.P. Morgan experienced 6-8% drawdown on unfunded balances

 

$31B: Secured funding outflow (Repo) 10% factor ($7B): Other funding Inflows/Outflows² 0-100% factor

¹ Financial crisis occurred between late 2007 and mid 2009 ² Includes impact of account payable/receivable, trading assets derivatives payable/receivable, and other contractual payments <30 days Note: Preliminary view (as of 9/7/10) of J.P. Morgan LCR ratio based on interpretation of current rules/ initial estimates of 2Q10 asset buffer and net funding outflow. Subject to change as interpretation of Basel III liquidity rules is ongoing and dependant on guidance from Basel/International regulators Numbers rounded for presentation purposes. Ratios and other calculations may not round perfectly

Potential levers to meet proposed Basel III LCR requirements
Known actions
 Reduction in size of IB (~$8B) & CIO portfolios (~$2B) – estimated

Business evolution

notional impact by end of 2011
 RFS loan run-off (~$80B) & reduction in size of PE (~$2B) – estimated

notional impact by end of 2013

Business evolution

 Raise Unsecured Term Debt (e.g., term CP, CDs, and 1+ year notes)  Term-out existing Short-Term debt  Raise Secured Term Debt (e.g., FHLB, Auto and Card ABS)  Reduce ―illiquid‖ assets so that proceeds can count towards the buffer  Consider profitability impact  Raise additional Retail deposits  Consider profitability impact

Business evolution

 Reduce Committed Credit and Liquidity Facilities - probably done

through pricing
 Consider client impact  Reduce wholesale deposits – probably done through pricing  Convert Financial Institution deposits to Term

E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

Questions

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY Julie Maquest Vice President, Asset Management Sales Belgium & Luxembourg
STRICTLY PRIVATE AND CONFIDENTIAL

What is a money market fund¹
Money market fund objectives
 Preservation of principal – maintain $1.00

Typical Investments

 Government Bills
 Time Deposits (TD)  Certificates of Deposit (CD)  Commercial Paper

share value (NAV)
 Provide daily liquidity  Maximize investment yield

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

Additional features and benefits of a money market fund
 AAA rated by Moody‘s, S&P or Fitch  Substantial diversification  Yield competitive with direct investments

 Repurchase Agreements  Asset Backed Securities

 Convenient purchase and redemption cut-

off times for same-day transactions
 Regulatory/Rating Agency oversight (Rule

2a-7, IMMFA)
1 An investment in a money market fund is not insured by the FDIC or any other government agency. Although money market funds strive to preserve the value of the investment at $1.00 per share, it is possible to lose money by investing in a money market fund

History of the Money Market Fund Trillion USD
5,000

 Money market funds were first launched in the US

to enable investors to achieve better returns on savings
4,000

Sep 2008 A US MMF ―breaks the buck‖ – only second fund to do so in 40 years Jan 2007 Basel II comes into effect in Europe Feb 2003 IMMFA Code of Conduct introduced Spring 2009 SEC announces intention to enhance the regulatory regime for US MMF‘s Jan 2010 SEC has adopted new rules for MMF‘s to increase investor protection, improve fund operations and enhance disclosures

 European demand has grown as financial

regulators accept money market funds as an alternative to bank deposits
J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

3,000

 Strong demand for money market funds is now

coming from Asia and South America
2,000
1970 First money market fund launched in the US 1983 Rule 2a-7 introduced in US to regulate MMF‘s Late 1980s First MMF‘s introduced in Europe

2002 MMF‘s in Europe can be classified as UCITS funds 1999 Single currency introduced in the EU

Nov 2007 Europe's MIFID directive allows client monies to be held in MMF‘s

1,000

1970

1980

1990

2000

2010

0

Oct-73

Oct-78

Oct-83

Oct-88

Oct-93

Oct-98

Oct-03

Jan-70

Jan-75

Jan-80

Jan-85

Jan-90

Jan-95

Jan-00

Jan-05

Oct-08

Source: i-MoneyNet

Jan-10

Apr-71

Apr-76

Apr-81

Apr-86

Apr-91

Apr-96

Apr-01

Apr-06

Jul-72

Jul-77

Jul-82

Jul-87

Jul-92

Jul-97

Jul-02

Jul-07

Users of Money Market Funds

Broker/Dealers Custodians & Clearers
J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

Corporate

Exchanges/ Clearing Houses

IFA’s

Liquidity Funds

Pension Funds

Supra Nationals

Asset managers Charities Sovereign Wealth Funds

Central Banks Private Banking Insurance Companies

Regulatory guidelines for J.P. Morgan money market funds
Guideline Max WAM¹ Max maturity Rule 2a-7  WAM 60 days / WAL 120 days  Fixed 397 days  Max tier-2 maturity – 45 days  FRN / VRN: Non US Govt – 397 days UCITS  60 days  Fixed 397 days IMMFA  WAM 60 days / WAL 120 days  Non Govt 397 days  Govt 2 years

Min credit rating

 Tier-1: AMB-1, R-1, F-1, P-1/MIG 1, A-  Investment grade  Moody‘s Baa or higher 1/SP-1  S&P BBB or higher  Tier-2: AMO-1, R-2, F2, P-2/MIG 2, A-2/SP-2  Tier-2: Max 3%  Issuer Concentration Tier-1: Max 5% Tier-2: Max 3% / Max 0.5% any single issuer  Diversification per issuer  Max 10%  Rule 5/10/40: Positions between 5% and 10% must not in aggregate exceed 40%

Maintain one of the following ratings:  Fitch AAAmmf  S&P AAAm  Moody‘s Aaa/MR+  Comply with the diversification requirements imposed by the rating agencies  Funds registered as UCITS must operate within the diversification requirements set out in UTCITS legislation (Directive 85/611/EEC)

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

Diversification/ concentration

Repo (lend cash)  Percentage limit: Max 25% per ctpy  Credit quality – fully collateralized that consists of cash items or Govt Illiquid securities²  Percentage limit: Max 5%

 Percentage Limit  Deposits – Max 20% per ctpy  Repo – Max 25% per ctpy  Percentage limit: Max 10%  Percentage limit: Max 10%

Portfolio liquidity  Min 10% daily2 / Min 30% weekly3  Tax-Free MMF exempted from daily liq
1 2

 Min 5% daily  Min 20% within 5 business days

WAM = Weighted Average Maturity. 1 Illiquid securities include Repos and Depos >7 days Assets must be in cash, U.S. Treasury securities, or securities that convert into cash within one day. 3Assets must be in cash, U.S. Treasury Securities, certain other government securities with remaining maturity of 60 days or less, or securities that convert into cash within five business days

A month that changed the world
 Fannie Mae
 Lehman  The Fed in

and Freddie Mac taken over by US Government

Brothers files for protection under Chapter 11 of the U.S. Bankruptcy Code after losing 94 percent of its market value this year Sep 15

conjunction with other central banks quadruples the amount of dollars its counterparts can auction around the world to $247bn Sep 18

 Goldman

 JPMorgan

 Three

Sachs, Morgan Stanley bring down curtain on era as they are transformed into commercial banks
Sep 22

acquires Washington Mutual from the Fed after WaMu is taken over by the FDIC

European countries rush to save Dexia bank
 Irish move to

guarantee their banking system

Sep 7

Sep 26

Sep 30

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

Sep 14
 Merrill Lynch

Sep 17
 Reserve Fund

Sep 19
 U.S. Treasury

Sep 25
 Hedge funds

Sep 29
 $700bn

agrees to be sold to Bank of America in an all stock deal for $29 a share

breaks the buck
 Lloyds TSB

Group agrees to acquire HBOS
 US Government

to insure Money- Market Fund holdings

move $100bn into money market funds

Financial rescue Plan is not approved by House of representatives in US
 B&B is

seizes control of AIG
 Putnam

nationalised
 Fortis rescued

Investments LLC closes its institutional Prime Money Market Fund
 Goldman falls

under a state sponsored plan
 US stocks

suffer the worst one day fall since 1987
 Glitnir & Hypo

26% and Morgan Stanley plunges 44% on NYSE

Real Estate are rescued

A crisis of two halves
Date range: June 29, 2007 to October 01, 2010

Act 1

Act 2

$170 Bn

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

$646 bn

$83bn
$473bn

Source: Offshore Money Fund Analyzer (iMoneyNet), October 01, 2010. Please note: Assets are in USD with historical FX rates. NOT FOR SALE IN THE U.S. OR TO U.S. PERSONS

The changes made during Act 1...
Sales and distribution Portfolio management and credit analysis

 Increased transparency, new reporting
 Built stronger relationships with clients,

 Reduce WAM and WAFM
 Reduced exposure to certain ABCP issues

proactive calling efforts
 Sales teams underwent training to answer

J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

very technical questions about our portfolios, holdings, credit process, risk management process, etc
 Launched Liquidity Insights programme to

but continued to buy the names and programmes that we were comfortable with
 Increased overnight liquidity bucket from

5-10% to 20%+
 Reduced tenors and exposure on certain

share our knowledge and insight with clients via conference calls, white papers, webinars, client round tables, etc
 Launched new government only liquidity

names
 Removed certain securities and

counterparties from our approved list
 For the first time we experienced liquidity

funds including: Euro Government, USD Government and Sterling Gilt to complement our existing USD Treasury Liquidity Fund

risk first hand when certain securities such as SIV‘s could not be sold in the secondary market

...prepared us well for Act 2
Sales and distribution Portfolio management and credit analysis

 We were extremely proactive in dealing

 Increased overnight liquidity buckets to

with headline risk and publicly declared our lack of exposure to certain names such as Lehman, AIG, WAMU
 We answered numerous client questions

between 20–60%
 Happened naturally, as securities

matured we reinvested in overnight securities
 We were not ‗forced sellers‘  Further reduced approved list to remove

beyond exposure to headline names and into the realm of
J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

 What happens if JPM fails?  How are the assets of JPM ring fenced

from other creditors/clients?
 Sales teams worked closely with legal

exposure to Irish banks, broker dealers, and certain EU countries such as Greece, Portugal, Ireland and Slovenia
 Continued to reduce tenor and increase

and compliance to provide accurate information to clients
 USD assets migrated from USD Liquidity

credit quality. A1+/P1 increased from 50% to more than 80% of the portfolios
 We will only buy the highest tiered credit

to USD Treasury
 The Euro Gov‘t fund grew from €3bn at

the start of Sept to a new high of €14bn in Q1 2009

out to 4 months. Any duration from 3-12 months comes in the form of government issued or guaranteed paper

Recap: Why invest in liquidity or money market funds?
 Funds represent J.P. Morgan‘s best investment ideas  Security – liquidity – yield – service  Funds provide daily liquidity  Participants receive quality service and attention from a dedicated team of professionals  High credit quality (AAA-rated) and increased diversification  A larger portfolio is created by pooling assets of many investors  A larger number of securities in the portfolio can reduce security-specific risk
J.P. MORGAN ASSET MANAGEMENT – GLOBAL LIQUIDITY

 Access to professional investment management  Credit analysts  Portfolio managers  Traders  Macro/micro economists and strategists  Cost savings – outsourcing  Funds offer a more simplified accounting procedure  Custodial costs are included in the fund‘s expense ratio  The size of the funds enables them to achieve more efficient trade execution, thus reducing

transactions costs
 Fast implementation / low set-up cost

E F F E C T I V E L I Q U I D I T Y M A N A G E M E N T I N T O D A Y’S M A R K E T : CONSIDERATIONS FOR LIQUIDITY BUFFERS

Questions

REFRESHMENT BREAK

THE ROAD AHEAD

RECENT DEVELOPMENTS IN US DOLLAR CLEARING Peter Vernon Executive Director, Product Specialist, Core Cash Management EMEA
STRICTLY PRIVATE AND CONFIDENTIAL

An industry in transition: New realities for global payments
Multiple market forces are driving change in the payments industry…
 Basel III, including need to invest in mandatory ongoing

Regulation

regulatory and compliance requirements.
 Selective Nationalisation.

Technology
 Some reduction in barriers to entry in UK banking.

Liquidity

 Sufficiency of capital to invest in clearing and

settlement mechanisms.
 Liquidity management.  Capabilities gap between large Global Clearers, and

Competition
RECENT DEVELOPMENTS IN USD CLEARING

smaller competitors, is widening significantly.
Clients
 Clients require holistic solutions.

Risk management / AML

 Costs increasing; revenue growth slowing; margins

thinning.

Focus is on Resiliency, Liquidity, Financial Stability, Capital Adequacy

Treasury Services – serving Clients around the globe

High Value Clearing
 Over 40 major and

Trade Solutions
 3 regional hubs  23 locations globally

minor currencies including US$, €, ¥, £, SGD HKD, AUD,INR, RMB, RUB and MXN
 Over 4.500

including 5 in China growing to 7
 Local Trade experts

correspondent banking relationships

deployed in local markets

Low Value Clearing
RECENT DEVELOPMENTS IN USD CLEARING

Liquidity Solutions Foreign Exchange Commercial Cards
 95 countries and 28  Over 135 currencies  Pooling, sweeping,

 Access to over 44

local clearing systems for non urgent or mass payments
 Fully compliant

and concentration
 Overnight and short

currencies

–nearly every currency that supports trade

term Investments
 Risk management

SEPA solutions

solutions

Global technology, operating and service platform … providing consistency and resiliency Global footprint providing reach, local expertise and service for you and your clients

J.P. Morgan‘s Global Solutions

Treasury Solutions

Solution Summary
Payments and receipts in over 40 currencies through in-country or multicurrency accounts across every region

Value Add
 Industry leading book transfer and STP rates  Intelligent routing and advanced auto repair

functionality
 Payment Prioritisation Options for urgent / priority

Urgent, High Value Payments & Receipts

payments
 Multiple – and flexible – charging options  Includes complex currencies like RUB, INR, RMB

and others

Non-urgent, Low Value Payments & Receipts

Domestic or cross border bulk electronic, paper or recurring payments including payroll, tax and normal accounts payable processing

 Access to over 44 local clearing systems around the globe  Fully SEPA compliant Euro solution  Single electronic interface for all payments  Cheque printing and collections for bulk payments

Foreign Exchange
RECENT DEVELOPMENTS IN USD CLEARING

 AutoConvert option converts into the Facilitate cross-currency beneficiary’s local currency prior to payment  AutoFx moves funds into/out of your existing electronic payments and receipts accounts in over 135 currencies with  Multiple channels to access service depending solutions tailored to client’s needs time and rate sensitivity Investment solutions designed for the needs of our clients’ short term cash End-to-end trade solutions including concentration, reissuance, traditional trade financing, SBLCs and supply chain financing Global program covers 95 countries and 28 currencies designed for expense management  Wide array of investment options and currencies  Sophisticated array of escrow arrangements for the specific control clients need  Full service or modular approach to solutions  Extensive network globally – 23 offices with 5 branches in China growing to 9  Local expertise drives speed of processing  Corporate Travel Card and Purchasing Card  Innovative expense control and tracking tools  Dedicated 24x7 support team

Liquidity Solutions & Escrow

Trade Finance

Commercial Cards

Why J.P. Morgan?
USD Clearing Leadership
 No. 1 USD clearer processing 365,000

A customized solution
 Financial strength and unparalleled scale fuels

transactions daily for over $3.1trillion.
 No. 1 combined CHIPS and Fedwire share of

>20%
 97% straight-through processing rate assisted by

continuous investment in our payments platform, and ensures that we deliver the products and services you require to increase efficiency, reduce expense, and enhance your own competitive position.
 Internal book transfer rate of more than 46%

advanced artificial intelligence repair capabilities
 >4000 correspondent bank relationships  State-of-the-art technology, highly efficient

improves payment timeliness, enhances payment certainty, and expedites inquiry resolution.
 Extended processing hours (22 hours x 6 days per

operating systems, robust disaster recovery capabilities that are regularly tested and proven
RECENT DEVELOPMENTS IN USD CLEARING

week) enable you to complete more same-day global payments within your business day.
 Best-in-class, 24 x 7 support through global client

 Thought leadership though active participation in

industry groups: CHIPS, Fed, IFSA, SWIFT, CLS, EBA, NACHA, ECCO.
 Best Cash Management Specialist, Financial

Institutions, for the fourth year–The Asset, 2005/9.
 One of the World‘s Top 50 Safest Banks,

service representatives and dedicated operational service centres ensure that J.P. Morgan resources who understand your business are available when you need them helping you to improve service to your client base.
 Resilient processing platforms provide payment

Global Finance, 2009.
 Top tier debit cap. and industry liquidity positions

certainty in all circumstances.

speed payment settlement and reduce your risk.

US dollar clearing systems

US dollar payment systems are the means by which payments are processed and settled among banks. The major methods for single, wire, financial and commercial transactions are
 Fedwire  CHIPS (Clearing House Interbank Payment System)  Book Transfers

RECENT DEVELOPMENTS IN USD CLEARING

Fedwire
What
 Fedwire is a public sector payment network operated by the US Federal Reserve

(FRB) and consists of 12 Federal Reserve Banks located across the US.
 Currently there are about 9,000 participating banks (predominantly indigenous US)

and each participant is identified by a 9 digit code (ABA).
 Primarily serves the needs of the US domestic payments, but also international for

high-value and/or contract-driven transactions.
 It is a real-time gross settlement system – immediate, final and irrevocable with

approx. +/- 550,000 transactions daily.
RECENT DEVELOPMENTS IN USD CLEARING

How
 The FRB creates liquidity in the system by establishing a de facto line of credit (known

as a ―debit cap.‖) for each participant which issue payments instructions against their Daylight Overdraft (―DoD‖) at the FRB within this limit.
 The Fed charges for intra-day liquidity (the DoD) at the annual rate of 1.5bp per hour

against the average DoD amount, and then credits the recipient bank‘s account.
 A $1bn payment resulting in a one hour overdraft cost the sender $416.67 in DoD.

Liquidity Savings Mechanisms (LSMs)
Measures being considered or already introduced to free up intra-day liquidity are called Liquidity Savings Mechanisms (LSMs).

Background
 The Federal Reserve Bank first engaged the market in mid-2006 regarding intra-day

liquidity management and its concern about:
 Late day concentration of value in Fedwire settlements, resulting in potential bottle-

necks.
 Need to free up liquidity to support settlements earlier in the day  LSMs have been pursued for:
RECENT DEVELOPMENTS IN USD CLEARING

 CHIPS: pro-active use of supplemental funding to settle pending/ unresolved items

(held by algorithm).
 Depository Trust Company: ease return of excess pre-funding amounts back to

participants prior to DTC close.
 Fedwire: introduction of collateral to support Fed debit cap.

Introduction of Collateral to support Fed Intra-day Overdraft Change in FRB Payment System Risk (PSR) Policy
 In December 2008 the Fed announced the pending introduction of collateral to

support intra-day Fed Debit Cap and secure related Fed daylight overdraft (DOD). The new Payment Systems Risk policy will go into effect in 1Q2011.

Key Changes
 Eligible collateral pledged at the Fed discount window will automatically be available

to support Fed DOD exposure. The pledging/use of collateral will remain ‗voluntary‘ but the participant bears a penalty rate if they do not pledge collateral.
 Cost associated with Fed DOD which is collateralized is reduced to zero; the cost
RECENT DEVELOPMENTS IN USD CLEARING

associated with Fed DOD which exceeds available collateral is increased from 1.5bp to 2.1bp per hour, calculated on an annualized basis.

Key Benefits
 Reduces the amount of unsecured intra-day credit risk which the Fed is taking on

clearing members.
 Helps alleviate the expense impact of Fed DOD charges on clearing participants and

encourage freer and earlier disbursement of large Fedwire payments.

CHIPS (Clearing House Interbank Payment System)What
 CHIPS is a private sector payment network, operated by the New York Clearing

House. It services the domestic as well as the cross-border payment needs of 54 US and overseas participant banks, accounting for an estimated 95 percent of all international inter-bank dollar transfers.
 It is a continuous real time net settlement system, which uses an algorithm for

bilateral and multi-lateral netting which, with minimal pre-funding, continually offsets and settles payments throughout the day. Payments (+/- 650,000 transactions daily) are matched, netted, and settled, usually in a matter of seconds. How
 Opening position requirement is the participant‘s mandatory pre-funding amount at
RECENT DEVELOPMENTS IN USD CLEARING

their account at the FRB.
 Current position reflects changes as payments are received and released intra-day.

The minimum current position allowed is zero while the maximum can be twice the opening position.
 If the release of an individual payment message would cause the sending participant‘s

current position to fall below zero, or cause the receiving participant to exceed its maximum, the balanced release algorithm will search for payment messages from the receiving participant to the sending participant. These will be bundled in a batch and netted against the first participant's payment message.

Combined Volume CHIPS & FED: Full Years 2009 + 2008
2009 Volume All Banks 1 2 3 4 5 6 7 8 9
RECENT DEVELOPMENTS IN USD CLEARING

2008 Volume 315,640,963 65,686,769 40,617,588 34,835,670 33,947,585 26,422,563 21,892,075 21,100,549 13,949,777 9,771,848 5,727,441 5,724,821 4,271,300 3,983,100 6,245,404 2,834,241 1,346,950 17,283,281

Total Market Share '09

Total Market Share '08

299,653,629 62,011,444 39,042,522 35,407,888 31,549,718 24,278,856 21,892,351 19,762,123 14,655,150 12,297,451 4,916,276 4,870,214 4,084,139 3,445,277 2,410,430 2,831,215 1,281,674 14,916,901

JPM Chase¹ CITI Bank Bank of America Bank of NY Mellon Wachovia HSBC Deutsche Bank Wells Fargo Standard Chartered UBS ABN Barclays Bank of China American Express BOTM M & T Bank All Others

20.69% 13.03% 11.82% 10.53% 8.10% 7.31% 6.59% 4.89% 4.10% 1.64% 1.63% 1.36% 1.15% 0.80% 0.94% 0.43% 4.98%

20.81% 12.87% 11.04% 10.76% 8.37% 6.94% 6.68% 4.42% 3.10% 1.81% 1.81% 1.35% 1.26% 1.98% 0.90% 0.43% 5.48%

10 11 12 13 14 15 16

1 Equates to only 56% of our total payment volume. Book transfer rate is 44%

Book transfers
 Book transfers are payments made between parties that maintain accounts

at the same bank.
 Book transfers are faster, less costly and subject to fewer errors than any

other kind of funds transfer because there is no external payment systems required.
 J.P. Morgan probably has the largest correspondent networks in the world,

very often both parties to a transaction maintain J.P. Morgan accounts.
 Later payment cut-off time.
RECENT DEVELOPMENTS IN USD CLEARING

 Clearing house administrative cost is eliminated.  No usage of our Fed Daylight Overdraft Line.  J.P. Morgan book transfer approximately 44% of our payment volume.

Speed payment settlement – extended operating hours
 J.P. Morgan actively participates in the extended CHIPS and Fedwire

operating hours.
 Payment/receipt processing operates 22 hrs/day, 6 days/week.
 Clearing investigations available 24/7.

CHIPS closes

Fedwire 3rd party closes

Fedwire settlement

Value date – 1
RECENT DEVELOPMENTS IN USD CLEARING

Value date

9:00 p.m.

12:00 a.m.

4:30 p.m. 5:00 p.m. 5:30 p.m. 6:00 p.m. 6:30 p.m.

Start of transaction processing

Guideline for CHIPS payments

Guideline for Fedwire payments

Guideline for Book transfers

USD payment industry fee practice
Remitter $1,000
Traditional OUR

Remitting Bank
OUR $1,000

Correspondent
BEN/SHA $1,000

Beneficiary Bank

Beneficiary

$990

Beneficiary Deduct

BEN/SHA $1,000

BEN/SHA $980

$970

RECENT DEVELOPMENTS IN USD CLEARING

Full No Deduct

OUR $1,000

OUR $1,000

$1,000

BEN/OUR

BEN/SHA $1,000

OUR $980

$980 Assumptions Debit bene-d $20 Credit bene-d $10

USD Payment Clearing Solutions from J.P. Morgan – best practices
Beneficiary deduction services
Debit beneficiary deduction Remitting Bank
 Instructs

J.P. Morgan
 Processes

Bene Bank
 Receives

Beneficiary
 Credited

J.P. Morgan to effect payment with charges for the beneficiary

payment deducting charges from principal

payment less deduction via book transfer, CHIPS or FED

with payment less any deduction

Customised applications for payments
RECENT DEVELOPMENTS IN USD CLEARING

 Message type: apply deductions to MT103 and/or MT202 transactions. Differentiated fee

schedules can be established for each message type.
 Codeword: apply deductions when our systems identify the presence of simple code

words payment messages. For MT103 transactions, include BEN or SHA in field 71A. For MT202 transactions, include/Deduct/in field 72.
 Transaction reference: apply deductions when our systems identify the presence of

unlimited pre-established reference patterns in payment messages. Clients can establish a customised fee schedule to their most sensitive clients and/or for unique transactions (e.g., trade payments), or suppress fees altogether (e.g., for inter-company payments).

Principal preservation services
Full No deduct Remitting Bank
 Sends payment

J.P. Morgan
 Processes

Bene Bank
 Receives payment

Beneficiary
 Credited

instruction to J.P. Morgan with/FND/ in field 72

payment instruction sending full principal to beneficiary bank via book transfer, CHIPS or Fedwire
 Processes claims

instruction with /OUR/ in field 71A and should credit beneficiary with full principal
 Reimbursement

with full principal

from bene bank

claim to J.P. Morgan

Full No deduct benefits
RECENT DEVELOPMENTS IN USD CLEARING

 Enhanced operational efficiency  Full no deduct enables clients to use same-day advising for their most sensitive

payments.
 J.P. Morgan can pass beneficiary bank claims back to clients, or absorb fees, in

exchange for an up-front fee, eliminating the claim reconcilement process.
 Improved customer service  Clients will know up-front that the beneficiary will receive payment proceeds in full.  Reduced operational expense with transaction fees managed up-front

Cover Payments vs Serial Payments
Cover payment method of transfer
Remitter Beneficiary

Pre-advising method of transfer
Remitter Beneficiary

Instruction MT103 Payment Instruction

Credit

Instruction

Credit

RECENT DEVELOPMENTS IN USD CLEARING

Remitting Bank

Beneficiary Bank

Remitting Bank

Beneficiary Bank

MT202 Cover Payment

MT910 Book Transfer or CHIPS/Fed payment New York Correspondent

MT103 Payment Instruction

MT103 Pre-Advice

MT910 Book Transfer or CHIPS/Fed payment New York Correspondent

J.P. Morgan: USD Autoconvert
Before Autoconvert
USD

With Autoconvert
USD

Remitting Bank

Remitting Bank

 Convert USD to

local currency
 MT103 to

 Convert USD to local

beneficiary bank (via J.P. Morgan branch or network provider)

currency
 Credit beneficiary
RECENT DEVELOPMENTS IN USD CLEARING

Beneficiary Bank

Beneficiary Bank

SGD

Beneficiary

SGD

Beneficiary

 Conversion takes place earlier in the payment chain.  Rapid conversion into local currency. Patterns can determine when to convert.  Generates revenue for remitting bank customer.

US Dollar Clearing Solutions improving operational efficiency and reducing risk
How can I better manage the risk of my treasury and high-value commercial payments?
Same- day amendment and cancellation via SWIFT
 Prior to 08.00 EST on value date, you can send MT192/292 cancellation instructions

and MT195/MT295 amendment instructions to special BIC CHASUS33SDI, formatted according to SWIFT standards. These will be processed without operator intervention.
 Reduces your exposure to counterparty risk.

Priority payments
 Enables you to include either the codeword /PRIORITY/ in field 70 or 72 or one of an

unlimited number of pre-agreed patterns in one of the ten fields that J.P. Morgan scans for patterns to identify your urgent payments.
RECENT DEVELOPMENTS IN USD CLEARING

Timed payments
 If you have a requirement to send payments that must be with the ultimate beneficiary

by a specific time, this process enables certain payments to be released by deadline specified by the sending bank.
 Primarily aimed to serve large value inter-bank and/or government payments or to

settle ―short‖ positions in Exchanges.
 Facilitated by codeword in Field 70 or 72: /TIMED/hhmm (where hhmm is New

York/US Eastern time).
 Payment released 30 minutes prior to the timed request.  Complement to /PRIORITY/ capability.

US Dollar Clearing Solutions streamlining reconciliation and inquiry
How can I get timely information about my account balances and transactions? Real-time debit & credit advising (covers SWIFT and J.P. MorganAccess delivery methods)
 MT103, MT202 and MT910 advices can be sent via SWIFT upon completion of

credit to account.
 The service can be customized to generate advices only upon location of

specific reference or text information and is available at the SWIFT branch level.

SWIFT statements
 Intraday balance and transaction information is available hourly via MT942 and
RECENT DEVELOPMENTS IN USD CLEARING

end-of-day balance and transaction information is available via MT940 and MT950.
 Statements are formatted according to SWIFT standards and contain all

standard transaction details and reference information.
 Reports indicate whether items were processed ―straight-through‖ or required

repair.
 End-of-day MT950s are the earliest available in the market to ensure that our

clients receive their account information as soon as possible in their business day.
 Multiple statements can be transmitted to multiple SWIFT addresses.

US Dollar Clearing Solutions: Improving operational efficiency and reducing Risk with automated repair capabilities
How can I increase my STP rates? Over 97% of the transactions received by J.P. Morgan are processed straight-through our systems
 Patented artificial intelligence repair capabilities automatically repair recurring

payments without operator intervention
 AIRS (Artificial Intelligence Repair Service) creates and stores repair patterns

following operator repair of any of the significant fields of a payment, allowing future receipt of the same payment instruction with the same formatting error to be processed straight through: 30,000 patterns on file / 10,000 items automatically repaired each day
RECENT DEVELOPMENTS IN USD CLEARING

 NARM (Name Auto Repair Maintenance) creates and stores repair patterns

following operator repair of any of the credit or reference fields of a payment, allowing future instructions with the same formatting error to be processed straight through
 EASE (Enhanced Acronym Search and Execution) automatically converts

bank name and city to the appropriate CHIPS and Fed identifiers allowing payment instructions without these identifiers to be processed STP
 Intermediary Bank Selection automatically selects a correspondent bank for

commercial payments less than $5,000,000 where the beneficiary bank can not be paid directly by J.P. Morgan and no intermediary bank is specified

Conclusion

In these challenging times, banks need a Global Payment Clearing Provider which offers:
 Resiliency  Liquidity  Financial Stability  Capital Adequacy

RECENT DEVELOPMENTS IN USD CLEARING

: RECENT DEVELOPMENTS IN USD CLEARING

Questions

RECENT DEVELOPMENTS AND EMERGING BEST PRACTICE IN INTERNATIONAL CURRENCY CLEARING AND SETTLEMENT

David Tudor
Vice President, Product Specialist, Core Cash Management EMEA
STRICTLY PRIVATE AND CONFIDENTIAL

.

Introduction Various factors are converging to test banks’ viability in payment clearing: Regulatory compliance demands Globalization and current economic conditions Profitability dynamics
 the cost of the response  pricing implications

Compliance Profitability Globalization

The world is getting smaller While certain currencies are dominant in global trade, their strength is being leveraged outside of “home turf” to grow local advantage, and new currency players are emerging.
 Offshore clearing systems growing in relevance, particularly in Asia  Alternative currencies seeking to establish toe-hold in settling regional/global trade  RMB and Ruble are potential legitimate alternatives in the medium term.  Net Settlement and Central Counterparty initiatives offer substitute solutions to

existing bi-lateral arrangements Corporations are diversifying product lines, requiring larger and more international supplier networks
 Burgeoning migration to SWIFT: greater demand for fewer banks to support

migration, complicated by less ―sticky‖ revenues and extensive client integration needs
 Greater need for far-reaching, global solutions that don‘t fragment liquidity  Population of niche providers increasing to fill capability gap at corporate treasury

level

Compliance Profitability

Globalization

Balancing earnings potential with client requirements

 Taking a comprehensive – rather than regional or country-specific – view of

payment flows to drive growth and distribution strategy.
 Emphasizing routing efficiency (serial payments/direct) to lower costs and

improve serviceability
 Consider greater use of principal deductions to drive additional revenue

potential, particularly in non-PSD governed currencies and transactions
 Make the most of inter-currency distinctions while managing sensitivity

through pattern-based technology.
 Explore potential for FX conversions without impacting beneficiary.

Compliance

Profitability Globalization

Structuring a global solution set requires a collaborative approach
Emphasize core competencies and currencies
 Direct available financial, operational and technical resources to your core.  Strengthen home-market capabilities and competitive edge.

Leverage strong partners to fill gaps or expand to new markets
 Gain immediate market share and virtual scale.
 Drive value added solutions to your customers through integrated solutions

regionally or globally.
 Minimize the investments in constantly changing infrastructure

developments to improve your profitability.
 Select banks that do not compete directly in your target segment.

J.P. Morgan‘s Global Footprint: local presence and currency clearing, worldwide.
High Value Clearing  Over 40 major and minor currencies including US$, €, ¥, £, SGD HKD, AUD,INR, RMB, RUB  Over 4.000 correspondent banking relationships Foreign Exchange  Over 135 currencies nearly every currency that supports trade

Low Value Clearing  Access to over 44 local clearing systems for non urgent or mass payments  Fully compliant SEPA solutions

Branch Expansion  9 add‘l in APAC  7 add‘l in EMEA  5 add‘l in Latin America

Liquidity Solutions  Pooling, sweeping, and concentration  Overnight and short term Investments  Risk management solutions

Trade Solutions  3 regional hubs  23 locations globally including 5 in China growing to 9  Local Trade experts deployed in local markets

Commercial Cards  95 countries and 28 currencies

Technology, operating and service platform that provides global consistency and resiliency

Vision for High Value Clearing & Settlement
Today
CLIENT

Best Practice
CLIENT

USD Provider

GBP Provider

Other Currency Providers

Primary Payments Provider

EURO Provider

USD JPY

EURO

JPY

GBP
  

RMB

OTHER CURRENCIES

Different experience, capabilities, service levels Varied pricing Longer time to market when expanding

 Local market expertise provides insight into local practices, rules, regulations and currency controls
   

Leverages premium client service model with support from in-country service teams Access to local clearing systems and a full suite of in-country payments and receivables services Earn better pricing by consolidating volumes across a group of currencies with J.P. Morgan as a single provider Global infrastructure for consistent processing across all currencies

Europe Highlight: a multi-faceted, fully PSD-compliant Euro solution
Allows Financial Institutions to participate in latest industry developments avoiding significant infrastructure and technology investments

Euro payments within PSD-Zone

Cross Border (One-leg-out/in) Euro payments

 TARGET2 indirect participation  SEPA indirect participation, SCT and SDD  Participate in other euro clearings (e.g. EBA  TARGET2 addressable participant  EBA EURO1 addressable participant  Generate new revenues  Control operational costs and increase efficiency  MT103 serial service  MT202COV & Advice alternative  BEN-OUR service  Principal preservation service (FND)

EURO1, EBA STEP2 XCT, Equens)
 Comply with compulsory regulations without the

expenditure to adapt systems
 OUR-SHA service  BEN-SHA service  MT103 serial service (incl. MT202COV)  Make and receive payments in foreign currency

payment service (AutoFX)

Europe Highlight: launch of Sterling Clearing and Offshore Russian Ruble Service

 Sterling CHAPS direct clearer June 2010.  Became cash settlement bank in CREST (UK and Irish securities) in 2009.  Strengthens existing service and our commitment to the UK payments market.  An important ingredient in Global Payments Provision.  BACS and UK Faster Payments also supported for low value/non urgent payments.  Russian Ruble clearing from an account with J.P. Morgan London.  Provides clients with access to credit and liquidity.  Solution insulates clients from the complexities of Ruble clearing.  Offers early same day settlement.

RATIONALE
 Development of UK Faster Payment Scheme and revision to internal resiliency assessment strategy.  Reduced competition due to UK Bank Mergers.  Demand for both Stg Clearing services & Russian Ruble services from large Corporates and Banks.  Use of Ruble in trade transactions instead of US dollar.  Our clients significant challenges in identifying a Ruble Clearing partner.  RTGS system in Russia gaining momentum but still some way off.

Asia Highlight: Simplifying RMB Clearing via J.P. Morgan Shanghai
J.P. Morgan RMB Clearing Features:

Overseas

China
Approved Corporate

 RMB nostro account  Clearing services:

Corporate

 MT103/MT202 incoming & outgoing  MT900/910/940/950 statement  Foreign exchange  Credit interest management

SWIFT MT103 Overseas Participating Bank Payment Flow Receipt Flow

CNAPS Domestic Settlement Bank

 Single provider, multiple benefits .  Onshore RMB account to support RMB

 Onshore access to RMB investments

products.
 Global infrastructure and local expertise

International Trade Settlement.
 Speedy and efficient collection and payment in

RMB as a result of our direct CNAPS membership.
 Elimination of conversion risks for RMB

enable clients to navigate local practice and foreign currency controls.
 Seamless and streamlined account

management for the client.
 Consolidated views/reports across all

receipts.
 Comprehensive solution, including trade

products and services.

accounts through J.P. Morgan ACCESS.

Continuous Linked Settlement (Back to Basics)
What is CLS?
 A clearing system for the settlement of foreign exchange trades which eliminates settlement risk

between trading counterparties.

What do we mean by settlement risk?
 You pay away money in the currency you sold but don‘t receive back the currency you bought.  Settlement risk may extend over many days (due to time zone differences between currencies

and reconciliation practices).
 The failure of one counterparty in the market may lead to financial consequences for the parties

concerned and other participants in the market as a whole.

How can CLS help?
 CLS eliminates counterparty settlement risk by settling trades on a payment versus payment

basis.
 It does not eliminate Mark to Market Risk.  It results in intra day payment exposure between 3rd Party Members and their chosen

Settlement Bank.

The CLS organisation
 Technically a bank, regulated by the US Federal Reserve with operations in the UK.  Owned by its member banks and operates as an industry utility—like SWIFT.  Began service in September 2002 and has proved to be very reliable.

Trades for settlement through CLS
Eligibility criteria for trade submission and settlement in CLS:
 Instrument: Foreign exchange trades, spot or forward, Non Deliverable Forward
 Eligible counterparty (settlement member, user member or third party)

In the case of an FX trade, both sides must be in CLS eligible currencies as listed below:
 In the case of Non Deliverable Forwards, the settlement currency must be a

CLS eligible currency.
 Matched by the CLS cut off time - 23:30 CET on D-1, not same day trades

 AUD

 JPY



ZAR

 CAD
 CHF  DKK  EUR  GBP  HKD  ILS

 KRW¹
 MXN  NOK  NZD  SEK  SGD  USD

Coming Soon, 2011? Thai Baht Chilean Peso Turkish Pound

¹ J.P. Morgan Chase does not currently offer a CLS service in KRW, but may do so in the future (subject to client demand)

Summary Features and Benefits of CLS with J.P. Morgan
Benefits of CLS participation
Benefits of CLS:
 Reduces settlement risk  Payment Vs. Payment  Increased trading capacity  Potential for trade volume and value

Benefits of CLS with J.P. Morgan
Benefits of our solution:
 The committed provider to CLS

 Outstanding reputation for Global Clearing
 A simple solution  Improved credit utilisation when integrated with

Multicurrency Clearing through J.P. Morgan
 Award winning service  Ample access to liquidity in all CLS currencies  Features of our solution:  Flexible trade submission options  Book Transfer Settlement  Links Online  Multiple SWIFT reporting functionality  Dedicated ‗best in class‘ CLS customer service,

increase with other CLS participants
 Processing scalability and lower cost per

trade
 Process substantially increased volumes  No need for additional headcount due to

improved STP
 Complies with market ‗best practice‘  Reach  Growth in membership now includes

Commercial Banks, Non Banks and Central Banks

operations and implementation team
 All inclusive per trade pricing  Voted number one CLS provider in the most

recent FIMetrix survey

Summary Change is a constant. As...
 the regulatory environment evolves.  the pace of change accelerates impact on profit margins.  customers expect increasingly global solutions.

...banks will need to consider a diversified global growth strategy that...
 emphasizes core strengths and markets.  leverages partners to complete their distribution network.

We welcome the opportunity for J.P. Morgan to be your partner of choice!

RECENT DEVELOPMENTS AND EMERGING BEST PRACTICE IN INTERNATIONAL CURRENCY

CLEARING AND SETTLEMENT

Questions

THANK YOU FOR YOUR PARTICIPATION

THE ROAD AHEAD