International Finance Corporation

Transcription

1 Dated March 7, 2014 SERIES PROSPECTUS International Finance Corporation CNY1,000,000, % Notes due 2017 Issue Price 100 per cent. The CNY1,000,000, % Notes due 2017 (the CNY Notes ) of International Finance Corporation (the Corporation ) bear interest at the rate of 2.00% per year, accruing from March 11, Interest on the CNY Notes is payable on January 18 and July 18 of each year, beginning on July 18, The CNY Notes will mature on January 18, The CNY Notes are issued as a series under the Corporation s Global Medium-Term Note Program (the Program ) described in this Series Prospectus. The CNY Notes are expected to be rated AAA by Standard & Poor s Ratings Services, a division of The McGraw Hill Companies, Inc. and Aaa by Moody s Investors Service, Inc. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. The CNY Notes will constitute direct, unconditional, general and unsecured obligations of the Corporation ranking pari passu and without any preference among themselves and pari passu with all other outstanding unsecured and unsubordinated obligations for borrowed money of the Corporation. THE CNY NOTES WILL NOT BE OBLIGATIONS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OR OF ANY GOVERNMENT. This series prospectus ( Series Prospectus ) comprises neither a prospectus for the purposes of Part VI of the Financial Services and Markets Act 2000 (as amended) (the FSMA ), a base prospectus for the purposes of Article 5.4 of Directive 2003/71/EC, as amended (the Prospectus Directive ), nor listing particulars given in compliance with the listing rules made under Part VI of the FSMA by the United Kingdom Financial Conduct Authority in its capacity as competent authority under the FSMA (the FCA ). Application will be made to the FCA for the CNY Notes to be admitted to the official list of the FCA (the Official List ) and to the London Stock Exchange plc (the London Stock Exchange ) for the CNY Notes to be admitted to trading on the London Stock Exchange s Regulated Market in accordance with its rules. The CNY Notes will initially be represented by a single Global Certificate in registered form deposited on the issue date with Citibank, N.A., London Branch as custodian for, and registered in the name of a nominee, for a common depositary for Euroclear Bank S.A./N.V. ( Euroclear ) and Clearstream Banking, société anonyme ( Clearstream, Luxembourg ). Prospective investors should have regard to the factors described under the section headed Risk Factors in this Series Prospectus. Lead Managers HSBC ICBC (Asia) J.P. Morgan

2 The Corporation accepts responsibility for the information contained in this Series Prospectus. To the best of the knowledge of the Corporation (having taken all reasonable care to ensure that such is the case) the information contained in this Series Prospectus is in accordance with the facts and does not omit anything likely to affect the import of such information. This Series Prospectus is to be read in conjunction with all documents which are deemed to be incorporated herein by reference (see Availability of Information and Incorporation by Reference below). Under the Program, the Corporation, subject to compliance with all relevant laws, regulations and directives, may from time to time issue notes with maturities of three months or longer from the date of the original issue (the Notes, which term, for the purposes of this Series Prospectus and where the context so allows, includes the CNY Notes) in an unlimited aggregate nominal amount. Notes will be sold through one or more Dealers (as defined in Plan of Distribution ) appointed by the Corporation, or directly by the Corporation itself as specified in the applicable Final Terms (as defined in Final Terms ). Under the Program, application may be made for Notes which are agreed at the time of issue to be so listed to be admitted to the official list of the Luxembourg Stock Exchange and to trading on the regulated market of the Luxembourg Stock Exchange. Under the Program, application may be made for permission to deal in, and for quotation of, any Notes which are agreed at the time of issue to be so listed on the Stock Exchange of Singapore Limited. The Program also provides that Notes may be listed on such other or further stock exchange(s) as may be agreed between the Corporation and the relevant Dealer(s) in relation to each issue. Unlisted Notes may also be issued pursuant to the Program. The applicable Final Terms in respect of the issue of any Notes will specify whether and on which exchange such Notes will be listed or whether such Notes will be unlisted. References in this Prospectus to Notes being listed (and all related references) shall mean that such Notes have been admitted to the official list (or equivalent) of the relevant stock exchange and admitted to trading on the relevant stock exchange s regulated market. Notes of any particular series will be in bookentry form, or bearer form ( Bearer Notes ) or registered form ( Registered Notes ), as specified in the applicable Final Terms. Bearer Notes may not be offered, sold or delivered within the United States or to U.S. persons as part of their primary distribution. Notes will be issued in the denominations specified in the applicable Final Terms. Unless an issue of Notes is intended to qualify as a targeted bearer issuance (as defined in Overview of the Program ), each Series (as defined herein) of Bearer Notes with a maturity at issue of more than one year will be represented on issue by a temporary global note in bearer form (each a Temporary Global Note ) exchangeable for a permanent global note in bearer form (each a Permanent Global Note, and collectively with Temporary Global Notes, Global Notes ) or, if and to the extent specified in the applicable Final Terms, for Bearer Notes in definitive bearer form ( Definitive Bearer Notes ), upon certification of non-u.s. beneficial ownership. Each Series of Bearer Notes that is issued as part of a targeted bearer issuance will be represented on issue by a Permanent Global Note or, if specified in the applicable Final Terms, Definitive Bearer Notes. Notes denominated and payable in U.S. dollars which will be cleared and settled through the Federal Reserve Bank of New York ( Fed Bookentry Notes ) will be issued in uncertificated bookentry form. Registered Notes will be represented by registered certificates (each a Certificate ), one Certificate being issued in respect of each Noteholder s entire interest in Registered Notes of one Series. Global Certificates ( Global Certificates ) may be issued representing all or a portion of a Series of Registered Notes, if specified in the applicable Final Terms. Depending on their form and Specified Currency (as defined herein), it is expected that Notes will be accepted for clearance through one or more clearing systems, as specified in the applicable Final Terms. These systems will include, in the United States, the system operated by The Depository Trust Company ( DTC ) and, for Fed Bookentry Notes, the Federal Reserve Banks and, outside the United States, those operated by Euroclear and Clearstream, Luxembourg. Global Notes may be issued in new global note form if they are intended to be eligible collateral for Eurosystem monetary policy or in classic global note form. 2

3 THE NOTES ARE NOT REQUIRED TO BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED. ACCORDINGLY, NO REGISTRATION STATEMENT HAS BEEN FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE COMMISSION ). THE NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS SERIES PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE IN THE UNITED STATES. No person has been authorized to give any information or to make any representation other than those contained in this Series Prospectus and the applicable Final Terms in connection with the offering or sale of the Notes and, if given or made, such information or representation must not be relied upon as having been authorized by the Corporation or any Dealer or the Arranger (as defined in Summary and Overview of the Program ). Neither the delivery of this Series Prospectus or any applicable Final Terms nor any offering or sale made in connection herewith or therewith shall, under any circumstances, create any implication that there has been no change in the financial condition or affairs of the Corporation since the date hereof or the date upon which this Series Prospectus has been most recently amended or supplemented or that there has been no adverse change in the financial condition or affairs of the Corporation since the date hereof or the date upon which this Series Prospectus has been most recently amended or supplemented or that any other information supplied in connection with the Program is correct as of any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The distribution of this Series Prospectus or any Final Terms and the offering or sale of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Series Prospectus or any Final Terms comes are required by the Corporation, any Dealer and the Arranger to inform themselves about and to observe any such restriction. For a description of certain restrictions on offers and sales of the Notes and on the distribution of this Series Prospectus or any Final Terms, see Plan of Distribution. Neither this Series Prospectus nor any Final Terms constitutes an offer of, or an invitation by or on behalf of the Corporation or any Dealer to subscribe for, or purchase, any Notes. Neither this Series Prospectus nor any other information supplied in connection with the Program should be considered as a recommendation by the Corporation or any of the Dealers that any potential investor should purchase any Notes. Each investor contemplating purchasing any Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Corporation. THE NOTES ARE NOT OBLIGATIONS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OR OF ANY GOVERNMENT. In connection with the issue of any Tranche (as defined herein) of Notes, the Dealer or Dealers (if any) named as the stabilizing manager(s) (the Stabilizing Manager(s) ) (or persons acting on behalf of any Stabilizing Manager(s)) in the applicable Final Terms may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Manager(s) (or persons acting on behalf of a Stabilizing Manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant Tranche and 60 days after the date of the allotment of the relevant Tranche. Any stabilization action or over-allotment must be conducted by the relevant Stabilizing Manager(s) (or persons acting on behalf of any Stabilizing Manager(s)) in accordance with all applicable laws and rules. In this Series Prospectus, unless otherwise specified or the context otherwise requires, references to, EUR and euro are to the currency introduced on 1 January 1999 pursuant to the Treaty establishing the European Community as amended by the Treaty on European Union, references to pounds, sterling, and GBP are to the lawful currency of the United Kingdom, references to yen are to the lawful currency of Japan, references to yuan, Renminbi and CNY are to the 3

4 lawful currency of the People s Republic of China and references to U.S. dollars, $ and U.S.$ are to United States dollars. 4

5 TABLE OF CONTENTS Page Availability of Information and Incorporation by Reference... 6 Series Prospectus Supplement... 7 Final Terms... 7 Use of Proceeds... 7 Summary and Overview of the Program... 8 Risk Factors Terms and Conditions of the Notes Form of Notes and Provisions Relating to the Notes while in Global Form Clearance and Settlement Tax Matters Currency Conversions Plan of Distribution Validity of the Notes General Information Appendix A CNY Notes Final Terms Appendix B IFC Information Statement

6 AVAILABILITY OF INFORMATION AND INCORPORATION BY REFERENCE Availability of Information The Corporation prepares: (a) unaudited quarterly financial statements and audited annual financial statements; (b) an annual information statement (the Information Statement ) which describes the Corporation, including its capital, operations and administration, the Articles of Agreement of the Corporation (the Articles of Agreement ), the Corporation s legal status, and its principal financial policies, and contains the Corporation s most recent audited financial statements; and (c) an annual report, which contains the Corporation s most recent audited financial statements. The Corporation is subject to certain information requirements of Regulation IFC, promulgated by the Commission under the United States International Finance Corporation Act of 1955, as amended, and in accordance therewith files with the Commission its unaudited quarterly and audited annual financial statements and its most recent Information Statement and annual report (collectively the IFC Information ). In addition, the IFC Information will be filed with the Commission and the Luxembourg Stock Exchange and any other stock exchange on which Notes are listed from time to time and which requires such a filing. The IFC Information may be inspected and copies may be obtained (without charge other than for the IFC Information obtainable from the Commission, which must be paid for at prescribed rates) at the following addresses, and at any other address specified in the applicable Final Terms: Securities and Exchange Commission 100 F Street, N.E. Washington, DC Citibank, N.A., London Branch 21 st Floor, Citigroup Centre Canada Square, Canary Wharf London E14 5LB Banque Internationale à Luxembourg S.A. 69, route d Esch L-1470 Luxembourg Luxembourg Citibank, N.A., Singapore Branch 5, Shenton Way, #06-00 UIC Building Singapore In addition, copies of the Articles of Agreement, the Fiscal Agency Agreement, the Global Agency Agreement and the Deed of Covenant (each as defined under Terms and Conditions of the Notes ) may be inspected at the above offices of Citibank, N.A., London Branch (the Global Agent ). Copies of such documents and the IFC Information also will be available without charge from the office of the Corporation set out at the end of this Series Prospectus. Incorporation by Reference The Corporation s latest Information Statement (attached hereto as Appendix B), and any unaudited quarterly or annual financial statements filed with the Commission prior to the date of this Series Prospectus shall be deemed to be incorporated in, and to form part of, this Series Prospectus, and references to this Series Prospectus shall mean this document and any documents incorporated by reference in, and forming part of, this document, except, and to the extent, any such document is superseded or modified by any subsequent document incorporated by reference in, and forming part of, this Series Prospectus. Documents incorporated by reference in, and forming part of, this document may not have been submitted to the same review and clearance procedures to which this Series Prospectus has been submitted as of the date hereof by any stock exchange or regulatory authority referred to herein. Any statement contained in a document which is incorporated by reference herein shall be deemed to be modified or superseded for the purpose of this Series Prospectus to the extent that a statement contained herein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Series Prospectus. 6

7 Copies of documents incorporated by reference in this Series Prospectus may be obtained (without charge) from the office of the Corporation set out at the end of this Series Prospectus and the website of the Corporation ( SERIES PROSPECTUS SUPPLEMENT The Corporation has undertaken to the Dealers that if during any time this Series Prospectus is being used in connection with the offer and sale of the CNY Notes, any event shall occur as a result of which, in the judgment of the Corporation, this Series Prospectus would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements herein, in light of the circumstances under which they were made, not misleading, the Corporation shall prepare an amendment or supplement to this Series Prospectus for use in connection with such offering of the CNY Notes and shall supply to each Dealer such number of copies of such amendment or supplement hereto as such Dealer may reasonably request. FINAL TERMS The Corporation will prepare in respect of each particular issue of Notes a final terms (each, a Final Terms ) which will contain the terms of, pricing details for, and settlement and clearance procedures relating to, such issue of Notes and such other information or disclosure as the Corporation considers appropriate. In respect of the CNY Notes, the Corporation has prepared a Final Terms (the CNY Notes Final Terms ) (attached hereto as Appendix A), which contains the terms of, pricing details for, and settlement and clearance procedures relating to, the CNY Notes. For the purposes of this Series Prospectus references to Final Terms shall be deemed to mean the CNY Notes Final Terms, which shall apply only in respect of the CNY Notes. USE OF PROCEEDS The net proceeds of the sale of the Notes will be used for the general operations of the Corporation in accordance with its Articles of Agreement. 7

8 SUMMARY AND OVERVIEW OF THE PROGRAM This summary must be read as an introduction to this Series Prospectus. Any decision to invest in any Notes should be based on a consideration of this Series Prospectus as a whole, including the documents incorporated by reference, by any investor. Words and expressions defined or used in Terms and Conditions of the Notes shall have the same meaning in this Summary. The Corporation International Finance Corporation is an international organization, established in 1956 to further economic growth in its developing member countries by promoting private sector development. The Corporation is a member of the World Bank Group, which also comprises the International Bank for Reconstruction and Development (the IBRD ), the International Development Association ( IDA ), the Multilateral Investment Guarantee Agency ( MIGA ) and the International Centre for Settlement of Investment Disputes ( ICSID ). It is a legal entity separate and distinct from IBRD, IDA, MIGA and ICSID with its own Articles of Agreement, share capital, financial structure, management, and staff. Membership in the Corporation is open only to member countries of IBRD. The obligations of the Corporation are not obligations of, or guaranteed by, IBRD or any government. The Corporation s principal office is located at 2121 Pennsylvania Avenue, N.W., Washington, D.C , United States of America. Its telephone number is The Corporation is an experienced supranational organization providing financing and financial services primarily to the private sector in developing countries that are members of the Corporation. It combines the characteristics of a multilateral development bank with those of a private financial institution. As of June 30, 2013, the Corporation's entire share capital was held by 184 member countries. As of June 30, 2013, member countries of the Organization for Economic Cooperation and Development ( OECD ) held per cent. of the voting power of the Corporation. The five largest of the Corporation s 184 shareholders are the United States (22.41 per cent. of the total voting power), Japan (5.58 per cent.), Germany (5.1 per cent.), United Kingdom (4.79 per cent.) and France (4.79 per cent.). The Corporation s share capital is provided by its member countries. It raises most of the funds for its investment activities through the issuance of notes, bonds and other debt securities in the international capital markets. Unlike most other multilateral institutions, the Corporation does not accept host government guarantees of its loans. Generally, the Corporation charges market based rates for its loans and seeks market returns on its debt security and equity investments. The financial strength of the Corporation is based principally on the quality of its investment portfolio, its substantial paid-in capital and retained earnings, low debt to equity ratio, the size of its liquid assets portfolio, its diversified earnings base and its consistent profitability. In partnership with private investors, the Corporation assists in financing the establishment, improvement, and expansion of private sector enterprises by making investments where sufficient private capital is not otherwise available on reasonable terms. The Corporation seeks to bring together domestic and foreign private capital and experienced management and thereby create conditions conducive to the flow of private capital (domestic and foreign) into productive investments in its developing member countries. In this way, the Corporation plays a catalytic role in mobilizing additional funding from other investors and lenders, through parallel loans, loan participations, partial credit guarantees, securitizations and risk sharing facilities ( resource mobilization ). In addition to project finance, corporate lending and resource mobilization, the Corporation offers an array of financial products and technical advisory services to private businesses in the developing world with a view to fulfilling its developmental mission. It also advises member governments on how to create an environment hospitable to the growth of private enterprise and foreign investment. 8

9 Overview of the Program The following overview is qualified in its entirety by the remainder of this Series Prospectus. Issuer: Description: Arranger: Dealers: Global Agent: Fiscal Agent: Paying Agents: Specified Currencies: Redenomination: Maturities: Specified Denomination: Method of Issue: Issue Price: International Finance Corporation Global Medium-Term Note Program Morgan Stanley & Co. International plc The Dealers will consist of any of one or more dealers appointed as dealers (as described in Plan of Distribution ) from time to time for a specific issue of Notes. Citibank, N.A., London Branch Federal Reserve Bank of New York Banque Internationale à Luxembourg S.A., and, for Notes cleared through The Central Depositary (Pte) Limited ( CDP ) Citibank, N.A., Singapore Branch, and such other Paying Agents as may be appointed in the applicable Final Terms. Subject to compliance with all relevant laws, regulations and directives, Notes may be issued in any currency agreed between the Corporation and the relevant Dealers. Notes denominated in the currency of a country that subsequently participates in the third stage of European Economic and Monetary Union may be subject to redenomination, renominalization and/or consolidation with other Notes then denominated in euro. The provisions applicable to any such redenomination, renominalization and/or consolidation will be as specified in the applicable Final Terms. Subject to compliance with all relevant laws, regulations and directives, Notes may be issued with any maturity of three months or longer from the date of the original issue. Definitive Notes will be in such denominations as may be specified in the applicable Final Terms. The Notes will be issued through Dealers acting as principal on a syndicated or non-syndicated basis, or on an agency basis. The Corporation may also directly offer and sell Notes to investors, to the extent permitted by applicable law. The Notes will be issued in series (each a Series ) having one or more dates of issue and on terms otherwise identical (or identical other than in respect of the first payment of interest), the Notes of each Series being intended to be interchangeable with all other Notes of that Series. Each Series may be issued in tranches (each a Tranche ) on the same or different dates of issue. The specific terms of each Tranche will be set out in the applicable Final Terms. Notes may be issued at their nominal amount or at a discount or premium to their nominal amount. Partly Paid Notes may be issued, the issue price of which will be payable in two or more instalments. 9

10 Form of Notes: Clearing Systems: Initial Delivery of Notes: The Notes may be issued in bookentry form, bearer form or in registered form. Fed Bookentry Notes, which are Notes denominated and payable in U.S. dollars cleared through the bookentry system of the Federal Reserve Banks (the Federal Reserve ), will be in bookentry form and may not be exchanged for Notes in registered form or for Notes in bearer form. Unless the issuance is intended to qualify as a targeted bearer issuance described in United States Treasury Regulations Section (c)(2)(i)(D)(3)(iii) (a targeted bearer issuance ), each Tranche of Bearer Notes will be represented upon initial issuance by a Temporary Global Note which may be exchanged (i) after a period of not less than 40 days from the date of issue for either (a) a Permanent Global Note upon certification of non-u.s. beneficial ownership in accordance with the applicable rules and regulations promulgated by the U.S. Treasury, or (b) Definitive Bearer Notes upon certification of non-u.s. beneficial ownership in accordance with the applicable rules and regulations promulgated by the U.S. Treasury; or (ii) if the applicable Final Terms so provides, in certain circumstances, for certificates representing Registered Notes ( Certificates ) representing the amount of Notes so exchanged, in each case as provided in the applicable Final Terms. Each Tranche of Bearer Notes issued as part of a targeted bearer issuance will be represented upon initial issuance by a Permanent Global Note or, if specified in the applicable Final Terms, Definitive Bearer Notes. Each Tranche of Registered Notes will be represented upon initial issuance by one or more Certificates, each evidencing an individual Noteholder s entire interest in such Registered Notes. Certificates representing Registered Notes that are registered in the name of a nominee for one or more clearing systems are referred to as Global Certificates. It is expected that Notes will be accepted for clearance through one or more clearing systems as specified in the applicable Final Terms. These systems will include, in the United States, the system operated by DTC and, for Fed Bookentry Notes, the Federal Reserve and, outside the United States, those operated by Euroclear and Clearstream, Luxembourg and, if so specified in the applicable Final Terms in the case of Notes listed on the Stock Exchange of Singapore Limited, CDP, and in relation to any Series, such other clearing system as specified in the applicable Final Terms. On or before the issue date for each Tranche of Bearer Notes, if the relevant Global Note is intended to be recognized as eligible collateral for Eurosystem monetary policy and intraday credit operations, such Global Note will be delivered to a common safekeeper (the Common Safekeeper ) for Euroclear and Clearstream, Luxembourg (such Global Notes are issued in new global note ( NGN ) form). On or before the issue date for each Tranche of Bearer Notes, if the relevant Global Note is not intended to be recognized as eligible collateral for Eurosystem monetary policy and intra- 10

11 Description of Notes: Fixed Rate Notes: Floating Rate Notes: Zero Coupon: Fixed Redemption Amount: Redemption by Instalments: day credit operations, unless otherwise agreed among the Corporation, the Global Agent and the relevant Dealer, the Corporation will deposit (i) a Temporary Global Note representing Bearer Notes (except in the case of a targeted bearer issuance); or (ii) a Permanent Global Note or Definitive Bearer Notes in the case of a targeted bearer issuance with a common depositary (the Common Depositary ) for Euroclear and Clearstream, Luxembourg, CDP, or any other clearing system specified in the applicable Final Terms (such Global Notes are issued in classic global note ( CGN ) form). On or before the issue date for each Tranche of Registered Notes, unless otherwise agreed among the Corporation, the Global Agent and the relevant Dealer, the Global Agent will deposit a Global Certificate representing Registered Notes with a custodian for, to be registered in the name of a nominee of, DTC, or any other clearing system specified in the applicable Final Terms. Notes may be either interest bearing at fixed or floating rates or non-interest bearing, with principal repayable at a fixed amount or by reference to one or more indices or formulae or any combination of the above, as specified in the applicable Final Terms. Notes which are expressed to be Fixed Rate will bear interest at the rate or rates specified in the applicable Final Terms. Floating Rate Notes will bear interest determined separately for each Series as follows: (i) on the same basis as the floating rate under a notional interest rate swap transaction in the relevant Specified Currency governed by an agreement incorporating the 2000 or 2006 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc.; or (ii) by reference to LIBOR, LIBID, LIMEAN or EURIBOR (or such other benchmark as may be specified in the applicable Final Terms) as adjusted for any applicable margin. Interest periods will be specified in the applicable Final Terms. Zero Coupon Notes may be issued at their nominal amount or at a discount to it and will not bear interest. Notes which have a fixed redemption amount will be redeemable at par or at a specified amount above or below par. The applicable Final Terms in respect of each Series of Notes that are redeemable in two or more instalments will set out the dates on which, and the amounts in which, such Notes may be redeemed. 11

12 Automatic Early Redemption: Optional Redemption: Other Notes: Status of Notes: Negative Pledge: Events of Default: Rating: The applicable Final Terms may provide that Notes of a Series will be redeemed automatically prior to their stated maturity on the basis that the interest payable on such Notes reaches or exceeds a benchmark determined in relation to one or more interest rates, exchange rates or stock market or commodities indices or formulae or a combination thereof as may be specified in, or otherwise provided in such Final Terms. The applicable Final Terms will state whether Notes may be redeemed prior to their stated maturity in whole or in part at the option of the Corporation and/or the holders, and, if so, the terms applicable to such redemption. Any limitations imposed by applicable law relating to the redemption of Notes denominated in any Specified Currency will be specified in the applicable Final Terms. Terms applicable to variable redemption amount Notes with a maturity at issue of one year or less, high interest Notes, low interest Notes, step-up Notes, step-down Notes, dual currency Notes, reverse dual currency Notes, optional dual currency Notes, Partly Paid Notes and any other type of Notes that the Corporation and any Dealer or Dealers may agree to issue under the Program will be set out in the applicable Final Terms. The Notes will constitute direct, unconditional, general and unsecured obligations of the Corporation ranking pari passu and without any preference among themselves and pari passu with all other outstanding unsecured and unsubordinated obligations for borrowed money of the Corporation. The Notes will not be obligations of the International Bank for Reconstruction and Development or of any government. None With respect to each Series of Notes, if the Corporation shall either (i) fail to pay when due the principal of, premium (if any), or interest on, any Note of such Series or (ii) fail to pay when due, in aggregate an amount equal to or exceeding U.S.$20,000,000 or its equivalent in any other relevant currency or currencies, of the principal of, premium (if any), or interest on, any Note of another Series or any notes, bonds or similar obligations (other than the Notes) which shall have been issued, assumed or guaranteed by the Corporation and, in either case, such failure shall continue for a period of 90 days, then at any time thereafter and during the continuance of such failure, the holder of any Note of such Series may deliver or cause to be delivered to the Corporation at its principal office in the City of Washington, District of Columbia, United States of America, written notice that such holder elects to declare all Notes of such Series held by it (the serial numbers and denominations of which shall be set forth in such notice) to be due and payable, and on the thirtieth day after such notice shall be so delivered to the Corporation, such Notes shall become due and payable together with accrued interest thereon, unless prior to that time all such defaults shall have been cured. The Program has been rated AAA by Standard & Poor s 12

13 Taxation: Governing Law: Listing: Selling Restrictions: Ratings Services, a division of The McGraw Hill Companies, Inc. ( S&P ) and Aaa by Moody s Investors Service ( Moody s ). As defined by S&P, an AAA rating means that the ability of the Corporation to meet its financial commitment on its obligations is extremely strong. As defined by Moody s, an Aaa rating means that the Corporation s ability to meet its financial obligations is judged to be of the highest quality, with minimal credit risk. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. The Notes and interest thereon are not exempt from taxation generally. Under the Articles of Agreement, payments in respect of principal, premium (if any), and interest due on the Notes are not subject to any tax by a member country (i) which tax discriminates against the Notes solely because they are issued by the Corporation or (ii) if the sole jurisdictional basis for the tax is the place or currency in which the Notes are issued, made payable or paid, or the location of any office or place of business maintained by the Corporation. Under the Articles of Agreement, the Corporation is not under any obligation to withhold or pay any tax imposed by any member country in respect of the Notes. Accordingly, payments in respect of principal, premium (if any) and interest due on the Notes will be paid to the Fiscal Agent or the Global Agent without deduction in respect of any such tax. However, tax withholding requirements may apply to payments made by financial intermediaries acting in any capacity other than as the Corporation s Fiscal Agent, Global Agent or paying agent. English, New York, or such other law as is specified in the applicable Final Terms. Fed Bookentry Notes will be governed by the laws of the State of New York. Application has been made for Notes issued under the Program to be listed on the Official List and admitted to trading on the regulated market of the Luxembourg Stock Exchange. However, specific Series of Notes may be listed on the Stock Exchange of Singapore Limited or on other stock exchanges or may be unlisted. The applicable Final Terms in respect of any Series of Notes will specify whether such Notes will be unlisted or listed on the Luxembourg Stock Exchange, the Stock Exchange of Singapore Limited or any other stock exchange. The sale and delivery of Notes, and the distribution of offering material relating to the Notes, are subject to certain restrictions in the United States and in certain other jurisdictions as set forth in this Series Prospectus and as may be set forth in the applicable Final Terms. In particular, the Notes are not required to be registered under the United States Securities Act of Bearer Notes may not be offered, sold or delivered within the United States or to U.S. persons in connection with their primary distribution. See 13

14 Plan of Distribution. 14

15 RISK FACTORS The following section does not describe all the risks (including those relating to each prospective investor s particular circumstances) with respect to an investment in the Notes of a particular series, including the interest rate, exchange rate or other indices, relevant specified currencies, calculation formulae, and redemption, option and other rights associated with such Notes or when the investor s currency is other than the Specified Currency of issue or in which the payment of such Notes will be made. The risks in the following section are provided as general information only. The Corporation disclaims any responsibility to advise prospective investors of such risks as they exist at the date of this Series Prospectus or as such risks may change from time to time. Prospective investors should consult their own financial and legal advisors about risks associated with an investment in an issue of Notes. Certain Notes are complex financial instruments and may not be suitable for all investors. Prospective investors should have the financial status and sufficient knowledge and experience in financial and business matters to evaluate the information contained in this Series Prospectus and the applicable Final Terms and the merits and risks of investing in a particular issue of Notes in the context of their financial position and particular circumstances. Prospective investors should have the ability and expertise, and/or access to the appropriate analytical resources to analyze such investment, to evaluate the sensitivity of such investment to changes in economic conditions, interest rate, exchange rate or other indices, the relevant calculation formulae, the redemption, option and other rights associated with such investment, and other factors which may have a bearing on the merits and risks of such investment, and the suitability of such investment in such investor s particular circumstances. In addition, prospective investors should have the financial capacity to bear the risks associated with any investment in such Notes and should review, among other things, the most recent audited and unaudited financial statements, if any, of the Corporation incorporated by reference into this Series Prospectus when deciding whether or not to purchase any Notes. Words and expressions defined or used in Terms and Conditions of the Notes shall have the same meaning in this section. Interest Rate Risks An investment in Notes the principal or premium of which is determined by reference to one or more interest rate indices, either directly or inversely, may entail significant risks not associated with similar investments in a conventional debt security, including the risk that the resulting interest rate will be less than that payable on a conventional debt security issued by the Corporation at the same time and that the investor could lose all or a substantial portion of the principal of its Note or that no premium may be payable thereon. The secondary market for such Notes will be affected by a number of factors independent of the creditworthiness of the Corporation and the value of the applicable interest rate index or indices, including the volatility of such interest rate index or indices, the method of calculating the index, principal or premium, the time remaining to the maturity of the Notes, the outstanding nominal amount of the Notes and market interest rates. The value of any applicable interest rate indices should not be taken as an indication of the future performance of such interest rate indices during the term of any Note. Exchange Rate Risks and Exchange Controls Notes may be denominated or payable in one of a number of currencies. For investors whose financial activities are denominated principally in a currency (the Investor s Currency ) other than the Specified Currency or where principal of, premium (if any) or interest on Notes is payable by reference to a Specified Currency index other than an index relating to the Investor s Currency, an investment in the Notes entails significant risks that are not associated with a similar investment in a security denominated in that Investor s Currency. Such risks include, without limitation, the possibility of significant changes in the rate of exchange between the Specified Currency and the Investor s Currency and the possibility of the imposition or modification of exchange controls by the country of the Specified Currency or the Investor s Currency. Such risks generally depend on economic and political events over which the Corporation has no control. In recent years, rates of exchange have been volatile and such volatility may be expected to continue in the future. Fluctuations in any particular exchange rate that have occurred in the past are not necessarily indicative, however, of fluctuations that may occur in the future. Depreciation of the Specified Currency against the Investor s Currency would result in a decrease in the Investor s Currency equivalent yield on a Note denominated in that Specified Currency, in the 15

16 Investor s Currency equivalent value of the principal payable at maturity of such Note and generally in the Investor s Currency equivalent market value of such Note. An appreciation of the Specified Currency against the Investor s Currency would have the opposite effect. In addition, depending on the specified terms of a Note denominated in, or the payment of which is related to the value of, one or more currencies, changes in exchange rates relating to any of the currencies involved may result in a decrease in such Note s effective yield and, in certain circumstances, could result in a loss of all or a substantial portion of the principal of a Note to the investor. Governments have imposed from time to time, and may in the future impose, exchange controls which could affect exchange rates as well as the availability of a Specified Currency at the time of payment of principal premium (if any) or interest in respect of a Note. Even if there are no actual exchange controls, it is possible that the Specified Currency for payment on any particular Note may not be available when payments on such Note are due. Structure Risks An investment in a Structured Note issued by the Corporation entails risks (which may be significant) not associated with an investment in a conventional debt security issued by the Corporation. A Structured Note is a Note with principal, premium (if any) or interest determined by reference to one or more interest rate indices or currency or currency units (including exchange rates and swap indices between currencies or currency units), or one or more stock market, commodities or other indices or formulae (each an Applicable Index ) (other than a single conventional interest rate index or formula, such as LIBOR) or features such as embedded options, caps or floors. Such risks may include, without limitation, the possibility that an Applicable Index may be subject to significant changes, that changes in an Applicable Index may not correlate with changes in interest rates or exchange rates generally or with changes in other indices, that two or more indices or formulae that may be expected to move in tandem or in any other relation to each other may unexpectedly converge or diverge or otherwise not move as expected, that the resulting interest rate may be less than that payable on a conventional debt security issued by the Corporation at the same time or that no interest may be payable, that the repayment of principal may occur at times other than that expected by the investor, that the investor may lose a substantial portion of the principal of its Note (whether payable at maturity, upon redemption or otherwise), that the amount of premium based on appreciation rights payable may be substantially less than anticipated or that no such premium is payable, that Structured Notes may have more volatile performance results, and that the effects of currency devaluations and (as discussed under Risk Factors Exchange Rate Risks and Exchange Controls ) the imposition or modification of exchange controls by authorities with jurisdiction over a relevant currency may be greater for Structured Notes than for conventional debt securities issued by the Corporation. Such risks generally depend on a number of factors, including financial, economic and/or political events over which the Corporation has no control. In addition, if an Applicable Index used to determine the amount of interest payable contains a spread or margin multiplier or if the Applicable Index used to determine the principal, premium (if any) or interest payable is subject to some other leverage factor, the effect of any change in such Applicable Index on the principal, premium (if any) or interest may be magnified. If an Applicable Index includes, or is subject to, a maximum ( cap ) or minimum ( floor ) interest rate limitation, the interest or principal payable on such Structured Note may be less than that payable on a conventional debt security issued by the Corporation at the same time. Two issues of Structured Notes issued at the same time and with interest rates determined by reference to the same Applicable Index and otherwise comparable terms may have different interest rates and yields when issued and thereafter if the frequency of interest rate adjustments for each issue is different. In recent years, certain interest rates, currencies, currency units, exchange rates and stock market, commodities or other indices have been highly volatile and such volatility may continue in the future. Fluctuations in any particular interest rate, currency, currency unit, exchange rate or such other index that have occurred in the past are not necessarily indicative, however, of fluctuations that may occur in the future. The timing of changes in the level of an Applicable Index may affect the actual yield to an investor, even if the average level is consistent with the investor s expectation. In general, the earlier a change in the level of an Applicable Index occurs, the greater the effect on an investor s yield. This is especially the case with Structured Notes providing for repayment of principal at one or more times prior to maturity. As a result, the effect on an investor s yield of an Applicable Index level that is lower 16

17 (or higher) during earlier periods than the rate anticipated by the investor may not be offset by a later equivalent increase (or reduction). Any optional redemption feature of Notes is likely to affect the market value of such Notes. During any period in which such Notes are subject to redemption at the option of the Corporation, their market value generally will not rise substantially above the redemption price because of the increased likelihood of redemption by the Corporation, and this also may be true prior to any such period. The Corporation may be expected to redeem such Notes in circumstances where the Corporation s cost of borrowing is lower than the interest rate on such Notes. At such times, an investor generally would not be able to reinvest redemption proceeds at an effective interest rate which is as high as the interest rate on such Notes, and such reinvestment might only be at a significantly lower rate. Investors should consider the related reinvestment risk in light of other investments that may be available to such investors. A partial redemption of an issue of Notes also may adversely affect liquidity for the remaining outstanding Notes of such issue. Investors in Structured Notes should have the ability and expertise, and/or access to appropriate analytical resources, to analyze quantitatively the effect (or value) of any redemption, cap or floor, or other features of such Structured Notes, and the resulting impact on the value of such Structured Notes. Market Liquidity and Yield Risks Notes may not have an established trading market when issued. There can be no assurance of a secondary market for any Notes or the liquidity of such market if one develops. Consequently, investors may not be able to sell their Notes readily or at prices that will enable them to realize a yield comparable to that of similar instruments, if any, with a developed secondary market. This is particularly the case for Structured Notes that are especially sensitive to interest rate, currency or other market risks, that are designed for specific investment objectives, or strategies or that have been structured to meet the investment requirements of limited categories of investors, which may have a more limited secondary market and less or no liquidity and may experience more price volatility than conventional debt securities. Illiquidity may have a severe adverse effect on the market value of Structured Notes. Depending upon the type of Notes, market conditions and other factors, investors seeking to sell relatively small or relatively large amounts of Notes may not be able to do so at prices comparable to those that may be available to other investors. The secondary market for an issue of Notes also will be affected by a number of other factors independent of the creditworthiness of the Corporation and the value of any Applicable Index. These factors may include the complexity and volatility of such Applicable Index, the method of calculating the principal, premium (if any) or any interest to be paid in respect of such Notes, the time remaining to the maturity of such Notes, the outstanding amount of such Notes, any amortization or optional redemption features of such Notes, the amount of other securities linked to such Applicable Index, the amount of such Notes being sold in the secondary market from time to time, any legal restrictions limiting demand for such Notes, the availability of comparable securities, and the level, direction and volatility of market interest rates generally. Such factors will also affect the market value of the Notes. No investor should purchase Notes unless such investor understands and is able to bear the risk that certain Notes may not be readily saleable, that the value of Notes will fluctuate over time, and that such fluctuations may be significant and could result in significant losses to such investor. This is particularly the case for investors whose circumstances may not permit them to hold the Notes until maturity. In addition to the foregoing considerations, the following additional considerations, among others, relate to the Notes indicated below. The market value of Notes bearing interest at a Floating Rate with caps or floors generally are more volatile than those of Notes bearing interest at a Floating Rate linked to the same Applicable Index without caps or floors, especially when the Applicable Index approaches the cap or floor. Similarly, the prices of Notes bearing interest at a Floating Rate with an Applicable Index containing a rate multiplier or other leverage factor greater than one generally are more volatile than those for Notes bearing interest at a Floating Rate linked to the same Applicable Index without such a rate multiplier or other leverage factor. 17

18 In the case of Notes bearing interest at a Floating Rate with an interest rate equal to a fixed rate less a rate based upon an Applicable Index, the interest rate will vary in the opposite direction of changes in such Applicable Index. The prices of such Notes typically are more volatile than those of conventional floating rate debt securities issued by the Corporation based on the same Applicable Index (and with otherwise comparable terms). This increased volatility is due to the fact that an increase in the Applicable Index not only decreases the interest rate (and consequently the value) of such Note, but also reflects an increase in prevailing interest rates, which further adversely affects the value of such Note. In the case of Notes that bear interest at a rate that the Corporation may elect to convert from a Fixed Rate to a Floating Rate, or from a Floating Rate to a Fixed Rate, the ability of the Corporation to convert the interest rate will affect the secondary market and the value of such Notes since the Corporation may be expected to elect such conversion when it would be expected to produce a lower overall cost of borrowing to the Corporation. If the Corporation elects to convert from a Fixed Rate to a Floating Rate, the Margin may be lower (if being added to the Applicable Index) or higher (if being subtracted from the Applicable Index) than prevailing spreads at the time of such conversion on other floating rate securities issued by the Corporation with comparable maturities using the same Applicable Index, and the interest rate at any time may be lower than that payable on other securities of the Corporation. Conversely, if the Corporation elects to convert from a Floating Rate to a Fixed Rate, the Fixed Rate may be lower than prevailing interest rates on other securities of the Corporation. The prices at which zero coupon instruments, such as Zero Coupon Notes, interest components and, in certain cases, principal components, trade in the secondary market tend to fluctuate more in relation to general changes in interest rates than do such prices for conventional interest-bearing securities with comparable maturities. This also is generally true in the case of other instruments issued at a substantial discount or premium from the nominal amount payable on such instruments, such as Notes issued at a substantial discount to their nominal amount or Notes issued with significantly abovemarket interest rates. Generally, the longer the remaining term of such instruments, the greater their price volatility as compared to that for conventional interest-bearing securities with comparable maturities. Legal Investment Risks Investors should consult their own legal advisors in determining whether and to what extent Notes constitute legal investments for such investors and whether and to what extent Notes can be used as collateral for various types of borrowings. In addition, financial institutions should consult their legal advisors or regulators in determining the appropriate treatment of Notes under any applicable riskbased capital or similar rules. Investors whose investment activities are subject to investment laws and regulations or to review or regulation by certain authorities may be subject to restrictions on investments in certain types of debt securities, which may include Notes. Investors should review and consider such restrictions prior to investing in Notes. Risk Factors relating to the Corporation As described in more detail in the Corporation s Information Statement, the Corporation is an experienced supranational organization providing financing and financial services primarily to the private sector in developing countries that are members of the Corporation. The Corporation s investment products include, among others, loans, equity and quasi-equity investments, guarantees and partial credit guarantees, and client risk management products. The Corporation s disbursed investment portfolio is diversified by country, region, industry, sector and project type, and it operates under a comprehensive enterprise risk management framework. The value of the Corporation s investments, and the financial returns on them, are subject to the risk of adverse changes in the financial condition of the Corporation s clients, which may arise from factors specific to a particular client or industry or from changes in the macroeconomic environment or the financial markets in the countries in which a client operates. Minimum Specified Denominations In relation to any issue of Bearer Notes which have a denomination consisting of the minimum Specified Denomination plus a higher integral multiple of another smaller amount, it is possible that the 18

19 Notes may be traded in amounts in excess of the minimum Specified Denomination that are not integral multiples of the minimum Specified Denomination. In such a case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than the minimum Specified Denomination will not receive a definitive Bearer Note in respect of such holding (should definitive Notes be printed) and would need to purchase a principal amount of Notes such that it holds an amount equal to one or more Specified Denominations. Convertibility and Remittance Restrictions The CNY Notes are denominated in Renminbi. Renminbi is not a freely convertible currency as of the date hereof and this may adversely affect the liquidity of the CNY Notes. There are significant restrictions on the remittance of Renminbi into and outside the People s Republic of China (the PRC ). The PRC government continues to regulate conversion between Renminbi and foreign currencies despite significant reduction in control by it in recent years over trade transactions involving import and export of goods and services as well as other frequent routine foreign exchange transactions. These transactions are known as current account items. Participating banks in Hong Kong have been permitted to engage in the settlement of current account trade transactions in Renminbi under a pilot scheme introduced in July 2009 which originally applied to approved pilot enterprises in five cities in the PRC. The pilot scheme was extended in August 2011 to cover the whole nation and to make RMB trade and other current account item settlement available in all countries worldwide. On April 7, 2011, the State Administration of Foreign Exchange of the PRC ( SAFE ) promulgated the Circular on Issues Concerning the Capital Account Items in connection with Cross- Border Renminbi (the SAFE Circular ), which became effective on May 1, According to the SAFE Circular, in the event that foreign investors intend to use cross-border Renminbi (including offshore Renminbi and onshore Renminbi held in the accounts of non PRC residents) to make a contribution to an onshore enterprise or make a payment for the transfer of an equity interest of an onshore enterprise by a PRC resident, such onshore enterprise shall be required to submit the relevant prior written consent from the Ministry of Commerce of the PRC ( MOFCOM ) to the relevant local branches of SAFE of such onshore enterprise and register for a foreign invested enterprise status. Further, the SAFE Circular clarifies that the foreign debts borrowed, and the external guarantee provided, by an onshore entity (including a financial institution) in Renminbi shall, in principle, be regulated under the current PRC foreign debt and external guarantee regime. On October 12, 2011, MOFCOM promulgated the Circular on Issues in relation to Cross-border Renminbi Foreign Direct Investment Cross-border Renminbi (the MOFCOM RMB FDI Circular ). In accordance with the MOFCOM RMB FDI Circular, MOFCOM and its local counterparts are authorised to approve Renminbi foreign direct investments ( RMB FDI ) in accordance with existing PRC laws and regulations regarding foreign investment, with certain exceptions which require the preliminary approval by the provincial counterpart of MOFCOM and the consent of MOFCOM. The MOFCOM RMB FDI Circular also states that the proceeds of RMB FDI may not be used towards investment in securities, financial derivatives or entrustment loans in the PRC, except for investments in PRC domestic listed companies through private placements or share transfers by agreement under the PRC strategic investment regime. On October 13, 2011, the People s Bank of China, the central bank of the PRC (the PBoC ) issued the Measures on Administration of Renminbi Settlement in relation to Foreign Direct Investment (the PBoC RMB FDI Measures ), to commence the PBOC s detailed RMB FDI administration system, which covers almost all aspects of RMB FDI, including capital injection, payment of purchase price in the acquisition of PRC domestic enterprises, repatriation of dividends and distribution, as well as RMB denominated cross-border loans. Under the PBOC RMB FDI Measures, special approval for RMB FDI and shareholder loans from the PBOC which was previously required is no longer necessary. In some cases however, post-event filing with the PBOC is still necessary. The MOFCOM RMB FDI Circular and the PBOC RMB FDI Measures, which are new regulations, will be subject to interpretation and application by the relevant PRC authorities. There is no assurance that the PRC government will continue to gradually liberalise the control over cross-border Renminbi remittances in the future, that the pilot scheme introduced in July 2009 will not be discontinued or that new PRC regulations will not be promulgated in the future which have the effect of restricting or eliminating the remittance of Renminbi into or outside the PRC. Further, if any 19

20 new PRC regulations are promulgated in the future which have the effect of permitting or restricting (as the case may be) the remittance of Renminbi for payment of transactions categorised as capital account items, then such remittances will need to be made subject to the specific requirements or restrictions set out in such rules. In the event that funds cannot be repatriated outside the PRC in Renminbi, the Issuer will need to source Renminbi outside the PRC to finance its obligations under the CNY Notes, and its ability to do so will be subject to the overall availability of Renminbi outside the PRC. Holders of interests in the CNY Notes denominated in Renminbi may be required to provide certifications and other information (including Renminbi account information) in order to allow the relevant paying agent to carry out the relevant procedures to process payments in Renminbi in accordance with the permitted banking practices and for such holders to receive payments in Renminbi. Availability of Renminbi Outside the PRC is Limited There is only limited availability of Renminbi outside the PRC, which may affect the liquidity of the CNY Notes and the Corporation s ability to source Renminbi outside the PRC to service the CNY Notes. As a result of the restrictions by the PRC government on cross-border Renminbi fund flows, the availability of Renminbi outside of the PRC is limited. Since February 2004, in accordance with arrangements between the PRC government and the Hong Kong government, licensed banks in Hong Kong may offer limited Renminbi-denominated banking services to Hong Kong residents and specified business customers. The PBoC has also established a Renminbi clearing and settlement system for participating banks in Hong Kong. On July 19, 2010, further amendments were made to the Settlement Agreement on the Clearing of RMB Business (the Settlement Agreement ) between the PBoC and Bank of China (Hong Kong) Limited (the Renminbi Clearing Bank ) to further expand the scope of Renminbi business for participating banks in Hong Kong. Pursuant to the revised arrangements, all corporations are allowed to open Renminbi accounts in Hong Kong; there is no longer any limit on the ability of corporations to convert Renminbi; and there will no longer be any restriction on the transfer of Renminbi funds between different accounts in Hong Kong. However, the current size of Renminbi-denominated financial assets outside the PRC is limited. Renminbi business participating banks do not have direct Renminbi liquidity support from PBoC. The Renminbi Clearing Bank only has access to onshore liquidity support from PBoC to square open positions of participating banks for limited types of transactions, including open positions resulting from conversion services for corporations relating to cross-border trade settlement and for individual customers of up to CNY20,000 per person per day and for the designated business customers relating to the RMB received in providing their services. The relevant Renminbi Clearing Bank is not obliged to square for participating banks any open positions resulting from other foreign exchange transactions or conversion services and the participating banks will need to source Renminbi from the offshore market to square such open positions. Although it is expected that the offshore Renminbi market will continue to grow in depth and size, its growth is subject to many constraints as a result of PRC laws and regulations on foreign exchange. There is no assurance that new PRC regulations will not be promulgated or the Settlement Agreement will not be terminated or amended in the future which will have the effect of restricting availability of Renminbi offshore. The limited availability of Renminbi outside the PRC may affect the liquidity of the CNY Notes. To the extent the Issuer is required to source Renminbi in the offshore market to service the CNY Notes, there is no assurance that the Issuer will be able to source such Renminbi on satisfactory terms, if at all. Payments for the CNY Notes will be Made in the Manner Specified in the CNY Notes All payments to investors in respect of the CNY Notes will be made, solely for so long as the CNY Notes are represented by a Global Certificate held with the common depositary for Clearstream, Luxembourg and Euroclear, by transfer to a Renminbi bank account maintained in Hong Kong. The Corporation cannot be required to make payment by any other means (including in any other currency or by transfer to a bank account in the PRC). 20

21 TERMS AND CONDITIONS OF THE NOTES The following is the text of the terms and conditions (the Conditions and each a Condition ) that, subject to completion and amendment and as supplemented or varied in accordance with the provisions of Part A of the applicable Final Terms, will apply to the Notes referred to in such Final Terms. If Notes are to be printed in definitive form either (i) the full text of these Conditions together with the relevant provisions of the Final Terms or (ii) these Conditions as so completed, amended, supplemented or varied (and subject to simplification by the deletion of non-applicable provisions), shall be endorsed on the Definitive Bearer Notes (as defined below) or on the Certificates (as defined below) relating to such Registered Notes (as defined below). The Bearer Notes and the Registered Notes (each as defined in Condition 1(a)) are issued pursuant to an Amended and Restated Global Agency Agreement (as amended or supplemented as at the date of issue of the Notes (the Issue Date )), dated as of June 3, 2008 (the Global Agency Agreement ) between the Corporation, Citibank, N.A., London Branch, as global agent and the other agents named therein and, in the case of Bearer Notes and Registered Notes to be cleared through The Central Depository (Pte) Limited, as supplemented by the Supplemental Agency Agreement dated as at June 3, 2008 (the Supplemental Agency Agreement ) between the Corporation and Citibank, N.A., Singapore Branch, as Singapore paying agent, and the other agent named therein and, in the case of Bearer Notes and Registered Notes governed by English law, with the benefit of an Amended and Restated Deed of Covenant (as amended or supplemented as at the Issue Date, the Deed of Covenant ) dated as of June 3, 2008 executed by the Corporation in relation to the Notes. The original executed Deed of Covenant is held by the global agent. The Global Agency Agreement includes forms of the Notes (other than Fed Bookentry Notes (as defined in Condition 1(a)) and the receipts (if any) for the payment of instalments of principal (the Receipts ) relating to Notes in bearer form of which the principal is payable in instalments, the coupons (if any) attaching to interest-bearing Notes in bearer form (the Coupons ) and the talons (if any) for further Coupons relating to such Notes (the Talons ). The global agent, the paying agents, the registrar, the transfer agents, the exchange agent(s), the determination agent(s) and the calculation agent(s) are referred to below respectively as the Global Agent, the Paying Agents (which expression shall also include the Global Agent and such additional paying agents the Corporation may appoint from time to time or in connection with particular issues of Notes), the Registrar, the Transfer Agents, the Exchange Agent(s), the Determination Agent(s) and the Calculation Agent(s) (which expressions shall include their respective successors and any additional agents appointed as such by the Corporation from time to time). The Global Agent, the Registrar, the Transfer Agent, the Exchange Agent(s), the Determination Agent(s), the Calculation Agent(s) and the Federal Reserve Bank of New York are together referred to herein as the Agents. Unless otherwise specified in these Conditions, the Calculation Agent will be Citibank, N.A., London Branch. The Noteholders (as defined below), the holders (the Couponholders ) of the interest coupons appertaining to interest bearing Notes in bearer form and, where applicable in the case of such Notes, talons for further Coupons, and the holders of the receipts for the payment of instalments of principal relating to Bearer Notes of which the principal is payable in instalments are bound by and are deemed to have notice of all of the provisions of the Global Agency Agreement, the Deed of Covenant and the Final Terms relevant to such Notes. Copies of the Global Agency Agreement and the Deed of Covenant are available for inspection at the specified offices of each of the Global Agent, the Registrar and the Transfer Agents. The Fed Bookentry Notes are issued in accordance with a uniform fiscal agency agreement effective as of July 20, 2006 (as amended and supplemented from time to time, the Fiscal Agency Agreement ) and made between the Corporation and the Federal Reserve Bank of New York, as fiscal and paying agent (the Fiscal Agent ). Copies of the Fiscal Agency Agreement are available for inspection at the specified offices of the Fiscal Agent. In these Conditions, Noteholder means the bearer of any Bearer Note and the Receipts relating to it or the Federal Reserve Bank of New York for Fed Bookentry Notes or the person in whose name a Registered Note is registered, and holder (in relation to a Bearer Note, Receipt, Coupon or Talon) means the bearer of any Bearer Note, Receipt, Coupon or Talon or, in relation to a Fed Bookentry Note, the Federal Reserve Bank of New York or, in relation to a Registered Note, the person in whose name a Registered Note is registered, as the case may be. 21

22 For Notes which are not Definitive Bearer Notes, Fed Bookentry Notes or individually certificated Registered Notes represented by Certificates (each as defined in Condition 1(a)), references in these Conditions to terms specified on a Note or specified hereon shall be deemed to include references to terms specified in the applicable Final Terms issued in respect of a particular issue of Notes of which such Note forms a part (each a Final Terms ) and which will be attached to such Note. For Notes which are Fed Bookentry Notes, references in these Conditions to terms specified on a Fed Bookentry Note or specified hereon shall be deemed to be references to the Final Terms applicable to such Fed Bookentry Note. These Conditions may be amended, modified or varied in relation to any Series of Notes by the terms of the applicable Final Terms in relation to such Series. All capitalized terms that are not defined in these Conditions will have the meanings given to them in the applicable Final Terms. 1. Form, Denomination, Title and Specified Currency (a) Form: Each issue of Notes of which this Note forms a part (the Notes ) is issued as: (i) (ii) (iii) bearer notes ( Bearer Notes ) in the nominal amount of a Specified Denomination (as defined in Condition 1(b)); uncertificated bookentry notes ( Fed Bookentry Notes ) in the nominal amount of a Specified Denomination; and/or registered notes other than those registered notes issued in exchange for Fed Bookentry Notes ( Registered Notes ) in the nominal amount of a Specified Denomination, as specified on such Note, and these Conditions must be read accordingly. An issue of Notes may comprise either Bearer Notes only, Registered Notes only, Registered Notes and Bearer Notes only, or Fed Bookentry Notes only (except as provided in Condition 2(b)). Bearer Notes may be issued in global form and/or definitive bearer form ( Definitive Bearer Notes ). Bearer Notes in definitive form are serially numbered and are issued with Coupons (and, where appropriate, a Talon) attached, except in the case of Notes that do not bear interest, in which case references to interest (other than in relation to interest due after the Maturity Date), Coupons and Talons in these Conditions are not applicable. Any Bearer Note the nominal amount of which is redeemable in instalments is issued with one or more Receipts attached. Registered Notes are represented by registered certificates ( Certificates ) in global and/or definitive form. Except as provided in Condition 2(c), one Certificate (including Certificates in global form) representing the aggregate nominal amount of Registered Notes held by the same holder will be issued to such holder, unless more than one Certificate is required for clearance and settlement purposes. Each Certificate will be numbered serially with an identifying number, which will be recorded in the register (the Register ) kept by the Registrar. (b) Denomination: Specified Denomination means the denomination or denominations specified on such Note. (c) Title: (i) (ii) Title to Bearer Notes and Receipts, Coupons and Talons shall pass by delivery. The Corporation may deem and treat the Federal Reserve Bank of New York, in respect of all Fed Bookentry Notes, as the absolute owner thereof for all purposes whatsoever notwithstanding any notice to the contrary and all payments to or on the order of the Federal Reserve Bank of New York and such registered owner, respectively, shall be valid and effective to discharge the liability of the Corporation with respect to such Fed Bookentry Notes to the extent of the sum or sums so paid. As custodian of Fed Bookentry Notes, the Federal Reserve Bank of New York may deem and treat other Federal Reserve Banks and Branches and Holding Institutions (as defined below) located in the Second Federal Reserve District holding any Fed Bookentry Notes as the absolute owner thereof for all purposes whatsoever notwithstanding any notice to the contrary; and all payments to or on the order of such Federal Reserve Banks or Branches or Holding Institutions, as the case may be, shall be valid and effective to discharge the liability of the Corporation with respect to such Fed Bookentry Notes to 22

23 (iii) the extent of the sum or sums paid. A Holding Institution is a depositary or other designated institution that has an appropriate bookentry account with a Federal Reserve Bank or Branch. The Corporation, the Global Agent, the Paying Agents, the Registrar and the Transfer Agents shall be entitled to deem and treat the bearer of any Bearer Note, Receipt, Coupon or Talon, or the Federal Reserve Bank of New York for Fed Bookentry Notes, or the registered holder of any Registered Note, to be the absolute owner thereof for the purpose of making payments and for all other purposes, whether or not such Bearer Note, Receipt, Coupon or Talon, Fed Bookentry Note or Registered Note is overdue and regardless of any notice of ownership, trust or an interest therein, any writing thereon (or on the Certificate representing it) or any notice of any previous theft or loss thereof (or of the related Certificate), and all payments on a Note or Coupon to such holder shall be deemed valid and effectual to discharge the liability of the Corporation in respect of such Note or Coupon to the extent of the sum or sums so paid. Title to Registered Notes shall pass by registration in the Register in accordance with the provisions of the Global Agency Agreement or otherwise in accordance with applicable law. (d) Specified Currency: The Specified Currency of any Note is as specified hereon. Unless otherwise specified hereon, all payments of principal and interest in respect of a Note shall be made in the Specified Currency. 2. Transfers of Registered Notes and Exchanges of Bearer Notes (a) Transfers: (i) (ii) Subject as provided in Condition 2(g), Registered Notes may be transferred in whole or in part in a Specified Denomination upon the surrender (at the specified office of the Registrar or any Transfer Agent) of the Certificate representing such Registered Notes to be transferred, together with the form of transfer endorsed on such Certificate duly completed and executed. In the case of a transfer of part only of Registered Notes represented by one Certificate, a new Certificate shall be issued to the transferee in respect of the part transferred and a further new Certificate in respect of the balance of the interest in the Notes not transferred shall be issued to the transferor. In the case of a transfer of Registered Notes to a person who is already a holder of Registered Notes, a new Certificate representing the transferee s aggregate interest in the Notes shall only be issued against surrender of the Certificate representing its existing interest in the Notes. Registered Notes may not be exchanged for Bearer Notes. (b) Transfer of Fed Bookentry Notes: Fed Bookentry Notes may be transferred between Holding Institutions, in Federal Reserve Districts where the respective Federal Reserve Banks have adopted appropriate procedures, in accordance with such procedures. Fed Bookentry Notes may not be exchanged for Registered Notes or for Bearer Notes. (c) Partial Exercise of Options or Partial Redemption in Respect of Registered Notes: In the case of a partial redemption (in respect of an exercise of the Corporation s or the Noteholder s option or otherwise) of Registered Notes represented by a single Certificate, a new Certificate in respect of the balance of the interest in any such Registered Notes not redeemed shall be issued to the holder to reflect the exercise of such option. In the case of a partial exercise of an option (other than in respect of optional redemption), one or more new Certificates may be issued to the relevant holders reflecting such exercise. New Certificates shall only be issued against surrender of the existing Certificates to the Registrar or any Transfer Agent. (d) Exchange of Bearer Notes: Subject as provided in Condition 2(g), and if so provided hereon, Bearer Notes may be exchanged for the same aggregate nominal amount of Registered Notes of the same Series at the request in writing of the relevant Noteholder and upon surrender of each Bearer Note to be exchanged, together with all unmatured Receipts, Coupons and Talons relating to it, at the specified office of any Transfer Agent; provided, however, that where such Bearer Note is surrendered 23

24 for exchange after the Record Date (as defined in Condition 6(c)) for any payment of interest, the Coupon in respect of that payment of interest need not be surrendered with it. Bearer Notes of one Specified Denomination may not be exchanged for Bearer Notes of another Specified Denomination. (e) Delivery of New Certificates and Notes: New Certificate(s) or Note(s) issued upon any transfer, exchange, partial redemption or partial exercise of options in accordance with this Condition 2 shall be mailed by uninsured post at the risk of the holder entitled to the new Certificate or Note to such address as may be so specified in the request for transfer or exchange, or in the redemption exercise notice delivered by the holder requesting such transfer, exchange or partial redemption, to the relevant Transfer Agent or Registrar, as the case may be (in respect of Registered Notes), or (if no address is so specified) as appears in the Register, or otherwise in accordance with the customary procedures of the relevant Transfer Agent, the Registrar or the Fiscal Agent, as the case may be, unless such holder requests otherwise and pays in advance to the relevant Agent the costs of such other method of delivery and/or such insurance as it may specify. (f) Exchange Free of Charge: Exchanges of Bearer Notes for Registered Notes and registrations of transfers of Certificates shall be effected without charge by or on behalf of the Corporation, the Registrar or the Transfer Agents, provided that the transferor or holder shall bear the expense of the issue and delivery of any Registered Note and shall make any payment of any tax or other governmental charges that may be imposed in relation to it (or the giving of such indemnity as the Registrar or the relevant Transfer Agent may require). (g) Closed Periods: No transfer of a Registered Note or the exchange of a Bearer Note for one or more Registered Note(s) will be effected (i) in the case of a transfer of a Registered Note or exchange of a Bearer Note, during the period of 15 days immediately preceding the due date for any payment of principal, redemption amount or premium (if any) in respect of that Note, or, in the case of a transfer of a Fed Bookentry Note, during the period of 10 days immediately preceding the due date for any payment of principal, redemption amount or premium (if any) in respect of that Note, (ii) during the notice period immediately preceding any date on which Notes may be called for redemption by the Corporation at its option pursuant to Condition 5(c), (iii) after any such Note has been called for redemption or (iv) during the period of 7 days ending on (and including) any Record Date (as defined in Condition 6(c)). If specified hereon that Bearer Notes may be exchanged for Registered Notes, then any such Bearer Note called for redemption may be exchanged for one or more Registered Note(s) not later than the relevant Record Date, provided that the Certificate in respect of such Registered Note(s) is simultaneously surrendered. (h) Provisions Concerning Transfers: All transfers of Registered Notes and entries on the Register will be made in accordance with the relevant procedures of the Registrar. A copy of the relevant procedures will be made available by the Registrar to any holder of a Registered Note upon request. 3. Status of Notes The Notes are direct, unconditional, general and unsecured obligations of the Corporation ranking pari passu and without any preference among themselves and pari passu with all other outstanding unsecured and unsubordinated obligations for borrowed money of the Corporation. THE NOTES ARE NOT OBLIGATIONS OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OR OF ANY GOVERNMENT. 4. Interest (a) Interest on Fixed Rate Notes: Each Fixed Rate Note bears interest on its outstanding nominal amount from and including the Interest Commencement Date at the rate per annum equal to the Rate of Interest, such interest being payable in arrear on each Interest Payment Date. The amount of interest payable shall be determined in accordance with Condition 4(h). (b) Interest on Floating Rate Notes and Index Linked Interest Notes: (i) Interest Payment Dates: Each Floating Rate Note and Index Linked Interest Note bears interest on its outstanding nominal amount from and including the Interest Commencement Date at 24

25 (ii) (iii) the rate per annum (expressed as a percentage) equal to the Rate of Interest, such interest being payable in arrear on each Interest Payment Date. The amount of interest payable shall be determined in accordance with Condition 4(h). Such Interest Payment Date(s) is/are either specified hereon as Specified Interest Payment Dates or, if no Specified Interest Payment Date(s) is/are specified hereon, Interest Payment Date shall mean each date which falls the number of months or other period specified hereon as the Interest Period after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date. Business Day Convention: If any date referred to in these Conditions that is specified to be subject to adjustment in accordance with a Business Day Convention would otherwise fall on a day that is not a Business Day, then, if the Business Day Convention specified is (A) the Floating Rate Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event (x) such date shall be brought forward to the immediately preceding Business Day and (y) each subsequent such date shall be the last Business Day of the month in which such date would have fallen had it not been subject to adjustment, (B) the Following Business Day Convention, such date shall be postponed to the next day that is a Business Day, (C) the Modified Following Business Day Convention, such date shall be postponed to the next day that is a Business Day unless it would thereby fall into the next calendar month, in which event such date shall be brought forward to the immediately preceding Business Day or (D) the Preceding Business Day Convention, such date shall be brought forward to the immediately preceding Business Day. Rate of Interest for Floating Rate Notes: The Rate of Interest in respect of Floating Rate Notes for each Interest Accrual Period shall be determined in the manner specified hereon and the provisions below relating to either ISDA Determination or Screen Rate Determination shall apply, depending upon which is specified hereon. (A) ISDA Determination for Floating Rate Notes Where ISDA Determination is specified hereon as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period shall be determined by the Calculation Agent as a rate equal to the relevant ISDA Rate. For the purposes of this sub-paragraph (A), ISDA Rate for an Interest Accrual Period means a rate equal to the Floating Rate that would be determined by the Calculation Agent under a Swap Transaction under the terms of an agreement incorporating the ISDA Definitions and under which: (x) the Floating Rate Option is as specified hereon; (y) the Designated Maturity is a period specified hereon; and (z) the relevant Reset Date is the first day of that Interest Accrual Period unless otherwise specified hereon. For the purposes of this sub-paragraph (A), Floating Rate, Calculation Agent, Floating Rate Option, Designated Maturity, Reset Date and Swap Transaction have the meanings given to those terms in the ISDA Definitions. (B) Screen Rate Determination for Floating Rate Notes (x) Where Screen Rate Determination is specified hereon as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Accrual Period will, subject as provided below, be either: (1) the offered quotation; or (2) the arithmetic mean of the offered quotations, 25

26 (expressed as a percentage rate per annum) for the Reference Rate which appears or appear, as the case may be, on the Relevant Screen Page as at either a.m. (London time in the case of LIBOR or Brussels time in the case of EURIBOR) on the Interest Determination Date in question as determined by the Calculation Agent. If five or more of such offered quotations are available on the Relevant Screen Page, the highest (or, if there is more than one such highest quotation, one only of such quotations) and the lowest (or, if there is more than one such lowest quotation, one only of such quotations) shall be disregarded by the Calculation Agent for the purpose of determining the arithmetic mean of such offered quotations. If the Reference Rate from time to time in respect of Floating Rate Notes is specified hereon as being other than LIBOR or EURIBOR, the Rate of Interest in respect of such Notes will be determined as provided hereon. (y) If the Relevant Screen Page is not available or, if sub-paragraph (x)(1) applies and no such offered quotation appears on the Relevant Screen Page, or, if sub-paragraph (x)(2) applies and fewer than three such offered quotations appear on the Relevant Screen Page, in each case as at the time specified above, subject as provided below, the Calculation Agent shall request, if the Reference Rate is LIBOR, the principal London Branch of each of the Reference Banks or, if the Reference Rate is EURIBOR, the principal Eurozone office of each of the Reference Banks, to provide the Calculation Agent with its offered quotation (expressed as a percentage rate per annum) for the Reference Rate if the Reference Rate is LIBOR, at approximately a.m. (London time), or if the Reference Rate is EURIBOR, at approximately a.m. (Brussels time) on the Interest Determination Date in question. If two or more of the Reference Banks provide the Calculation Agent with such offered quotations, the Rate of Interest for such Interest Accrual Period shall be the arithmetic mean of such offered quotations as determined by the Calculation Agent. (z) If paragraph (y) above applies and the Calculation Agent determines that fewer than two Reference Banks are providing offered quotations, subject as provided below, the Rate of Interest shall be the arithmetic mean of the rates per annum (expressed as a percentage) as communicated to (and at the request of) the Calculation Agent by the Reference Banks or any two or more of them, at which such banks were offered, if the Reference Rate is LIBOR, at approximately a.m. (London time) or, if the Reference Rate is EURIBOR, at approximately a.m. (Brussels time) on the relevant Interest Determination Date, deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate by leading banks in, if the Reference Rate is LIBOR, the London inter-bank market or, if the Reference Rate is EURIBOR, the Euro-zone inter-bank market, as the case may be, or, if fewer than two of the Reference Banks provide the Calculation Agent with such offered rates, the offered rate for deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate, or the arithmetic mean of the offered rates for deposits in the Specified Currency for a period equal to that which would have been used for the Reference Rate, at which, if the Reference Rate is LIBOR, at approximately a.m. (London time) or, if the Reference Rate is EURIBOR, at approximately a.m. (Brussels time), on the relevant Interest Determination Date, any one or more banks (which bank or banks is or are in the opinion of the Calculation Agent and the Corporation suitable for such purpose) informs the Calculation Agent it is quoting to leading banks in, if the Reference Rate is LIBOR, the London inter-bank market or, if the Reference Rate is EURIBOR, the Euro-zone inter-bank market, as the case may be, provided that, if the Rate of Interest cannot be determined in accordance with the foregoing provisions of this paragraph, the Rate of 26

27 (iv) Interest shall be determined as at the last preceding Interest Determination Date (though substituting, where a different Margin or Maximum or Minimum Rate of Interest is to be applied to the relevant Interest Accrual Period from that which applied to the last preceding Interest Accrual Period, the Margin or Maximum or Minimum Rate of Interest relating to the relevant Interest Accrual Period, in place of the Margin or Maximum or Minimum Rate of Interest relating to that last preceding Interest Accrual Period). Rate of Interest for Index Linked Interest Notes: The Rate of Interest in respect of Index Linked Interest Notes for each Interest Accrual Period shall be determined in the manner specified hereon and interest will accrue by reference to an Index or Formula as specified hereon. (c) Zero Coupon Notes: Where a Note the Interest Basis of which is specified to be Zero Coupon is repayable prior to the Maturity Date, the amount due and payable prior to the Maturity Date shall be the Early Redemption Amount of such Note. As from the Maturity Date, the Rate of Interest for any overdue principal of such a Note shall be a rate per annum (expressed as a percentage) equal to the Amortization Yield (as described in Condition 5(b)(i)). (d) Dual Currency Notes: In the case of Dual Currency Notes, if the rate or amount of interest fails to be determined by reference to a Rate of Exchange or a method of calculating Rate of Exchange, the rate or amount of interest payable shall be determined in the manner specified hereon. (e) Partly Paid Notes: In the case of Partly Paid Notes (other than Partly Paid Notes which are Zero Coupon Notes), interest will accrue as aforesaid on the paid-up nominal amount of such Notes and otherwise as specified hereon. (f) Accrual of Interest: Interest shall cease to accrue on each Note on the due date for redemption unless, upon due presentation, payment is improperly withheld or refused, in which event interest shall continue to accrue (as well after as before judgment) at the Rate of Interest in the manner provided in this Condition 4 to the Relevant Date (as defined in Condition 7). (g) Margin, Maximum/Minimum Rates of Interest, Instalment Amounts and Redemption Amounts and Rounding: (i) (ii) (iii) If any Margin is specified hereon (either (x) generally, or (y) in relation to one or more Interest Accrual Periods), an adjustment shall be made to all Rates of Interest, in the case of (x), or the Rates of Interest for the specified Interest Accrual Periods, in the case of (y), calculated in accordance with (b) above by adding (if a positive number) or subtracting the absolute value (if a negative number) of such Margin subject always to the next paragraph; If any Maximum or Minimum Rate of Interest, Instalment Amount or Redemption Amount is specified hereon, then any Rate of Interest, Instalment Amount or Redemption Amount shall be subject to such maximum or minimum, as the case may be; For the purposes of any calculations required pursuant to these Conditions (unless otherwise specified), (x) all percentages resulting from such calculations shall be rounded, if necessary, to the nearest one hundred-thousandth of a percentage point (with halves being rounded up), (y) all figures shall be rounded to seven significant figures (with halves being rounded up) and (z) all currency amounts that fall due and payable shall be rounded to the nearest unit of such currency (with halves being rounded up), save in the case of yen, which shall be rounded down to the nearest yen. For these purposes unit means the lowest amount of such currency that is available as legal tender in the country(ies) of such currency. (h) Calculations: The amount of interest payable per Calculation Amount in respect of any Note for any Interest Accrual Period shall be equal to the product of the Rate of Interest, the Calculation Amount specified hereon, and the Day Count Fraction for such Interest Accrual Period, unless an Interest Amount (or a formula for its calculation) is applicable to such Interest Accrual Period, in which case the amount of interest payable per Calculation Amount in respect of such Note for such Interest 27

28 Accrual Period shall equal such Interest Amount (or be calculated in accordance with such formula). Where any Interest Period comprises two or more Interest Accrual Periods, the amount of interest payable per Calculation Amount in respect of such Interest Period shall be the sum of the Interest Amounts payable in respect of each of those Interest Accrual Periods. In respect of any other period for which interest is required to be calculated, the provisions above shall apply save that the Day Count Fraction shall be for the period for which interest is required to be calculated. If the Calculation Amount is not specified hereon, the Calculation Amount shall equal the minimum Specified Denomination. (i) Determination and Publication of Rates of Interest, Interest Amounts, Final Redemption Amounts, Early Redemption Amounts, Optional Redemption Amounts and Instalment Amounts: The Calculation Agent shall, as soon as practicable on such date as the Calculation Agent may be required to calculate any rate or amount, obtain any quotation or make any determination or calculation, determine such rate and calculate the Interest Amounts for the relevant Interest Accrual Period, calculate the Final Redemption Amount, Early Redemption Amount, Optional Redemption Amount or Instalment Amount, obtain such quotation or make such determination or calculation, as the case may be, and cause the Rate of Interest and the Interest Amounts for each Interest Accrual Period and the relevant Interest Payment Date and, if required to be calculated, the Final Redemption Amount, Early Redemption Amount, Optional Redemption Amount or any Instalment Amount to be notified to the Global Agent, Fiscal Agent, the Corporation, each of the Paying Agents, the Noteholders, any other Calculation Agent appointed in respect of the Notes that is to make a further calculation upon receipt of such information and, if the Notes are listed on a stock exchange and the rules of such exchange or other relevant authority so require, such exchange or other relevant authority as soon as possible after their determination but in no event later than (i) the commencement of the relevant Interest Period, if determined prior to such time, in the case of notification to such exchange of a Rate of Interest and Interest Amount, or (ii) in all other cases, the fourth Business Day after such determination. Where any Interest Payment Date or Interest Period Date is subject to adjustment pursuant to Condition 4(b)(ii), the Interest Amounts and the Interest Payment Date so published may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. If the Notes become due and payable under Condition 9, the accrued interest and the Rate of Interest payable in respect of the Notes shall nevertheless continue to be calculated as previously in accordance with this Condition but no publication of the Rate of Interest or the Interest Amount so calculated needs to be made. The determination of any rate or amount, the obtaining of each quotation and the making of each determination or calculation by the Calculation Agent(s) shall (in the absence of manifest error) be final and binding upon all parties. (j) Definitions: In these Conditions, unless the context otherwise requires, the following defined terms shall have the meanings set out below: Business Day means: (i) (ii) (iii) in the case of a currency other than euro, a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments in the principal financial centre for such currency; and/or in the case of euro, a day on which the TARGET system is operating (a TARGET Business Day ); and/or in the case of a currency and/or one or more Business Centres, a day (other than a Saturday or a Sunday) on which commercial banks and foreign exchange markets settle payments in such currency in the Business Centre(s) or, if no currency is indicated, generally in each of the Business Centres. Day Count Fraction means, in respect of the calculation of an Interest Amount on any Note for any period of time (from and including the first day of such period to but excluding the last) (whether or not constituting an Interest Period or an Interest Accrual Period, the Calculation Period ): (i) if Actual/Actual or Actual/Actual - ISDA is specified hereon, the actual number of days in the Calculation Period divided by 365 (or, if any portion of that Calculation Period falls in a leap year, the sum of (A) the actual number of days in that portion of 28

29 (ii) (iii) (iv) (v) (vi) the Calculation Period falling in a leap year divided by 366 and (B) the actual number of days in that portion of the Calculation Period falling in a non-leap year divided by 365); if Actual/365 (Fixed) is specified hereon, the actual number of days in the Calculation Period divided by 365; if Actual/360 is specified hereon, the actual number of days in the Calculation Period divided by 360; if 30/360, 360/360 or Bond Basis is specified hereon, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows: Day Count Fraction = [360 x (Y 2 - Y 1 )] + [30 x (M 2 - M 1 )] + (D 2 - D 1 ) where: Y 1 is the year, expressed as a number, in which the first day of the Calculation Period falls; Y 2 is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; M 1 is the calendar month, expressed as a number, in which the first day of the Calculation Period falls; M 2 is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; D 1 is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D 1 will be 30; and D 2 is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31 and D 1 is greater than 29, in which case D 2 will be 30; if 30E/360 or Eurobond Basis is specified hereon, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows: Day Count Fraction = [360 x (Y 2 - Y 1 )] + [30 x (M 2 - M 1 )] + (D 2 D 1 ) where: Y 1 is the year, expressed as a number, in which the first day of the Calculation Period falls; Y 2 is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; M 1 is the calendar month, expressed as a number, in which the first day of the Calculation Period falls; M 2 is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; D 1 is the first calendar day, expressed as a number, of the Calculation Period, unless such number would be 31, in which case D 1 will be 30; and D 2 is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless such number would be 31, in which case D 2 will be 30; if 30E/360 (ISDA) is specified hereon, the number of days in the Calculation Period divided by 360, calculated on a formula basis as follows:

30 (vii) (viii) Day Count Fraction = [360 x (Y 2 - Y 1 )] + [30 x (M 2 - M 1 )] + (D 2 D 1 ) where: Y 1 is the year, expressed as a number, in which the first day of the Calculation Period falls; Y 2 is the year, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; M 1 is the calendar month, expressed as a number, in which the first day of the Calculation Period falls; M 2 is the calendar month, expressed as a number, in which the day immediately following the last day included in the Calculation Period falls; D 1 is the first calendar day, expressed as a number, of the Calculation Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D 1 will be 30; and D 2 is the calendar day, expressed as a number, immediately following the last day included in the Calculation Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D 2 will be 30; if Actual/Actual-ICMA is specified hereon, (a) if the Calculation Period is equal to or shorter than the Determination Period during which it falls, the number of days in the Calculation Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Periods normally ending in any year; and (b) if the Calculation Period is longer than one Determination Period, the sum of: (x) the number of days in such Calculation Period falling in the Determination Period in which it begins divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year; and (y) the number of days in such Calculation Period falling in the next Determination Period divided by the product of (1) the number of days in such Determination Period and (2) the number of Determination Periods normally ending in any year, where: Determination Period means the period from and including a Determination Date in any year to but excluding the next Determination Date; and Determination Date means the date specified as such hereon or, if none is so specified, the Interest Payment Date; or 360 in all other cases, such other basis as may be agreed, as specified hereon. Euro-zone means the region comprised of member states of the European Union that adopt the single currency in accordance with the Treaty establishing the European Community, as amended. Interest Accrual Period means the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Period Date and each successive period beginning on (and including) an Interest Period Date and ending on (but excluding) the next succeeding Interest Period Date. Interest Amount means: (i) in respect of an Interest Accrual Period, the amount of interest payable per Calculation Amount for that Interest Accrual Period and which, in the case of Fixed Rate Notes, and 30

31 (ii) unless otherwise specified hereon, shall mean the Fixed Coupon Amount or Broken Amount specified hereon as being payable on the Interest Payment Date ending the Interest Period of which such Interest Accrual Period forms part; and in respect of any other period, the amount of interest payable per Calculation Amount for that period. Interest Commencement Date means the Issue Date or such other date as may be specified hereon. Interest Determination Date means, with respect to a Rate of Interest and Interest Accrual Period, the date specified as such hereon or, if none is so specified, (i) the first day of such Interest Accrual Period if the Specified Currency is Sterling or (ii) the day falling two Business Days in London prior to the first day of such Interest Accrual Period if the Specified Currency is neither Sterling nor euro or (iii) the day falling two TARGET Business Days prior to the first day of such Interest Accrual Period if the Specified Currency is euro. Interest Period means the period specified as such hereon or, if none is so specified, the period beginning on (and including) the Interest Commencement Date and ending on (but excluding) the first Interest Payment Date and each successive period beginning on (and including) an Interest Payment Date and ending on (but excluding) the next succeeding Interest Payment Date. Interest Period Date means each Interest Payment Date unless otherwise specified hereon. ISDA Definitions means the 2006 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc., unless otherwise specified hereon. Rate of Interest means the rate of interest payable from time to time in respect of this Note and that is either specified hereon or calculated in accordance with the provisions specified hereon. Reference Banks means, in the case of a determination of LIBOR, the principal London office of four major banks in the London inter-bank market and, in the case of a determination of EURIBOR, the principal Euro-zone office of four major banks in the Eurozone inter-bank market, in each case selected by the Calculation Agent or as specified hereon. Reference Rate means the rate specified as such hereon. Relevant Screen Page means such page, section, caption, column or other part of a particular information service as may be specified hereon. Specified Currency means the currency specified as such hereon or, if none is specified, the currency in which the Notes are denominated. TARGET System means the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET) System or any successor thereto. (k) Calculation Agent: The Corporation shall procure that there shall at all times be one or more Calculation Agents if provision is made for them in the applicable Final Terms and for so long as any Note is outstanding (as defined in the Global Agency Agreement). Where more than one Calculation Agent is appointed in respect of the Notes, references in these Conditions to the Calculation Agent shall be construed as each Calculation Agent performing its respective duties under the Conditions. If the Calculation Agent is unable or unwilling to act as such or if the Calculation Agent fails duly to establish the Rate of Interest for an Interest Accrual Period or to calculate any Interest Amount, Instalment Amount, Final Redemption Amount, Early Redemption Amount or Optional Redemption Amount, as the case may be, or to comply with any other requirement, the Corporation shall appoint a leading bank or investment banking firm engaged in the interbank market (or, if appropriate, money, swap or over-the-counter index options market) that is most closely connected with the calculation or determination to be made by the Calculation Agent (acting through its principal London office or any other office actively involved in such market) to act as such in its place. The Calculation Agent may not resign its duties without a successor having been appointed as aforesaid. 31

32 5. Redemption, Purchase and Options (a) Final Redemption: Unless previously redeemed, purchased and cancelled as provided below, each Note shall be finally redeemed on the Maturity Date specified hereon at its Final Redemption Amount (which, unless otherwise provided, is its nominal amount) or, in the case of a Note falling within paragraph (b) below, its final Instalment Amount. (b) Redemption by Instalments: Unless previously redeemed, purchased and cancelled as provided in this Condition 6, each Note that provides for Instalment Dates and Instalment Amounts shall be partially redeemed on each Instalment Date at the related Instalment Amount specified hereon. The outstanding nominal amount of each such Note shall be reduced by the Instalment Amount (or, if such Instalment Amount is calculated by reference to a proportion of the nominal amount of such Note, such proportion) for all purposes with effect from the related Instalment Date, unless payment of the Instalment Amount is improperly withheld or refused, in which case, such amount shall remain outstanding until the Relevant Date relating to such Instalment Amount. (c) Early Redemption Amounts: (i) (ii) Notes Other than Zero Coupon Notes: The Early Redemption Amount payable in respect of any Note (other than Notes described in (ii) below), upon it becoming due and payable as provided in Condition 9, shall be the Final Redemption Amount unless otherwise specified hereon. Zero Coupon Notes: (A) The Early Redemption Amount payable in respect of any Zero Coupon Note, upon it becoming due and payable as provided in Condition 9, shall be the Amortized Face Amount (calculated as provided below) of such Note unless the Early Redemption Amount is linked to an index and/or a formula, or unless otherwise specified hereon. (B) Subject to the provisions of sub-paragraph (C) below, the Amortized Face Amount of any such Note shall be the scheduled Final Redemption Amount of such Note on the Maturity Date discounted at a rate per annum (expressed as a percentage) equal to the Amortization Yield (which, if none is specified hereon, shall be such rate as would produce an Amortized Face Amount equal to the issue price of the Notes if they were discounted back to their issue price on the Issue Date) compounded annually. (C) If the Early Redemption Amount payable in respect of any such Note upon it becoming due and payable as provided in Condition 9 is not paid when due, the Early Redemption Amount due and payable in respect of such Note shall be the Amortized Face Amount of such Note as defined in sub-paragraph (B) above, except that such sub-paragraph shall have effect as though the date on which the Note becomes due and payable were the Relevant Date. The calculation of the Amortized Face Amount in accordance with this sub-paragraph shall continue to be made (both before and, to the extent permitted by applicable law, after judgment) until the Relevant Date, unless the Relevant Date falls on or after the Maturity Date, in which case the amount due and payable shall be the scheduled Final Redemption Amount of such Note on the Maturity Date together with any interest that may accrue in accordance with Condition 4(c). Where such calculation is to be made for a period of less than one year, it shall be made on the basis of the Day Count Fraction specified hereon. (d) Redemption at the Option of the Corporation: If Call Option is specified hereon as applicable, the Corporation may, on giving not less than 14 nor more than 30 days irrevocable notice to the Noteholders (or such other notice period as may be specified hereon) redeem, all or, if so provided, some, of the Notes on any Optional Redemption Date. Any such redemption of Notes shall be at their Optional Redemption Amount together with interest accrued to the date fixed for redemption. Any such redemption or exercise must relate to Notes of a nominal amount at least equal to the Minimum 32

33 Redemption Amount to be redeemed specified hereon and no greater than the Maximum Redemption Amount to be redeemed specified hereon. All Notes in respect of which any such notice is given shall be redeemed on the Optional Redemption Date specified in such notice in accordance with this Condition. In the case of a partial redemption of Notes other than Fed Bookentry Notes, the notice to Noteholders shall also contain the certificate numbers of the Bearer Notes, or, in the case of Registered Notes, shall specify the nominal amount of Registered Notes drawn and the holder(s) of such Registered Notes, to be redeemed, which shall have been drawn in such place and in such manner as may be fair and reasonable in the circumstances, taking account of prevailing market practices, subject to compliance with any applicable laws and stock exchange or other relevant authority requirements. So long as the Notes are listed on the Luxembourg Stock Exchange or any other stock exchange and the rules of that stock exchange so require, the Corporation shall, once in each year in which there has been a partial redemption of the Notes, cause to be published either on the website of the Luxembourg Stock Exchange ( or in a newspaper having general circulation in Luxembourg or, as specified by such other stock exchange, a notice specifying the aggregate nominal amount of Notes outstanding and a list of the Notes drawn for redemption but not surrendered. In the case of a partial redemption of Fed Bookentry Notes, each such Note will be redeemed in the amount of its pro rata share of the aggregate amount of such partial redemption and thereafter shall be treated as being outstanding as to its unredeemed balance. (e) Redemption at the Option of Noteholders: If Put Option is specified hereon as applicable, the Corporation shall, at the option of the holder of any such Note, upon the holder of such Note giving not less than 46 nor more than 60 days notice to the Corporation (or such other notice period as may be specified hereon) redeem such Note on the Optional Redemption Date(s) at its Optional Redemption Amount together with interest accrued to the date fixed for redemption. In the case of a Note which is not a Fed Bookentry Note, to exercise such option the holder must deposit (in the case of Bearer Notes) such Note (together with all unmatured Receipts and Coupons and unexchanged Talons) with any Paying Agent or (in the case of Registered Notes) the Certificate representing such Note(s) with the Registrar or any Transfer Agent at its specified office, together with a duly completed option exercise notice ( Exercise Notice ) in the form obtainable from any Paying Agent, the Registrar or any Transfer Agent (as applicable) within the notice period. In the case of a Fed Bookentry Note, if the holder wishes to exercise such option, the holder must give notice thereof to the Corporation through the relevant Holding Institution. No Note or Certificate so deposited and option exercised may be withdrawn (except as provided in the Fiscal Agency Agreement or the Global Agency Agreement) without the prior consent of the Corporation. (f) Automatic Early Redemption: If Automatic Early Redemption is specified hereon as applicable, the Corporation shall redeem all of the Notes on the Optional Redemption Date at their Optional Redemption Amount together with interest accrued to the date fixed for redemption. (g) Partly Paid Notes: Partly Paid Notes will be redeemed, whether at maturity, early redemption or otherwise, in accordance with the provisions of this Condition and the provisions specified hereon. (h) Purchases: The Corporation may at any time purchase or otherwise acquire Notes in the open market or otherwise. Notes purchased or otherwise acquired by the Corporation may be held or resold or, at the discretion of the Corporation, surrendered to the Global Agent for cancellation (together with (in the case of Definitive Bearer Notes) any unmatured Coupons, unexchanged Talons or Receipts attached thereto or purchased therewith). If purchases are made by tender, tenders must be made available to all Noteholders of the same Series alike. (i) Cancellation: All Notes purchased by or on behalf of the Corporation may be surrendered for cancellation, in the case of Bearer Notes, by surrendering each such Note together with all unmatured Receipts and Coupons and all unexchanged Talons to the Global Agent and, in the case of Registered Notes, by surrendering the Certificate representing such Notes to the Registrar, and, in each case, if so surrendered, shall, together with all Notes redeemed by the Corporation, be cancelled forthwith (together with all unmatured Receipts and Coupons and unexchanged Talons attached thereto or surrendered therewith). Any Notes so surrendered for cancellation may not be reissued or resold and the obligations of the Corporation in respect of any such Notes shall be discharged. 33

34 6. Payments (a) Bearer Notes: (i) (ii) Payments of principal and interest in respect of Bearer Notes shall, subject as mentioned below, be made against presentation and surrender of the relevant Receipts (in the case of payments of Instalment Amounts other than on the due date for redemption and provided that the Receipt is presented for payment together with its relative Note), Notes (in the case of all other payments of principal and, in the case of interest, as specified in Condition 6(f)(vi)) or Coupons (in the case of interest, save as specified in Condition 6(f)(vi)), as the case may be, at the specified office of any Paying Agent outside the United States by a check payable in the relevant currency drawn on, or, at the option of the holder, by transfer to an account denominated in such currency with, a Bank. Bank means a bank in the principal financial centre for such currency or, in the case of euro, in a city in which banks have access to the TARGET System. Notwithstanding the foregoing, if the Specified Currency of any Bearer Notes or payments thereunder are otherwise to be made in U.S. dollars, payments in respect thereof may be made at the specified office of any Paying Agent in New York City in the same manner as aforesaid if (i) the Corporation shall have appointed Paying Agents with specified offices outside the United States with the reasonable expectation that such Paying Agents would be able to make payment of the amounts on the Notes in the manner provided above when due, (ii) payment in full of such amounts at all such offices is illegal or effectively precluded by exchange controls or other similar restrictions on payment or receipt of such amounts, and (iii) such payment is then permitted by U.S. law. Payments of principal, premium (if any) and interest in respect of Bearer Notes represented by a Global Note in classic global note ( CGN ) form will (subject as provided below) be made in the manner specified above in relation to Definitive Bearer Notes and otherwise in the manner specified in the relevant Global Note against presentation or surrender, as the case may be, of such Global Note at the specified office of any Paying Agent. A record of which payment made against presentation or surrender of such Global Note in CGN form, distinguishing between any payment of principal and any payment of interest, will be made on such Global Note by such Paying Agent and such record shall be prima facie evidence that the payment in question has been made. If the Global Note is in new global note ( NGN ) form, the Corporation shall procure that details of each such payment shall be entered pro rata in the records of the relevant clearing system and in the case of payments of principal, the nominal amount of the Notes recorded in the records of the relevant clearing system and represented by the Global Note will be reduced accordingly. Payments under the Global Note in NGN form will be made to its holder. Each payment so made will discharge the Corporation s obligations in respect thereof. Any failure to make the entries in the records of the relevant clearing system shall not affect such discharge. (b) Fed Bookentry Notes: (i) (ii) Payments of principal and interest on the Notes will be payable at a designated office or agency of the Corporation in New York City in U.S. dollars to the holder on the Fed Bookentry Record Date (as defined below), provided that, at the Corporation s option, principal and interest in respect of Fed Bookentry Notes may be paid by credit to a Federal Reserve Bank or branch account of Holding Institutions holding such Fed Bookentry Notes. The Federal Reserve Bank of New York, 33 Liberty Street, New York, New York 10045, will act as the Fiscal Agent for the Notes pursuant to the Fiscal Agency Agreement. The Fed Bookentry Record Date for the purpose of payment of interest or principal on the Fed Bookentry Notes shall be as of the close of business at the Fiscal Agent on the day preceding the due date for payment thereof. If any such day is not a day on which the Fiscal Agent is open for business, the Fed Bookentry Record Date shall be the next preceding day on which the Fiscal Agent is open for business. Noteholders will not be entitled to any interest or other payment for any delay after the due date if any date for payment is not a day on which the Fiscal Agent is open for 34

35 business, and the Noteholder will not be entitled to payment until the next following day on which the Fiscal Agent is open for business. (c) Registered Notes: (i) (ii) (iii) (iv) Payments of principal (which for the purposes of this Condition 6(c) shall include final Instalment Amounts but not other Instalment Amounts) in respect of Registered Notes shall be made against surrender of the relevant Certificates at the specified office of any of the Transfer Agents or of the Registrar and in the same manner provided in paragraph (ii) below. Interest (which for the purpose of this Condition 6(c) shall include all Instalment Amounts other than final Instalment Amounts) on Registered Notes shall be paid to the person shown on the Register at the close of business on the fifteenth day before the due date for payment thereof (the Record Date ). Payments of interest on each Registered Note shall be made in the relevant currency by check drawn on a Bank and mailed to the holder (or to the first-named of joint holders) of such Note at its address appearing in the Register. Upon application by the holder to the specified office of the Registrar or any Transfer Agent before the Record Date, such payment of interest may be made by transfer to an account in the relevant currency maintained by the payee with a Bank. Registered Notes held through The Depository Trust Company ( DTC ) will be paid as follows: (A) if the Specified Currenc(y/ies) for payment is(are) U.S. dollars, payments of principal, premium (if any), and/or interest will be made in accordance with Conditions 6(c)(i) and (ii). (B) if the Specified Currenc(y/ies) for payment is(are) a currency other than U.S. dollars, payments of principal and interest will be made by the Global Agent in the relevant currency to the Exchange Agent who will make payments in such currency by wire transfer of same day funds to the designated account in such currency of DTC participants entitled to receive the relevant payment who have made an irrevocable election prior to 5:00 p.m. New York City time on the third day on which banks are open for business in New York City (a DTC Business Day ) following the applicable Record Date in the case of interest and the twelfth calendar day prior to the payment date for the payment of principal to receive that payment in such currency. In the case of DTC participants entitled to receive the relevant payments but who have not elected to receive payments in such currency, the Exchange Agent, after converting amounts in such currency into U.S. dollars as necessary to make payments in U.S. dollars, will deliver U.S. dollar amounts in same day funds to DTC for payment through its settlement system to such DTC participants. The Global Agency Agreement sets out the manner in which such conversions or such elections are to be made. Noteholders will not be entitled to any interest or other payment for any postponed payment resulting from the application of Condition 6(h) if the Noteholder is late in surrendering its Certificate (if required to do so) or if its Certificate cannot be surrendered to a Transfer Agent that is open for business on the day of such surrender or if a check mailed in accordance with this Condition 6(c) arrived after the due date for payment. (d) Payments Subject to Law: All payments are subject in all cases to any applicable fiscal or other laws, regulations and directives. No commission or expenses shall be charged to the Noteholders or Couponholders in respect of such payments. (e) Appointment of Agents: The Fiscal Agent, the Global Agent, the Paying Agents, the Registrar, the Transfer Agents and the Calculation Agent initially appointed by the Corporation and their respective specified offices are listed below. The Fiscal Agent, the Global Agent, the Paying Agents, the Registrar, Transfer Agents and the Calculation Agent(s) act solely as agents of the Corporation and do not assume any obligation or relationship of agency or trust for or with any Noteholder or Couponholder. The Corporation reserves the right at any time to vary or terminate the 35

36 appointment of the Fiscal Agent, the Global Agent, any other Paying Agent, the Registrar, any Transfer Agent, any Calculation Agent or any other agent and to appoint a substitute Fiscal Agent or Global Agent and/or additional or other Paying Agents, Registrars, Transfer Agents, Calculation Agents or any other agent; provided that the Corporation shall at all times maintain (i) a Fiscal Agent with respect to Fed Bookentry Notes, (ii) a Global Agent with respect to Bearer Notes and Registered Notes, (iii) for Registered Notes, a Registrar and Transfer Agent in New York City and a Transfer Agent having its specified office in a European city which, so long as Notes are listed on the Luxembourg Stock Exchange, will be Luxembourg, (iv) for Bearer Notes, a Paying Agent having its specified office in a European city which, so long as the Notes are listed on the Luxembourg Stock Exchange, will be Luxembourg, (v) for so long as any Notes are listed on the Singapore Exchange Securities Trading Limited (and that Exchange so requires), a paying agent (which may be the Global Agent) having a specified office in Singapore, (vi) one or more Calculation Agent(s) if specified hereon, and (vii) such other agents as may be required by any other stock exchange on which the Notes may be listed. In addition, the Corporation shall appoint a Paying Agent in New York City in respect of any Bearer Notes the Specified Currency of which is U.S. dollars or payments in respect of which are otherwise to be made in U.S. dollars in the circumstances described in Condition 6(a)(ii). Notice of any such change or any change of any specified office shall promptly be given to the Noteholders in accordance with Condition 13. (f) Unmatured Coupons and Receipts and Unexchanged Talons: (i) (ii) (iii) (iv) (v) (vi) Upon the due date for redemption of Bearer Notes which comprise Fixed Rate Notes (other than Dual Currency Notes or Index Linked Notes), they should be surrendered for payment together with all unmatured Coupons (if any) relating thereto, failing which an amount equal to the face value of each missing unmatured Coupon (or, in the case of payment not being made in full, that proportion of the amount of such missing unmatured Coupon that the sum of principal so paid bears to the total principal due) shall be deducted from the Final Redemption Amount, Early Redemption Amount or Optional Redemption Amount, as the case may be, due for payment. Any amount so deducted shall be paid in the manner mentioned above against surrender of such missing Coupon within a period of 10 years from the Relevant Date for the payment of such principal (whether or not such Coupon has become void pursuant to Condition 8). Upon the due date for redemption of any Bearer Note comprising a Floating Rate Note, Dual Currency Interest Note or Index Linked Note, any unmatured Coupon relating to such Note (whether or not attached) shall become void and no payment shall be made in respect of such Coupon. Upon the due date for redemption of any Bearer Note, any unexchanged Talon relating to such Note (whether or not attached) shall become void and no Coupon shall be delivered in respect of such Talon. Upon the due date for redemption of any Bearer Note that is redeemable in instalments, any Receipt relating to such Note having an Instalment Date falling on or after such due date (whether or not attached) shall become void and no payment shall be made in respect of such Receipt. Where any Bearer Note that provides that the relative unmatured Coupons are to become void upon the due date for redemption of those Notes is presented for redemption without all unmatured Coupons, and where any Bearer Note is presented for redemption without any unexchanged Talon relating to it, redemption shall be made only against the provision of such indemnity as the Corporation may require. If the due date for redemption of any Note is not a due date for payment of interest, interest accrued from the preceding due date for payment of interest or the Interest Commencement Date, as the case may be, shall only be payable against presentation (and surrender, if appropriate) of the relevant Bearer Note or Certificate representing it, as the case may be. Interest accrued on a Note that only bears interest after its Maturity Date shall be payable on redemption of such Note against presentation of the relevant Note or Certificate representing it, as the case may be. 36

37 (g) Talons: On or after the Interest Payment Date for the final Coupon forming part of a Coupon sheet issued in respect of any Bearer Note, the Talon forming part of such Coupon sheet may be surrendered at the specified office of the Global Agent in exchange for a further Coupon sheet (and if necessary another Talon for a further Coupon sheet) (but excluding any Coupons that may have become void pursuant to Condition 8). (h) Non-Business Days: If any date for payment in respect of any Note, Receipt or Coupon is not a business day, the holder shall not be entitled to payment until the next following business day nor to any interest or other sum in respect of such postponed payment. In this paragraph, business day means a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are open for business in the relevant place of presentation, in such jurisdictions as shall be specified as Financial Centres in the applicable Final Terms; and: (i) (ii) (in the case of a payment in a currency other than euro) where payment is to be made by transfer to an account maintained with a bank in the relevant currency, on which foreign exchange transactions may be carried on in the relevant currency in the principal financial centre of the country of such currency; or (in the case of a payment in euro) which is a TARGET Business Day. (i) Currency of Payment: If any payment in respect of this Note is payable in a Specified Currency other than U.S. dollars that is no longer used by the government of the country issuing such currency for the payment of public and private debts or used for settlement of transactions by public institutions in such country or within the international banking community, or in a Specified Currency that is not expected to be available, when any payment on this Note is due as a result of circumstances beyond the control of the Corporation, the Corporation shall be entitled to satisfy its obligations in respect of such payment by making such payment in U.S. dollars on the basis of the noon buying rate in U.S. dollars in the City of New York for wire transfers for such Specified Currency as published by the Federal Reserve Bank of New York on the second Business Day prior to such payment or, if such rate is not available on such second Business Day or is not so published, on the basis of the rate most recently available to the Calculation Agent on or prior to such second Business Day. Any payment made by the Corporation under such circumstances in such other currency or U.S. dollars will constitute valid payment, and will not constitute a default in respect of this Note. For the purpose of this Condition 6(i), Business Day means a day on which the Federal Reserve Bank of New York is open for business in New York City. 7. Taxation The Notes (and any interest thereon) are not exempt from taxation generally. Under the Articles of Agreement constituting the Corporation, the Corporation is not under any obligation to withhold or pay any tax imposed by any member country in respect of the Notes. Accordingly, payments in respect of principal, premium (if any), and interest due on the Notes will be paid to the Global Agent or the Fiscal Agent, as the case may be, without deduction in respect of any such tax. Under the Articles of Agreement constituting the Corporation, payments in respect of principal, premium (if any), and interest due on the Notes are not subject to any tax by a member (i) which tax discriminates against the Notes solely because they are issued by the Corporation, or (ii) if the sole jurisdictional basis for the tax is the place or currency in which the Notes are issued, made payable or paid, or the location of any office or place of business maintained by the Corporation. 8. Prescription Other than for Notes, Receipts and Coupons governed by the laws of the State of New York, claims against the Corporation for payment in respect of the Notes, Receipts and Coupons (which for this purpose shall not include Talons) shall be prescribed and become void unless made within ten years (in the case of principal) or five years (in the case of interest) from the appropriate Relevant Date in respect thereof. As used in these Conditions, Relevant Date in respect of any Note, Receipt or Coupon means the date on which payment in respect of it first becomes due or (if any amount of the money payable is improperly withheld or refused) the date on which payment in full of the amount outstanding is made or (if earlier) the date seven days after that on which notice is duly given to the 37

38 Noteholders that, upon further presentation of the Note (or surrender of the relative Certificate), Receipt or Coupon being made in accordance with the Conditions, such payment will be made, provided that payment is in fact made upon such presentation or surrender. References in these Conditions to (i) principal shall be deemed to include any premium payable in respect of the Notes, all Instalment Amounts, Final Redemption Amounts, Early Redemption Amounts, Optional Redemption Amounts, Amortized Face Amounts and all other amounts in the nature of principal payable pursuant to Condition 5 or any amendment or supplement to it and (ii) interest shall be deemed to include all Interest Amounts and all other amounts payable pursuant to Condition 4 or any amendment or supplement to it. 9. Events of Default With respect to a Series of Notes, if the Corporation shall either (a) fail to pay when due the principal of, premium (if any), or interest on, any Note of such Series or (b) fail to pay when due in aggregate an amount equal to or exceeding U.S.$20,000,000 or its equivalent in any other relevant currency or currencies of the principal of, premium (if any), or interest on, any Note of another Series, or any notes, bonds or similar obligations (other than the Notes) which shall have been issued, assumed or guaranteed by the Corporation and, in either case, such failure shall continue for a period of 90 days, then at any time thereafter and during the continuance of such failure, the holder of any Note of such Series may deliver or cause to be delivered to the Corporation at its principal office in the City of Washington, District of Columbia, United States of America, written notice that such holder elects to declare all Notes of such Series held by it (the serial numbers and denominations of which shall be set forth in such notice) to be due and payable, and on the thirtieth day after such notice shall be so delivered to the Corporation, such Notes shall become due and payable together with accrued interest thereon, unless prior to that time all such defaults shall have been cured. For the purpose of this Condition 9, any payment obligations that are denominated in a currency other than U.S. dollars shall be translated into U.S. dollars at the spot rate for the sale of U.S. dollars against the purchase of the relevant currency quoted by a leading commercial bank in London on the day on which default in respect of payment thereon is made (or, if for any reason such rate is not available on that day, on the first day thereafter on which such rate is available or as otherwise determined by the Global Agent or the Fiscal Agent, as the case may be, after consultation with the Corporation). 10. Meeting of Noteholders and Modifications (a) Meetings of Noteholders: The Global Agency Agreement contains provisions for convening meetings of Noteholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution (as defined in the Global Agency Agreement) of a modification of any of these Conditions. Such a meeting may be convened by Noteholders holding not less than 10 per cent. in nominal amount of the Notes for the time being outstanding. The quorum for any meeting convened to consider an Extraordinary Resolution shall be two or more persons holding or representing a clear majority in nominal amount of the Notes for the time being outstanding, or at any adjourned meeting two or more persons being or representing Noteholders whatever the nominal amount of the Notes held or represented, unless the business of such meeting includes consideration of proposals, inter alia, (i) to amend the dates of maturity or redemption of the Notes, any Instalment Date or any date for payment of interest or Interest Amounts on the Notes, (ii) to reduce or cancel the nominal amount of, or any Instalment Amount of, or any premium payable on redemption of, the Notes, (iii) to reduce the Rate(s) of Interest in respect of the Notes or to vary the method or basis of calculating the Interest Amount(s) or the basis for calculating any Interest Amount in respect of the Notes, (iv) if a Minimum Rate of Interest and/or a Maximum Rate of Interest, Instalment Amount, Final Redemption Amount, Early Redemption Amount, Optional Redemption Amount or other redemption amount is specified, to reduce any such Minimum Rate of Interest and/or Maximum Rate of Interest or redemption amount, (v) to vary any method of, or basis for, calculating any redemption amount, including the method of calculating the Amortized Face Amount, (vi) to vary the currency or currencies of payment or denomination of the Notes, (vii) to take any steps that as specified hereon may only be taken following approval by an Extraordinary Resolution to which the special quorum provisions apply or (viii) to modify the provisions concerning the quorum required at any meeting of Noteholders or the majority required to pass the Extraordinary Resolution, in which case the necessary quorum shall be two or more persons holding or representing not less than 75 per cent., or at any adjourned meeting not less than 25 38

39 per cent., in nominal amount of the Notes for the time being outstanding. Any Extraordinary Resolution duly passed shall be binding on Noteholders (whether or not they were present at the meeting at which such resolution was passed) and on all Couponholders. These Conditions may be amended, modified, or varied in relation to any Series of Notes by the terms of the applicable Final Terms in relation to such Series. (b) Modification of Global Agency Agreement and Fiscal Agency Agreement: The Corporation shall only permit any modification of, or any waiver or authorization of any breach or proposed breach of or any failure to comply with, the Global Agency Agreement and the Fiscal Agency Agreement, if to do so could not reasonably be expected to be materially prejudicial to the interests of the Noteholders. 11. Replacement of Notes, Certificates, Receipts, Coupons and Talons If a Note, Certificate, Receipt, Coupon or Talon is lost, stolen, mutilated, defaced or destroyed, it may be replaced, subject to applicable laws and regulations, and the rules and regulations of relevant stock exchanges and clearing systems, at the specified office of the Paying Agent in Luxemourg (in the case of Bearer Notes, Receipts, Coupons or Talons), and of the Registrar (in the case of Certificates), or such other Paying Agent or Transfer Agent, as the case may be, as may from time to time be designated by the Corporation for the purpose and notice of whose designation is given to Noteholders, in each case on payment by the claimant of the fees and costs incurred in connection therewith and on such terms as to evidence, security and indemnity (which may provide, inter alia, that if the allegedly lost, stolen or destroyed Note, Certificate, Receipt, Coupon or Talon is subsequently presented for payment or, as the case may be, for exchange for further Coupons, there shall be paid to the Corporation on demand the amount payable by the Corporation in respect of such Notes, Certificates, Receipts, Coupons or further Coupons) and otherwise as the Corporation may require. Mutilated or defaced Notes, Certificates, Receipts, Coupons or Talons must be surrendered before replacements will be issued. 12. Further Issues The Corporation may from time to time without the consent of the Noteholders create and issue further notes either having the same terms and conditions as the Notes in all respects (or in all respects save for the issue date and the first payment of interest thereon) and so that such further issue shall be consolidated and form a single series with the outstanding securities of any series (including the Notes) or upon such terms as the Corporation may determine at the time of their issue. References in these Conditions to the Notes include (unless the context requires otherwise) any other securities issued pursuant to this Condition and forming a further Tranche of Notes of the same Series as the Notes. 13. Notices Notices to the holders of Registered Notes shall be mailed to them at their respective addresses in the Register. Notices to holders of Registered Notes shall be deemed to have been given on the fourth weekday (being a day other than a Saturday or a Sunday) after the date of mailing. Unless otherwise specified in the applicable Final Terms, notices to the holders of Bearer Notes shall be valid if published in a daily newspaper of general circulation in London (which is expected to be the Financial Times), and so long as the Notes listed on the Luxembourg Stock Exchange, published either on the website of the Luxembourg Stock Exchange ( or in the daily newspaper with general circulation in Luxembourg (which is expected to be the Luxemburger Wort) and in respect of Notes listed on the Stock Exchange of Singapore Limited, in a leading English language daily newspaper with general circulation in Singapore (which is expected to be The Business Times). If any such publication is not practicable, notice shall be validly given if published in another leading daily English language newspaper with general circulation in Europe or Singapore, as applicable. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the date of the first publication as provided above. Other than in the case of Notes listed on the Luxembourg Stock Exchange or the Stock Exchange of Singapore Limited and the rules of the relevant stock exchange so require, until such time as any Definitive Bearer Notes are issued, there may, so long as the Global Note(s) is or are held in its or their entirety on behalf of Euroclear Bank S.A./N.V. ( Euroclear ) and Clearstream Banking, société anonyme ( Clearstream, Luxembourg ), be substituted for such publication in such newspaper the delivery of the relevant notice to Euroclear and Clearstream, Luxembourg for communication by them 39

40 to the holders of the Notes. Any such notice shall be deemed to have been given to the holders of the Notes on the seventh day after the day on which the said notice was given to Euroclear and Clearstream, Luxembourg. Holders of Coupons, Receipts and Talons shall be deemed for all purposes to have notice of the contents of any notice given to the holders of Bearer Notes in accordance with this Condition. Notices to be given by any holder of the Notes (other than Fed Bookentry Notes) shall be in writing and given by lodging the same, together with the relative Note or Certificate, with the Global Agent or the Fiscal Agent, as the case may be. In the case of Bearer Notes, so long as any of such Notes are represented by a Global Note, such notice may be given by any holder of a Note to the Global Agent via Euroclear and/or Clearstream, Luxembourg, as the case may be, in such manner as the Global Agent and Euroclear and/or Clearstream, Luxembourg, as the case may be, may approve for this purpose. 14. Contracts (Rights of Third Parties) Act 1999 In respect of any Notes, Receipts and Coupons governed by English law, unless specified otherwise in the Notes, no person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act Governing Law and Jurisdiction (a) Governing Law: The Notes, the Receipts, the Coupons and the Talons are governed by, and shall be construed in accordance with, either English law, the laws of the State of New York, or such other law as is specified hereon. The governing law of Partly Paid Notes shall not be the laws of the State of New York. (b) Jurisdiction: With respect to any legal action or proceedings ( Proceedings ) in the courts of England arising out of or in connection with any Notes, Receipts, Coupons or Talons, the Corporation irrevocably submits to the non-exclusive jurisdiction of the courts of England. (c) Service of Process: The Corporation irrevocably appoints its office at 12 th Floor, Millbank Tower, Millbank, London SW1P 4QP as its agent in England to receive, for it and on its behalf, service of process in any Proceedings in England. If the Corporation no longer maintains an office in England or if for any reason such process agent ceases to be able to act as such or no longer has an address in London, the Corporation irrevocably agrees to appoint a substitute process agent and shall immediately notify Noteholders of such appointment in accordance with Condition 13. Nothing shall affect the right to serve process in any manner permitted by law. 40

41 FORM OF NOTES AND PROVISIONS RELATING TO THE NOTES WHILE IN GLOBAL FORM Words and expressions defined or used in Terms and Conditions of the Notes shall have the same meaning in this section. The Corporation and the relevant Dealer(s) shall agree on the form of Notes to be issued in respect of any issue of Notes. The form may be either registered, bookentry (for Notes denominated and payable in U.S. dollars to be cleared and settled through the Federal Reserve Banks) or bearer and will be specified in the applicable Final Terms. Notes payable in certain Specified Currencies may only be issued in global form. Registered Notes Each Series of Registered Notes sold in primary distribution entirely to investors in the United States shall, unless otherwise specified in the applicable Final Terms, initially be represented by a single Certificate in registered global form (a Global Certificate ) deposited on its Issue Date with Citibank, N.A., London Branch (the Custodian ) as custodian for, and registered in the name of a nominee of, DTC (a DTC Global Certificate ). Each Series of Registered Notes sold in primary distribution entirely to investors outside the United States shall, unless otherwise specified in the applicable Final Terms, initially be represented by one or more Global Certificates deposited on its or their Issue Date with the Custodian as depositary for, and registered in the name of a nominee of, whichever clearing system(s) is agreed between the Corporation and the relevant Dealer(s) and specified in the applicable Final Terms. Each Series of Registered Notes sold in primary distribution both within the United States and outside the United States shall, unless otherwise specified in the applicable Final Terms, initially be represented by one or more Global Certificates. A DTC Global Certificate in respect of Notes sold within the United States will be deposited on its Issue Date with the Custodian as custodian for, and registered in the name of a nominee of, DTC. The same or one or more other Global Certificates in respect of Notes sold outside the United States will be deposited on its or their Issue Date with the Custodian as depositary for, and registered in the name of a nominee of, either DTC or the relevant clearing system(s) agreed between the Corporation and the relevant Dealer(s) and specified in the applicable Final Terms. Registered Notes may, if so specified in the applicable Final Terms, initially be issued in definitive registered form represented by Certificates registered in the names of the beneficial owners thereof. Otherwise, Certificates registered in the names of beneficial owners will only be available (i) in the case of Notes initially issued as Bearer Notes, as described under Bearer Notes below; or (ii) in the case of Registered Notes initially represented by Global Certificates (other than Notes in certain Specified Currencies), in certain circumstances described below. Certificates to be issued at the request of a beneficial owner in respect of such owner s Notes will be issued at the expense of such owner. Unless otherwise specified in the applicable Final Terms, interests in a Global Certificate will be exchangeable for Registered Notes represented by Certificates registered in the names of the beneficial owners thereof only if such exchange is permitted by applicable law and (i) in the case of a DTC Global Certificate, DTC notifies the Corporation that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the DTC Global Certificate, or ceases to be a clearing agency registered under the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act ), or is at any time no longer eligible to act as such and the Corporation is unable to locate a qualified successor within 90 days of receiving notice of such ineligibility on the part of DTC; or (ii) in the case of any other Global Certificate, if the clearing system(s) through which it is cleared and settled is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so; or (iii) if principal in respect of any Note is not paid when due, by the Noteholder giving notice to the Global Agent of its election for such exchange. In such circumstances, the Corporation will cause sufficient Certificates to be executed and delivered as soon as practicable (and in any event within 45 days of the occurrence of such circumstances) to the Registrar for completion, authentication and delivery to the relevant Noteholder(s). A person having an interest in a Global Certificate must provide the Registrar with a written order containing instructions and such other information as the Corporation 41

42 and the Registrar may require to complete, execute and deliver such Certificates. Registered Notes shall not be exchangeable for Bearer Notes. If so specified in the applicable Final Terms, interests in a Global Certificate may be exchanged for, or transferred to transferees who wish to take delivery thereof in the form of, interests in a DTC Global Certificate, and interests in a DTC Global Certificate may be exchanged for, or transferred to transferees who wish to take delivery thereof in the form of, interests in a Global Certificate. Any such exchange or transfer shall be made in accordance with the rules and operating procedures of DTC, Euroclear, and Clearstream, Luxembourg, and in compliance with the provisions of Clauses 7 and 9 of the Global Agency Agreement. DTC has advised the Corporation that it will take any action permitted to be taken by a holder of Registered Notes (including, without limitation, the presentation of DTC Global Certificates for exchange as described above) only at the direction of one or more participants in whose account with DTC interests in DTC Global Certificates are credited and only in respect of such portion of the aggregate nominal amount of the relevant DTC Global Certificates as to which such participant or participants has or have given such direction. However, in the circumstances described above, DTC will surrender the relevant DTC Global Certificates in exchange for Certificates registered in the name(s) of beneficial owners of Registered Notes. Except as described above, so long as a DTC Global Certificate is deposited with DTC or its custodian, Certificates registered in the name(s) of beneficial owners of Registered Notes will not be eligible for clearing or settlement through DTC or any other clearing system. Fed Bookentry Notes On initial issue, all Notes denominated and payable in U.S. dollars which will be cleared and settled through the Federal Reserve Banks will be issued in uncertificated bookentry form only through the Federal Reserve Bank of New York and held by Holding Institutions designated by the relevant Dealer(s). After initial issue, all Fed Bookentry Notes will continue to be held by such Holding Institutions unless an investor arranges for the transfer of its Fed Bookentry Notes to another Holding Institution. Bearer Notes Except as provided below, each Tranche of Bearer Notes with a maturity at issue of more than one year will initially be represented by a Temporary Global Note without Coupons, which (i) in the case of NGNs, will be delivered to the Common Safekeeper for Euroclear and Clearstream, Luxembourg on or prior to the relevant Issue Date or (ii) in the case of CGNs, will be deposited with a common depositary on behalf of Euroclear and Clearstream, Luxembourg on the relevant Issue Date. Interests in a Temporary Global Note will be exchangeable in whole or in part for interests in a Permanent Global Note without Coupons or, if and to the extent specified in the applicable Final Terms, for Bearer Notes in definitive form, for interests in a Global Certificate or for Certificates registered in the name(s) of beneficial owners of Registered Notes. Bearer Notes may be exchanged for Registered Notes if and to the extent specified in the applicable Final Terms. Bearer Notes that are issued as part of a targeted bearer issuance will initially be represented by a Permanent Global Note or, if specified in the applicable Final Terms, Definitive Bearer Notes. Initial Issue of Notes If the Global Notes are stated in the applicable Final Terms to be issued in NGN form, they are intended to be eligible collateral for Eurosystem monetary policy and the Global Notes will be delivered on or prior to the original issue date of the Tranche to a Common Safekeeper. Depositing the Global Notes with the Common Safekeeper does not necessarily mean that the Notes will be recognized as eligible collateral for Eurosystem monetary policy and intra-day credit operations by the Eurosystem either upon issue, or at any or all times during which the Notes are outstanding. Such recognition will depend upon satisfaction of the Eurosystem eligibility criteria. Global Notes which are issued in CGN form and Certificates may be delivered on or prior to the original Issue Date of the Tranche to a Common Depositary. If the Global Note is in CGN form, upon the initial deposit of a Global Note with the Common Depositary or registration of Registered Notes in the name of any nominee for Euroclear and 42

43 Clearstream, Luxembourg and delivery of the relative Global Certificate to the Common Depositary, Euroclear or Clearstream, Luxembourg will credit each subscriber with a nominal amount of Notes equal to the nominal amount thereof for which it has subscribed and paid. If the Global Note is in NGN form, the nominal amount of the Notes shall be the aggregate amount from time to time entered in the records of Euroclear or Clearstream, Luxembourg. The records of such clearing system shall be conclusive evidence of the nominal amount of Notes represented by the Global Note and a statement issued by such clearing system at any time shall be conclusive evidence of the records of the relevant clearing system at that time. Notes that are initially deposited with the Common Depositary may also be credited to the accounts of subscribers with (if indicated in the applicable Final Terms) other clearing systems through direct or indirect accounts with Euroclear and Clearstream, Luxembourg held by such other clearing systems. Conversely, Notes that are initially deposited with any other clearing system may similarly be credited to the accounts of subscribers with Euroclear, Clearstream, Luxembourg or other clearing systems. Provisions relating to Bearer Notes while in Global Form Each Temporary Global Note and each Permanent Global Note will contain provisions which apply to the Bearer Notes while they are in global form, some of which supplement the terms and conditions of the Notes set out in this Series Prospectus. The following is a summary of certain of those provisions: Exchange. A Temporary Global Note is exchangeable in whole or in part (free of charge to the holder) either (i) after a period of not less than 40 days from the Issue Date, for either interests in a Permanent Global Note representing Bearer Notes (if the Global Note is in CGN form, or if the Global Note is in NGN form, the Corporation will procure that details of such exchange be entered pro rata in the records of the relevant clearing system) or, if and to the extent specified in the applicable Final Terms, for Definitive Bearer Notes, in each case upon certification as to non-u.s. beneficial ownership by the relevant clearing system in the form set out in the Global Agency Agreement; or (ii) in certain circumstances, if the applicable Final Terms so provides, for interests in a Global Certificate or for Certificates registered in the names of beneficial owners of Registered Notes. If one or more Temporary Global Notes are exchanged in whole or in part for Definitive Bearer Notes under (i) above, such Definitive Bearer Notes shall be issued in Specified Denominations of the minimum Specified Denomination only. A Permanent Global Note (other than for Notes denominated in certain Specified Currencies) is exchangeable in whole (free of charge to the holder) for Definitive Bearer Notes if the Permanent Global Note is held on behalf of a clearing system and such clearing system is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, by such holder giving notice to the Global Agent. A Permanent Global Note is also exchangeable in whole or in part (free of charge to the holder) for interests in a Global Certificate or for Certificates registered in the name(s) of the beneficial owners on or after the Exchange Date (as defined below), if and to the extent specified in the applicable Final Terms. On or after any Exchange Date, the holder of a Permanent Global Note may surrender the Permanent Global Note to or to the order of the Global Agent. In exchange for the Permanent Global Note, the Corporation will deliver, or cause the delivery of, an equal aggregate nominal amount of duly executed and authenticated Definitive Bearer Notes (having attached to them all Coupons and Talons in respect of interest which has not already been paid on the Permanent Global Note and security-printed in accordance with any applicable legal and stock exchange requirements), Global Certificate(s) or Certificates registered in the names of the beneficial owners of Registered Note(s), as the case may be, each in or substantially in the form attached to the Global Agency Agreement. On exchange in full of the Permanent Global Note, the Corporation will, if the holder so requests, ensure that it is cancelled and returned to the holder. Exchange Date means a day falling, in the case of exchange of a Temporary Global Note for a Permanent Global Note or Definitive Bearer Notes, not less than 40 days from the Issue Date, and, in the case of exchange of any Global Note, Definitive Bearer Notes or Global Certificates for Certificates registered in the names of the beneficial owners of Registered Notes or interests in a Global Certificate, not less than five days after the day on which the notice requiring exchange is given and on which 43

44 banks are open for business in the city in which the specified office of the Global Agent is located and, if applicable, in the cities in which the relevant clearing systems are located. Payments. Prior to the Exchange Date, payments on a Temporary Global Note will be made only against certification of non-u.s. beneficial ownership by the relevant clearing system. On or after the Exchange Date, no payments will be made on the Temporary Global Note unless exchange for interests in a Permanent Global Note (or, if specified in the applicable Final Terms, for Definitive Bearer Notes, or for individual Certificates) is improperly withheld or refused. Payments under the Global Note in CGN form will be made to its holder against presentation for endorsement and, if no further payment is to be made, surrender of the Permanent Global Note to or to the order of the Global Agent or such other Paying Agent as shall have been provided in a notice to the Noteholders for such purpose. If the Permanent Global Note is in CGN form, a record of each payment so made will be endorsed in the appropriate schedule to the Permanent Global Note, which endorsement will be prima facie evidence that such payment has been made. If the Permanent Global Note is in NGN form, the Corporation shall procure, that details of each such payment shall be entered pro rata in the records of the relevant clearing system and in the case of payments of principal, the nominal amount of the Notes recorded in the records of the relevant clearing system and represented by the Permanent Global Note will be reduced accordingly. Payments under the Global Note in NGN form will be made to its holder. Each payment so made will discharge the Corporation s obligations in respect thereof. Any failure to make the entries in the records of the relevant clearing system shall not affect such discharge. Notices. So long as Bearer Notes are represented by a Permanent Global Note and the Permanent Global Note is held on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled accountholders, except that if and so long as a Series of Bearer Notes is listed on the Luxembourg Stock Exchange or the Stock Exchange of Singapore Limited and the rules of that exchange so require, notices shall also be published, in the case of Notes listed on the Luxembourg Stock Exchange, either on the website of the Luxembourg Stock Exchange ( or in a leading newspaper having general circulation in Luxembourg (which is expected to be the Luxemburger Wort) or, in the case of Notes listed on the Stock Exchange of Singapore Limited, in a leading newspaper with general circulation in Singapore (which is expected to be The Business Times). Prescription. Other than for Notes governed by the laws of the State of New York, claims against the Corporation for principal and interest in respect of a Permanent Global Note will become prescribed unless the Permanent Global Note is presented for payment within the number of years from the appropriate Relevant Date (as described in Condition 8) as specified in the applicable Final Terms. Purchase and cancellation. Cancellation of any Bearer Note which the Corporation elects to be cancelled following its purchase will be effected by reduction in the nominal amount of the Permanent Global Note. Default. The holder of a Permanent Global Note may cause the Permanent Global Note or a portion of it to become due and repayable in circumstances described in Condition 9 by stating in the notice to the Corporation the nominal amount of Notes which is being declared due and repayable. Following the giving of notice of an event of default, the holder of a Permanent Global Note which is governed by English law and executed as a deed poll may elect that the Permanent Global Note becomes void as to a specified portion and that the persons entitled to such portion as accountholders with a clearing system acquire direct enforcement rights against the Corporation under the Deed of Covenant. Redemption at the option of the Corporation. No drawing of Notes will be required under Condition 5(c) in the event that the Corporation exercises its call option set forth in that Condition while an issue of Bearer Notes is represented by a Permanent Global Note in respect of less than the aggregate nominal amount of such Bearer Notes then outstanding. In these circumstances, the relevant clearing systems will allocate the redemption of Bearer Notes as between holders. Redemption at the option of a Noteholder. Any Noteholder s option set out in Condition 5(d) to require the Corporation to redeem Notes may be exercised by the holder of a Permanent Global Note giving notice to the Global Agent of the nominal amount of Bearer Notes in respect of which the option is exercised and, where the Permanent Global Note is in CGN form, presenting the Permanent Global Note for endorsement of exercise within the time limits specified in Condition 5(d). Where the 44

45 Permanent Global Note is in NGN form, the Corporation shall procure that details of such exercise shall be entered pro rata in the records of the relevant clearing system and the nominal amount of the Notes recorded in those records will be reduced accordingly. NGN nominal amount. Where the Permanent Global Note is in NGN form, the Corporation shall procure that any exchange, payment, cancellation, exercise of any option or any right under the Notes, as the case may be, in addition to the circumstances set out above shall be entered in the records of the relevant clearing systems and upon any such entry being made, in respect of payments of principal, the nominal amount of the Notes represented by such Global Note shall be adjusted accordingly. Meetings The holder of a Permanent Global Note or of the Notes represented by a Global Certificate shall (unless such Permanent Global Note or Global Certificate represents only one Note) be deemed to be two persons for the purposes of any quorum requirements of a meeting of Noteholders. At any such meeting, the Noteholder shall have one vote in respect of each Specified Denomination of Notes for which such Global Note may be exchanged or, in the case of Registered Notes, one vote in respect of each minimum Specified Denomination comprising such Noteholder s holding, whether or not represented by a Global Certificate. Partly Paid Notes The provisions relating to partly-paid Notes ( Partly Paid Notes ) are not set out in this Series Prospectus, but will be contained in the applicable Final Terms and thereby in the Global Notes. Partly Paid Notes governed by the laws of the State of New York will not be issued. While any instalments of the subscription moneys due from the holder of Partly Paid Notes are overdue, no interest in a Global Note representing such Notes may be exchanged for an interest in a Permanent Global Note or for Definitive Bearer Notes (as the case may be). If any Noteholder fails to pay any instalment due on any Partly Paid Notes within the time specified, the Corporation may forfeit such Notes and shall have no further obligation to their holder in respect of them. 45

46 CLEARANCE AND SETTLEMENT Introduction The Program has been designed so that Notes may be held through one or more international and domestic clearing systems, principally, the bookentry systems operated by the Federal Reserve and DTC in the United States, and by Euroclear and Clearstream, Luxembourg in Europe. Electronic securities and payment transfer, processing, depositary and custodial links have been established among these systems and others, either directly or indirectly through custodians and depositaries, which enable Notes to be issued, held and transferred among the clearing systems across these links. Special procedures have been established among the Global Agent and these clearing systems to facilitate clearance and settlement of certain Notes traded across borders in the secondary market. Cross-market transfers of Notes denominated in certain currencies and issued in global form (as described below) may be cleared and settled using these procedures on a delivery against payment basis. Cross-market transfers of Notes in other than global form may be cleared and settled in accordance with other procedures established for this purpose among the Global Agent and the relevant clearing systems. The relationship between the Corporation and the holder of a Registered Note, a Fed Bookentry Note or a Bearer Note is governed by the terms and conditions of that Note. The holder of a Global Note or a Global Certificate will be one or more clearing systems. The beneficial interests in Notes held by a clearing system will be in bookentry form in the relevant clearing system or a depositary or nominee on its or their behalf. Each clearing system has its own separate operating procedures and arrangements with participants or accountholders which govern the relationship between them and the relevant clearing system and to which the Corporation is not and will not be a party. The Corporation will not impose fees payable by any holder with respect to any Notes held by one or more clearing systems; however, holders of beneficial interests in Notes may incur fees payable in respect of the maintenance and operation of the bookentry accounts in which Notes are held. Each of the persons shown in the records of Euroclear, Clearstream, Luxembourg, or any other specified clearing system as the holder of a Note represented by a Global Note or a Global Certificate must look solely to such clearing system for his share of each payment made by the Corporation to the bearer of such Global Note or the registered holder of the Registered Notes represented by such Global Certificate, as the case may be, and in relation to all other rights arising under the Global Notes or Global Certificates, subject to and in accordance with the respective rules and procedures of such clearing system. Such persons shall have no claim directly against the Corporation in respect of payments due on the Notes for so long as the Notes are represented by such Global Note or Global Certificate and such obligations of the Corporation will be discharged by payment to the bearer of such Global Note or the registered holder of the Registered Notes represented by such Global Certificate, as the case may be, in respect of each amount so paid. Citibank, N.A., London Branch ( Citibank ) is the Global Agent for Notes held through DTC, Euroclear, Clearstream, Luxembourg and such other clearing systems as may be specified in the applicable Final Terms. The Federal Reserve Bank of New York is the fiscal and paying agent for U.S. dollar denominated Notes issued in the United States and held through the bookentry system operated by the Federal Reserve Banks. The Global Agent and Paying Agents Citibank will act as the Global Agent for Notes issued under the Program. Citibank has direct custodial and depositary linkages with, and (unless otherwise provided in the applicable Final Terms) will act as custodian for Global Notes or Global Certificates held by, DTC, Euroclear and Clearstream, Luxembourg to facilitate issue, transfer and custody of Notes in these clearing systems. As necessary (and as more fully described below), Citibank will act as Registrar, Transfer Agent, Exchange Agent, Determination Agent and Paying Agent and, from time to time, Calculation Agent for the Notes as may be specified in the applicable Final Terms. Citibank, N.A., Singapore Branch will act as Singapore Paying Agent for Notes held through CDP. 46

47 The Clearing Systems Federal Reserve Bookentry System The Federal Reserve Banks operate the Federal bookentry system which provides bookentry holding and settlement for all U.S. dollar denominated securities issued by the U.S. government, certain of its agencies and international organizations (including the Corporation) in which the United States is a member. The system enables specified depositaries and other institutions with an appropriate account with a Federal Reserve Bank or Branch ( Holding Institutions ) to hold, make payments and transfer securities and funds through the Federal Reserve Bank s Fedwire electronic funds transfer system. DTC DTC is a limited-purpose trust company organized under the laws of the State of New York, and is a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities for DTC participants and facilitates the clearance and settlement of transactions between DTC participants through electronic bookentry changes in accounts of DTC participants. Euroclear Euroclear is incorporated in Belgium and has branch offices in Amsterdam, Paris and London. Euroclear holds securities for participating organizations and facilitates multicurrency clearance and settlement of securities transactions between its and Clearstream, Luxembourg accountholders through electronic bookentry changes in accounts of its accountholders. Clearstream, Luxembourg Clearstream, Luxembourg is incorporated under the laws of Luxembourg as a professional depositary. Clearstream, Luxembourg holds securities for its participating organizations and facilitates multicurrency clearance and settlement of securities transactions between its and Euroclear s accountholders through electronic bookentry changes in accounts of its accountholders. Other Clearing Systems Any other clearing system which the Corporation, the Global Agent and the relevant Dealer(s) agree shall be available for a particular issue of Notes will be described in the applicable Final Terms, together with the clearance and settlement procedures for such clearing system. Clearance and Settlement Procedures Primary Distribution Introduction Distribution of Notes will be through one or more of the clearing systems described above or any other clearing system specified in the applicable Final Terms. Payment for Notes will be on a delivery versus payment or free delivery basis, as more fully described in the applicable Final Terms. Registered Notes and Fed Bookentry Notes The Corporation and the relevant Dealer(s) shall agree whether global clearance and settlement procedures or specific clearance and settlement procedures should be available for any issue of Notes, as specified in the applicable Final Terms. Clearance and settlement procedures may vary according to the Specified Currency of issue. The customary clearance and settlement procedures are described under the specific clearance and settlement procedures below. Application will be made to the relevant clearing system(s) for the Notes of the relevant issue to be accepted for clearance and settlement and the applicable clearance numbers will be specified in the applicable Final Terms. Unless otherwise agreed between the Corporation and the Global Agent, Citibank, N.A., acting through its relevant office, will act as the custodian or depositary for all Notes in global form. (i) Global Clearance and Settlement Specified Currencies Global clearance and settlement of Notes denominated in certain Specified Currencies will take place through those clearing systems specified in the applicable Final Terms. The procedures expected to be followed are those which relevant clearing systems have established to clear and settle single global issues in the Specified Currency and will be set out in the applicable Final Terms. 47

48 (ii) (iii) (iv) Specific Clearance and Settlement Federal Reserve Bank of New York The Federal Reserve Bank of New York will take delivery of and hold Fed Bookentry Notes as record owner and custodian for other Federal Reserve Banks and for Holding Institutions located in the Second Federal Reserve District. Holding Institutions located in other Federal Reserve Districts can hold Fed Bookentry Notes through their respective Federal Reserve Banks or Branches. The aggregate holdings of Fed Bookentry Notes of each Holding Institution will be reflected in the bookentry account of such Holding Institution with its Federal Reserve Bank or Branch. The Notes may be held of record only by Holding Institutions, which are entities eligible to maintain bookentry accounts with the Federal Reserve Banks. A Holding Institution may not be the beneficial holder of a Note. Beneficial holders will ordinarily hold the Notes through one or more financial intermediaries, such as banks, brokerage firms and securities clearing organizations. Each Holding Institution, and each other intermediate holder in the chain to the ultimate beneficial holder, will have the responsibility of establishing and maintaining accounts for its customers having interests in Fed Bookentry Notes. Federal Reserve Banks will be responsible only for maintaining the bookentry accounts of Holding Institutions, effecting transfers on their books and ensuring that payments from the Corporation, through the Federal Reserve Bank of New York, are credited to appropriate Holding Institutions. With respect to Fed Bookentry Notes, Federal Reserve Banks will act only on the instructions of Holding Institutions for which they maintain such Fed Bookentry Notes. The Federal Reserve Banks will not record pledges of Fed Bookentry Notes. Specific Clearance and Settlement DTC Registered Notes which are to be cleared and settled through DTC will be represented by a DTC Global Certificate. DTC participants acting on behalf of DTC investors holding Registered Notes through DTC will follow the delivery practices applicable to DTC s Same- Day Funds Settlement System. Registered Notes will be credited to DTC participants securities accounts following confirmation of receipt of payment to the Corporation on the relevant Issue Date. Specific Clearance and Settlement Euroclear and Clearstream, Luxembourg Registered Notes which are to be cleared and settled through Euroclear and Clearstream, Luxembourg will be represented by one or more Global Certificates registered in the name of a nominee of the Euroclear and Clearstream, Luxembourg depositaries. Investors holding Registered Notes through Euroclear and Clearstream, Luxembourg will follow the settlement procedures applicable to conventional eurobonds. Registered Notes will be credited to Euroclear and Clearstream, Luxembourg participants securities clearance accounts either on the Issue Date or on the settlement day following the relevant Issue Date against payment in same day funds (for value on the relevant Issue Date). Bearer Notes The Corporation will make applications to Euroclear and Clearstream, Luxembourg for acceptance in their respective bookentry systems of any issue of Bearer Notes. Customary clearance and settlement procedures for each such clearing system applicable to bearer eurobonds denominated in the Specified Currency will be followed, unless otherwise specified in the applicable Final Terms. Clearance and Settlement Procedures Secondary Market Transfers Transfers of Registered Notes Transfers of interests in a Global Certificate within the various clearing systems which may be clearing and settling interests therein will be made in accordance with the usual rules and operating procedures of the relevant clearing system applicable to the Specified Currency and the nature of the transfer. Further details concerning such rules and procedures may be set forth in the applicable Final Terms. 48

49 For issues that are cleared and settled through both DTC and another clearing system, because of time zone differences, in some cases the securities account of an investor in one clearing system may be credited during the settlement processing day immediately following the settlement date of the other clearing system and the cash account will be credited for value on the settlement date but may be available only as of the day immediately following such settlement date. The laws of some states in the United States require that certain persons take physical delivery in definitive form of securities. Consequently, the ability to transfer interests in a DTC Global Certificate to such persons may be limited. Because DTC can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in a DTC Global Certificate to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by the lack of a definitive security in respect of such interest. Transfers of Fed Bookentry Notes Transfers of Fed Bookentry Notes between Holding Institutions can be made through the Federal Reserve Communications System. Transfer of Bearer Notes Transfers of interests in a Temporary Global Note or a Permanent Global Note and of Definitive Bearer Notes held by a clearing system will be made in accordance with the normal euromarket debt securities operating procedures of the relevant clearing system. General Although DTC, Euroclear and Clearstream, Luxembourg have established procedures to facilitate transfers of beneficial interests in Notes in global form among participants and accountholders of DTC, Euroclear and Clearstream, Luxembourg, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Corporation, the Global Agent or any other agent will have responsibility for the performance by DTC, Euroclear and Clearstream, Luxembourg or their respective obligations under the rules and procedures governing their operations. Pre-issue Trades Settlement It is expected that delivery of Notes will be made against payment therefor on the relevant Issue Date, which could be more than three business days following the date of pricing. Under Rule 15c6-1 of the Commission under the Exchange Act, trades in the United States secondary market generally are required to settle within three business days (T+3), unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Notes in the United States on the date of pricing or the next succeeding business days until the relevant Issue Date will be required, by virtue of the fact the Notes initially will settle beyond T+3, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Settlement procedures in other countries will vary. Purchasers of Notes may be affected by such local settlement practices and purchasers of Notes who wish to trade Notes between the date of pricing and the relevant Issue Date should consult their own adviser. 49

50 TAX MATTERS United States Internal Revenue Service Circular 230 Notice: To ensure compliance with U.S. Internal Revenue Service Circular 230, prospective investors are hereby notified that: (a) any discussion of U.S. federal tax issues contained or referred to in this Prospectus or any document referred to herein is not intended or written to be used, and cannot be used, by prospective investors for the purpose of avoiding penalties that may be imposed on them under the U.S. Internal Revenue Code; (b) such discussion is written for use in connection with the promotion or marketing of the transactions or matters addressed herein; and (c) prospective investors should seek advice based on their particular circumstances from an independent tax advisor. The following is a summary of the provisions of the Articles of Agreement concerning taxation of the Notes and of certain anticipated United States federal income, withholding and estate tax consequences resulting from the ownership of the Notes. This summary does not cover all of the possible tax consequences relating to the ownership of the Notes and the receipt of interest thereon, and it is not intended as tax advice to any person. It addresses only holders who are initial purchasers of the Notes at the initial offering price and hold the Notes as capital assets, and does not address special classes of holders, such as dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, banks, tax-exempt entities, life insurance companies, persons holding Notes as a hedge or hedged against interest rate or currency risks or as part of a straddle or conversion transaction, or holders whose functional currency is not the U.S. dollar. Investors who purchase Notes at a price other than the offering price should consult their tax advisor as to the possible applicability to them of the amortizable bond premium or market discount rules. This summary is based upon the United States federal income, withholding and estate tax laws as currently in effect and as currently interpreted and does not include any description of the tax laws of any state, local or foreign government that may apply. Prospective purchasers of Notes should consult their own tax advisers concerning the application of the United States federal income, withholding and estate tax laws, as well as the possible application of the tax laws of any other jurisdiction, to their particular situation. Taxation of the Notes in General The Notes and the interest thereon generally will be subject to taxation, including United States federal income taxation. Under the Articles of Agreement, however, the Notes and the interest thereon are not subject to any tax by a member country of the Corporation (i) which tax discriminates against the Notes solely because they were issued by the Corporation, or (ii) if the sole jurisdictional basis for the tax is the place or currency in which the Notes are issued, made payable or paid, or the location of any office or place of business maintained by the Corporation. The imposition of United States federal income tax in the manner described herein is not inconsistent with the Articles of Agreement. United States Federal Income Taxation Bearer Notes Notes issued as Bearer Notes under this Program may, in certain circumstances, be treated by the U.S. Internal Revenue Service as registered notes and not as bearer notes for U.S. federal income tax purposes. Any reference to Bearer Notes in this section assumes that such Bearer Notes will be treated as bearer notes for U.S. federal income tax purposes. Treatment of Qualified Stated Interest Under the Internal Revenue Code of 1986, as amended (the Code ), a holder of a Note who or which is (i) a United States citizen or resident alien individual, (ii) a United States domestic corporation, (iii) an estate subject to United States federal income taxation on a net income basis in respect of a Note or (iv) a trust if a United States court can exercise primary supervision over the trust s administration and one or more United States persons are authorized to control all substantial decisions of the trust (a U.S. Holder ) will be taxable on the qualified stated interest accrued or received on such Note in accordance with such U.S. Holder s method of accounting for United States federal income tax purposes. Qualified stated interest is interest that is payable at a single fixed rate at least annually. Notes bearing interest other than qualified stated interest and Notes issued at a discount may be subject to the original issue discount provisions of the Code. 50

51 If an interest payment is denominated in or determined by reference to a currency other than the U.S. dollar (a foreign currency ), the amount of income recognized by a cash basis U.S. Holder will be the U.S. dollar value of the interest payment, based on the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. Accrual basis U.S. Holders may determine the amount of income recognized with respect to such interest payments in accordance with either of two methods, in either case regardless of whether the payments are in fact converted into U.S. dollars. Under the first method, the amount of income recognized will be based on the average exchange rate in effect during the interest accrual period (or, with respect to an accrual period that spans two taxable years, the partial period within the taxable year). Under the second method, an accrual basis U.S. Holder may elect to translate interest income into U.S. dollars at the exchange rate in effect on the last day of the accrual period (or, in the case of an accrual period that spans two taxable years, at the exchange rate in effect on the last day of the partial period within the taxable year). Additionally, if a payment of interest is actually received within five business days of the last day of the accrual period or taxable year, an electing accrual basis U.S. Holder may instead translate such accrued interest into U.S. dollars at the exchange rate in effect on the day of actual receipt. Any election to use the second method will apply to all debt instruments held by the U.S. Holder at the beginning of the first taxable year to which the election applies or thereafter acquired by such U.S. Holder, and will be irrevocable without the consent of the Internal Revenue Service. Upon receipt of an interest payment (including a payment attributable to accrued but unpaid interest upon the sale or retirement of a Note) denominated in, or determined by reference to, a foreign currency, an accrual basis U.S. Holder will recognize ordinary income or loss measured by the difference between (x) the average exchange rate used to accrue interest income, or the exchange rate as determined under the second method described above if the U.S. Holder elects that method, and (y) the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. The United States Treasury Department has issued to the Corporation a ruling dated February 14, 1992 (the Ruling ) regarding certain United States federal tax consequences of the receipt of interest on securities issued by the Corporation. The Ruling provides that interest paid by the Corporation on such securities, including payments attributable to accrued original issue discount, constitutes income from sources without the United States. Because, under the Ruling, interest and original issue discount on the Notes is treated as income from sources without the United States, interest paid by the Corporation would ordinarily not be subject to United States federal income tax, including withholding tax, if paid to a nonresident alien individual (or foreign estate or trust not subject to United States federal income tax on a net income basis) or to a foreign corporation (a non-u.s. Holder ), whether or not such person is engaged in trade or business in the United States. However, absent any special statutory or treaty exception, such income would be subject to United States federal income tax in the following cases: (a) such interest is derived by such person in the active conduct of a banking, financing or similar business within the United States and such interest is attributable to an office or other fixed place of business of such person within the United States or (b) such person is a foreign corporation taxable as an insurance company carrying on a United States insurance business to which such interest is attributable. Purchase, Sale and Retirement of the Notes A U.S. Holder s initial tax basis in a Note will generally be its U.S. dollar cost. The U.S. dollar cost of Notes purchased with foreign currency will generally be the U.S. dollar value of the purchase price on the date of purchase or, in the case of Notes traded on an established securities market (within the meaning of Treasury Regulations Section (a)(2)(iv)) purchased by a cash basis U.S. Holder (or an electing accrual basis U.S. Holder), on the settlement date for the purchase. A U.S. Holder s initial tax basis in a Note may be adjusted in certain circumstances, such as, in the case of an accrual basis U.S. Holder, the accrual of interest income. A U.S. Holder generally will recognize gain or loss on the sale or retirement of a Note equal to the difference between the amount realized on the sale or retirement and the adjusted tax basis of the Note. The amount realized on a sale or retirement for an amount in a foreign currency will be the U.S. dollar value of such amount on the date of sale or retirement or, in the case of Notes traded on an established securities market (within the meaning of Treasury Regulations Section (a)(2)(iv)) sold by a cash 51

52 basis U.S. Holder (or an electing accrual basis U.S. Holder), on the settlement date for the sale. Except to the extent described in the next succeeding paragraph or attributable to accrued but unpaid interest, gain or loss recognized on the sale or retirement of a Note will be capital gain or loss. Capital gain of a non-corporate U.S. Holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15 per cent. where the holder has a holding period greater than one year. Gain or loss recognized by a U.S. Holder on the sale or retirement of a Note that is attributable to changes in exchange rates will be treated as ordinary income or loss. However, exchange gain or loss is taken into account only to the extent of total gain or loss realized on the transaction. A United States person generally will not be entitled to deduct any loss sustained on the sale or other disposition (including the receipt of principal) of Bearer Notes (other than Bearer Notes having a maturity of one year or less from the date of issue) and must treat as ordinary income any gain realized on the sale or other disposition (including the receipt of principal) of Bearer Notes (other than Bearer Notes having a maturity of one year or less from the date of issue). A non-u.s. Holder generally will not be taxable on gain or loss on the sale or exchange of a Note unless ownership of the Note is effectively connected with the conduct of a trade or business in the United States or, in the case of a nonresident alien individual, such individual is present in the United States for 183 or more days in the taxable year of the sale or exchange and certain other conditions are met. Exchange of Amounts in Foreign Currency Foreign currency received as interest on a Note or on the sale or retirement of a Note will have a tax basis equal to its U.S. dollar value at the time such interest is received or at the time of such sale or retirement. Foreign currency that is purchased will generally have a tax basis equal to the U.S. dollar value of such foreign currency on the date of purchase. Any gain or loss recognized on a sale or other disposition of a foreign currency (including its use to purchase Notes or upon exchange for U.S. dollars) will be ordinary income or loss. United States Federal Withholding Tax Under the Articles of Agreement, the Corporation is not under any obligation to withhold or pay any tax imposed by any member on the interest on the Notes. The Ruling confirms that neither the Corporation nor an agent appointed by it as principal for the purpose of paying interest on securities issued by the Corporation is required to withhold tax on interest paid by the Corporation. Payments of interest and accrued original issue discount on the Notes will therefore be made to the Fiscal Agent without deduction in respect of any such tax. United States Federal Estate Tax In the case of United States federal estate tax, the Ruling determined that, unless an applicable death tax convention with a foreign country provides otherwise, securities of the Corporation are deemed to be situated without the United States for purposes of the United States federal estate tax and are not includible in the value of the gross estate for purposes of such tax in the case of the estate of a nonresident of the United States who is not a citizen of the United States. United States Information Reporting and Backup Withholding The Corporation is not subject to the reporting requirements that generally are imposed by United States law with respect to certain payments of interest or principal on debt obligations, nor is it subject to backup withholding obligations imposed in certain circumstances by United States law with respect to such payments. While temporary regulations issued by the Internal Revenue Service confirm that the backup withholding requirements do not apply to any paying agent of the Corporation with respect to the Notes, the Fiscal Agent may file information returns with the Internal Revenue Service with respect to payments on the Notes made within the United States to certain non-corporate United States persons as if such returns were required. Brokers, trustees, custodians and other intermediaries within the United States are subject to reporting and backup withholding requirements with respect to certain payments on the Notes received by them for the account of certain non-corporate United States persons, and foreign persons receiving 52

53 payments on the Notes within the United States may be required by such intermediaries to establish their status in order to avoid information reporting and backup withholding by such intermediaries in respect of such payments. 53

54 CURRENCY CONVERSIONS Payments for Notes Investors will be required to pay for Notes in the applicable Specified Currency. Each Dealer may, under certain terms and conditions, arrange for the conversion of the Investor s Currency into the Specified Currency to enable investors whose financial activities are denominated principally in the Investor s Currency to pay for the Notes in the Specified Currency. Each such conversion will be made by such Dealer (in this respect acting as principal and not as an agent of the Corporation) on such terms and subject to such conditions, limitations and charges as such Dealer may from time to time establish in accordance with its regular foreign exchange practices, and subject to any applicable laws and regulations. All costs of conversion will be borne by such investors of the Notes. Payments on Notes Payments in respect of such Notes will be made in the Specified Currency for principal, premium (if any) and/or interest payments as specified in the applicable Final Terms. Currently, there are limited facilities in the United States for the conversion of U.S. dollars into foreign currencies and vice versa. In addition, most banks in the United States do not currently offer non-u.s. dollar denominated checking or savings account facilities in the United States. Accordingly, unless otherwise specified in the applicable Final Terms, payments in respect of Notes in a Specified Currency other than U.S. dollars will be made to an account outside the United States. Noteholders holding interests in a DTC Global Note denominated in a Specified Currency other than U.S. dollars ( DTC Noteholders ) will receive payments in U.S. dollars, unless they elect to receive such payments in the Specified Currency. In the event that a DTC Noteholder shall not have made such election, payments to such DTC Noteholder will be converted to U.S. dollars by the Exchange Agent. The U.S. dollar amount in respect of any payment to be paid to a DTC Noteholder who did not make a timely election to receive payment in the Specified Currency will be based on the Exchange Agent s spot rate for the purchase of U.S. dollars with the aggregate amount of the Specified Currency payable to all DTC Noteholders receiving U.S. dollar payments, for settlement on the applicable Payment Date, at a time and date immediately preceding such Payment Date, unless otherwise specified in the applicable Final Terms. If such spot rate is not available, the Exchange Agent will obtain a bid quotation from a leading foreign exchange bank in London or New York City selected by the Exchange Agent for such purchase. All costs of any such conversion into U.S. dollars will be borne by the relevant DTC Noteholder by deduction from such payments. If no spot rate or bid quotation is available, the Exchange Agent will make payments in the Specified Currency to Noteholders who were expecting to receive U.S. dollars, provided that such payment will only be made to such a Noteholder if and when the Exchange Agent has been notified of the Specified Currency account to which such payment should be made. A DTC Noteholder may elect to receive payment of the principal and premium (if any) of, or interest with respect to, the Notes in the Specified Currency (other than U.S. dollars) by notifying DTC prior to 5:00 p.m. Eastern Standard Time ( E.S.T. ) on the third DTC Business Day following the applicable record date in the case of interest, and the twelfth calendar day prior to the payment date for the payment of principal, of (i) such holder s election to receive all or a portion of such payment in the Specified Currency for value the relevant due date for interest payment or final redemption, as the case may be, and (ii) wire transfer instructions to an account denominated in the Specified Currency with respect to any payment to be made in the Specified Currency. Such election shall be made by the Noteholder holding its interest in a DTC Global Note and any such election in respect of that payment shall be irrevocable. An indirect DTC participant must notify the DTC Noteholder through which it is holding its interest in a DTC Global Note of such election and wire transfer instructions prior to 5:00 p.m. E.S.T. on the first DTC Business Day following the applicable record date. DTC will notify the Exchange Agent of such election and wire transfer instructions and of the amount of the Specified Currency to be converted into U.S. dollars, prior to 5:00 p.m. E.S.T. on the fifth DTC Business Day following the applicable record date in the case of interest and the tenth calendar day prior to the payment date for the payment of principal. If complete instructions are received by the DTC participant and forwarded by the DTC participant to DTC, and by DTC to the Exchange Agent, on or prior to such dates, the DTC Noteholder will receive payment in the Specified Currency outside DTC. Otherwise, only U.S. dollar payments will be made by the Exchange Agent. Payments in the Specified Currency 54

55 (other than U.S. dollars) outside DTC will be made by wire transfer of same day funds in accordance with the relevant wire transfer instructions for value the relevant payment date. 55

56 PLAN OF DISTRIBUTION Dealers The Program provides for the appointment of dealers in respect of any particular issue of Notes (all such dealers together, the Dealers ), the names of which will be set out in the applicable Final Terms. References herein to the Dealers include any Managers set out in the applicable Final Terms. Morgan Stanley & Co. International plc ( Morgan Stanley ) is arranger of the Program pursuant to a Program Agreement between the Corporation and Morgan Stanley, dated June 3, There are no sponsoring dealers under the Program. Any Dealer will be able to purchase Notes on an underwritten basis, either individually or as part of a syndicate, or on an agency basis. Standard Provisions Notes may be sold from time to time by the Corporation to or through any one or more Dealers and by the Corporation itself. The arrangements under which the Notes may from time to time be agreed to be sold by the Corporation to or through the Dealers are set out in the Standard Provisions dated as of June 3, 2008 (as amended or supplemented from time to time, the Standard Provisions ). The Standard Provisions will be incorporated by reference into the terms agreement by which Dealers are appointed in respect of a particular issue of Notes. Any agreement for the sale of Notes will, inter alia, make provision for the form and terms and conditions of the relevant Notes, the method of distribution of the Notes, the price at which such Notes will be purchased by the relevant Dealer(s) and the commissions or other agreed deductibles (if any) which are payable or allowable by the Corporation in respect of such purchase. In addition, each placement of Notes is subject to certain conditions, including the condition that there shall not have occurred any national or international calamity or development, crisis of a political or economic nature, or change in the money or capital markets in which the Notes are being offered, the effect of which on such financial markets shall be such as in the judgment of the relevant Dealer(s) or the Corporation materially adversely affects the ability of the relevant Dealer(s) to sell or distribute the Notes, whether in the primary market or in respect of dealings in the secondary market. Sales Restrictions No action has been or will be taken in any jurisdiction by any Dealer or the Corporation that would permit a public offering of any of the Notes, or possession or distribution of this Series Prospectus, or any part thereof including any Final Terms, or any other offering or publicity material relating to the Notes, in such jurisdiction. The relevant Dealer(s) (and the Corporation in connection with sales of Notes on its own behalf) will, to the best of its knowledge, comply with all relevant laws, regulations and directives in each jurisdiction in which it purchases, offers, sells, or delivers Notes or has in its possession or distributes this Series Prospectus, or any part thereof including any Final Terms, or any such other material, in all cases at its own expense. No Dealer is authorized to make any representation or use any information in connection with the issue, offering and sale of the Notes other than as contained in this Series Prospectus, the applicable Final Terms or such other information relating to the Corporation and/or the Notes which the Corporation has authorized to be used. Selling restrictions may be modified by the agreement of the Corporation and the relevant Dealer(s) following a change in any relevant law, regulation or directive. Selling restrictions may also be added to reflect the requirements of any particular Specified Currency. Any such modification or addition will be set out in the Final Terms issued in respect of each issue of Notes to which such modification or addition relates or in a supplement to this Series Prospectus. United States The Notes are not required to be registered under the U.S. Securities Act of 1933, as amended. Bearer Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions, except in certain transactions permitted by U.S. tax regulations. Accordingly, under U.S. federal tax laws and regulations, Bearer Notes (including Temporary Global Notes and Permanent Global Notes) with a maturity of more than one year may not 56

57 be offered or sold during the restricted period (as defined in United States Treasury Regulations Section (c)(2)(i)(D)(7)) within the United States or to United States persons (each as defined below) other than to an office located outside the United States of a United States financial institution (as defined in United States Treasury Regulations Section (c)(1)(v)), purchasing for its own account or for resale or for the account of certain customers, that provides a certificate stating that it agrees to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Code, and the United States Treasury Regulations thereunder, or to certain other persons described in United States Treasury Regulations Section (c)(2)(i)(D)(1)(iii)(B). Moreover, such Bearer Notes may not be delivered in connection with their sale during the restricted period within the United States. Any distributor (as defined in United States Treasury Regulations Section (c)(2)(i)(D)(4)) participating in the offering or sale of Bearer Notes with a maturity of more than one year must agree that it will not offer or sell during the restricted period any such Bearer Notes within the United States or to United States persons (other than the persons described above), it will not deliver in connection with the sale of such Bearer Notes during the restricted period any such Bearer Notes within the United States and it has in effect procedures reasonably designed to ensure that its employees and agents who are directly engaged in selling the Bearer Notes are aware of the restrictions on offers and sales described above. No Bearer Notes (other than a Temporary Global Note and certain Bearer Notes described in the following paragraph) with a maturity of more than one year may be delivered, nor may interest be paid on any such Bearer Note, until the person entitled to receive such Bearer Note or such interest furnishes a written certificate to the effect that the relevant Bearer Note (i) is owned by a person that is not a United States person, (ii) is owned by a United States person that is a foreign branch of a United States financial institution purchasing for its own account or for resale, or is owned by a United States person who acquired the Bearer Note through the foreign branch of such a financial institution and who holds the Bearer Note through such financial institution on the date of certification, provided, in either case, that such financial institution provides a certificate to the Corporation or the distributor selling the Bearer Note to it, within a reasonable time of selling the Bearer Note, stating that it agrees to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of the Code and the United States Treasury Regulations thereunder, or (iii) is owned by a financial institution for purposes of resale during the restricted period. A financial institution described in clause (iii) of the preceding sentence (whether or not also described in clause (i) or (ii)) must certify that it has not acquired the Bearer Note for purposes of resale directly or indirectly to a United States person or to a person within the United States. In the case of a Note represented by a Permanent Global Note, such certification must be given in connection with notation of a beneficial owner s interest therein. A Bearer Note will not be subject to the certification requirements described in the preceding paragraph if the Bearer Note is sold during the restricted period and all of the following conditions are satisfied: (i) the interest and principal with respect to the Bearer Note are denominated only in the currency of a single foreign country; (ii) the interest and principal with respect to the Bearer Note are payable only within that foreign country; (iii) the Bearer Note is offered and sold in accordance with practices and documentation customary in that foreign country; (iv) the distributor of the Bearer Note agrees to use reasonable efforts to sell the Bearer Note within that foreign country; (v) the Bearer Note is not listed, or the subject of an application for listing, on an exchange located outside that foreign country; (vi) the U.S. Internal Revenue Service has designated the foreign country as a foreign country in which certification under Treasury Regulations Section (c)(2)(i)(D)(3)(i) is not permissible; (vii) the issue of the Bearer Note is subject to guidelines or restrictions imposed by governmental, banking or securities authorities in that foreign country; and (viii) more than 80 per cent., by value, of the Bearer Notes included in the offering of which the Bearer Note is a part are sold to non-distributors by distributors maintaining an office located in that foreign country. Bearer Notes that are convertible into U.S. dollar denominated debt obligations or which are otherwise linked by their terms to the U.S. dollar are not eligible for the certification exemption described in this paragraph. The only foreign countries that have been designated as foreign countries in which certification under Treasury Regulations Section (c)(2)(i)(D)(3)(i) is not permissible are Switzerland and Germany. Each Temporary Global Note, Permanent Global Note or Bearer Note with a maturity of more than one year, and any Talons and Coupons relating to such Bearer Notes, will bear the following legend: 57

58 Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code. As used herein, United States person means any citizen or resident of the United States, any corporation, partnership or other entity created or organized in or under the laws of the United States and any estate or trust the income of which is subject to United States federal income taxation regardless of its source, and United States means the United States of America (including the states thereof and the District of Columbia) and its possessions. Other terms used herein have the meanings given to them by the Code and the Treasury Regulations issued thereunder. United Kingdom Each Dealer will be required to represent, warrant and agree that it has complied and will comply with all applicable provisions of the Financial Services and Markets Act 2000 with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. Japan The Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law ) and each Dealer will be required to represent, warrant and agree that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organised under the laws of Japan), or to others for reoffering or resale, directly or indirectly, in Japan or to a resident of Japan except pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Financial Instruments and Exchange Law and any applicable laws, regulations and ministerial guidelines of Japan. Singapore Each dealer acknowledges that this Series Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, each Dealer will be required to represent, warrant and agree that it has not offered or sold any Notes or caused the Notes to be made the subject of an invitation for subscription or purchase nor will it offer or sell the Notes or cause the Notes to be made the subject of an invitation for subscription or purchase, nor has it circulated or distributed nor will it circulate or distribute this Series Prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. France Any offer of Notes in France pursuant to this Series Prospectus falls within Article L of the Code monétaire et financier. This Series Prospectus has not been reviewed by the Autorité des marchés financiers. 58

59 VALIDITY OF THE NOTES The validity of the Notes will be passed on by the General Counsel, or the Deputy General Counsel, of the Corporation and by Sullivan & Cromwell LLP (as to Notes governed by New York law) and Linklaters LLP (as to Notes governed by English law), counsel to the Dealers, each of which, with respect to certain matters, will rely upon counsel to the Corporation. It is expected that the validity of Notes governed by the law of any other jurisdiction will be passed on by counsel to the relevant Dealers at the time of issue. The opinions of counsel to the Corporation, Sullivan & Cromwell LLP and Linklaters LLP will be conditioned upon, and subject to certain assumptions regarding, future action required to be taken by the Corporation and the Global Agent or the Fiscal Agent in connection with the issuance and sale of any particular Note, the specific terms of Notes and other matters which may affect the validity of Notes but which cannot be ascertained on the date of such opinions. 59

60 GENERAL INFORMATION The execution of all documents associated with the Program and, subject to the borrowing limit authorized by the Board of Directors of the Corporation from time to time, the creation, issue, sale execution and delivery of the Notes has been authorized by resolutions approved by the Board of Directors of the Corporation. There has been no significant change in the financial position of the Corporation since June 30, The Corporation is not involved in any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Corporation is aware) during the 12 months preceding the date of this Series Prospectus which are likely to have, or have had in the recent past, significant effects on the financial position of the Corporation. Each Bearer Note having a maturity of more than one year, Receipt, Coupon and Talon will bear the following legend: Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code. For so long as Notes may be issued pursuant to this Series Prospectus, the following documents will be available, during usual business hours on any weekday (Saturdays and public holidays excepted), for inspection at the office of Global Agent: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) the Global Agency Agreement (which includes the form of the Global Notes, the Definitive Bearer Notes, the Certificates, the Coupons, the Receipts and the Talons); the Fiscal Agency Agreement (which includes the form of the Definitive Registered Bookentry Notes); the Program Agreement; the Deed of Covenant; the Articles of Agreement of the Corporation; the documents incorporated by reference in this Series Prospectus; each Final Terms (other than for an unlisted Series of Notes); a copy of this Series Prospectus together with any supplement to this Series Prospectus or further Series Prospectus; and all reports, letters and other documents, balance sheets, valuations and statements by any expert any part of which is extracted or referred to in this Series Prospectus. Copies of the latest Information Statement and the latest unaudited quarterly financial statements of the Corporation may be obtained, and copies of the Global Agency Agreement, the Fiscal Agency Agreement and the Deed of Covenant will be available for inspection, at the specified office of the Global Agent during normal business hours, so long as any of the Notes is outstanding. KPMG LLP of 1801 K Street NW, Washington, DC 20006, U.S.A. have audited the financial statements of the Corporation as of June 30, 2013 in accordance with auditing standards generally accepted in the United States of America, and rendered their report dated August 7, 2013 without qualification. 60

61 APPENDIX A CNY NOTES FINAL TERMS Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Series Prospectus dated March 7, This document constitutes the Final Terms of the CNY Notes (the Notes or the CNY Notes ) described herein and must be read in conjunction with the Series Prospectus. Full information on International Finance Corporation (the Corporation ) and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Series Prospectus. The Series Prospectus may be obtained (without charge) from the office of the Corporation at 2121 Pennsylvania Avenue, N.W., Washington D.C., U.S.A. and is available for viewing at the website of the Corporation ( THE NOTES ARE NOT AN OBLIGATION OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OR OF ANY GOVERNMENT. PART A CONTRACTUAL TERMS 1. Issuer: International Finance Corporation 2. (i) Series Number: 1303 (ii) Tranche Number: Specified Currency or Currencies: Renminbi (CNY) 4. Aggregate Nominal Amount: (i) Series: CNY1,000,000,000 (ii) Tranche: CNY1,000,000, Issue Price: per cent. of the Aggregate Nominal Amount 6. (i) Specified Denominations: CNY10,000 (ii) Calculation Amount: CNY10, (i) Issue Date: March 11, 2014 (ii) Interest Commencement Date: Issue Date 8. Maturity Date: January 18, 2017, adjusted in accordance with the Modified Following Business Day Convention 9. Interest Basis: 2.00 per cent. Fixed Rate 10. Redemption/Payment Basis: Redemption at par 11. Change of Interest or Redemption/Payment Basis: Not Applicable 12. Put/Call Options: Not Applicable 13. Status of the Notes: Senior 14. Method of distribution: Syndicated PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE 15. Fixed Rate Note Provisions: Applicable (i) Rate of Interest: 2.00 per cent. per annum payable semi-annually in arrear (ii) Interest Payment Date(s): January 18 and July 18 in each year, beginning July 18, 2014, adjusted in accordance with the Modified Following Business Day Convention (iii) Fixed Coupon Amount(s): Not Applicable 61

62 (iv) Broken Amount(s): CNY70.68 per Calculation Amount payable on July 18, 2014 in respect of the period from, and including, March 11, 2014 to, but excluding, July 18, 2014 (v) Day Count Fraction: Actual/365 (Fixed) (vi) Determination Dates: (vii) Other terms relating to the method of calculating interest for Fixed Rate Notes: Not Applicable Not Applicable 16. Floating Rate Note Provisions: Not Applicable 17. Zero Coupon Note Provisions: Not Applicable 18. Index Linked Interest Note/other variable-linked interest Note Provisions: Not Applicable 19. Dual Currency Note Provisions: Not Applicable PROVISIONS RELATING TO REDEMPTION 20. Call Option: Not Applicable 21. Put Option: Not Applicable 22. Final Redemption Amount of each Note: 23. Early Redemption Amount: Early Redemption Amount: GENERAL PROVISIONS APPLICABLE TO THE NOTES 24. Form of Notes: Registered Notes: 25. New Global Note (NGN): No 26. Financial Centre(s) or other special provisions relating to payment dates: 27. Talons for future Coupons or Receipts to be attached to Definitive Notes (and dates on which such Talons mature): 28. Details relating to Partly Paid Notes: amount of each payment comprising the Issue Price and date on which each payment is to be made and consequences (if any) of failure to pay, including any right of the Corporation CNY10,000 per Calculation Amount CNY10,000 per Calculation Amount Global Certificate available on Issue Date Hong Kong and New York Notwithstanding Condition 6(h), if any payment date would fall on a date which is not a business day, the relevant date will be the first following day which is a business day, unless that day falls in the next calendar month, in which case the relevant date will be the first preceding day which is a business day. In the above paragraph, business day means a day on which banks and foreign exchange markets are open for business in (i) the relevant place of presentation, (ii) any Financial Centres and (iii) the principal financial centre of the country of the relevant currency. No Not Applicable 62

63 to forfeit the Notes and interest due on late payment: 29. Details relating to instalment Notes: amount of each instalment, date on which each payment is to be made: 30. Redenomination, renominalization and reconventioning provisions: Not Applicable Not Applicable 31. Consolidation provisions: Not Applicable 32. Additional terms: Applicable (i) Governing law: English (ii) Others: DISTRIBUTION 33. (i) If syndicated, names and addresses of Managers and underwriting commitments: (ii) Date of Terms Agreement: March 7, 2014 (iii) Stabilizing Manager(s) (if any): 34. If non-syndicated, name and address of Dealer: All payments in respect of the Notes will be made by transfer to the Renminbi account maintained by the payee with a bank in Hong Kong. See Annex A for certain modifications to the Conditions with respect to the Notes HSBC Bank plc: CNY333,340,000 Industrial and Commercial Bank of China (Asia) Limited: CNY333,330,000 J.P. Morgan Securities (Asia Pacific) Limited: CNY333,330,000 HSBC Bank plc Not Applicable 35. Additional selling restrictions: (a) People s Republic of China: Each Manager has represented and agreed that the Notes are not being offered or sold and may not be offered or sold, directly or indirectly, in the People s Republic of China (for such purposes, not including Hong Kong and Macau Special Administrative Regions or Taiwan), except as permitted by the securities laws of the People s Republic of China. (b) Hong Kong: Each Manager has represented and agreed that it has not issued or had in its possession for the purposes of issue, and will not issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the Notes, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance (Cap. 571 of Hong Kong) 63

64 RESPONSIBILITY and any rules made under that Ordinance. The Corporation accepts responsibility for the information contained in these Final Terms. Signed on behalf of the Corporation: By: Duly authorized 64

65 PART B OTHER INFORMATION 1. LISTING (i) Listing: The Official List of the London Stock Exchange (ii) Admission to trading: Application has been made to the London Stock Exchange for the CNY Notes to be admitted to trading on the London Stock Exchange s Regulated Market with effect from March 11, RATINGS Ratings: The Notes to be issued have been rated: S & P: AAA Moody s: Aaa 3. INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE ISSUE Save as discussed in Plan of Distribution in the Series Prospectus, so far as the Corporation is aware, no person involved in the offer of the Notes has an interest material to the offer. 4. OPERATIONAL INFORMATION Intended to be held in a manner which would allow Eurosystem eligibility: ISIN Code: No XS Common Code: CUSIP: CINS: Any clearing system(s) other than Euroclear Bank S.A./N.V., Clearstream Banking, société anonyme and The Depository Trust Company and the relevant identification number(s): Delivery: Names and addresses of additional Paying Agent(s) (if any): 5. GENERAL Not Applicable Not Applicable Not Applicable Delivery against payment Not Applicable Applicable TEFRA exemption: Not Applicable 65

66 ANNEX A - MODIFICATIONS TO THE CONDITIONS The Terms and Conditions shall be further modified as set forth below for the purposes of the CNY Notes that are subject to these Final Terms: 1. Defined terms: The following defined terms shall be inserted: PRC means the People s Republic of China which, for the purpose of these Conditions, shall exclude Hong Kong, the Macau Special Administrative Region of the People s Republic of China and Taiwan. Spot Rate means the spot Renminbi/U.S. dollar exchange rate for the purchase of U.S. dollars with Renminbi in the over-the-counter Renminbi exchange market in Hong Kong for settlement in two business days, as determined by the Calculation Agent at or around a.m. (Hong Kong time) on the Determination Date, on a deliverable basis by reference to Reuters Screen Page TRADCNY3, or if no such rate is available, on a non-deliverable basis by reference to Reuters Screen Page TRADNDF. If neither rate is available, the Calculation Agent will determine the Spot Rate at or around a.m. (Hong Kong time) on the Determination Date as the most recently available Renminbi/U.S. dollar official fixing rate for settlement in two business days reported by The State Administration of Foreign Exchange of the PRC, which is reported on the Reuters Screen Page CNY=SAEC. Reference to a page on the Reuters Screen means the display page so designated on the Reuters Monitor Money Rates Service (or any successor service) or such other page as may replace that page for the purpose of displaying a comparable currency exchange rate. 2. Condition 6 (Payment): Condition 6(i) shall be replaced with the following: Currency of Payment: If the Specified Currency is no longer used by the government of the PRC for the payment of public and private debts or used for settlement of transactions by public institutions in the PRC or, in the reasonable opinion of the Calculation Agent, is not expected to be available, when any payment on the Notes is due as a result of circumstances beyond the control of the Corporation, the Corporation shall be entitled to satisfy its obligations in respect of such payment by making such payment in U.S. dollars on the basis of the Spot Rate on the second Business Day prior to such payment (the Determination Date ) or, if such rate is not available on the Determination Date, on the basis of the Spot Rate most recently available prior to such Determination Date, as determined by the Calculation Agent. Any payment made under such circumstances in U.S. dollars, will constitute valid payment, and will not constitute a default in respect of the Notes. For these purposes Business Day means a day (other than a Saturday or Sunday) on which commercial banks are open for general business (including dealings in foreign exchange) in Hong Kong and New York. 66

67 APPENDIX B IFC INFORMATION STATEMENT 67

68 Information Statement International Finance Corporation I N T E R N A T I O N A L C O R P O R A T I O N F I N A N C E International Finance Corporation ( IFC or the Corporation ) intends from time to time to issue its notes, bonds, structured debt securities or other evidences of indebtedness ( Securities ), with maturities and on terms determined by market conditions at the time of sale. The Securities may be sold to dealers or underwriters that may resell them in public offerings or otherwise, or they may be sold by IFC, either directly or through agents. In connection with the sale of Securities issued at any particular time, the aggregate principal amount, maturity, interest rate(s) or method for determining such rate(s), interest payment dates, redemption premium (if any), purchase price to be paid to IFC, provisions for redemption or other special terms, form and denomination of such Securities, information as to stock exchange listing and the names of the dealers, underwriters or agents as well as other relevant information will be set forth in a prospectus, offering circular or information memorandum for such issuance or in related offering documents. Except as otherwise indicated, in this Information Statement (1) all amounts are stated in current United States dollars translated as indicated in the notes to the consolidated financial statements, Note A-Summary of significant accounting and related policies, remeasurement of foreign currency transactions, and (2) all information is given as of June 30, AVAILABILITY OF INFORMATION IFC will provide additional copies of this Information Statement to the public upon request and without charge. Written or telephone requests should be directed to IFC s principal office at 2121 Pennsylvania Avenue, N.W., Washington, D.C., 20433, Attention: Treasury Department, Tel: (202) IFC s consolidated financial statements and other information filed with the U.S. Securities and Exchange Commission (the Commission ) may also be inspected at the offices of the Commission at Room 1580, 100 F Street, N.E., Washington, D.C., 20549, and copies of such material may be obtained from the Public Reference section of the Commission at the above address at prescribed rates. The Information Statement is also available on IFC s website at Other documents on IFC s website are not intended to be incorporated by reference in this Information Statement. Recipients of this Information Statement should retain it for future reference, as it is intended that each prospectus, offering circular, information memorandum or other offering document will refer to this Information Statement for a description of IFC, its operations and financial status. November 21, 2013

69 SUMMARY INFORMATION Except as otherwise indicated, all data are as of June 30, IFC is an international organization, established in 1956 to further economic growth in its developing member countries by promoting private sector development. IFC is a member of the World Bank Group, which also comprises the International Bank for Reconstruction and Development ( IBRD ), the International Development Association ( IDA ), the Multilateral Investment Guarantee Agency ( MIGA ), and the International Centre for Settlement of Investment Disputes ( ICSID ). It is a legal entity separate and distinct from IBRD, IDA, MIGA, and ICSID with its own Articles of Agreement, share capital, financial structure, management, and staff. Membership in IFC is open only to member countries of IBRD. The obligations of IFC are not obligations of, or guaranteed by, IBRD or any government. IFC is an experienced supranational organization providing financing and financial services primarily to the private sector in developing countries that are members of IFC. It combines the characteristics of a multilateral development bank with those of a private financial institution. As of June 30, 2013, IFC s entire share capital was held by 184 member countries. As of June 30, 2013, member countries of the Organization for Economic Cooperation and Development ( OECD ) held 68.36% of the voting power of IFC. The five largest of IFC s 184 shareholders are the United States (22.41% of the total voting power), Japan (5.58%), Germany (5.10%), United Kingdom (4.79%), and France (4.79%). Generally, IFC charges market-based rates for its loans and seeks market returns on its equity investments and investments in debt securities. Unlike most other multilateral institutions, IFC does not accept host government guarantees of its loans. The financial strength of IFC is based principally on the quality of its investment portfolio, its substantial paid-in capital and retained earnings, low debt to equity ratio, the size of its liquid assets portfolio, its diversified earnings base and its profitability. Basis of Preparation of IFC s Consolidated Financial Statements. The accounting and reporting policies of IFC conform to accounting principles generally accepted in the United States ( US GAAP ). IFC s accounting policies are discussed in more detail in the Section, Critical Accounting Policies and in Note A to IFC s Consolidated Financial Statements as of and for the year ended June 30, 2013 ( FY13 ) ( FY13 Consolidated Financial Statements ). Investment Products. As of June 30, 2013, IFC s disbursed loan, equity, and debt securities investment portfolio ( disbursed investment portfolio ) amounted to United States dollars ( US dollars or $ ) 33.9 billion. Loans represented 66.7%, equity investments 27.2%, and debt securities 6.1% of the disbursed investment portfolio. The disbursed investment portfolio is diversified by country, region, industry, sector, and project type. Risks are shared with other private sector investors as IFC does not generally provide financing for its own account for more than 25% of project cost. IFC s investment portfolio is subject to a number of operational and prudential limits, including limitations on single project/client exposure, single country exposure, and segment concentration. IFC applies stringent lending and investment criteria; projects are appraised on their technical, managerial, financial, and economic merits. Generally, IFC loans are priced on a market basis and equity and debt security investment decisions are similarly made based on risk-reward considerations. Liquid Assets. As of June 30, 2013, the fair value of IFC s liquid assets portfolio (net of associated derivative instruments and securities lending activities) amounted to $31.2 billion, up from $29.7 billion at June 30, IFC s liquid assets plus undrawn borrowings from IBRD are sufficient to cover all of IFC s undisbursed loan and equity commitments. IFC s liquidity policy is to maintain a minimum level of liquidity, consisting of proceeds from external funding, to cover at least 65% of the sum of: (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed guarantees; and (iii) 30% of committed client risk management products. During the three months ended March 31, 2013, IFC s management decided to modify the External Funding Policy by eliminating the cap on the operational range of 65% to 85%. IFC invests its liquid assets portfolio in highly rated fixed and floating rate instruments issued by, or unconditionally guaranteed by governments, government agencies and instrumentalities, multilateral organizations, and high quality corporate issuers; these include assetbacked securities ( ABS ) and mortgage-backed securities ( MBS ), time deposits and other unconditional obligations of banks and financial institutions. Diversification in multiple dimensions ensures a favorable risk return profile. IFC manages the market risk associated with these investments through a variety of hedging techniques including derivatives, principally currency and interest rate swaps and financial futures. Borrowings. IFC raises virtually all of the funds for its lending, equity and debt security investment activities through the issuance of debt obligations in the international capital markets, while maintaining a small borrowing window with IBRD. IFC diversifies its borrowings by currency, country, source and maturity to provide flexibility and cost effectiveness. As of June 30, 2013, IFC s outstanding borrowings, including fair value adjustments, totaled $44.9 billion. In addition, IFC undertakes a substantial volume of currency swap and interest rate swap transactions to convert its market borrowings into variable-rate US dollar liabilities. Enterprise Risk Management. In executing its sustainable private sector development business, IFC assumes various risks of various types. Active management of these risks is critical to IFC s ability to maintain financial sustainability and achieve development impact. IFC has developed a comprehensive enterprise risk management framework within which risks are continuously identified, measured, monitored, analyzed and controlled. This framework is defined in terms of several interrelated dimensions, namely: IFC s guiding principles provide the foundation for active management of risk in IFC s business, in its entirety, under the supervision of the Board of Directors, the Audit Committee, the Executive Vice President/CEO and the Management Team; risk appetite is defined and implemented in the form of exposure limits, policies and procedures; the Risk Management, Portfolio Vice Presidency, together with independent institutional oversight bodies, monitors compliance with prescribed limits, policies and procedures; risk governance is provided by a sub-committee of the Management Team, the Corporate Risk Committee which reviews and approves all risk policies, sets risk standards and receives regular reports on different aspects of risk management at the enterprise level; and as a member of the World Bank Group, IFC liaises with the corresponding Risk Management areas across the group on a regular basis. Total Capital. As of June 30, 2013, IFC s total capital amounted to $22.3 billion, including $18.7 billion in retained earnings, of which $0.3 billion has been designated for specific purposes. IFC s reporting of capital adequacy is Deployable Strategic Capital. Deployable Strategic Capital is based on the Corporation s Board of Director-approved risk based economic capital. Deployable Strategic Capital as a percentage of Total Resources Available (defined as paid-in capital plus retained earnings net of designated retained earnings plus general and specific reserves against losses on loans) stood at 8% at June 30, Under IFC s Articles of Agreement, so long as IFC has outstanding indebtedness to IBRD, IFC s leverage, as measured by the ratio of IFC s debt (borrowings plus outstanding guarantees) to equity (total subscribed capital plus retained earnings), may not exceed 4.0 to 1. At June 30, 2013, this ratio was 2.6 to 1. The above information is supplemented and qualified by the additional information and Consolidated Financial Statements and Notes thereto appearing elsewhere in this Information Statement. 2

70 SELECTED FINANCIAL DATA The table below presents selected financial data for the last five fiscal years (in millions of US dollars, except where otherwise stated): As of and for the years ended 30 June Net income highlights: Income from loans and guarantees... $ 1,059 $ 938 $ 877 $ 801 $ 871 (Provision) release of provision for losses on loans, guarantees and other receivables... (243) (117) 40 (155) (438) Income (loss) from equity investments ,457 1,464 1,638 (42) Income from debt securities Income from liquid asset trading activities Charges on borrowings... (220) (181) (140) (163) (488) Other income Other expenses... (1,401) (1,207) (981) (853) (764) Foreign currency transaction gains and losses on non-trading activities (33) (82) 10 Income (loss) before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA ,877 2,024 2,285 (153) Net gains and losses on other non-trading financial instruments accounted for at fair value (219) 155 (339) 452 Income before grants to IDA... 1,350 1,658 2,179 1, Grants to IDA... (340) (330) (600) (200) (450) Net income (loss)... 1,010 1,328 1,579 1,746 (151) Less: Net loss attributable to noncontrolling interests... 8 Net income (loss) attributable to IFC... $ 1,018 $ 1,328 $ 1,579 $ 1,746 $ (151) Consolidated balance sheet highlights: Total assets... $77,525 $75,761 $68,490 $61,075 $51,483 Liquid assets, net of associated derivatives... 31,237 29,721 24,517 21,001 17,864 Investments... 34,677 31,438 29,934 25,944 22,214 Borrowings outstanding, including fair value adjustments... 44,869 44,665 38,211 31,106 25,711 Total capital... $22,275 $20,580 $20,279 $18,359 $16,122 Of which: Undesignated retained earnings... $18,435 $17,373 $16,032 $14,307 $12,251 Designated retained earnings Capital stock... 2,403 2,372 2,369 2,369 2,369 Accumulated other comprehensive income (AOCI)... 1, ,543 1, Noncontrolling interests Financial ratios: (1) Return on average assets (GAAP basis) (2) % 1.8% 2.4% 3.1% (0.3)% Return on average assets (non-gaap basis) (3) % 2.8% 1.8% 3.8% (1.1)% Return on average capital (GAAP basis) (4) % 6.5% 8.2% 10.1% (0.9)% Return on average capital (non-gaap basis) (5) % 9.9% 6.0% 11.8% (3.0)% Cash and liquid investments as a percentage of next three years estimated net cash requirements... 77% 77% 83% 71% 75% External funding liquidity level (6) % 327% 266% 190% 163% Debt to equity ratio (7) :1 2.7:1 2.6:1 2.2:1 2.1:1 Total reserves against losses on loans to total disbursed portfolio (8) % 6.6% 6.6% 7.4% 7.4% Capital measures: Capital to risk-weighted assets ratio (9)... n/a n/a n/a n/a 44% Total resources required ($ billions) (10) Total resources available ($ billions) (11) Strategic capital (12) Deployable strategic capital (13) Deployable strategic capital as a percentage of total resources available... 8% 9% 10% 14% 16% 3

71 1 Certain financial ratios as described below are calculated excluding the effects of unrealized gains and losses on investments, other non-trading financial instruments, AOCI, and impacts from consolidated Variable Interest Entities ( VIEs ). 2 Net income for the fiscal year as a percentage of the average of total assets at the end of such fiscal year and the previous fiscal year. 3 Net income excluding unrealized gains and losses on certain investments accounted for at fair value, income from consolidated VIEs, and net gains and losses on non-trading financial instruments accounted for at fair value, as a percentage of total disbursed loan and equity investments (net of reserves) at cost, liquid assets net of repos, and other assets averaged for the current period and previous fiscal year. 4 Net income for the fiscal year as a percentage of the average of total capital (excluding payments on account of pending subscriptions) at the end of such fiscal year and the previous fiscal year. 5 Net income excluding unrealized gains and losses on certain investments accounted for at fair value, income from consolidated VIEs, and net gains and losses on non-trading financial instruments accounted for at fair value, as a percentage of paid-in share capital and retained earnings (before certain unrealized gains and losses and excluding cumulative designations not yet expensed) averaged for the current period and previous fiscal year. 6 IFC s objective is to maintain a minimum level of liquidity, consisting of proceeds from external funding to cover at least 65% of the sum of (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed guarantees; and (iii) 30% of committed client risk management products. As of FY13 Q3, IFC s management decided to modify the External Funding Policy by eliminating the cap on the operational range of 65% to 85%. 7 Leverage (Debt/equity) ratio is defined as the number of times outstanding borrowings plus outstanding guarantees cover paid-in capital and accumulated earnings (net of retained earnings designations and certain unrealized gains/losses). 8 Total reserves against losses on loans to total disbursed loan portfolio is defined as reserve against losses on loans as a percentage of the total disbursed loan portfolio at the end of the fiscal year. 9 The ratio of capital (including paid-in capital, retained earnings, and portfolio (general) loan loss reserves) to risk-weighted assets, both on- and off-balance sheet. The ratio does not include designated retained earnings reported in total capital on IFC s consolidated balance sheet. The Board of Directors has approved the use of a risk-based economic capital framework beginning in the year ended June 30, 2008 ( FY08 ). Parallel use of the capital to riskweighted assets ratio has now been discontinued. 10 The minimum capital required consistent with the maintenance of IFC s AAA rating. It is computed as the aggregation of risk-based economic capital requirements for each asset class across the Corporation. 11 Paid-in capital plus retained earnings net of designated retained earnings plus general and specific reserves against losses on loans. This is the level of available resources under IFC s risk-based economic capital adequacy framework. 12 Total resources available less total resources required % of total resources available less total resources required. USE OF PROCEEDS The net proceeds to IFC from the sale of the Securities will normally be used for the general operations of IFC in accordance with its Articles of Agreement. FINANCIAL STRUCTURE OF IFC Total assets were $77.5 billion at June 30, 2013 ($75.8 billion June 30, 2012), including $31.2 billion in liquid assets, net of associated derivatives ($29.7 billion June 30, 2012) and $34.7 billion in the investment portfolio, including fair value and other adjustments, and net of reserves against losses on loans ($31.4 billion June 30, 2012). Total assets also include $3.4 billion in derivative assets at fair value ($4.6 billion June 30, 2012). 4

72 MANAGEMENT S DISCUSSION AND ANALYSIS AS OF AND FOR THE YEAR ENDED JUNE 30, 2013 OVERVIEW OF FINANCIALRESULTS IFC helps developing countries achieve sustainable growth by financing private sector investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. IFC s principal investment products are loans and equity investments, with smaller debt securities and guarantee portfolios. IFC also plays an active and direct role in mobilizing additional funding from other investors and lenders through a variety of means. Such means principally comprise: loan participations, parallel loans, sales of loans, the non-ifc portion of structured finance transactions which meet core mobilization criteria, the non-ifc portion of commitments in IFC s initiatives, and the non-ifc investment portion of commitments in funds managed by IFC s wholly owned subsidiary, IFC Asset Management Company LLC ( AMC ), (collectively Core Mobilization ). Unlike most other development institutions, IFC does not accept host government guarantees of its exposures. IFC raises virtually all of the funds for its lending activities through the issuance of debt obligations in the international capital markets, while maintaining a small borrowing window with IBRD. Equity investments are funded from net worth. For FY13, IFC had an authorized borrowing program of up to $10 billion, and up to $2 billion to allow for possible prefunding during FY13 of the funding program for the year ending June 30, 2014 ( FY14 ). For FY14, IFC has an authorized borrowing program of up to $13.5 billion, and, subject to completion of its FY14 program, up to $2.0 billion to allow for possible prefunding during FY14 of the funding program for the year ending June 30, 2015 ( FY15 ). IFC s capital base and its assets and liabilities, other than its equity investments, are primarily denominated in US dollars. IFC seeks to minimize foreign exchange and interest rate risks by closely matching the currency and rate bases of its assets in various currencies with liabilities having the same characteristics. IFC generally manages non-equity investment related and certain lending related residual currency and interest rate risks by utilizing currency and interest rate swaps and other derivative instruments. The Management s Discussion and Analysis contains forward looking statements which may be identified by such terms as anticipates, believes, expects, intends, plans or words of similar meaning. Such statements involve a number of assumptions and estimates that are based on current expectations, which are subject to risks and uncertainties beyond IFC s control. Consequently, actual future results could differ materially from those currently anticipated. BASIS OF PREPARATION OF IFC S CONSOLIDATED FINANCIAL STATEMENTS The accounting and reporting policies of IFC conform to US GAAP. IFC s accounting policies are discussed in more detail in Critical Accounting Policies and in Note A to IFC s FY13 Consolidated Financial Statements. FINANCIAL PERFORMANCE SUMMARY From year to year, IFC s net income is affected by a number of factors that can result in volatile financial performance. Such factors are detailed more fully in Results of Operations. IFC reported income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA of $928 million in FY13, as compared to $1,877 million in the year ended June 30, 2012 ( FY12 ) and $2,024 million in the year ended June 30, 2011 ( FY11 ). 5

73 The decrease in income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA in FY13 when compared to FY12 and in FY12 when compared to FY11 was principally as a result of the following (US$ millions): Increase (decrease) FY13 vs FY12 Realized capital gains on equity investments... $(1,079) Provisions for losses on loans, guarantees and other receivables... (126) Foreign currency transaction gains and losses on non-trading activities... (110) Advisory services expenses, net... (91) Expense from pension and other postretirement benefit plans... (77) Unrealized gains on equity investments Income from liquid asset trading activities Other-than-temporary impairments on equity investments Other, net... (58) Overall change... $ (949) Increase (decrease) FY12 vs FY11 Unrealized losses on equity investments... $ (582) Other-than-temporary impairments on equity investments... (474) Income from liquid asset trading activities... (216) Gains on non-monetary exchanges of equity investments... (214) Provisions for losses on loans, guarantees and other receivables... (157) Advisory services expenses, net Foreign currency transaction gains and losses on non-trading activities Realized capital gains on equity investments... 1,263 Other, net... (77) Overall change... $ (147) Net gains on other non-trading financial instruments accounted for at fair value totaled $422 million in FY13 (net losses of $219 million in FY12 and net gains of $155 million in FY11) resulting in income before grants to IDA of $1,350 million in FY13, as compared to $1,658 million in FY12 and $2,179 million in FY11. Grants to IDA totaled $340 million in FY13, as compared to $330 million in FY12 and $600 million in FY11. Net loss attributable to noncontrolling interests totaled $8 million in FY13 ($0 in FY12 and FY11). Accordingly, net income attributable to IFC totaled $1,018 million in FY13, as compared with $1,328 million in FY12 and $1,579 million in FY11. IFC s net income (loss) for each of the past five fiscal years ended June 30, 2013 is presented below (US$ millions): US$ millions 2,000 1,500 1, (500)

74 IFC s financial performance is detailed more fully in Results of Operations. CLIENT SERVICES BUSINESS OVERVIEW IFC fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments. IFC has five strategic focus areas: strengthening the focus on frontier markets addressing climate change and ensuring environmental and social sustainability addressing constraints to private sector growth in infrastructure, health, education, and the food-supply chain developing local financial markets building long-term client relationships in emerging markets For all new investments, IFC articulates the expected impact on sustainable development, and, as the projects mature, IFC assesses the quality of the development benefits realized. IFC s strategic focus areas are aligned to advance the World Bank Group s global priorities. IFC has three businesses: Investment Services, Advisory Services, and Asset Management. INVESTMENT SERVICES IFC s investments are normally made in its developing member countries. The Articles of Agreement mandate that IFC shall invest in productive private enterprise. The requirement for private ownership does not disqualify enterprises that are partly owned by the public sector if such enterprises are organized under local commercial and corporate law, operate free of host government control in a market context and according to profitability criteria, and/or are in the process of being totally or partially privatized. IFC provides a range of financial products and services to its clients to promote sustainable enterprises, encourage entrepreneurship, and mobilize resources that wouldn t otherwise be available. IFC s financing products are tailored to meet the needs of each project. Investment services product lines include: loans, equity investments, trade finance, loan participations, structured finance, client risk management services, and blended finance. IFC s investment project cycle can be divided into the following stages: Business Development Concept Review Appraisal (Due Diligence) Investment Review Negotiations Public Disclosure Board of Directors Review and Approval Commitment Disbursement of funds Project Supervision and Development Outcome Tracking Evaluation Closing 7

75 IFC carefully supervises its projects to monitor project performance and compliance with contractual obligations and with IFC s internal policies and procedures. Investment products Loans IFC finances projects and companies through loans, typically for seven to twelve years. IFC also makes loans to intermediary banks, leasing companies, and other financial institutions for on-lending. IFC s loans traditionally have been denominated in the currencies of major industrial nations, but has a growing local currency product line. Equity IFC s equity investments provide developmental support and long-term growth capital for private enterprises, and opportunities to support corporate governance and enhanced social responsibility. IFC invests directly in companies equity, and also through private equity funds. IFC generally invests between 5 and 20 percent of a company s equity. IFC also invests in preferred shares and uses put and call options, profit participation features, conversion features, warrants and other types of instruments in managing its equity investments. Debt Securities Investments typically in the form of bonds and notes issued in bearer or registered form, securitized debt obligations and preferred shares that are mandatorily redeemable by the issuer or puttable by IFC are classified as debt securities in IFC s consolidated balance sheet. Trade and Supply Chain Finance IFC s Global Trade Finance Program ( GTFP ) guarantees traderelated payment obligations of approved financial institutions. Separately, the Global Trade Liquidity Program ( GTLP ) and Critical Commodities Finance Program ( CCFP ) provides liquidity for trade in developing countries. IFC has also commenced a number of other Trade and Supply Chain Finance-related programs, including Global Trade Supplier Finance, Global Warehouse Finance Program, Working Capital and Systemic Solutions and Global Trade Structured Trade. Loan Participations IFC s loan participation program mobilizes capital from international commercial banks, emerging market banks, funds, insurance companies, and development-finance institutions for development needs. Structured Finance IFC uses structured and securitized products to provide forms of financing that may not otherwise be available to clients to help clients diversify funding, extend maturities, and obtain financing in particular currencies. Products include partial credit guarantees, structured liquidity facilities, portfolio risk transfer, securitizations, and Islamic finance. Client Risk Management Services IFC provides derivative products to its clients to allow them to hedge their interest rate, currency, or commodity-price exposures. IFC intermediates between clients in developing countries and derivatives market makers to provide such clients with access to risk-management products. Blended Finance IFC combines concessional funds, typically from donor partners, with IFC s resources to finance certain projects. ADVISORY SERVICES Advisory services recognized as a key part of the Corporation s mandate, and have grown to become an increasingly important tool for delivering on IFC s mission. Advisory Services play a crucial role in helping government clients create an effective enabling environment for private investment, while strengthening the capacity and know-how of private sector clients thereby extending IFC s reach into challenging markets. IFC s advisory services are organized into four business lines: Access to finance Works with financial intermediaries to expand access to financial services. Provides advice on small and medium enterprises ( SMEs ) and micro/retail finance solutions, as well as enabling financial infrastructure. 8

76 Investment climate Works with governments to create an enabling environment to increase the role of private sector growth and development. Provides advice on business regulation and taxation, investment policies, as well as industry-specific investment climate reform. Public-private partnerships to help governments design and implement public-private partnerships ( PPPs ) in infrastructure and other basic public services. Provides advice on preparing and structuring of PPP mandates. Sustainable business Works with companies and their supply chains to promote adoption of, and catalyze investment in, sound environmental, social and governance practices and technologies that create a competitive edge. Around half of IFC s advisory projects work with government clients to help unlock investment opportunities for IFC and others as is the case when IFC assists governments to improve the investment climate or to design and implement PPPs, complementing the work of IBRD and the International Monetary Fund. The other half of advisory projects involves work with private sector clients to build capacity or demonstrate the business case for desirable business practices. Investment Services and Advisory Services may be offered either in tandem or sequentially. Examples include microfinance, SME banking, energy efficiency financing, corporate governance, or supply chain development in the agricultural sector. Advisory Services make a substantial contribution to IFC s shared corporate priorities. Advisory Services are often IFC s first offering in new or challenging markets. Advisory Services have continuously strengthened their alignment and deepened their synergies with investment operations, particularly with regards to Fragile & Conflict Situations, Climate Change, SMEs, Agribusiness and Infrastructure, with gender as a cross-cutting priority. ASSET MANAGEMENTCOMPANY AMC, a wholly-owned subsidiary of IFC, invests third-party capital and IFC capital, enabling outside investors to benefit from IFC s expertise in achieving strong equity returns, as well as positive development impact in the countries in which it invests in developing and frontier markets. Investors in funds managed by AMC include sovereign wealth funds, national pension funds, multilateral and bilateral development institutions, national development agencies and international financial institutions. AMC helps IFC mobilize additional capital resources for investment in productive private enterprise in developing countries. At June 30, 2013, AMC managed seven funds, with $5.5 billion under management: the IFC Capitalization (Equity) Fund, L.P. ( Equity Capitalization Fund ); the IFC Capitalization (Subordinated Debt) Fund, L.P. ( Sub-Debt Capitalization Fund ); the IFC African, Latin American and Caribbean Fund, LP ( ALAC Fund ); the Africa Capitalization Fund, Ltd. ( Africa Capitalization Fund ); the IFC Russian Bank Capitalization Fund, LP ( Russian Bank Cap Fund ); the IFC Catalyst Fund, LP and the IFC Catalyst Fund (UK), LP (collectively, Catalyst funds ); and the IFC Global Infrastructure Fund, LP ( Global Infrastructure Fund ). The Equity Capitalization Fund and the Sub-Debt Capitalization Fund are collectively referred to as the Global Capitalization Fund. The Global Capitalization Fund, established in the year ended June 30, 2009 ( FY09 ), helps strengthen systemically important banks in emerging markets. The ALAC Fund was established in the year ended June 30, 2010 ( FY10 ). The ALAC Fund invests in equity investments across a range of sectors in Sub-Saharan Africa, Latin America, and the Caribbean. The Africa Capitalization Fund was established in FY10 to capitalize systemically important commercial banking institutions in northern and Sub- Saharan Africa. The Russian Bank Cap Fund was established in FY12 to invest in mid-sized, commercial banks in Russia that are either: (i) privately owned and controlled; or (ii) state-owned; or (iii) controlled and on a clear path to privatization. The Catalyst Funds were established in FY13 to make investments in selected climate- and resource efficiency-focused private equity funds in emerging markets. 9

77 The Global Infrastructure Fund was established in FY13 to focus on making equity and equity-related investments in the infrastructure sector in global emerging markets. INVESTMENT PROGRAM Commitments In FY13, total commitments were $24,853 million, compared with $20,358 million in FY12, an increase of 22%, of which IFC commitments totaled $18,349 million ($15,462 million FY12) and Core Mobilization totaled $6,504 million ($4,896 million FY12). FY13 and FY12 commitments and Core Mobilization comprised the following (US$ millions): FY13 FY12 Total commitments 1... $24,853 $20,358 IFC Commitments Loans... $ 8,520 $ 6,668 Equity investments... 2,732 2,282 Guarantees: GTFP... 6,477 6,004 Other Client risk management Total IFC commitments... $18,349 $15,462 Core Mobilization Loan participations, parallel loans, and other mobilization Loan participations... $ 1,829 $ 1,764 Parallel loans... 1, Other mobilization Total loan participations, parallel loans, and other mobilization... $ 3,578 $ 3,505 AMC: Equity Capitalization Fund... $ 214 $ 24 Sub-Debt Capitalization Fund ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund Total AMC... $ 768 $ 437 Other initiatives GTLP and CCFP... $ 1,096 $ 850 PPP Mobilization Infrastructure Crisis Facility Debt & Asset Recovery Program Total other initiatives... $ 2,158 $ 954 Total Core Mobilization... $ 6,504 $ 4,896 Core Mobilization Ratio Debt security commitments are included in loans and equity investments based on their predominant characteristics. 10

78 Disbursements IFC disbursed $10,012 million for its own account in FY13 ($7,981 million in FY12): $6,940 million of loans ($5,651 million in FY12), $2,549 million of equity investments ($1,810 million in FY12), including $42 million attributable to noncontrolling interest ($0 in FY12), and $523 million of debt securities ($520 million in FY12). Disbursed investment portfolio IFC s total disbursed investment portfolio (a non-us GAAP performance measure) was $33,885 million at June 30, 2013 ($30,700 million at June 30, 2012), comprising the disbursed loan portfolio of $22,606 million ($21,043 million at June 30, 2012), the disbursed equity portfolio of $9,209 million ($7,547 million at June 30, 2012), and the disbursed debt security portfolio of $2,070 million ($2,110 million at June 30, 2012). IFC s disbursed investment portfolio is diversified by industry sector and geographic region with a focus on strategic high development impact sectors such as financial markets and infrastructure. The carrying value of IFC s investment portfolio comprises: (i) the disbursed investment portfolio; (ii) reserves against losses on loans; (iii) unamortized deferred loan origination fees, net and other; (iv) disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets; (v) unrealized gains and losses on equity investments held by consolidated variable interest entities; (vi) unrealized gains and losses on investments accounted for at fair value as available-for-sale; and (vii) unrealized gains and losses on investments. The following charts show the distribution of the disbursed investment portfolio by geographical region and industry sector as of June 30, 2013, and June 30, 2012: Distribution by region FY13 FY12 Latin America and Caribbean Europe and Central Asia Asia Middle East and North Africa Sub-Saharan Africa Other Latin America and Caribbean Europe and Central Asia Asia Middle East and North Africa Sub-Saharan Africa Other 11

79 Distribution by industry sector Finance & Insurance Electric Power Collec ve Investment Vehicles Oil, Gas and Mining Transporta on and Warehousing Agriculture and Forestry Chemicals Informa on Nonmetallic Mineral Product Manufacturing Industrial & Consumer Products Food & Beverages Health Care U li es Construc on and Real Estate Wholesale and Retail Trade Primary Metals Accommoda on & Tourism Services Educa on Services Pulp & Paper Tex les, Apparel & Leather Other 0% 5% 10% 15% 20% 25% 30% 35% 40% FY12 Disbursed loan participations The portfolio of disbursed and outstanding loan participations which are serviced by IFC at June 30, 2013, totaled $6,621 million, as compared with $6,463 million at June 30, Additional information on IFC s investment portfolio as of and for the years ended June 30, 2013, and June 30, 2012, can be found in Notes B, D, E, F, G, H and I to IFC s FY13 Consolidated Financial Statements. Loans Loans generally have the following characteristics: Term typically amortizing with final maturities generally for seven to twelve years, although some loans have been made for tenors as long as 20 years Currency primarily in major convertible currencies, principally US dollar, and to a lesser extent, Euro, but with a growing local currency loan portfolio Interest rate typically variable (or fixed and swapped into variable) Pricing reflects such factors as market conditions and country and project risks IFC s loans traditionally have been made in major currencies, based on client demand and on IFC s ability to economically hedge loans in these currencies through the use of mechanisms such as cross-currency swaps or forward contracts. Fixed-rate loans and loans in currencies other than US dollars are normally economically hedged using currency and/or interest rate swaps, into US dollar variable rate assets. Loans traditionally have been denominated in the currencies of major industrial nations, but IFC has a growing portfolio of local currency products. IFC typically offers local currency products in other currencies where it can economically hedge the local currency loan cash flows back into US dollars using swap markets or where it can fund itself in local bond markets. IFC s disbursed loan portfolio at June 30, 2013 includes $2,633 million of currency products denominated in Indian rupee, Mexican peso, Chinese renminbi, Philippine pesos, Russian ruble, South African rand, Brazilian reais, Indonesian rupiah, Colombian pesos, Turkish lira and Vietnamese dong ($2,314 million at June 30, 2012). IFC has also made loans in a number of frontier market currencies such as Tunisian dinar, Paraguayan guarani, Rwandan franc, and Zambian kwacha. IFC s disbursed loan portfolio totaled $22,606 million at June 30, 2013 ($21,043 million at June 30, 2012). The carrying amount of IFC s loan portfolio on IFC s consolidated balance sheet (comprising the disbursed loan portfolio together with adjustments as detailed in Note D to IFC s FY13 Consolidated Financial Statements) grew 7% to $20,831 million at June 30, 2013 ($19,496 million at June 30, 2012). 12 FY13

80 Loans comprise 67% of the disbursed investment portfolio as of June 30, 2013 (68% at June 30, 2012) and 60% of the carrying amount of the investment portfolio as of June 30, 2013 (62% at June 30, 2012). At June 30, 2013, 74% (74% at June 30, 2012) of IFC s disbursed loan portfolio was US dollardenominated. The currency composition of the disbursed loan portfolio at June 30, 2013, and June 30, 2012, is shown below: US dollars Euro Chinese renminbi Indian rupees Mexican pesos Philippine pesos Brazilian reais South African rand Russian rubles Indonesian rupiah Colombian pesos Turkish lira Other 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 FY12 FY13 Equity investments IFC s equity investments are typically in the form of common or preferred stock which is not mandatorily redeemable by the issuer or puttable to the issuer by IFC and are usually denominated in the currency of the country in which the investment is made. IFC s disbursed equity portfolio totaled $9,209 million at June 30, 2013 ($7,547 million at June 30, 2012), an increase of 22%. The carrying amount of IFC s equity investment portfolio (comprising the disbursed equity portfolio, together with adjustments as detailed in Note D to IFC s FY13 Consolidated Financial Statements), grew 20% to $11,695 million at June 30, 2013 ($9,774 million at June 30, 2012). The fair value of IFC s equity portfolio 2 was $14,654 million at June 30, 2013 ($12,985 million at June 30, 2012). Equity investments accounted for 27% of IFC s disbursed investment portfolio at June 30, 2013, compared with 25% at June 30, 2012 and 34% of the carrying amount of the investment portfolio at June 30, 2013 (31% at June 30, 2012). Debt securities Debt securities are typically in the form of bonds and notes issued in bearer or registered form, securitized debt obligations (e.g. asset-backed securities ( ABS ), mortgage-backed securities ( MBS ), and other collateralized debt obligations) and preferred shares that are mandatorily redeemable by the issuer or puttable to the issuer by IFC. IFC s disbursed debt securities portfolio totaled $2,070 million at June 30, 2013 ($2,110 million at June 30, 2012). The carrying amount of IFC s debt securities portfolio (comprising the disbursed debt securities portfolio, together with adjustments as detailed in Note D to IFC s FY13 Consolidated Financial Statements), was $2,151 million at June 30, 2013 ($2,168 million at June 30, 2012). Debt securities accounted for 6% of IFC s disbursed investment portfolio at June 30, 2013 (7% at June 30, 2012) and 6% of the carrying amount of the investment portfolio at June 30, 2013 (7% at June 30, 2012). 2 Including equity-like securities classified as debt securities in IFC s consolidated balance sheet and equity-related options. 13

81 Guarantees Global Trade Finance Program FY13 commitments include $6,477 million ($6,004 million FY12) relating to GTFP. Guarantees and partial credit guarantees IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds and/or loans. IFC s guarantee is available for debt instruments and trade obligations of clients and covers commercial as well as noncommercial risks. IFC will provide local currency guarantees, but when a guarantee is called, the client will generally be obligated to reimburse IFC in US dollar terms. Guarantee fees are consistent with IFC s loan pricing policies. FY13 commitments include $482 million of guarantees ($398 million FY12). Client risk management products IFC provides derivative products to its clients to allow them to hedge their interest rate, currency or commodity price exposures. IFC intermediates between its developing country clients and derivatives market makers in order to provide IFC s clients with full market access to risk management products. FY13 commitments included $138 million of such products ($110 million FY12). Core Mobilization Core Mobilization is financing from entities other than IFC that becomes available to clients due to IFC s direct involvement in raising resources. IFC finances only a portion, usually not more than 25%, of the cost of any project. All IFC-financed projects, therefore, require other financial partners. IFC mobilizes such private sector finance from other entities through loan participations, parallel loans, partial credit guarantees, securitizations, loan sales, and risk sharing facilities. In FY09, IFC launched AMC and a number of other initiatives, each with a formally approved Core Mobilization component, and revised its mobilization resources definition accordingly to include these in the measure. In FY12, IFC expanded the Core Mobilization definition to account for third party financing made available for PPP projects due to IFC s mandated lead advisor role to national, local government or other government entity. The components of Core Mobilization are as follows: Loan participations The principal direct means by which IFC mobilizes private sector finance is through the sale of participations in its loans. Through the loan participation program, IFC has worked primarily with commercial banks but also with nonbank financial institutions in financing projects since the early 1960s. Whenever it participates a loan, IFC will always make a loan for its own account, thereby sharing the risk alongside its loan participants. IFC acts as the lender of record and is responsible for the administration of the entire loan, including the loan participation. IFC charges fees to the borrower at prevailing market rates to cover the cost of the loan participation. Loan participation commitments were $1,829 million in FY13 ($1,764 million in FY12). Parallel loans Loans from other financial institutions that IFC helped arrange for clients and received a fee, but for which IFC is not the lender of record, in FY13 were $1,269 million ($927 million in FY12). Other mobilization Other case-by-case mobilization decisions totaled $480 million in FY13 ($814 million in FY12). 14

82 AMC The activities of the funds managed by AMC at June 30, 2013 and June 30, 2012 can be summarized as follows (US$ millions unless otherwise indicated): Equity Sub-Debt Capitalization Capitalization Fund Fund ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund Catalyst Funds Global Infrastructure Fund Assets under management as of June 30, $1,275 $1,725 $1,000 $182 $550 $282 $500 $5,514 From IFC ,625 From other investors , ,889 For the year ended June 30, 2013 Fund Commitments to Investees: From IFC From other investors Disbursements from investors to Fund: From IFC From other investors Disbursements made by Fund ,261 Disbursements made by Fund (number) Equity Sub-Debt Capitalization Capitalization Fund Fund ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund Catalyst Funds Global Infrastructure Fund Assets under management as of June 30, $1,275 $1,725 $1,000 $182 $275 $ $ $4,457 From IFC ,325 From other investors , ,132 For the year ended June 30, 2012 Fund Commitments to Investees: From IFC From other investors Disbursements from investors to Fund: From IFC From other investors Disbursements made by Fund Disbursements made by Fund (number) Total Total 15

83 Other initiatives GTLP and CCFP IFC s FY13 Core Mobilization included $1,096 million ($850 million FY12) relating to GTLP and CCFP. Infrastructure Crisis Facility The infrastructure crisis facility is a facility that includes debt and equity components and provides short- to medium-term financing for infrastructure projects. It also includes advisory services to help governments design or redesign public-private-partnership projects. FY13 Core Mobilization includes $110 million relating to the Infrastructure Crisis Facility ($63 million FY12). PPP Mobilization FY13 resources mobilized includes $942 million relating to PPP Mobilization, which is the non-ifc, nongovernment portion of financing made available for PPP projects due to IFC s mandated lead advisor role to national/local government or other government entity ($41 million FY12). Core Mobilization ratio The Core Mobilization ratio is defined as: Loan participations + parallel loans + sales of loans and other mobilization + non-ifc investment part of structured finance which meets core mobilization criteria + non-ifc commitments in Initiatives + non-ifc investments committed in funds managed by AMC + PPP Mobilization Commitments (IFC investments + IFC portion of structured finance + IFC commitments in new Initiatives + IFC investments committed in funds managed by AMC) For each dollar that IFC committed, IFC mobilized (in the form of loan participations, parallel loans, other mobilization, the non-ifc portion of structured finance and the non-ifc commitments in Initiatives, and the non- IFC investments committed in funds managed by AMC) $0.35 in FY13 ($0.32 in FY12). ADVISORY SERVICES The IFC Advisory Services Portfolio as of June 30, 2013 totaled $1,037 million, as compared to $894 million as of June 30, The Advisory Services program with clients grew to $232 million in FY13, up from $197 million in FY12, with continued focus on strategic priority areas, including IDA, fragile situations and climate change. In FY13 the Advisory Services program grew in each of these areas. The largest regional advisory program in FY13 was in Sub Saharan Africa ($65 million), comprising, 28% of the total Advisory Services program, followed by East Asia and the Pacific ($39 million; 17%), Europe and Central Asia ($36 million; 16%), South Asia ($34 million; 14%) and others regions ($58 million; 25%). Program focus by business line shows that the largest program was in Investment Climate ($75 million; 32%), followed by Access to Finance ($63 million; 27%), Sustainable Business ($55 million; 24%) and Public Private Partnerships ($39 million; 17%). In FY13, the Advisory Services program in IDA countries grew by 17% to $142 million, or 65% of the total Advisory Services program. The program in Fragile and Conflict Situations grew by 18% to $39 million (18% of the total Advisory Services program). Engagements in climate change increased almost 80% to $53 million (24% of the total Advisory Services program). Program results continue to show a positive trend. Development effectiveness ratings of the projects reached a record 76% success rate in FY13, up from 72% in FY12. Likewise, client satisfaction reached a record of 90%, up from 88% in FY12. 16

84 LIQUID ASSETS IFC invests its liquid assets portfolio in highly rated fixed and floating rate instruments issued by, or unconditionally guaranteed by, governments, government agencies and instrumentalities, multilateral organizations, and high quality corporate issuers; these include ABS and MBS, time deposits, and other unconditional obligations of banks and financial institutions. Diversification in multiple dimensions ensures a favorable risk return profile. IFC manages the market risk associated with these investments through a variety of hedging techniques including derivatives, principally currency and interest rate swaps and financial futures. IFC s liquid assets are invested in seven separate portfolios, internally named P0 through P4, P6 and P7. All seven portfolios are accounted for as trading portfolios. IFC s liquid assets portfolio is summarized as follows: Portfolio P0 $1.7 ($0.5) P1 $22.5 ($21.9) P2 $4.4 ($5.6) P3 $0.9 ($0.9) P4 $0.8 ($0.8) P6 $0.9 ($0.7) Total $31.2 ($30.4) Fair value ($ billions)* Comprising Managed by Invested in Benchmark Proceeds from discount note program and cash inflows from investment operations Proceeds from market borrowings invested pending disbursement of operational loans Primarily IFC s paidin capital and accumulated earnings that have not been invested in equity and quasi-equity investments An outsourced portion of the P1 portfolio An outsourced portion of the P2 portfolio The proceeds of liquidity raised in local currency prior to disbursement IFC s Treasury Department IFC s Treasury Department IFC s Treasury Department External managers appointed by IFC External managers appointed by IFC IFC s Treasury Department Money market instruments * at June 30, 2013 (June 30, 2012) ** The net duration of the P1 and P3 benchmarks is approximately 0.25 years. *** The net duration of the P2 and P4 benchmark is 1.9 years. Principally global government bonds, ABS, bank deposits, and high quality corporate bonds generally swapped into 3- month US dollar LIBOR US Treasuries, ABS, and other sovereign and agency issues Global government bonds and other high quality corporate bonds as well as mortgage-backed securities Global government bonds, and other high quality corporate bonds as well as mortgage-backed securities Short-term money market instruments denominated in South African rand, Turkish lira, Polish zloty, Russian rubles, Mexican pesos and Brazilian reais Overnight US dollar London Interbank Bid Rate (LIBID) Custom-created index of a series of six, equally weighted 6-month LIBID deposits that mature on the 15th of each month average life of 3 months** Lehman Brothers US 1 3 year maturity Treasury Index*** Same as for P1 Same as for P2 Local interbank rate indices The P7 portfolio was created in FY10, and, prior to FY13, contained the after-swap proceeds from variablerate borrowings denominated and invested in Euros. In FY13, IFC invested part of the proceeds of a Nigeria naira borrowing in the P7 portfolio. The P7 portfolio was $31 million at June 30,

85 IFC has a flexible approach to managing the liquid assets portfolios by making investments on an aggregate portfolio basis against its benchmark within specified risk parameters. In implementing these portfolio management strategies, IFC utilizes derivative instruments, including futures and options, and takes positions in various industry sectors and countries. All liquid assets are managed according to an investment authority approved by the Board of Directors and liquid asset investment guidelines approved by IFC s Corporate Risk Committee, a subcommittee of IFC s Management Team. FUNDING RESOURCES IFC s funding resources (comprising borrowings, capital and retained earnings) as of June 30, 2013 and June 30, 2012 are as follows: FY13 FY12 Borrowings from market sources Discount Note Program Borrowings from IBRD Paid-in capital Retained earnings Borrowings from market sources Discount Note Program Borrowings from IBRD Paid-in capital Retained earnings BORROWINGS The major source of IFC s borrowings is the international capital markets. Under the Articles of Agreement, IFC may borrow in the public markets of a member country only with approvals from that member, together with the member in whose currency the borrowing is denominated. IFC borrowed (after the effect of borrowingrelated derivatives) $12.8 billion during FY13 ($11.9 billion in FY12 and $10.3 billion in FY11). In addition, the Board of Directors has authorized the repurchase and/or redemption of debt obligations issued by IFC, which enhances the liquidity of IFC s borrowings. During FY13, IFC repurchased and retired $0.4 billion of outstanding debt ($0.6 billion in FY12 and $0.3 billion in FY11), generating gains on buybacks of $11 million in FY13 ($19 million FY12 and $10 million FY11). IFC diversifies its borrowings by currency, country, source, and maturity to provide flexibility and costeffectiveness. IFC also has a developmental role in helping open up new domestic markets to foreign issuers in its member countries. In FY13, IFC borrowed in fourteen currencies and in final maturities ranging from one to 30 years. Outstanding market borrowings have remaining maturities ranging from less than one year to approximately 30 years, with a weighted average remaining contractual maturity of 4.1 years at June 30, 2013 (5.5 years at June 30, 2012). Actual maturities may differ from contractual maturities due to the existence of call features in certain of IFC s borrowings. Market borrowings are generally swapped into floating-rate obligations denominated in US dollars. As of June 30, 2013, IFC had gross payables from borrowing-related currency swaps of $18.7 billion ($18.3 billion at June 30, 2012) and from borrowing-related interest rate swaps in the notional principal payable amount of $37.8 billion ($35.2 billion at June 30, 2012). After the effect of these derivative instruments is taken into consideration, 99% of IFC s market borrowings at June 30, 2013 were variable rate US dollar-denominated (99% June 30, 2012). IFC s mandate to help develop domestic capital markets can result in raising local currency funds. At June 30, 2013, $0.5 billion of such non-us$-denominated market borrowings were outstanding, denominated in C.F.A. francs, Chinese renminbi, Dominican pesos, Nigerian naira, and Russian rubles. Proceeds of such borrowings were invested in such local currencies, onlent to clients and/or partially swapped into US dollars. 18

86 The weighted average cost of market borrowings after currency and interest rate swap transactions was 0.4% at June 30, 2013 (0.7% at June 30, 2012). Prior to FY13, IFC had a short term US$ discount note program to provide an additional funding and liquidity management tool for IFC in support of certain of IFC s trade finance and supply chain initiatives. Beginning in FY13, IFC launched a short term CNY discount note program to complement the US$ program and to expand the availability of short-term local currency finance for private enterprises in CNY. The discount note program provides for issuances with maturities ranging from overnight to one year. At June 30, 2013, $1.1 billion ($1.4 billion June ) and $0.2 billion ($0 June 30, 2012) were outstanding under the US$ and CNY short-term discount note programs, respectively. CAPITAL AND RETAINED EARNINGS As of June 30, 2013, IFC s authorized capital was $2.58 billion ($2.58 billion June 30, 2012), of which $2.40 billion was subscribed and paid-in at June 30, 2013 ($2.37 billion at June 30, 2012). As of June 30, 2013, IFC s total capital as reported in IFC s consolidated balance sheet amounted to $22.28 billion, up from the June 30, 2012 level of $20.58 billion. At June 30, 2013, total capital comprised $2.40 billion of paid-in capital, up from $2.37 billion at June 30, 2012, $18.71 billion of retained earnings ($17.70 billion at June 30, 2012), and $1.12 billion of accumulated other comprehensive income ($0.51 billion at June 30, 2012). Noncontrolling interests totaled $0.05 billion at June 30, 2013 ($0 June 30, 2012). Selective Capital Increase ( SCI ) On July 20, 2010 the Board of Directors recommended that the Board of Governors approve an increase in the authorized share capital of IFC of $130 million, to $2,580 million, and through the issuance of $200 million of shares (including $70 million of unallocated shares). The Board of Directors also recommended that the Board of Governors approve an increase in Basic Votes aimed at enhancing the voice and participation of developing and transition countries ( DTCs ) and requiring an amendment to IFC s Articles of Agreement. The resolution recommended by the Board of Directors was adopted by the Board of Governors on March 9, The amendment to the Articles of Agreement and the increase in the authorized share capital have become effective on June 27, As of the same date, eligible members have been authorized to subscribe to their allocated IFC shares. The subscription period will end on June 27, 2014 and payment of subscribed shares must occur no later than June 27, During the year ended FY13, IFC received $31 million of capital subscriptions related to the SCI. Designations of retained earnings Beginning in the year ended June 30, 2004 ( FY04 ), IFC began a process of designating retained earnings to increase its support of advisory services and, subsequently, for performance-based grants ( PBG ) (year ended June 30, 2005 ( FY05 )), grants to IDA (year ended June 30, 2006 ( FY06 )), the Global Infrastructure Project Development Fund ( FY08 ), and IFC SME Ventures for IDA Countries ( FY08 ). The levels and purposes of retained earnings designations are set based on the Board of Directors-approved principles, which are applied each year to assess IFC s financial capacity and to determine the maximum levels of retained earnings designations. Amounts available to be designated are determined based on a Board of Directors-approved income-based formula and, beginning in FY08, on a principles-based Board of Directors-approved financial distribution policy, and are approved by the Board of Directors. IFC recognizes designations of retained earnings for advisory services when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. 19

87 Expenditures for the various approved designations are recorded as expenses in IFC s consolidated income statement in the year in which they occur, and have the effect of reducing retained earnings designated for this specific purpose. FY12 designations On August 9, 2012, the Board of Directors approved the designation of $340 million of IFC s retained earnings for grants to IDA and a designation of $80 million of IFC s retained earnings for advisory services. On October 12, 2012, the Board of Governors noted with approval these designations. On January 15, 2013, IFC recognized expenditures against grants to IDA of $340 million on signing of a grant agreement between IDA and IFC concerning the transfer to IDA and use of funds corresponding to the aforementioned paragraph. IFC recognized expenditures for advisory services and expenditures against other designated retained earnings totaling $124 million, compared to $82 million in FY12. At June 30, 2013, retained earnings comprised $18,435 million of undesignated retained earnings ($17,373 million at June 30, 2012; and $16,032 million at June 30, 2011), $199 million of retained earnings designated for advisory services ($219 million at June 30, 2012; and $217 million at June 30, 2011), $31 million of retained earnings designated for PBG ($41 million at June 30, 2012; and $54 million at June 30, 2011), $20 million of retained earnings designated for the Global Infrastructure Project Development Fund ($30 million at June 30, 2012; and $30 million at June 30, 2011), and $28 million of retained earnings designated for IFC SME Ventures for IDA countries ($32 million at June 30, 2012; and $34 million at June 30, 2011). FY13 designations Income available for designations in FY13 (a non-gaap measure) 3 totaled $1,060 million. Based on the Board-approved distribution policy, the maximum amount available for designation was $251 million. On August 7, 2013, the Board of Directors approved a designation of $251 million of IFC s retained earnings for grants to IDA. This designation is expected to be noted with approval by the Board of Governors, and thereby concluded, in FY14. Deployable strategic capital IFC s deployable strategic capital decreased from 9.3% at June 30, 2012 to 8.4% at June 30, This decrease represents the effects of increases in investment commitments and disbursements partially offset by realized gains in FY13 and the reduction in the net unfunded status of the pension plans as of June 30, 2013 when compared to June 30, ENTERPRISE RISK MANAGEMENT In executing its sustainable private sector development business, IFC assumes various risks of various types. Active management of these risks is critical to IFC s ability to maintain financial sustainability and achieve development impact. IFC has developed a comprehensive enterprise risk management framework within which risks are continually identified, measured, monitored, analyzed and controlled. This framework is defined in terms of several interrelated dimensions: IFC s guiding principles provide the foundation for active management of risk in IFC s business, in its entirety, under the supervision of the Board of Directors, the Audit Committee, the Executive Vice President/CEO and the Management Team. 3 Income available for designations generally comprises net income excluding unrealized gains and losses on investments and unrealized gains and losses on other non-trading financial instruments, income from consolidated VIEs, and expenses reported in net income related to prior year designations. 20

88 Risk appetite is defined and implemented in the form of exposure limits, policies and procedures. The Risk Management and Portfolio Vice Presidency, together with independent institutional oversight bodies, monitors compliance with prescribed limits, policies and procedures. Risk governance is provided by a sub-committee of the Management Team, the Corporate Risk Committee which reviews and approves all risk policies, sets risk standards and receives regular reports on different aspects of risk management at the enterprise level. As a member of the World Bank Group, IFC liaises with the corresponding Risk Management areas across the group on a regular basis. KEY RISK MANAGEMENT PRINCIPLES The key principles which guide IFC s integrated risk management framework are: the effective balancing of development impact, risk and reward; ensuring business decisions are based on an understanding of risks; being extremely selective in undertaking activities which may result in adverse reputational impact; and shared responsibility for risk management across the Corporation. RISK PROFILE At the highest level, IFC s risk management objectives are to maintain financial soundness and preserve its reputation. Financial soundness is impacted by, among other things, the level of deployable strategic capital, IFC s cost of funding and the liquidity of the liquid asset portfolios. Key to maintaining IFC s reputation is the Corporation s ability to continually adapt to an evolving external business environment, the integrity and corporate governance of its business partners and clients, and the environmental and social effects of the projects with which IFC is associated. IFC s capacity to take risks is constrained primarily by its capital base. RISK APPETITE IFC s risk appetite defines the types of risk which IFC is willing to assume in the pursuit of its business objectives. Risk tolerance defines the amount of each risk type that IFC considers acceptable in the context of its business activities. IFC translates risk appetite and tolerance into limits, policies, procedures and directives. The Corporation regularly measures, monitors and evaluates its risk profile to ensure that both individual and aggregated risks remain within the ranges deemed acceptable by Senior Management. RISK GOVERNANCE The Board of Directors and Board Committees oversee the overall risk tolerance for the Corporation and provide the highest level of oversight. Centralized risk management is provided by IFC s Management Committees and Senior Management. IFC s Management Team, under the direction of the Executive Vice President and CEO, is responsible for the Corporation s day-to-day operations, including oversight and management of existing and potential risks. The Risk Management and Portfolio Vice Presidency is responsible for managing IFC s financial and operational risks. Project-specific environmental, social and corporate governance issues which arise out of IFC s activities are overseen by the Business Advisory Services Vice Presidency; legal issues are overseen by the General Counsel Vice Presidency. There is common and shared accountability for strategic and stakeholder risk management at the IFC Management Team level. The Independent Evaluation Group assesses the alignment between projected and realized outcomes while the Compliance Advisor/Ombudsman, ensures that IFC remains accessible to its stakeholders. In addition, the World Bank Group s Internal Audit Vice Presidency monitors internal controls and governance while the Integrity Vice Presidency monitors integrity in operations and investigates allegations of fraud and corruption. MANAGING FINANCIAL AND REPUTATIONAL IMPACT The consequences of failing to manage risks optimally are financial loss and/or adverse impact to IFC s reputation. Reputational impact is of significant concern to IFC as negative perceptions of stakeholders and/or the general public may adversely impact IFC s ability to carry out its business effectively. 21

89 Risks are mitigated in practice by a variety of measures including close monitoring by risk management units and oversight by IFC s Senior Management. In FY13, communication activities related to reputational impact were managed by the Corporate Relations Department, which provides advice on strategic and crisis communications in order to manage potential and actual reputational impacts both at the corporate and project levels throughout the investment cycle. This team is also responsible for external and internal communications, public affairs and brand marketing and collaborates across the Corporation to help develop and implement effective communications strategies. FY13 enterprise risk highlights Highlights from significant changes made in FY13 are as follows: Updated the existing framework to include a more comprehensive approach to measuring economic capital for IFC s Treasury activities. Created a working group, tasked with improving and formalizing the process and methodology for Corporation-wide stress testing. Extended Risk and Control Self-Assessment to all departments to support active management of operational risk. Designed enhancements to IFC s Integrity Due Diligence process to increase consistency, better manage accountability and augment decision-making efficiency. Created a new Regional Chief Risk Officer role to serve IFC s decentralized business model and provide senior risk oversight for the Sub-Saharan Africa region. Benchmarked IFC against industry best practice in workouts and operational risk management. STRATEGIC RISK IFC defines strategic risk as the potential reputation, financial, and other consequences of a failure to achieve its strategic objectives, and in particular, the risk of not achieving IFC s purpose of furthering economic development by encouraging the growth of productive private enterprise in member countries and its vision that people should have the opportunity to escape poverty and improve their lives. The key guiding principles and policies established as part of the framework for managing IFC s strategic risks consist of: An ex-ante assessment of strategic fit of each project; Guiding principles for IFC s operations (catalytic role, business partnership and additionality); Environment and social policies; and IFC s sanctions procedures. The overall management of strategic risk is effected through the design, confirmation and implementation of an annual strategy for IFC. The strategy is developed by Senior Management and approved by the Board of Directors. IFC monitors the implementation of its strategy through many processes, including: (i) corporate and department scorecards; (ii) cascaded objectives; (iii) and an integrated quarterly management report. In addition, the Independent Evaluation Group conducts ex-post evaluations of the implementation of IFC s strategy on an ongoing basis. Given the nature and scope of products and services that IFC provides its clients in furtherance of its development mandate, operational or business conflicts of interest can arise in the normal course of its activities. IFC recognizes that adverse reputational, client-relationship and other implications can arise if such conflicts are not carefully managed. In order to properly manage operational or business conflicts, IFC has implemented processes directed at (i) the identification of such conflicts as and when they arise; and (ii) the application of mitigation measures specifically tailored to the circumstances pertaining to the identified conflicts. 22

90 IFC s Sustainability Framework articulates the Corporation s strategic commitment to sustainable development and is an integral component of IFC s approach to risk management. The Sustainability Framework comprises IFC s Policy and Performance Standards on Environmental and Social Sustainability and IFC s Access to Information Policy: The Policy on Environmental and Social Sustainability describes IFC s commitments, roles and responsibilities in relation to environmental and social sustainability. The Performance Standards are intended to help guide clients on sustainable business practices a part of which involves continually identifying and managing risks through stakeholder engagements and client disclosure obligations in relation to project-level activities. IFC s Access to Information Policy reflects the Corporation s commitment to transparency and good governance and outlines institutional disclosure obligations. IFC uses the Sustainability Framework along with other strategies, policies and initiatives to focus business activities on achieving the Corporation s development objectives. All project teams are required to record expectations of development outcomes with time-bound targets using standard indicators. These indicators are tracked and performance is rated on an annual basis for the entire duration of every project. Guiding principles for IFC s operations Catalytic role: IFC will seek above all to be a catalyst in facilitating productive investments in the private sector of its developing member countries. It does so by mobilizing financing from both foreign and domestic investors from the private and public sectors. Business partnership: IFC functions as a business in partnership with the private sector. Thus, IFC takes the same commercial risks as do private institutions, investing its funds under the discipline of the marketplace. Additionality: IFC participates in an investment only when it can make a special contribution not offered or brought to the deal by other investors. Sanctions procedures In the year ended June 30, 2007, IFC established a set of procedures to sanction parties involved in IFC projects committing corrupt, fraudulent, collusive, coercive or obstructive practices. In April 2010, the World Bank Group concluded an agreement with other multilateral development banks ( MDBs ) whereby entities debarred by one MDB may be sanctioned for the same misconduct by the other participating development banks. The enhanced emphasis on combating fraud and corruption does not change the high expectations IFC has always held for its staff, clients and projects, including due diligence and commitment to good corporate governance. FY13 strategic risk highlights IFC s Development Goals ( IDGs ) are targets for reach, access, or other tangible development outcomes that IFC projects are expected to deliver during their lifetime. In FY12, the testing phase for two such goals, IDG 2 (Health and Education) and IDG 3 (Financial Services), was completed and in FY13, they moved into implementation and are fully integrated into IFC s corporate scorecard and incentives for management. FINANCIAL RISK Financial risk management is about taking calculated risks that are aligned with the Corporation s overall risk appetite and within the boundaries of established tolerances. As such, financial risk management at IFC begins with an articulation of the Corporation s risk appetite as defined by the types of risk that the Corporation is willing to take in the pursuit of its strategic objectives. Following from this articulation is an enterprise risk management framework that encompasses strategy, capital planning, target setting and risk monitoring and management. IFC s risk appetite, as it pertains to financial risk, has been defined by Senior Management and the Board of Directors as maintaining a AAA rating within a three-year time horizon. To align risk tolerance with this definition, IFC uses its economic capital framework to measure the capital required to maintain its AAA rating. Further, processes are in effect which translate IFC s risk appetite into limits, policies, procedures and directives that help guide the management of IFC s financial risk within acceptable tolerance bands. 23

91 An important consideration when setting IFC s risk appetite is the need to use capital efficiently by recognizing the inherent trade-offs involved with maintaining reserve capital. Excess capital that is not deployed has limited financial and no development impact; at the same time, keeping some capital in reserve allows IFC to maintain financial strength and respond proactively in the event of future crises. Key financial policies and guidelines IFC operates under a number of key financial policies and guidelines as detailed below, which have been approved by its Board of Directors: Minimum liquidity (liquid assets plus undrawn borrowing commitments from IBRD) must be sufficient at all times to cover at least 45% of IFC s estimated net cash requirements for the next three years. Loans are funded with liabilities that have similar characteristics in terms of interest rate basis and currency and, for fixed rate loans, duration except for the Board of Directors-approved new products involving asset-liability mismatches. IFC maintains a minimum level of liquidity, consisting of proceeds from external funding, that covers at least 65% of the sum of: (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed guarantees; and (iii) 30% of committed client risk management products. IFC is required to maintain a minimum level of total resources (including paid-in capital, total loss reserves and retained earnings, net of designations) equal to total potential losses for all on- and offbalance sheet exposures estimated at levels consistent with the maintenance of a AAA rating. Credit risk IFC defines credit risk as the risk that third parties that owe IFC money, securities or other assets will not fulfill their obligations. These parties may default on their obligations to IFC due to bankruptcy, lack of liquidity, operational failure or other reasons. Credit risk management consists of policies, procedures and tools for managing credit risk, primarily in IFC s loan portfolio, but also related to counterparty risk taken in the liquid asset and borrowing portfolios. Credit risk management spans investment origination to final repayment or sale; it includes portfolio management and risk modeling activities that provide an integrated view of credit risks and their drivers across the Corporation. With respect to IFC s credit risk exposure to clients in developing emerging markets, at key steps during the investment approval process, information obtained from the investment departments is analyzed and an independent review of the credit risk of the transaction undertaken, including the assignment of a credit risk rating. The credit risk rating, together with investment size and product type, is a key input into the risk tiering that determines authority levels required for transaction approval. After commitment, the quality of IFC s investment portfolio is monitored according to principles and procedures defined in the Operational Policies and Procedures. Responsibility for the day-to-day monitoring and management of credit risk in the portfolio rests with the individual investment departments. Credit risk also includes concentration risk: the risk of extreme credit losses due to concentration of credit exposure to a common risk factor. IFC manages concentration risk through a number of operational and prudential limits, including limitations on single project/client exposure, single country exposure, and segment concentration. Similarly, credit policies and guidelines have been formulated covering treasury operations; these are subject to annual review and approval by the Corporate Risk Committee. Credit risk across IFC s investment portfolio is monitored and managed through proactive identification of emerging risks and portfolio stress testing in focus sub-portfolios. For impaired loans and other investments at risk, rapid response is essential, as early involvement is the key to recovery when projects get into difficulty. IFC provides focused attention on portfolio projects that require more sophisticated workout and restructuring. To help enable early involvement, seasoned professionals from IFC s Special Operations Department comprised of workout professionals with extensive experience in handling such projects, work in close coordination with IFC s Legal Department to provide rapid response. 24

92 The credit risk of loans is quantified in terms of the probability of default, loss given default and exposure at risk. These risk parameters are used to determine risk based economic capital for capital adequacy, capital allocation and internal risk management purposes as well as for setting general loan loss reserves and limits. Treasury counterparty credit risk is managed to mitigate potential losses from the failure of a trading counterparty to fulfill its contractual obligations. General counterparty eligibility criteria are set by the Board of Directors-approved Asset-Liability Management and Derivative Products Authorization and Liquid Asset Management General Investment Authorization. IFC Counterparties are subject to conservative eligibility criteria and are predominantly restricted to banks and financial institutions with high quality credit ratings by leading international credit rating agencies. The eligibility criteria and limits of Treasury counterparties are stipulated by the Liquid Asset Investment Directives. Specifically, IFC has adopted the following key financial policies and guidelines that have been approved by the Corporate Risk Committee: Investment operations IFC does not normally finance for its own account more than 25% of a project s cost. Total exposure to a country is based on the amount of economic capital required to support its investment portfolio in that country. Exposure limits are set for each country based on the size of its economy and its risk score. Sub-limits apply for certain sector exposures within a country. Lender of record exposure in a country may not exceed a specified percentage of a country s total longterm external debt. Lower trigger levels are set for certain countries. IFC s total exposure to a single obligor and groups of obligors may not exceed stipulated economic capital and nominal limits based on the riskiness of the obligor. IFC s committed exposure in guarantees that are subrogated in local currency is limited to $300 million for currencies for which there are no adequate currency and interest rate risk hedging instruments as determined by IFC s Treasury Department at the time of commitment. There is a sublimit of $100 million for an individual currency under this limit. Treasury operations Counterparties are subject to conservative eligibility criteria. For derivative instruments, IFC s counterparties are currently restricted to banks and financial institutions with high quality credit ratings (with a mark-to-market agreement) by leading international credit rating agencies. In addition to IFC s traditional use of top-rated international banks as swap counterparties, for the sole purpose of funding local currency loans, IFC has recently extended the universe of eligible swap counterparties to include central banks and select local banks. Exposures to individual counterparties are subject to concentration limits. For derivatives, exposure is measured in terms of replacement cost for measuring total potential exposure. Institution-specific limits are updated at least quarterly based on changes in the total size of IFC derivatives portfolio or as needed according to changes in counterparty s fundamental situation or credit status. To limit its exposure, IFC signs collateral agreements with counterparties that require the posting of collateral when net mark-to-market exposures exceed certain predetermined thresholds. IFC also requires that low quality counterparties should not have more than 30% of total net-of-collateral exposures. Because counterparties can be downgraded during the life of a given transaction, the agreements provide an option for IFC to terminate all swaps if the counterparty is downgraded below investment grade or if other early termination events materialize. For exchange-traded instruments, IFC limits credit risk by restricting transactions to a list of authorized exchanges, contracts and dealers, and by placing limits on the Corporation s position in each contract. 25

93 FY13 credit risk highlights Investment operations The quality of IFC s loan portfolio, as measured by aggregate risk ratings was substantially unchanged between June 30, 2012 and June 30, IFC does not recognize income on loans where collectability is in doubt or payments of interest or principal are past due more than 60 days unless collection of interest is expected in the near future. The amount of non-performing loans as a percentage of the disbursed loan portfolio 4, a key indicator of loan portfolio performance, was 5.6% at June 30, 2013 (4.1% at June 30, 2012). The principal amount outstanding on non-performing loans totaled $1,272 million at June 30, 2013, an increase of $413 million (48%) from the June 30, 2012 level of $859 million. The increase in the amount of non-performing loans as a percentage of the disbursed loan portfolio was largely driven by the placing of seven loans with principal outstanding greater than $45 million for an aggregate amount of $423 million, partially offset by the removal of one loan with principal outstanding of $45 million. Total reserves against losses on loans at June 30, 2013, increased to $1,628 million ($1,381 million at June 30, 2012). Total reserves against losses on loans are equivalent to 7.2% of the disbursed loan portfolio (6.6% June 30, 2012). The five-year trend of non-performing loans is presented below: $ millions % of disbursed loans $ millions 1,400 1,200 1, FY09 FY10 FY11 FY12 FY % of disbursed loans The guarantee portfolio is exposed to the same idiosyncratic and systematic risks as IFC s loan portfolio and the inherent probable losses in the guarantee portfolio need to be covered by a reserve for loss. The reserve at June 30, 2013, was $17 million, down from $21 million at June 30, 2012, based on the year-end portfolio, and is included in payables and other liabilities on IFC s consolidated balance sheet. There was a release of provision of $4 million on guarantees in the consolidated income statement in FY13 ($3 million release of provision FY12). Treasury operations Counterparty credit risk in IFC s Treasury operations is managed on a daily basis through strict eligibility criteria and accompanying limits. Treasury operations counterparties also remain well diversified by sector and geography. In accordance with IFC s key financial policies and guidelines noted above, IFC holds collateral in the amount of $1,274 million at June 30, 2013 ($3,570 million June 30, 2012). Market risk IFC s exposure to market risk is largely mitigated by the Corporation s matched-funding policy and by the use of derivative instruments to convert most of IFC s assets that are funded from market borrowings and such market borrowings into floating rate US dollar assets and liabilities with similar duration. Additional strategies that are employed are as described below. 4 Excluding loan-like debt securities. 26

94 Investment operations IFC takes equity risk in its listed and unlisted equity investments in emerging markets. The Corporate Equity Committee, a subcommittee of the Management Team, provides guidance on IFC s overall strategy in equity investments, equity portfolio management and asset allocation. Numerous factors are taken into consideration when making asset allocation decisions, reflecting IFC s roles as a development institution and long-term investor, as well as the fact that most of the Corporation s equity investments are in private securities, at least at origination. The factors taken into consideration by the Corporate Equity Committee include projected developmental impact, IFC s additionality and comparative advantages, country diversification, sector diversification, IFC s country exposure considerations, macro-economic considerations, global trends in equity markets, and valuations. Interest rate and currency exchange risk associated with fixed rate and/or non-us dollar lending is largely economically hedged via currency and interest rate swaps that convert cash flows into variable rate US dollar flows. Market risk resulting from derivative transactions with clients, which are intended to facilitate clients risk management, is mitigated by entering into offsetting positions with highly rated market counterparties. Liquid asset portfolios The market risk in the internally-managed liquid asset portfolios is measured using a corporate value-at-risk model, which calculates daily value-at-risk measurements, interest rate exposure and credit spread exposure. The primary instruments for maintaining sufficient liquidity are IFC s seven liquid asset portfolios: P0, which is generally invested in short-dated deposits, money market funds, fixed certificates of deposits, one-month floater securities and repos, reflecting its use for short-term funding requirements P1 and P2, which are generally invested in: (a) high quality foreign sovereign, sovereign-guaranteed and supranational fixed income instruments; (b) US Treasury or agency instruments; (c) high quality ABS rated by at least two rating agencies and/or other high quality notes issued by corporations; (d) MBS; (e) interest rate futures and swaps to manage currency risk in the portfolio, as well as its duration relative to benchmark; and (f) cash deposits and repos P3, which is an outsourced portion of the P1 portfolio (managed by external managers) P4, which is an outsourced portion of the P2 portfolio (managed by external managers) P6, which is invested in short-term local currency money market instruments and local government securities P7, which consists of after-swap proceeds from variable-rate borrowings denominated and invested in Euros and proceeds from fixed-rate borrowings denominated and invested in Nigerian naira. The P0, P1 and P3 portfolios are managed to variable rate US dollar benchmarks, on a portfolio basis. To this end, a variety of derivative instruments are used, including short-term, over-the-counter foreign exchange forwards (covered forwards), interest rate and currency swaps, and exchange-traded interest rate futures and options. IFC takes both long and short positions in securities in the management of these portfolios to their respective benchmarks. The primary source of interest rate risk in the liquid asset portfolios is the P2 and P4 portfolios, which are managed to Barclay s 1-3 year US Treasury Index benchmark. P2 represents the portion of IFC s capital not disbursed as equity investments, and the benchmark reflects the chosen risk profile for this un-invested capital (paid-in capital and retained earnings). P4 represents an outsourced portion of the P2 portfolio. In addition, the P1 and P3 portfolios also contain spread risk of high quality credit counterparties. The P6 portfolio consists of foreign currency proceeds raised locally through swaps and other funding instruments to provide more flexible local currency loan products to clients. 27

95 The Euro portion of the P7 portfolio is managed to six equal-weighted EURIBID deposits maturing at the next six monthly reset dates of outstanding liabilities, rebalanced at each calendar month-end. The Nigerian naira portion of the P7 portfolio is managed to the related IFC debenture issued in FY13. Borrowing activities IFC expands its access to funding and decreases its overall funding cost by issuing debt securities in various capital markets in a variety of currencies, sometimes using complex structures. These structures include borrowings payable in multiple currencies, or borrowings with principal and/or interest determined by reference to a specified index such as a reference interest rate, or one or more foreign exchange rates. Market risk associated with fixed rate obligations and structured instruments entered into as part of IFC s funding program is generally mitigated by using derivative instruments to convert them into variable rate US dollar obligations, consistent with the matched-funding policy. Asset-liability management While IFC s matched-funding policy provides a significant level of protection against currency and interest rate risk, IFC can be exposed to residual market risks in its overall asset and liability management of the market borrowings funded balance sheet. Residual currency risk arises from events such as changes in the level of non-us dollar loan loss reserves. The aggregate position in each lending currency is monitored on a daily basis and the risk is managed within a range of +/- $5 million equivalent in each currency. Residual interest rate risk may arise from differing interest rate reset dates on assets and liabilities or assets that are fully match-funded at inception, which can become mismatched over time due to write-downs, prepayments, or rescheduling. The residual interest rate risk is managed by measuring the sensitivity of the present value of assets and liabilities in each currency to a one basis point change in interest rates and managed on a daily basis within a range of +/- $50,000. FY13 market risk highlights The overall level of market risk in IFC s Treasury operations increased in FY13 due to increasing volatility of Sovereign interest rates near the end of FY13 yet Treasury market risk still remained low compared to other portfolios and risk types. Interest rate, foreign exchange, and spread risk are all carefully controlled on a daily basis using a system of limits that remained in compliance during FY13. Shortly after the fiscal year began, the European Central Bank announced their, not-yet-used, Outright Monetary Transactions (OMT) program aimed at equalizing borrowing costs for private borrowers across the European Union by providing support for short-dated sovereign government bonds. Risk premia receded across financial markets in response. The decrease in risk premia was further supported by the United States when it avoided the fiscal cliff and the Bank of Japan, which announced a much greater-than-expected ease in monetary policy. The liquid asset portfolios benefitted from this improvement in the markets and remained fully invested in spread risk throughout the fiscal year. The overall level of market risk in IFC s equity portfolio was quite elevated in FY13, due to large fluctuations in global equity markets, foreign exchange rates and commodity prices. Equity valuations improved steadily during the first half of FY13, both in local currency and, to a greater degree, in IFC s reporting currency, the US$, as most emerging market currencies appreciated moderately against the US$ in the first half of FY13. This period was followed by sideways fluctuations in the third quarter of FY13 and the first half of the last quarter of FY13, but the last seven weeks of FY13 virtually erased all gains from the first half of FY13, as prospects of a less accommodative Federal Reserve and renewed concerns on global growth, dominated world markets. It should also be noted that emerging market equities lagged most developed equity markets in FY13, accelerating the trend that started in late

96 In response to such heightened volatility, the Corporation remained especially selective at entry and managed its equity investment portfolio pro-actively through close monitoring, quarterly portfolio reviews and continued oversight from the Corporate Equity Committee. Active portfolio management enabled the Corporation to revolve its funds significantly in FY13, and maintain an acceptable level of profitability. Liquidity risk IFC s investments are predominantly illiquid in nature due to the lack of capital flows, the infrequency of transactions, and the lack of price transparency in many emerging markets. To offset this liquidity risk, strict investment eligibility criteria for the Liquid Asset portfolios are defined in the Liquid Asset Management Investment Guidelines. Examples of these criteria include minimum sizes for bond issuances, single bond issue concentration limits and percentage of total bond issuance limits. Consequently, a significant portion of the liquid assets is invested in highly liquid securities such as: (i) high quality foreign sovereign, sovereign-guaranteed and supranational fixed income instruments; (ii) US Treasury or agency instruments; and (iii) money market mutual funds. In the event of a liquidity crisis, these assets will be available to generate funds that are needed to support IFC s cash requirements. IFC s liquid assets maintained similar exposure to high credit quality counterparties, while credit spread risk declined in FY13 due to improving credit conditions. Net interest rate risk of IFC s Liquid Asset portfolios remained concentrated in short-maturity obligations and the spread risk is well diversified by sector and geography. FY13 liquidity risk highlights On June 30, 2013, IFC s liquid assets portfolio stood at $31.2 billion ($30.4 billion on June 30, 2012). Current levels of liquid assets also represented 309% of the sum of (i) 100% of committed but undisbursed straight senior loans; (ii) 30% of committed guarantees; and (iii) 30% of committed client risk management products (327% on June 30, 2012). Funding risk IFC s primary objective with respect to managing funding risk is to maintain its triple-a credit ratings and, thereby, maintain access to market funding as needed at the lowest possible cost. The risk of higher funding costs is also reduced by IFC s annual funding targets, the US$ benchmark bonds, and the Discount Note Program. Accessing the capital markets for financing establishes investor confidence, liquidity, price transparency, and a diversified investor base, all of which help to reduce financing cost. IFC s Discount Note Program provides swift access to funded liquidity, to complement traditional funding sources, and to provide a natural funding source for short term financing programs. FY13 funding risk highlights During FY13, IFC raised $12.8 billion, net of derivatives ($11.9 billion in FY12 and $10.3 billion in FY11). The outstanding balance under the Discount Note Program at June 30, 2013 was $1.3 billion ($1.4 billion June 30, 2012). During FY13, credit spreads for IFC s new borrowings deteriorated to around Libor flat for a 5 year term issue, from Libor minus 10 basis points in FY12. OPERATIONAL RISK Consistent with Internal Convergence of Capital Measurement and Capital Standards, A Revised Framework issued by the Basel Committee on Banking Supervision in June 2004, IFC defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. IFC s Operational Risk Management (ORM) program is based on a directive approved by the Corporate Risk Committee during FY10. This directive establishes the approach and roles and responsibilities for operational risk management in the Corporation. 29

97 IFC s ORM approach is designed to ensure that operational risks are identified, assessed, and managed so as to minimize potential adverse impacts and to enable Senior Management to determine which risks IFC will: (i) manage internally, as part of its ongoing business; (ii) mitigate through contingency planning; or (iii) transfer to third parties, whether by subcontracting, outsourcing, or insurance. IFC seeks to mitigate the risks it manages internally by maintaining a comprehensive system of internal controls that is designed not only to identify the parameters of various risks but also to monitor and control those areas of particular concern. IFC utilizes risk transfer, including insurance, at both the project and the institutional levels for mitigation of low frequency and high severity operational risks. At both levels, IFC identifies and evaluates risks, determines available contractual transfer and insurance options, implements the optimal structure, and tracks its effectiveness over time. IFC also insures its corporate assets and operations against catastrophic losses where commercially viable. Other key components of IFC s operational risk management approach include: Operational risk assessment and measurement based on market practices and tools. Adoption of the COSO 5 control framework as the basis for its evaluation of the effectiveness of its internal controls over financial reporting. Ongoing independent review of the effectiveness of IFC s internal controls in selected key areas and functions performed by the Internal Audit Vice Presidency of the World Bank Group. Promoting data integrity in the Corporation based on its data management policy. Ensuring that processes and controls are in place to manage the risks in new products and initiatives before they are executed, through a New Initiative and Product Assessment Group with representation from key business and support functions. FY13 operational risk highlights IFC is continuing a multiyear effort to develop and implement enhanced methodologies for identifying, measuring, monitoring and managing operational risk in its key activities. IFC continued the program established in FY12 for obtaining annual written assertions on operational risk management by Vice Presidents and Directors. To support this, IFC also: Formalized a network of departmental Operational Risk Management Liaisons and provided training for them in applying operational risk management tools to their business processes. Extended Risk and Control Self-Assessment to all departments. Continued rolling out other operational risk management methodologies and tools, including risk events tracking, root cause analysis and key risk indicators. Conducted events to promote and raise awareness of operational risk management. IFC also continues to focus on its preparedness to react to an emergency situation that could disrupt its normal operations. During FY13, IFC: Collaborated with the World Bank in updating the World Bank Group Business Continuity Management policy to align with internationally recognized business continuity standards. Conducted emergency simulation exercises in Washington, in cooperation with the World Bank. Maintained Emergency Management Teams in all regions; and held emergency management workshops and simulations in larger country offices in one region. 5 COSO refers to the Internal Control 1992 Integrated Framework formulated by the Committee of Sponsoring Organizations of the Treadway Commission, which was convened by the US Congress in response to the well-publicized irregularities that occurred in the financial sector in the United States during the late 1980s. 30

98 Conducted exercises involving individual members of the Management Team, in anticipation of an exercise for the whole Management Team. Leveraging Business Impact Analysis results, updated Business Continuity Plans for departments responsible for critical business processes, and conducted a business continuity exercise for one critical Treasury process. Continued to implement the information technology disaster recovery testing strategy established in FY12 by performing component and integration tests for most applications supporting critical business processes. Began planning for a comprehensive update to IFC s Business Impact Analysis in FY14. CRITICAL ACCOUNTINGPOLICIES Note A to IFC s FY13 Consolidated Financial Statements contain a summary of IFC s significant accounting policies, including a discussion of recently adopted accounting standards and accounting and financial reporting developments. Certain of these policies are considered to be critical to the portrayal of IFC s financial condition and results of operations, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. These policies include: Determining the level of reserves against losses in the loan portfolio; Determining the level and nature of impairment for equity investments and debt securities carried at fair value with changes in fair value being reported in other comprehensive income ( OCI ) and for equity investments accounted for at cost less impairment (where impairment is determined with reference to fair value); Determining the fair value of certain equity investments, debt securities, loans, liquid assets, borrowings and derivatives, which have no quoted market prices and are accounted for at fair value; and Determining the future pension and postretirement benefit costs and obligations using actuarial assumptions based on financial market interest rates, past experience, and management s best estimate of future benefit cost changes and economic conditions. Many of IFC s financial instruments are classified in accordance with the fair value hierarchy established by accounting standards for fair value measurements and disclosures where the fair value and/or impairment is estimated based on internally developed models or methodologies utilizing significant inputs that are nonobservable. RESERVE AGAINST LOSSES ON LOANS IFC considers a loan as impaired when, based on current information and events, it is probable that IFC will be unable to collect all amounts due according to the loan s contractual terms. The reserve against losses for impaired loans reflects management s judgment of the present value of expected future cash flows discounted at the loan s effective interest rate. The reserve against losses for loans also includes an estimate of probable losses on loans inherent in the portfolio but not specifically identifiable. The reserve is established through periodic charges to income in the form of a provision for losses on loans. Loans written off, as well as any subsequent recoveries, are recorded through the reserve. The assessment of the adequacy of reserves against losses for loans is highly dependent on management s judgment about factors such as its assessment of the financial capacity of borrowers, geographical concentration, industry, regional and macroeconomic conditions, and historical trends. Due to the inherent limitation of any particular estimation technique, management utilizes a capital pricing and risk framework to estimate the probable losses on loans inherent in the portfolio but not specifically identifiable. This Board of Directors-approved framework uses actual loan loss history and aligns the loan loss provisioning framework with IFC s capital adequacy framework. 31

99 The reserve against losses on loans is separately reported in the consolidated balance sheet as a reduction of IFC s total loans. Increases or decreases in the reserve level are reported in the income statement as provision for losses or release of provision for losses on loans, and guarantees. The reserve against losses on loans relates only to the Investment services segment of IFC (see Note T to the FY13 Consolidated Financial Statements for further discussion of IFC s business segments). OTHER-THAN-TEMPORARY IMPAIRMENTS ON EQUITY INVESTMENTS AND DEBT SECURITIES IFC assesses all equity investments accounted for at fair value through OCI and all equity investments accounted for at cost less impairment for impairment each quarter. When impairment is identified and is deemed to be other-than-temporary, the equity investment is written down to its impaired value, which becomes the new cost basis in the equity investment. IFC generally presumes that all equity impairments are deemed to be otherthan-temporary. Impairment losses on equity investments accounted for at cost less impairment are not reversed for subsequent recoveries in value of the equity investment until it is sold. Recoveries in value on equity investments accounted for at fair value through OCI that have been the subject of an other-than-temporary impairments are reported in OCI until sold. IFC assesses all debt security investments accounted for at fair value through OCI for impairment each quarter. When impairment is identified, the entire impairment is recognized in net income if certain conditions are met (as detailed in Note A to IFC s FY13 Consolidated Financial Statements). However, if IFC does not intend to sell the debt security and it is not more likely than not that IFC will be required to sell the security, but the security has suffered a credit loss, the credit-related impairment loss is recognized in net income and the noncredit related loss is recognized in OCI. VALUATION OF FINANCIAL INSTRUMENTS WITH NO QUOTED MARKET PRICES IFC reports at fair value all of its derivative instruments, all of its liquid asset trading securities and certain borrowings, loans, equity investments and debt securities. In addition, various investment agreements contain embedded or stand-alone derivatives that, for accounting purposes, are separately accounted as either derivative assets or liabilities, including puts, caps, floors, and forwards. IFC classifies all financial instruments accounted for at fair value based on the fair value hierarchy established by accounting standards for fair value measurements and disclosures as described in more detail in Notes A and R to IFC s FY13 Consolidated Financial Statements. Many of IFC s financial instruments accounted for at fair value are valued based on unadjusted quoted market prices or using models where the significant assumptions and inputs are market-observable. The fair values of financial instruments valued using models where the significant assumptions and inputs are not marketobservable are generally estimated using complex pricing models of the net present value of estimated future cash flows. Management makes numerous assumptions in developing pricing models, including an assessment about the counterparty s financial position and prospects, the appropriate discount rates, interest rates, and related volatility and expected movement in foreign currency exchange rates. Changes in assumptions could have a significant impact on the amounts reported as assets and liabilities and the related unrealized gains and losses reported in the income statement and statement of OCI. The fair value computations affect both the Investment services and Treasury segments of IFC (see Note T to the FY13 Consolidated Financial Statements for further discussion of IFC s business segments). PENSION AND OTHER POSTRETIREMENT BENEFITS IFC participates, along with IBRD and MIGA, in pension and postretirement benefit plans that cover substantially all of their staff members. All costs, assets and liabilities associated with the plans are allocated between IBRD, IFC and MIGA based upon their employees respective participation in the plans. The underlying actuarial assumptions used to determine the projected benefit obligations, the fair value of plan assets and the funded status associated with these plans are based on financial market interest rates, past experience, and management s best estimate of future benefit cost changes and economic conditions. For further details, please refer to Note W to the FY13 Consolidated Financial Statements. 32

100 OVERVIEW RESULTS OF OPERATIONS The overall market environment has a significant influence on IFC s financial performance. The main elements of IFC s net income and comprehensive income and influences on the level and variability of net income and comprehensive income from year to year are: Elements Net income: Yield on interest earning assets Liquid asset income Income from the equity investment portfolio Provisions for losses on loans and guarantees Other income and expenses Gains and losses on other non-trading financial instruments accounted for at fair value Grants to IDA Other comprehensive income: Unrealized gains and losses on listed equity investments and debt securities accounted for as available-for-sale Unrecognized net actuarial gains and losses and unrecognized prior service costs on benefit plans Significant Influences Market conditions including spread levels and degree of competition. Nonaccruals and recoveries of interest on loans formerly in nonaccrual status and income from participation notes on individual loans are also included in income from loans. Realized and unrealized gains and losses on the liquid asset portfolios, which are driven by external factors such as: the interest rate environment; and liquidity of certain asset classes within the liquid asset portfolio. Global climate for emerging markets equities, fluctuations in currency and commodity markets and company-specific performance for equity investments. Performance of the equity portfolio (principally realized capital gains, dividends, equity impairments, gains on non-monetary exchanges and unrealized gains and losses on equity investments). Risk assessment of borrowers and probability of default and loss given default. Level of advisory services provided by IFC to its clients, the level of expense from the staff retirement and other benefits plans, and the approved administrative and other budgets. Principally, differences between changes in fair values of borrowings, including IFC s credit spread, and associated derivative instruments and unrealized gains associated with the investment portfolio including puts, warrants and stock options which in part are dependent on the global climate for emerging markets. These securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-observable. Level of the Board of Governors-approved grants to IDA. Global climate for emerging markets equities, fluctuations in currency and commodity markets and company-specific performance. Such equity investments are valued using unadjusted quoted market prices and debt securities are valued using internally developed models or methodologies utilizing inputs that may be observable or nonobservable. Returns on pension plan assets and the key assumptions that underlay projected benefit obligations, including financial market interest rates, staff expenses, past experience, and management s best estimate of future benefit cost changes and economic conditions. 33

101 The following paragraphs detail significant variances between FY13 and FY12, and FY12 and FY11, covering the periods included in IFC s FY13 Consolidated Financial Statements. Certain amounts in FY12 and FY11 have been reclassified to conform to the current year s presentation. Where applicable, the following paragraphs reflect reclassified prior year comparative information. Such reclassifications had no effect on net income or total assets. FY13 VERSUS FY12 Net income IFC reported income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA of $928 million in FY13, as compared to $1,877 million in FY12. The decrease in income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA in FY13 when compared to FY12 was principally as a result of the following (US$ millions): Increase (decrease) FY13 vs FY12 Realized capital gains on equity investments... $ (1,079) Provisions for losses on loans, guarantees and other receivables... (126) Foreign currency transaction gains and losses on non-trading activities... (110) Advisory services expenses, net... (91) Expenses from pension and other postretirement benefit plans... (77) Unrealized gains on equity investments Income from liquid asset trading activities Other-than-temporary impairments on equity investments Other, net... (58) Overall change... $ (949) Net gains on other non-trading financial instruments accounted for at fair value totaled $422 million in FY13, $641 million higher than net losses of $219 million in FY12. Accordingly, IFC has reported income before grants to IDA of $1,350 million, $308 million lower than income before grants to IDA of $1,658 million in FY12. Grants to IDA totaled $340 million in FY13, as compared to $330 million in FY12. Net loss attributable to noncontrolling interest totaled $8 million in FY13 as compared to $0 in FY12. Accordingly, net income attributable to IFC totaled $1,018 million in FY13, as compared with a net income of $1,328 million in FY12. A more detailed analysis of the components of IFC s net income follows. Income from loans and guarantees IFC s primary interest earning asset is its loan portfolio. Income from loans and guarantees for FY13 totaled $1,059 million, compared with $938 million in FY12, an increase of $121 million. The disbursed loan portfolio grew by $1,563 million, from $21,043 million at June 30, 2012 to $22,606 million at June 30, The weighted average contractual interest rate on loans at June 30, 2013 was 4.5%, versus 4.7% at June 30, These factors combined resulted in $90 million higher interest income than in FY12. Commitment and financial fees were $28 million higher than in FY12. Recoveries of interest on loans removed from non-accrual status, net of reversals of income on loans placed in nonaccrual status were $26 million lower than in FY12. There were no gains on sale of loans in FY13 as compared to $2 million in FY12. Income from IFC s participation notes over and above minimum contractual interest and other income were $3 million lower than in FY12. Unrealized gains on loans accounted for at fair value and gains on non-monetary exchanges were $34 million higher than in FY12. 34

102 Income from equity investments Income from the equity investment portfolio decreased by $705 million from $1,457 million in FY12 to $752 million in FY13. IFC generated realized gains on sales of equity investments for FY13 of $921 million, as compared with $2,000 million for FY12, a decrease of $1,079 million. IFC sells equity investments where IFC s developmental role was complete, and where pre-determined sales trigger levels had been met and, where applicable, lock ups have expired. Total realized gains on equity investments are concentrated in FY13, 10 investments generated individual capital gains in excess of $20 million for a total of $562 million, or 61%, of the FY13 realized gains, compared to 11 investments generating individual capital gains in excess of $20 million for a total of $1,821 million, or 91%, of the FY12 realized gains. Gains on non-monetary exchanges in FY13 totaled $6 million, as compared with $3 million in FY12. Dividend income totaled $248 million, as compared with $274 million in FY12, a decrease of $26 million. The decrease was largely due to a one time dividend from one investment in FY12 in the amount of $41 million that did not recur in FY13. Dividend income in FY13 included returns from four unincorporated joint ventures (UJVs) in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $36 million, as compared with $43 million from three such UJVs in FY12. Other-than-temporary impairments on equity investments totaled $441 million in FY13 ($289 million on equity investments accounted for as available-for-sale; and $152 million on equity investments accounted for at cost less impairment), as compared with $692 million in FY12 ($420 million on equity investments accounted for as available-for-sale; and $272 million on equity investments accounted for at cost less impairment). In FY13, three investments generated individual other-than-temporary impairments in excess of $20 million for a total of $90 million. In FY12, eight investments generated individual other-than-temporary impairments in excess of $20 million for a total of $298 million. Other-than temporary impairments on equity investments in FY13 were concentrated in the last three months of FY13, reflecting the weaker performance of emerging markets equities in general. Such impairments totaled $201 million in the last three months of FY13, as compared to $240 million in the first nine months of FY13. Unrealized gains on equity investments in FY13 totaled $26 million, as compared with unrealized losses of $128 million in FY12. One investment accounted for $217 million of unrealized gains in FY13. Seven investments in equity funds accounted for $162 million of the unrealized losses in FY13. Seven investments in equity funds accounted for $146 million of the unrealized losses in FY12. Individual investments in such Funds provided a significant component of such unrealized gains and losses. Income from debt securities Income from debt securities decreased to $5 million in FY13 from $81 million in FY12, a decrease of $76 million. The largest components of the decrease were higher other-than-temporary impairments ($19 million) and unrealized losses on debt securities accounted for at fair value ($60 million) in FY13 when compared with FY12. Realized gains on debt securities were $2 million lower in FY13 as compared to FY12. Provision for losses on loans and guarantees and other receivables The quality of IFC s loan portfolio, as measured by average country risk ratings and average credit risk ratings was substantially unchanged during FY13. By another measure, non-performing loans increased from $859 million (4.1%) of the disbursed loan portfolio at June 30, 2012 to $1,272 million (5.6%) at June 30, IFC recorded provision for losses on loans, guarantees and other receivables of $243 million in FY13 ($298 million of specific provisions for losses on loans, $49 million release of portfolio provisions for losses on loans, and $6 million release of provision for losses on guarantees and other receivables) as compared to provisions for losses of $117 million in FY12 ($76 million of specific provisions for losses on loans, $39 million of portfolio provisions for losses on loans and $2 million of provision for losses on guarantees and other receivables). 35

103 On June 30, 2013, IFC s total reserves against losses on loans were 7.2% of the disbursed loan portfolio (6.6% at June 30, 2012). Specific reserves against losses at June 30, 2013 of $741 million ($447 million at June 30, 2012) are held against impaired loans of $1,403 million ($923 million at June 30, 2012), a coverage ratio of 53% (48%). Income from liquid asset trading activities The liquid assets portfolio, net of derivatives and securities lending activities, increased from $30.4 billion at June 30, 2012, to $31.2 billion at June 30, Income from liquid asset trading activities totaled $500 million in FY13 ($313 million in FY12). In FY13 and FY12, all liquid asset portfolios outperformed their respective benchmarks, except for the P4 portfolio (which has a Net Asset Value (NAV) of $769 million and marginally underperformed). Interest income in FY13 totaled $430 million. In addition, the portfolio of ABS and MBS experienced fair value gains totaling $161 million in FY13. Holdings in other products, including US Treasuries, global government bonds, high quality corporate bonds and derivatives generated $91 million of losses in FY13, a net gain of $70 million. The P1 portfolio generated a return of $292 million in FY13, or 1.4%. In FY12, the P1 portfolio generated a return of $217 million, or 0.9%. The externally managed P3 portfolio, managed against the same variable rate benchmark as the P1 portfolio, returned $17 million in FY13, or 1.9%, $3 million higher than the $14 million, or 1.6% return in FY12. The P2 and externally-managed P4 portfolios returned $147 million (3.1%) and $2 million (0.3%) in FY13, respectively, as compared to $62 million (1.2%) and $14 million (2.0%) in FY12, respectively. IFC s P0 portfolio earned $2 million in FY13, a return of 0.1%, as compared to $7 million (0.5%) in FY12. The P6 local currency liquidity portfolio generated income of $42 million (4.5%) in FY13, $1 million less than the $43 million (5.7%) in FY12. At June 30, 2013, trading securities with a fair value of $85 million are classified as Level 3 securities ($150 million on June 30, 2012). Charges on borrowings IFC s charges on borrowings increased by $39 million, from $181 million in FY12 to $220 million in FY13, largely reflecting the increased level of borrowings partly set off by lower US dollar interest rate environment, when comparing FY13 and FY12. During FY13, IFC bought back $0.4 billion of its market borrowings ($0.6 billion in FY12). Charges on borrowings of $220 million in FY13 ($181 million in FY12) are reported net of gains on buybacks of $11 million ($19 million in FY12). The weighted average rate of IFC s borrowings outstanding from market sources, after the effects of borrowing-related derivatives, and excluding short-term borrowings issued under the Discount Note Program, declined during the year from 0.7% at June 30, 2012 to 0.4% at June 30, The size of the borrowings portfolio (excluding the short-term Discount Note Program), net of borrowing-related derivatives and before fair value adjustments, increased by $3.2 billion during FY13 from $40.7 billion at June 30, 2012, to $43.9 billion at June 30, Other income Other income of $441 million for FY13 was $7 million lower than in FY12 ($448 million). Other income in FY13 includes management fees and service fee reimbursements from AMC of $40 million ($28 million in FY12) and income from advisory services of $239 million ($269 million in FY12). In FY13, income from advisory services included $210 million contributed by donors ($189 million FY12) and $29 million of fees from clients and administrative fees from donors ($25 million FY12). 36

104 Other expenses Administrative expenses (the principal component of other expenses) increased by $47 million from $798 million in FY12 to $845 million in FY13, driven largely by a 6.7% increase in staffing and, to a lesser extent, salary increases to existing staff. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC s reimbursable program and expenses incurred in relation to workout situations (Jeopardy Projects) ($26 million in FY13, as compared with $22 million in FY12). IFC recorded expenses from pension and other postretirement benefit plans in FY13 of $173 million, as compared with $96 million in FY12, an increase driven by actuarial assumptions related to the funding status of the various benefit plans at June 30, Advisory services expenses totaled $351 million in FY13 ($290 million in FY12). Advisory services expenses included $210 million of funds contributed by donors that were utilized in the provision of advisory services in FY13 ($189 million FY12). Net gains and losses on other non-trading financial instruments As discussed in more detail in Note A to IFC s FY13 Consolidated Financial Statements, IFC accounts for certain financial instruments at fair value with unrealized gains and losses on such financial instruments being reported in net income, namely: (i) all swapped market borrowings; and (ii) all equity investments in which IFC has greater than 20% holdings and/or equity and fund investments which, in the absence of the Fair Value Option, would be required to be accounted for under the equity method, and (iii) substantially all market borrowings. All other non-trading derivatives, including stand-alone and embedded derivatives in the loan, equity and debt security portfolios continue to be accounted for at fair value. The resulting effects of fair value accounting for these non-trading financial instruments on net income in FY13 and FY12 are summarized as follows (US$ millions): Realized gains and losses on derivatives associated with investments... $ 35 $ 11 Non-monetary gains on derivatives associated with investments Unrealized gains and losses on derivatives associated with investments (34) Unrealized gains and losses on market borrowings and associated derivatives, net (206) Net gains and losses on other non-trading financial instruments accounted for at fair value... $ 422 $ (219) Changes in the fair value of IFC s market borrowings and associated derivatives, net, includes the impact of changes in IFC s own credit spread when measured against US$ LIBOR. As credit spreads widen, unrealized gains are recorded and when credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but do not alter cash flow. IFC s policy is to generally match currency, amount and timing of cash flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. In FY12, unsettled conditions in European sovereign debt markets and renewed signs of flagging economic activity were accompanied by further interest rate declines from already low levels. Risk appetites in the capital markets receded, as evidenced by some flight to quality along the credit spectrum. This led to better pricing for triple-a IFC issues which in FY11 sat at around LIBOR flat, but moved back to 5 to 10 basis points below LIBOR by the end of FY12 for US$ issuances at 5 year tenor. This development, along with movements in foreign exchange basis swap rates, resulted in adverse after swap revaluations on market borrowings, net of associated derivatives and accordingly, IFC reported unrealized losses in FY12 of $206 million. In FY13, interest rate levels remained stable through the first nine months of the year, then, in the last three months of FY13, bond markets weakened on the prospect of tighter liquidity conditions amid signs of accelerating US economic activity. Benchmark 5 year US$ interest rates jumped around 50 basis points during the last three months of FY13 causing large revaluation gains on IFC s portfolio of medium to long term 37 FY13 FY12

105 borrowings, offset by losses on associated derivatives. Credit spreads for benchmark IFC USD issuance deteriorated by around 10 basis points in FY13 contributing to overall unrealized gains on market borrowings and associated derivatives of $32 million. IFC reported net gains on derivatives associated with investments (principally put options, stock options, conversion features, warrants and interest rate and currency swaps economically hedging the fixed rate and /or non-us$ loan portfolio) of $390 million in FY13 (net losses of $13 million in FY12). Gains and losses are highly concentrated, with five derivatives accounting for $153 million of gains and five derivatives accounting for $73 million of losses in FY13 (five derivatives accounting for $113 million of gains and five derivatives accounting for $73 million of losses in FY12). Grants to IDA During FY13, IFC recorded a grant to IDA of $340 million, as compared with $330 million in FY12. Other comprehensive income Unrealized gains and losses on equity investments and debt securities IFC s investments in debt securities and equity investments that are listed in markets that provide readily determinable fair values are classified as available-for-sale, with unrealized gains and losses on such investments being reported in OCI until realized. When realized, the gain or loss is transferred to net income. Changes in unrealized gains and losses on equity investments and debt securities reported in OCI are significantly impacted by (i) the global environment for emerging markets; and (ii) the realization of gains on sales of such equity investments and debt securities. The net change in unrealized gains and losses on equity investments and debt securities in OCI can be summarized as follows: Net unrealized gains and losses on equity investments arising during the year: Unrealized gains... $ 757 $ 290 Unrealized losses... (396) (813) Reclassification adjustment for realized gains and other-than-temporary impairments included in net income Net unrealized gains and losses on equity investments... $ 385 $(246) Net unrealized gains and losses on debt securities arising during the year: Unrealized gains... $ 194 $ 85 Unrealized losses... (201) (358) Reclassification adjustment for realized gains, non-credit related portion of impairments which were recognized in net income and other-than-temporary impairments included in net income Net unrealized gains and losses on debt securities (259) Total unrealized gains and losses on equity investments and debt securities... $ 407 $ (505) FY13 FY12 Unrecognized net actuarial gains and losses and unrecognized prior service costs on benefit plans Changes in the funded status of pension and other postretirement benefit plans are recognized in OCI, to the extent they are not recognized in net income under periodic benefit cost for the year. During FY13, IFC experienced a gain of $201 million primarily due to $200 million of unrecognized net actuarial gains, resulting from the increase in the discount rates used to determine the projected benefit 38

106 obligations and higher return on pension assets. The discount rate assumption used to determine the projected benefit obligation for the largest benefit plan, the Staff Retirement Plan, increased from 3.9% at June 30, 2012 to 4.6% at June 30, FY12 VERSUS FY11 Net income IFC reported income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA of $1,877 million in FY12, as compared to $2,024 million in FY11. The decrease in income before net gains and losses on other non-trading financial instruments accounted for at fair value and grants to IDA in FY12 when compared to FY11 was principally as a result of (US$ millions): Increase (decrease) FY12 vs FY11 Unrealized losses on equity investments accounted for at fair value... $ (582) Other-than-temporary impairments on equity investments... (474) Income from liquid asset trading activities... (216) Gains on non-monetary exchanges... (214) Provisions for losses on loans, guarantees and other receivables... (157) Advisory services expenses, net Foreign currency transaction gains and losses on non-trading activities Realized capital gains on equity investments... 1,263 Other, net... (77) Overall change... $ (147) Net losses on other non-trading financial instruments accounted for at fair value totaled $219 million in FY12 (net gains of $155 million in FY11), resulting in income before grants to IDA of $1,658 million in FY12, as compared to $2,179 million in FY11. Grants to IDA totaled $330 million in FY12, as compared to $600 million in FY11. Accordingly, net income totaled $1,328 million in FY12, as compared with $1,579 million in FY11. A more detailed analysis of the components of IFC s net income follows. Income from loans and guarantees IFC s primary interest earning asset is its loan portfolio. Income from loans and guarantees for FY12 totaled $938 million, compared with $877 million in FY11, an increase of $61 million. The disbursed loan portfolio grew by $1,159 million, from $19,884 million at June 30, 2011 to $21,043 million at June 30, The weighted average contractual interest rate on loans at June 30, 2012 was 4.7%, versus 4.6% at June 30, These factors resulted in $90 million higher interest income than in FY11. Commitment and financial fees were $12 million higher than in FY11. Recoveries of interest on loans removed from non-accrual status, net of reversals of income on loans placed in nonaccrual status were $14 million higher than in FY11. Gain on sales of loan was $2 million as compared to no such gains in FY11. Income from IFC s participation notes over and above minimum contractual interest and other income were $10 million higher than in FY11. Unrealized gains on loans accounted for at fair value and gains on non-monetary exchanges were $67 million lower than in FY11. Income from equity investments Income from the equity investment portfolio decreased by $7 million from an income of $1,464 million in FY11 to $1,457 million in FY12. 39

107 IFC generated record realized gains on sales of equity investments for FY12 of $2,000 million, as compared with $737 million for FY11, an increase of $1,263 million. IFC sells equity investments where IFC s developmental role was complete, and where pre-determined sales trigger levels had been met and, where applicable, lock ups have expired. Total realized gains on equity investments are concentrated in FY12, 11 investments generated individual capital gains in excess of $20 million for a total of $1,821 million, or 91%, of the FY12 gains, compared to 10 investments generating individual capital gains in excess of $20 million for a total of $416 million, or 56%, of the FY11 gains. Gains on non-monetary exchanges in FY12 totaled $3 million, as compared with $217 million in FY11. There were two large transactions that resulted in the recording of gains on non-monetary exchanges in FY11 that did not recur in FY12. Dividend income totaled $274 million, as compared with $280 million in FY11. Consistent with FY11, a significant amount of IFC s dividend income in FY12 was due to returns on IFC s joint ventures in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $43 million in FY12, as compared with $57 million in FY11. Other-than-temporary impairments on equity investments totaled $692 million in FY12 ($420 million on equity investments accounted for as available-for-sale; and $272 million on equity investments accounted for at cost less impairment), as compared with $218 million in FY11 ($131 million on equity investments accounted for as available-for-sale; and $87 million on equity investments accounted for at cost less impairment). In FY12, eight investments generated individual other-than-temporary impairments in excess of $20 million for a total of $298 million. In FY11, one investment generated an other-than-temporary impairment loss of $40 million. There were no other investments that generated an other-than-temporary impairment loss in excess of $20 million. Unrealized losses on equity investments that are accounted for at fair value through net income in FY12 totaled $128 million, as compared with gains of $454 million in FY11. Seven investments in equity funds accounted for $146 million of the unrealized losses in FY12. Six investments in equity funds accounted for $199 million of the unrealized gains in FY11. Individual investments in such funds provided a significant component of the unrealized gains and losses. Income from debt securities Income from debt securities increased to $81 million in FY12 from $46 million in FY11, an increase of $35 million. The largest components of the increase were higher interest income ($21 million) and higher unrealized gains on debt securities accounted for at fair value ($23 million) in FY12 when compared with FY11. Realized gains on debt securities were $14 million higher in FY12 as compared to FY11. Provision for losses on loans and guarantees The quality of IFC s loan portfolio, as measured by average country risk ratings and average credit risk ratings was substantially unchanged during FY12. By another measure, non-performing loans decreased from $943 million (4.7%) of the disbursed loan portfolio at June 30, 2011 to $859 million (4.1%) at June 30, IFC recorded provision for losses on loans and guarantees of $112 million in FY12 ($76 million specific provisions on loans, $39 million portfolio provisions on loans, and $3 million release of provision for losses on guarantees) as compared to release of provision of $40 million in FY11 ($16 million release in specific provisions, and $24 million release in portfolio provisions). On June 30, 2012, IFC s total reserves against losses on loans were 6.6% of the disbursed loan portfolio (6.6% at June 30, 2011). Specific reserves against losses at June 30, 2012 of $447 million ($382 million at June 30, 2011) are held against impaired loans of $923 million ($918 million at June 30, 2011), a coverage ratio of 48% (42%). 40

108 Income from liquid asset trading activities Income from liquid asset trading activities comprises interest from time deposits and securities, net gains and losses on trading activities, and a small currency effect. The liquid assets portfolio, net of derivatives and securities lending activities, increased from $24.5 billion at June 30, 2011, to $29.7 billion at June 30, Income from liquid asset trading activities totaled $313 million in FY12 ($529 million in FY11). In FY12 and FY11, all liquid asset portfolios except for the P7 portfolio (which has an NAV less than $10 million), outperformed their respective benchmarks. In addition to interest income and foreign currency transaction gains of $648 million, the portfolio of ABS and MBS experienced fair value losses totaling $8 million in FY12. Holdings in other products, including US Treasuries, global government bonds, high quality corporate bonds and derivatives generated $327 million of losses in FY12. At June 30, 2012, trading securities with a fair value of $150 million are classified as Level 3 securities ($210 million on June 30, 2011). The P1 portfolio generated a return of $218 million in FY12, or 0.95%. In FY11, the P1 portfolio generated a return of $330 million, or 2.29%. The externally managed P3 portfolio, managed against the same variable rate benchmark as the P1 portfolio, returned $13 million in FY12, or 1.64%, $7 million higher than the $6 million, or 0.97% return in FY11. The P2 and externally-managed P4 portfolios returned $60 million (1.15%) and $13 million (2.00%) in FY12, respectively, as compared to $179 million (3.33%) and $9 million (1.87%) in FY11, respectively. IFC s P0 portfolio earned $9 million in FY12, a total return of 0.47%, as compared to $4 million (0.44%) in FY11. The P7 portfolio earned less than $0.5 million (1.15%) in FY12 as compared to earning $1 million (1.32%) in FY11. Charges on borrowings IFC s charges on borrowings increased by $41 million, from $140 million in FY11 to $181 million in FY12, largely reflecting the higher US dollar interest rate environment and increased level of borrowings, when comparing FY12 and FY11. During FY12, IFC bought back $0.6 billion of its market borrowings ($0.3 billion in FY11). Charges on borrowings of $181 million in FY12 ($140 million in FY11) are reported net of gains on buybacks of $19 million ($10 million in FY11). The weighted average rate of IFC s borrowings outstanding from market sources, after the effects of borrowing-related derivatives, and excluding short-term borrowings issued under the Discount Note Program, rose during the year from 0.3% at June 30, 2011 to 0.7% at June 30, The size of the borrowings portfolio (excluding the short-term Discount Note Program), net of borrowing-related derivatives and before fair value adjustments, increased by $6.8 billion during FY12 from $33.9 billion at June 30, 2011, to $40.7 billion at June 30, Other income Other income of $448 million for FY12 was $226 million higher than in FY11 ($222 million). Other income in FY12 includes income from the P6 local currency liquidity portfolio of $43 million (reported in income from liquid asset trading in FY13 and amounting to $44 million in FY11), management fees and service fee reimbursements from AMC of $28 million ($28 million in FY11) and income from advisory services of $269 million ($0 in FY11). In FY12, income from advisory services included $189 million contributed by donors and $25 million of fees from clients and administrative fees from donors. Other expenses Administrative expenses (the principal component of other expenses) increased by $98 million from $700 million in FY11 to $798 million in FY12, driven largely by a 9% increase in staffing and, to a lesser extent, 41

109 salary increases to existing staff. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC s reimbursable program and Jeopardy Projects ($22 million in FY12, as compared with $24 million in FY11). IFC recorded an expense from pension and other postretirement benefit plans in FY12 of $96 million, as compared with $109 million in FY11, a decrease driven by actuarial assumptions. Advisory services expenses totaled $290 million in FY12 ($153 million in FY11). Advisory services expenses included $189 million of funds contributed by donors that were utilized in the provision of advisory services. Net gains and losses on other non-trading financial instruments As discussed in more detail in Note A to IFC s FY12 Consolidated Financial Statements, IFC accounts for certain financial instruments at fair value with unrealized gains and losses on such financial instruments being reported in net income, namely: (i) all swapped market borrowings; and (ii) all equity investments in which IFC has greater than 20% holdings and/or equity and fund investments which, in the absence of the Fair Value Option, would be required to be accounted for under the equity method, and (iii) substantially all market borrowings. All other non-trading derivatives, including stand-alone and embedded derivatives in the loan, equity and debt security portfolios continue to be accounted for at fair value. The resulting effects of fair value accounting for these non-trading financial instruments on net income in FY12 and FY11 are summarized as follows (US$ millions): Realized gains and losses on derivatives associated with investments... $ 11 $ 63 Non-monetary gains on derivatives associated with investments Unrealized gains and losses on derivatives associated with investments... (34) (23) Unrealized gains and losses on market borrowings and associated derivatives, net... (206) 93 Net gains and losses on other non-trading financial instruments accounted for at fair value... $ (219) $ 155 Changes in the fair value of IFC s market borrowings and associated derivatives, net includes the impact of changes in IFC s own credit spread when measured against US$ LIBOR. As credit spreads widen, unrealized gains are recorded and when credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but do not alter the cash flows. IFC s policy is to generally match currency, amount and timing of cash flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. In FY11, the trend decline in global interest rate paused temporarily in the second quarter of the year and interest rates remained stable at low levels subsequently. Credit spreads were little changed throughout FY11 and resulting pricing was at around LIBOR flat for IFC s benchmark US$ global bond offerings. In FY10, credit spreads remained elevated relative to the levels that prevailed before FY09. As a result, IFC reported unrealized gains for FY11 of $93 million, as compared to unrealized losses of $226 million in FY10. In FY12, unsettled conditions in European sovereign debt markets and renewed signs of flagging economic activity were accompanied by further interest rate declines from already low levels. Risk appetites in the capital markets receded, as evidenced by some flight to quality along the credit spectrum. This led to better pricing for AAA IFC issues which in FY11 sat at around LIBOR flat, but moved back to 5 to 10 basis points below LIBOR by the end of FY12. This development, along with movements in foreign exchange basis swap rates, resulted in adverse after swap revaluations on IFC s financial statements and IFC reported unrealized losses for FY12 of $206 million, as compared to unrealized gains of $93 million in FY11. IFC reported net losses on derivatives associated with investments (principally put options, stock options, conversion features, warrants and swaps associated with loans) of $13 million in FY12 (net gains of $62 million 42 FY12 FY11

110 in FY11). Gains and losses are highly concentrated, with five derivatives accounting for $113 million of gains and five derivatives accounting for $73 million of losses in FY12 (five derivatives accounting for $140 million of gains and five derivatives accounting for $58 million of losses in FY11). Grants to IDA During FY12, IFC recorded a grant to IDA of $330 million, as compared with $600 million in FY11. Other comprehensive income Unrealized gains and losses on equity investments and debt securities IFC s investments in debt securities and equity investments that are listed in markets that provide readily determinable fair values at fair value are classified as available-for-sale, with unrealized gains and losses on such investments being reported in OCI until realized. When realized, the gain or loss is transferred to net income. Changes in unrealized gains and losses on equity investments and debt securities reported in OCI are significantly impacted by (i) the global environment for emerging markets; and (ii) the realization of gains on sales of such equity investments and debt securities. The net change in unrealized gains and losses on equity investments and debt securities in OCI can be summarized as follows: FY12 FY11 Net unrealized gains and losses on equity investments arising during the year: Unrealized gains... $ 290 $ 697 Unrealized losses... (813) (309) Reclassification adjustment for realized gains and impairments included in net income (274) Net unrealized gains and losses on equity investments... $ (246) $ 114 Net unrealized gains and losses on debt securities arising during the year: Unrealized gains... $ 85 $ 234 Unrealized losses... (358) (97) Reclassification adjustment for realized gains, non credit-related portion of impairments which were recognized in net income and impairments included in net income Net unrealized gains and losses on debt securities... $ (259) $ 141 Total unrealized gains and losses on equity investments and debt securities... $ (505) $ 255 Unrecognized net actuarial gains and losses and unrecognized prior service costs on benefit plans Changes in the funded status of pension and other postretirement benefit plans are recognized in OCI, to the extent they are not recognized in net income under periodic benefit cost for the year. During FY12, IFC experienced a loss of $525 million, primarily due to the following factors: Unrecognized net actuarial losses on benefits plans: $501 million of unrecognized net actuarial losses, primarily due to the decrease in the discount rates used to determine the projected benefit obligations and lower return on pension assets. The discount rate assumption used to determine the projected benefit obligation for the largest benefit plan, the Staff Retirement Plan, decreased from 5.3% at June 30, 2011 to 3.9% at June 30, Unrecognized net prior service cost on benefit plans: $24 million of unrecognized prior service cost, primarily due to an amendment made to the pension plan. See notes to FY12 Consolidated Financial Statements Note W Pension and Other Postretirement Benefits for further details. 43

111 GOVERNANCE AND CONTROL SENIOR MANAGEMENT CHANGES The following changes occurred in the Senior Management of IFC since June 30, 2012: Dr. Jim Yong Kim became President, effective July 1, Mr. Thierry Tanoh retired as Vice President, Sub-Saharan Africa, Latin America and the Caribbean, and Western Europe, effective July 16, Mr. Bernard Sheahan, Director, Global Infrastructure and Natural Resources, was appointed Acting Vice President, Sub-Saharan Africa, Latin America and the Caribbean, and Western Europe, effective July 16, 2012 and ending on February 14, Mr. Jin-Yong Cai became Executive Vice President and CEO, effective October 1, Ms. Rachel Robbins retired as Vice President and General Counsel, effective October 31, Mr. David Harris, Deputy General Counsel, was Acting Vice President and General Counsel, effective November 1, 2012 and ending on March 31, Mr. Jean Philippe Prosper became Vice President, Sub-Saharan Africa, Latin America and the Caribbean, effective February 15, Mr. Dimitris Tsitsiragos title changed from Vice President, Eastern Europe, Central Asia, Middle East and North Africa to Vice President, Europe, Central Asia, Middle East and North Africa, effective February 15, Ms. Saadia Khairi s title changed from Vice President, Risk, Finance and Strategy to Vice President, Risk Management and Reporting, effective February 15, Mr. Rashad Kaldany s title changed from Vice President, Global Industries to Vice President and Chief Operating Officer, effective February 15, Mr. Ethiopis Tafara was appointed IFC s Vice President and General Counsel, effective April 1, Ms. Dorothy Berry retired as Vice President, Human Resources, Communications, and Administration, effective June 30, The position of Vice President, Human Resources, Communications, and Administration will not be filled. Effective July 1, 2013, Human Resource services to IFC will be provided by the World Bank Group Integrated Services, and IFC Human Resources business partners, under the leadership of Sean McGrath. Mr. Rashad Kaldany, Vice President and Chief Operating Officer retired from IFC on September 6, 2013 whereupon the position was not filled. GENERAL GOVERNANCE IFC s decision-making structure consists of the Board of Governors, the Board of Directors, the President, the Executive Vice President and CEO, other officers and staff. The Board of Governors is the highest decisionmaking authority. Governors are appointed by their member governments for a five-year term, which is renewable. The Board of Governors may delegate authority to the Board of Directors to exercise any of its powers, except those reserved to the Board of Governors under the Articles of Agreement. BOARD MEMBERSHIP In accordance with its Articles of Agreement, members of the Board of Directors are appointed or elected every two years by their member governments. Currently, the Board of Directors is composed of 25 Directors. These Directors are neither officers nor staff of IFC. The President is the only member of the Board of Directors from management, serving as a non-voting member and as Chairman of the Board of Directors. The Board of Directors has established several Committees including: Audit Committee Budget Committee 44

112 Committee on Development Effectiveness Committee on Governance and Executive Directors Administrative Matters Ethics Committee Human Resources Committee The Board of Directors and their Committees function in continuous session at the principal offices of the IBRD, as business requires. Each Committee s terms of reference establishes its respective roles and responsibilities. As Committees do not vote on issues, their role is primarily to serve the Board of Directors in discharging its responsibilities. The Board of Directors considers proposals made by the President on the use of IFC s net income: retained earnings and designation of retained earnings and is responsible for the conduct of the general operations of IFC. The Directors are also responsible for presenting to the Board of Governors, at the Annual meetings, audited accounts, an administrative budget, and an annual report on operations and policies as well as other matters. AUDIT COMMITTEE Membership The Audit Committee consists of eight Directors. Membership on the Audit Committee is determined by the Board of Directors, based upon nominations by the Chairman of the Board of Directors, following informal consultation with the Directors. Key responsibilities The Audit Committee is appointed by the Board of Directors to assist it in the oversight and assessment of IFC s finances and accounting, including the effectiveness of financial policies, the integrity of financial statements, the system of internal controls regarding finance, accounting and ethics (including fraud and corruption), and financial and operational risks. The Audit Committee also has the responsibility for reviewing the performance and recommending to the Board of Directors the appointment of the external auditor, as well as monitoring the independence of the external auditor. The Audit Committee participates in oversight of the internal audit function and reviews the annual internal audit plan. In the execution of its role, the Audit Committee discusses with management, the external auditors, and the internal auditors, financial issues and policies which have a bearing on IFC s financial position and risk-bearing capacity. The Committee also reviews with the external auditor the financial statements prior to their publication and recommends the annual audited financial statements for approval to the Board of Directors. The Audit Committee monitors the evolution of developments in corporate governance and the role of audit committees on an ongoing basis and updated its terms of reference in July Executive sessions Under the Audit Committee s terms of reference, members of the Audit Committee may convene in executive session at any time, without management present. It meets separately in executive session with the external and internal auditors. Access to resources and to management Throughout the year, the Audit Committee receives a large volume of information, which supports the execution of its duties. The Audit Committee meets both formally and informally throughout the year to discuss relevant matters. The Audit Committee has complete access to management and reviews and discusses with management topics contemplated in their Terms of Reference. The Audit Committee has the capacity, under exceptional circumstances, to obtain advice and assistance from outside legal, accounting or other advisors as deemed appropriate. 45

113 BUSINESS CONDUCT IFC promotes a positive work environment where staff members understand their ethical obligations to the institution, which are embodied in its Core Values and Principles of Staff Employment. In support of this commitment, the institution has in place a code of conduct, entitled Living our Values (the Code). The Code applies to all World Bank Group staff worldwide and is available on In addition to the Code, Staff and Administrative Manuals, guidance for staff is also provided through programs, training materials, and other resources. Managers are responsible for ensuring that internal systems, policies, and procedures are consistently aligned with the IFC s business conduct framework. There exists both an Ethics HelpLine and a Fraud and Corruption hotline. A third-party service offers numerous methods of worldwide communication. Reporting channels include: phone, mail, , or through confidential submission through a website. IFC has in place procedures for the receipt, retention and handling of recommendations and concerns relating to business conduct identified during accounting, internal control and auditing processes. Staff Rules clarify and codify the obligations of staff in reporting suspected fraud, corruption or other misconduct that may threaten operations or governance of the Corporation. Additionally, these rules offer protection from retaliation. AUDITOR INDEPENDENCE The appointment of the external auditor of IFC is governed by a set of Board of Director-approved principles. Key features of those principles include: Prohibition of the external auditor from the provision of all non audit-related services. All audit-related services must be pre-approved on a case-by-case basis by the Board of Directors, upon recommendation of the Audit Committee. Mandatory rebidding of the external audit contract every five years, with a limitation of two consecutive terms and mandatory rotation thereafter. External auditors are appointed to a five-year term of service. This is subject to annual reappointment based on the recommendation of the Audit Committee and approval of a resolution by the Board of Directors. In FY14, KPMG LLP ( KPMG ) will begin a second five-year term as IFC s external auditor. Communication between the external auditor and the Audit Committee is ongoing, as frequently as is deemed necessary by either party. The Audit Committee meets periodically with the external auditor, and individual members of the Audit Committee have independent access to the external auditor. IFC s external auditors also follow the communication requirements with audit committees set out under generally accepted auditing standards in the United States of America. INTERNAL CONTROL Internal control over financial reporting Management makes an annual assertion whether, as of June 30 of each fiscal year, its system of internal control over its external financial reporting has met the criteria for effective internal control over external financial reporting as described in the Internal Control-Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Concurrently, IFC s external auditor provides an attestation report on whether management s assertion regarding the effectiveness of internal control over external financial reporting is fairly stated in all material respects. For each fiscal year, management performs an evaluation of internal control over external financial reporting for the purpose of determining if there are any changes made in internal controls during the fiscal year 46

114 covered by the report that materially affect, or would be reasonably likely to materially affect IFC s internal control over external financial reporting. As of June 30, 2013, no such changes had occurred. Disclosure Controls and Procedures Disclosure controls and procedures are those processes which are designed to ensure that information required to be disclosed is accumulated and communicated to management as appropriate, to allow timely decisions regarding required disclosure by IFC. Management has undertaken an evaluation of the effectiveness of such controls and procedures. Based on that evaluation, management has concluded that these controls and procedures were effective as of June 30, AUDIT FEES For FY13 and FY12, KPMG served as IFC s independent external auditors. The aggregate fees for professional services rendered for IFC, including reimbursable expenses, by KPMG for FY13 and FY12 are as follows: Fees earned by KPMG for audit and audit-related services rendered to IFC, AMC and funds managed by AMC totaled $2.74 million ($2.52 million FY12), comprising $2.37 million of audit services ($2.21 million FY12) and $0.37 million of audit-related services ($0.31 million FY12). Audit-related services performed by KPMG are closely related to audit services and in many cases could only be provided by IFC s independent external auditors. Such audit-related services include accounting consultations, financial statement translation services, comfort letters and other reporting in support of IFC s borrowing activities, and certain attestation services such as agreed upon procedures. ORGANIZATION AND ADMINISTRATION OF IFC MEMBERSHIP IFC was organized in 1956 with an original membership of 56 countries, which has since grown to 184 member countries at June 30, Membership in IFC is open only to members of IBRD at such times and in accordance with such terms and conditions as IFC shall prescribe. Although any member may withdraw from membership in IFC by delivering notice thereof in writing, any government which ceases to be a member remains liable for all its obligations to IFC. In the event of withdrawal, IFC will arrange for the repurchase of that government s capital stock in IFC. Also, a member may be suspended by a decision of a majority of the Board of Governors exercising a majority of IFC s total voting power if such member fails to fulfill any of its obligations to IFC. ADMINISTRATION IFC s administration is comprised of the Board of Governors, the Board of Directors, the President, the Executive Vice President, other officers and staff. All of the powers of IFC are vested in the Board of Governors which is composed of a Governor (and an Alternate Governor) appointed by each member country of IFC. Each member country has 250 votes plus one additional vote for each share of stock held by that member. Except as otherwise expressly provided in the Articles of Agreement, all matters before IFC are decided by a majority of the votes cast. The Board of Governors holds regular annual meetings, but has delegated to the Board of Directors authority to exercise all of the powers of IFC except those reserved to the Board of Governors under the Articles of Agreement. The Board of Directors is responsible for the conduct of the general operations of IFC. It is composed of each Executive Director of IBRD who has been either (i) appointed by a member of IBRD which is also a member of IFC, or (ii) elected in an election in which the votes of at least one member of IBRD which is also a member of IFC shall have counted toward his or her election. Each Director is entitled to cast the number of votes which the member by which he or she was appointed, or the member (or members) that voted for his or her 47

115 election, is entitled to cast. The Board of Directors presently consists of 25 Directors. Five Directors are appointed by individual members and the remaining 20 are elected by the Board of Governors representing the other members. The President of IBRD is ex officio Chairman of the Board of Directors of IFC. The President is the chief of the operating staff of IFC and is appointed by the Board of Directors. Under the direction and control of the Board of Directors, the President is responsible for the organization, appointment and dismissal of the officers and staff. The authority to conduct the ordinary business of IFC is vested in the Executive Vice President. The following is a list of the principal officers of IFC as of November 15, 2013: President... Dr.JimYong Kim Executive Vice President and CEO... Jin-Yong Cai Vice President, Financial and Private Sector Development... Janamitra Devan Vice President, Asia-Pacific... Karin Finkelston Vice President, Treasury and Syndications... Jingdong Hua Vice President, Risk Management and Portfolio... Saadia Khairi Vice President, Sub-Saharan Africa and Latin America and the Caribbean... Jean Philippe Prosper Vice President, Business Advisory Services... Nena Stoiljkovic Vice President and General Counsel... Ethiopis Tafara Vice President, Europe, Central Asia, Middle East and North Africa... Dimitris Tsitsiragos CEO, IFC Asset Management Company LLC (a wholly-owned subsidiary of IFC)... Gavin E.R. Wilson IFC is a legal entity separate and distinct from IBRD. The funds of IFC are kept separate and apart from those of IBRD and obligations of IFC are not obligations of, or guaranteed by, IBRD. THE ARTICLES OF AGREEMENT The Articles of Agreement constitute IFC s governing charter. They prescribe IFC s purpose, capital structure and organization, authorize the operations in which it may engage, prescribe limitations on the carrying on of those operations and establish the status, privileges and immunities of IFC in its member countries. The Articles of Agreement also contain provisions with respect to the admission of additional members, the increase of the authorized capital stock of IFC, the terms and conditions under which IFC may invest its funds, the distribution of the net income of IFC to its members, the withdrawal and suspension of members and the suspension of operations of IFC. Pursuant to its provisions, the Articles of Agreement may be amended only by a vote of three-fifths of the Governors exercising 85% of the total voting power (except for certain provisions the amendment of which requires the affirmative vote of all Governors). The Articles of Agreement further provide that questions of interpretation of provisions of the Articles of Agreement arising between any member and IFC or between members of IFC shall be decided by the Board of Directors. Its decisions may be referred by any member to the Board of Governors, whose decision is final. Pending the result of such reference, IFC may act on the basis of the decision of the Board of Directors. Copies of the full text of the Articles of Agreement are available for inspection and distribution at IFC s head office in Washington, D.C. and are available at 48

116 LEGAL STATUS, IMMUNITIES AND PRIVILEGES The Articles of Agreement contain provisions which accord to IFC legal status and certain immunities and privileges in the territories of each of its members, including those summarized below. IFC has full juridical personality with capacity to make contracts, to acquire and dispose of property and to sue and be sued. Actions may be brought against IFC only in a court of competent jurisdiction in the territories of a member in which IFC has an office, has appointed an agent to accept service of process, or has issued or guaranteed securities, but no action may be brought against IFC by a member or persons acting for or deriving claims from a member. The Governors, Directors, Alternates and the officers and employees of IFC are immune from legal process for acts performed by them in their official capacities. The archives of IFC are inviolable and the property and assets of IFC are immune from seizure, attachment or execution prior to delivery of final judgment against IFC. The property and assets of IFC are also immune from search, requisition, confiscation, expropriation or any other form of seizure by executive or legislative action. IFC, its assets, property, income and its operations and transactions authorized by the Articles of Agreement, are immune from all taxation and customs duties imposed by a member country. IFC is also immune from liability for the collection or payment of any tax or duty. Under the Articles of Agreement, securities issued or guaranteed by IFC and the interest or dividends thereon are not subject to any tax (a) which discriminates against such securities solely because they are issued or guaranteed by IFC or (b) if the sole jurisdictional basis for the tax is the place or currency in which such securities are issued, made payable or paid, or the location of any office or place of business maintained by IFC. IFC in its discretion may waive any of the privileges and immunities conferred under the Articles of Agreement upon such conditions as it may determine. MANAGEMENT S DISCUSSION AND ANALYSIS AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2013 INTRODUCTION This Management s Discussion and Analysis should be read in conjunction with IFC s consolidated financial statements and management s discussion and analysis issued for FY13. IFC undertakes no obligation to update any forward-looking statements. 49

117 BASIS OF PREPARATION OF IFC S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accounting and reporting policies of IFC conform to US GAAP. IFC s accounting policies are discussed in more detail in Note A to IFC s Condensed Consolidated Financial Statements as of and for the three months ended September 30, 2013 (FY14 Q1 Financial Statements). SELECTED FINANCIALDATA AND RATIOS As of and for the three months ended September 30, 2013 September 30, 2012 As of and for the year ended June 30, 2013 Investment Program (US$ millions) IFC commitments... $3,659 $3,307 $18,349 Core Mobilization ,504 Total commitments... $4,102 $4,042 $24,853 Income Statement (US$ millions) Income before grants to IDA... $ 247 $ 465 $ 1,350 Grants to IDA... (340) Net income... $ 247 $ 465 $ 1,010 Less: Net (gains) losses attributable to noncontrolling interests... (3) 8 Net income attributable to IFC... $ 244 $ 465 $ 1,018 Financial Ratios 6 Return on average assets (US GAAP-basis) % 2.4% 1.3% Return on average capital (US GAAP-basis) % 8.9% 4.8% Deployable strategic capital as a percentage of Total Resources Available... 7% 10% 8% External funding liquidity level % 342% 309% Debt to equity ratio :1 2.7:1 2.6:1 Cash and liquid investments as a percentage of next three years estimated net cash requirements... 83% 83% 77% IFC s debt-to-equity ratio was 2.8:1, well within the maximum of 4:1 required by policy approved by IFC s Board of Directors. The externally funded liquidity ratio was 363%, above the Board required minimum of 65% and IFC s overall liquidity as a percentage of the next three years estimated net cash needs stood at 83%, above the minimum requirement of the Board of 45%. OVERVIEW OF FINANCIALRESULTS IFC is an international organization, established in 1956, to further economic growth in its developing member countries by promoting private sector development. IFC is a member of the World Bank Group, which also comprises IBRD, IDA, MIGA, and ICSID. It is a legal entity separate and distinct from IBRD, IDA, MIGA, and ICSID, with its own Articles of Agreement, share capital, financial structure, management, and staff. Membership in IFC is open only to member countries of IBRD. As of September 30, 2013, IFC s entire share capital was held by 184 member countries. IFC helps developing countries achieve sustainable growth by financing private sector investment, mobilizing capital in international financial markets, and providing advisory services to businesses and governments. IFC s principal investment products are loans and equity investments, with smaller debt securities and guarantee portfolios. IFC also plays an active and direct role in mobilizing additional funding from other 6 Returns are annualized 50

118 investors and lenders through a variety of means. Such means principally comprise Core Mobilization. Unlike most other development institutions, IFC does not accept host government guarantees of its exposures. IFC raises virtually all of the funds for its lending activities through the issuance of debt obligations in the international capital markets, while maintaining a small borrowing window with IBRD. Equity investments are funded from net worth. For FY13, IFC had an authorized borrowing program of up to $10 billion, and up to $2 billion to allow for possible prefunding during FY13 of the borrowing program for FY14. For FY14, IFC has an authorized borrowing program of up to $13.5 billion, and, subject to completion of its FY14 program, up to $2.0 billion to allow for possible prefunding during FY14 of the borrowing program for FY15. IFC s capital base and its assets and liabilities, other than its equity investments, are primarily denominated in US dollars. IFC seeks to minimize foreign exchange and interest rate risks by closely matching the currency and rate bases of its assets in various currencies with liabilities having the same characteristics. IFC generally manages non-equity investment related and certain lending related residual currency and interest rate risks by utilizing currency and interest rate swaps and other derivative instruments. This Management s Discussion and Analysis contains forward looking statements which may be identified by such terms as anticipates, believes, expects, intends, plans or words of similar meaning. Such statements involve a number of assumptions and estimates that are based on current expectations, which are subject to risks and uncertainties beyond IFC s control. Consequently, actual future results could differ materially from those currently anticipated. FINANCIAL PERFORMANCE SUMMARY IFC s net income is affected by a number of factors that can result in volatile financial performance. IFC s financial performance is detailed more fully in Results of Operations. Three months ended September 30, 2013 IFC has reported income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA of $325 million in the three months ended September 30, 2013 ( FY14 Q1 ), as compared to $296 million in the three months ended September 30, 2012 ( FY13 Q1 ). The increase in income before net unrealized gains and losses on non-trading financial instruments and grants to IDA in FY14 Q1 when compared to FY13 Q1 of $29 million was principally as a result of (US$ millions): Increase (decrease) FY14 Q1 vs FY13 Q1 Gains on equity investments and associated derivatives, net... $135 Other-than-temporary impairments on equity investments Foreign currency transaction gains and losses on non-trading activities Provision for losses on loans, guarantees and other receivables... (42) Income from liquid asset trading activities... (143) Other, net Overall change... $ 29 Net unrealized losses on non-trading financial instruments accounted for at fair value totaled $78 million in FY14 Q1 ($169 million net unrealized gains in FY13 Q1) and there were no grants to IDA in FY14 Q1 and FY13 Q1, resulting in net income of $247 million in FY14 Q1, as compared to $465 million in FY13 Q1. After net gains attributable to noncontrolling interests of $3 million in FY14 Q1 ($0 in FY13 Q1), net income attributable to IFC totaled $244 million in FY14 Q1 ($465 million in FY13 Q1). 51

119 CLIENT SERVICES BUSINESS OVERVIEW IFC fosters sustainable economic growth in developing countries by financing private sector investment, mobilizing capital in the international financial markets, and providing advisory services to businesses and governments. IFC has five strategic focus areas: strengthening the focus on frontier markets addressing climate change and ensuring environmental and social sustainability addressing constraints to private sector growth in infrastructure, health, education, and the food-supply chain developing local financial markets building long-term client relationships in emerging markets For all new investments, IFC articulates the expected impact on sustainable development, and, as the projects mature, IFC assesses the quality of the development benefits realized. IFC s strategic focus areas are aligned to advance the World Bank Group s global priorities. IFC has three businesses: Investment Services, Advisory Services, and Asset Management. INVESTMENT SERVICES IFC s investments are normally made in its developing member countries. The Articles of Agreement mandate that IFC shall invest in productive private enterprise. The requirement for private ownership does not disqualify enterprises that are partly owned by the public sector if such enterprises are organized under local commercial and corporate law, operate free of host government control in a market context and according to profitability criteria, and/or are in the process of being totally or partially privatized. IFC provides a range of financial products and services to its clients to promote sustainable enterprises, encourage entrepreneurship, and mobilize resources that wouldn t otherwise be available. IFC s financing products are tailored to meet the needs of each project. Investment services product lines include: loans, equity investments, trade finance, loan participations, structured finance, client risk management services, and blended finance. IFC carefully supervises its projects to monitor project performance and compliance with contractual obligations and with IFC s internal policies and procedures. ADVISORY SERVICES Advisory services recognized as a key part of the Corporation s mandate, have grown to become an increasingly important tool for delivering on IFC s mission. Advisory Services play a crucial role in helping government clients create an effective enabling environment for private investment, while strengthening the capacity and know-how of private sector clients thereby extending IFC s reach into challenging markets. IFC s Advisory Services are organized into four business lines: Access to finance Works with financial intermediaries to expand access to financial services. Provides advice on SMEs and micro/retail finance solutions, as well as enabling financial infrastructure. Investment climate Works with governments to create an enabling environment to increase the role of private sector growth and development. Provides advice on business regulation and taxation, investment policies, as well as industry-specific investment climate reform. 52

120 Public-private partnerships to help governments design and implement PPPs in infrastructure and other basic public services. Provides advice on preparing and structuring of PPP mandates. Sustainable business Works with companies and their supply chains to promote adoption of, and catalyze investment in, sound environmental, social and governance practices and technologies that create a competitive edge. Around half of IFC s advisory projects work with government clients to help unlock investment opportunities for IFC and others as is the case when IFC assists governments to improve the investment climate or to design and implement PPPs, complementing the work of IBRD and the International Monetary Fund. The other half of advisory projects involves work with private sector clients to build capacity or demonstrate the business case for desirable business practices. Investment Services and Advisory Services may be offered either in tandem or sequentially. Examples include microfinance, SME banking, energy efficiency financing, corporate governance, or supply chain development in the agricultural sector. Advisory Services make a substantial contribution to IFC s shared corporate priorities. Advisory Services are often IFC s first offering in new or challenging markets. Advisory Services have continuously strengthened their alignment and deepened their synergies with investment operations, particularly with regards to Fragile & Conflict Situations, Climate Change, SMEs, Agribusiness and Infrastructure, with gender as a cross-cutting priority. AMC AMC, a wholly-owned subsidiary of IFC, invests third-party capital and IFC capital, enabling outside investors to benefit from IFC s expertise in achieving strong equity returns, as well as positive development impact in the countries in which it invests in developing and frontier markets. Investors in funds managed by AMC include sovereign wealth funds, national pension funds, multilateral and bilateral development institutions, national development agencies and international financial institutions. AMC helps IFC mobilize additional capital resources for investment in productive private enterprise in developing countries. At September 30, 2013, AMC managed seven funds, with $6.1 billion under management: Equity Capitalization Fund; Sub-Debt Capitalization Fund; ALAC Fund; Africa Capitalization Fund; Russian Bank Cap Fund; Catalyst funds; and Global Infrastructure Fund. The Equity Capitalization Fund and Sub-Debt Capitalization Fund are collectively referred to as the Global Capitalization Fund. The Global Capitalization Fund, established in FY09, helps strengthen systemically important banks in emerging markets. The ALAC Fund was established in FY10. The ALAC Fund invests in equity investments across a range of sectors in Sub-Saharan Africa, Latin America, and the Caribbean. The Africa Capitalization Fund was established in FY10 to capitalize systemically important commercial banking institutions in northern and Sub-Saharan Africa. The Russian Bank Cap Fund was established in FY12 to invest in mid-sized, commercial banks in Russia that are either: (i) privately owned and controlled; or (ii) state-owned; or (iii) controlled and on a clear path to privatization. 53

121 The Catalyst Funds were established in FY13 to make investments in selected climate- and resource efficiency-focused private equity funds in emerging markets. The Global Infrastructure Fund was established in FY13 to focus on making equity and equity-related investments in the infrastructure sector in global emerging markets. The activities of the funds managed by AMC as of and for the three months ended September 30, 2013 and 2012 can be summarized as follows (US$ millions unless otherwise indicated): Equity Sub-Debt Capitalization Capitalization Fund Fund ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund Catalyst Funds Global Infrastructure Fund Assets under management as of September 30, $1,275 $1,725 $1,000 $182 $550 $347 $1,050 $6,129 From IFC ,725 From other investors , ,404 For the three months ended September 30, 2013 Fund Commitments to Investees: From IFC From other investors Disbursements from investors to Fund: From IFC From other investors Disbursements made by Fund Disbursements made by Fund (number) Equity Sub-Debt Capitalization Capitalization Fund Fund ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund Catalyst Funds Global Infrastructure Fund Assets under management as of September 30, $1,275 $1,725 $1,000 $182 $275 $ $ $4,457 From IFC ,325 From other investors , ,132 For the three months ended September 30, 2012 Fund Commitments to Investees: From IFC From other investors Disbursements from investors to Fund: From IFC From other investors Disbursements made by Fund Disbursements made by Fund (number) Total Total

122 INVESTMENT PROGRAM Commitments In FY14 Q1, total commitments were $4,102 million, compared with $4,042 million in FY13 Q1, an increase of 1.5%, of which IFC commitments totaled $3,659 million ($3,307 million FY13 Q1) and Core Mobilization totaled $443 million ($735 million FY13 Q1). FY14 Q1 and FY13 Q1 commitments and Core Mobilization comprised the following (US$ millions): FY 14 Q1 FY 13 Q1 Total commitments 7... $ 4,102 $ 4,042 IFC commitments... Loans... $ 1,608 $ 1,449 Equity investments Guarantees: Global Trade Finance Program... 1,575 1,267 Other Client risk management Total IFC commitments... $ 3,659 $ 3,307 Core Mobilization Loan participations, parallel loans, and other mobilization Loan participations... $ 230 $ 120 Parallel loans Other mobilization Total loan participations, parallel loans and other mobilization... $ 248 $ 153 AMC Equity Capitalization Fund... $ $ 68 ALAC Fund Africa Capitalization Fund Russian Bank Cap Fund... 2 Global Infrastructure Fund Total AMC... $ 85 $ 202 Other initiatives PPP... $ 110 $ 300 Infrastructure Crisis Facility Total other initiatives... $ 110 $ 380 Total Core Mobilization... $ 443 $ 735 Core Mobilization Ratio Core mobilization Core Mobilization is financing from entities other than IFC that becomes available to clients due to IFC s direct involvement in raising resources. lfc finances only a portion, usually not more than 25%, of the cost of any project. All IFC-financed projects, therefore, require other financial partners. IFC mobilizes such private 7 Debt security commitments are included in loans and equity investments based on their predominant characteristics. 55

123 sector finance from other entities through loan participations, parallel loans, partial credit guarantees, securitizations, loan sales, and risk sharing facilities. In FY09, IFC launched AMC and a number of other initiatives, each with a formally approved Core Mobilization component, and revised its mobilization resources definition accordingly to include these in the measure. In FY12, IFC expanded the Core Mobilization definition to account for third party financing made available for PPP projects due to IFC s mandated lead advisor role to national, local government or other government entity. Core mobilization ratio The Core Mobilization ratio is defined as: Loan participations + parallel loans + sales of loans and other mobilization + non-ifc investment part of structured finance which meets core mobilization criteria + non-ifc commitments in Initiatives + non-ifc investments committed in funds managed by AMC + PPP Mobilization Commitments (IFC investments + IFC portion of structured finance + IFC commitments in new Initiatives + IFC investments committed in funds managed by AMC) For each dollar that IFC committed, IFC mobilized (in the form of loan participations, parallel loans, other mobilization, the non-ifc portion of structured finance and the non-ifc commitments in Initiatives, and the non- IFC investments committed in funds managed by AMC) $0.12 in FY14 Q1 ($0.22 in FY13 Q1). Disbursements IFC disbursed $2,346 million for its own account in FY14 Q1 ($2,235 million in FY13 Q1): $1,858 million of loans ($1,757 million in FY13 Q1), $340 million of equity investments ($417 million in FY13 Q1), including $1 million attributable to noncontrolling interest ($0 in FY13 Q1), and $148 million of debt securities ($61 million in FY13 Q1). Investment portfolio The carrying value of IFC s investment portfolio was $35,928 million at September 30, 2013 ($34,677 million at June 30, 2013), comprising the loan portfolio of $21,775 million ($20,831 million at June 30, 2013), the equity portfolio of $11,952 million ($11,695 million at June 30, 2013), and the debt security portfolio of $2,201 million ($2,151 million at June 30, 2013). The carrying value of IFC s investment portfolio comprises: (i) the disbursed investment portfolio; (ii) reserves against losses on loans; (iii) unamortized deferred loan origination fees, net and other; (iv) disbursed amount allocated to a related financial instrument reported separately in other assets or derivative assets; (v) unrealized gains and losses on equity investments held by consolidated variable interest entities; (vi) unrealized gains and losses on investments accounted for at fair value as available-for-sale; and (vii) unrealized gains and losses on investments. Guarantees and partial credit guarantees IFC offers partial credit guarantees to clients covering, on a risk-sharing basis, client obligations on bonds and/or loans. IFC s guarantee is available for debt instruments and trade obligations of clients and covers commercial as well as noncommercial risks. IFC will provide local currency guarantees, but when a guarantee is called, the client will generally be obligated to reimburse IFC in US dollar terms. Guarantee fees are consistent with IFC s loan pricing policies. Guarantees of $3,280 million were outstanding (i.e., not called) at September 30, 2013 ($3,565 million at June 30, 2013). LIQUID ASSETS IFC invests its liquid assets portfolio generally in highly rated fixed and floating rate instruments issued by, or unconditionally guaranteed by, governments, government agencies and instrumentalities, multilateral organizations, and high quality corporate issuers; these include asset-backed securities ( ABS ) and mortgage- 56

124 backed securities ( MBS ), time deposits, and other unconditional obligations of banks and financial institutions. Diversification in multiple dimensions ensures a favorable risk return profile. IFC manages the market risk associated with these investments through a variety of hedging techniques including derivatives, principally currency and interest rate swaps and financial futures. IFC s liquid assets are invested in eight separate portfolios, which are accounted for as trading portfolios. The net asset value of the Liquid Assets Portfolio was at $34.8 billion at September 30, 2013 ($31.2 billion at June 30, 2013). Sizeable additions to the portfolio from the investment of the net proceeds of market borrowings plus returns made on the investment portfolio were partially offset by reduction due to investment disbursements. IFC has a flexible approach to managing the liquid assets portfolios by making investments on an aggregate portfolio basis against its benchmark within specified risk parameters. In implementing these portfolio management strategies, IFC utilizes derivative instruments, including futures and options, and takes positions in various industry sectors and countries. All liquid assets are managed according to an investment authority approved by the Board of Directors and liquid asset investment guidelines approved by IFC s Corporate Risk Committee, a subcommittee of IFC s Management Team. BORROWINGS FUNDING RESOURCES The major source of IFC s borrowings is the international capital markets. Under the Articles of Agreement, IFC may borrow in the public markets of a member country only with approvals from that member, together with the member in whose currency the borrowing is denominated. IFC s medium and long-term borrowings (after the effect of borrowing-related derivatives) totaled $5.9 billion during FY14 Q1 ($2.8 billion in FY13 Q1). Market borrowings are generally swapped into floating-rate obligations denominated in US dollars. IFC s mandate to help develop domestic capital markets can result in raising local currency funds. Proceeds of such borrowings were invested in such local currencies, on-lent to clients, and/or partially swapped into US dollars. At September 30, 2013, $0.6 billion of non-us dollar-denominated market borrowings in Chinese renminbi, C.F.A. francs, Dominican pesos, Nigerian naira, New Zambian kwacha and Russian rubles were used for such purposes ($0.5 billion at June 30, 2013). CAPITAL AND RETAINED EARNINGS As of September 30, 2013, total capital as reported in IFC s condensed consolidated balance sheet amounted to $22.52 billion, up from the June 30, 2013 level of $22.28 billion. At September 30, 2013, total IFC capital comprised $2.40 billion of paid-in capital, substantially unchanged from June 30, 2013, $18.96 billion of retained earnings ($18.72 billion at June 30, 2013), and $1.11 billion of accumulated other comprehensive income ($1.12 billion at June 30, 2013). Noncontrolling interests totaled $0.05 billion at September 30, 2013 ($0.04 billion June 30, 2013). As of September 30, 2013, IFC s authorized capital was $2.58 billion, of which $2.40 billion was subscribed and paid-in at September 30, 2013, substantially unchanged from June 30, Selective Capital Increase On July 20, 2010, the Board of Directors recommended that the Board of Governors approve an increase in the authorized share capital of IFC of $130 million, to $2,580 million, and through the issuance of $200 million of shares (including $70 million of unallocated shares). The Board of Directors also recommended that the Board of Governors approve an increase in Basic Votes aimed at enhancing the voice and participation of developing and transition countries and requiring an amendment to IFC s Articles of Agreement. 57

125 The resolution recommended by the Board of Directors was adopted by the Board of Governors on March 9, The amendment to the Articles of Agreement and the increase in the authorized share capital have become effective on June 27, As of the same date, eligible members have been authorized to subscribe to their allocated IFC shares. The subscription period will end on June 27, 2014 and payment of subscribed shares must occur no later than June 27, During the three months ended September 30, 2013, IFC received less than $0.5 million related to selective capital increase ($0 for the three months ended September 30, 2012). Designations of Retained Earnings Beginning in FY04, IFC began a process of designating retained earnings to increase its support of advisory services and, subsequently, for PBGs (FY05), grants to IDA (FY06), the Global Infrastructure Project Development Fund (FY08), and IFC SME Ventures for IDA Countries (FY08). The levels and purposes of retained earnings designations are set based on the Board of Directors-approved principles, which are applied each year to assess IFC s financial capacity and to determine the maximum levels of retained earnings designations. Amounts available to be designated are determined based on a Board of Directors-approved income-based formula and, beginning in FY08, on a principles-based Board of Directors-approved financial distribution policy, and are approved by the Board of Directors. IFC recognizes designations of retained earnings for advisory services when the Board of Directors approves it and recognizes designation of retained earnings for grants to IDA when it is noted with approval by the Board of Governors. Expenditures for the various approved designations are recorded as expenses in IFC s condensed consolidated income statement in the year in which they occur, and have the effect of reducing retained earnings designated for this specific purpose. Income available for designations in FY13 (a non-gaap measure) 8 totaled $1,060 million. Based on the Board-approved distribution policy, the maximum amount available for designation was $251 million. On August 7, 2013, the Board of Directors approved a designation of $251 million of IFC s retained earnings for grants to IDA. On October 11, 2013, the Board of Governors noted with approval the designation approved by the Board of Directors. At September 30, 2013 and June 30, 2013, retained earnings comprised the following (US$ millions): September 30, 2013 June 30, 2013 Undesignated retained earnings... $ 18,695 $ 18,435 Designated retained earnings Advisory services PBG IFC SME Ventures for IDA countries and Global Infrastructure Project Development Fund Total designated retained earnings... $ 262 $ 278 Total retained earnings... $ 18,957 $ 18,713 8 Income available for designations generally comprises net income excluding unrealized gains and losses on investments and unrealized gains and losses on non-trading financial instruments, income from consolidated VIEs, and expenses reported in net income related to prior year designations. 58

126 OVERVIEW RESULTS OF OPERATIONS The overall market environment has a significant influence on IFC s financial performance. The main elements of IFC s net income and comprehensive income and influences on the level and variability of net income and comprehensive income are: Elements Net income: Yield on interest earning assets Liquid asset income Income from equity investments and associated derivatives Provisions for losses on loans and guarantees Other income and expenses Unrealized gains and losses on non-trading financial instruments accounted for at fair value Grants to IDA Other comprehensive income: Unrealized gains and losses on listed equity investments and debt securities accounted for as available-for-sale Unrecognized net actuarial gains and losses and unrecognized prior service costs on benefit plans Significant Influences Market conditions including spread levels and degree of competition. Nonaccruals and recoveries of interest on loans formerly in nonaccrual status and income from participation notes on individual loans are also included in income from loans, realized gains and losses on associated derivatives and guarantees. Realized and unrealized gains and losses on the liquid asset portfolios, which are driven by external factors such as: the interest rate environment; and liquidity of certain asset classes within the liquid asset portfolio. Global climate for emerging markets equities, fluctuations in currency and commodity markets and company-specific performance for equity investments and associated derivatives. Performance of equity investments (principally realized gains and losses, dividends, equity impairments and unrealized gains and losses on equity investments) are in part dependent on the global climate for emerging markets, as are gains and loss on associated derivatives (including puts, warrants and stock options). Risk assessment of borrowers and probability of default and loss given default. Level of advisory services provided by IFC to its clients, the level of expense from the staff retirement and other benefits plans, and the approved administrative and other budgets. Principally, differences between changes in fair values of borrowings, including IFC s credit spread, and associated derivative instruments and unrealized gains associated with the loan and debt securities portfolio, including interest rate and currency swaps that hedge investment loans and debt securities, and loan conversion options which in part are dependent on the global climate for emerging markets. These securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-observable. Level of the Board of Governors-approved grants to IDA. Global climate for emerging markets equities, fluctuations in currency and commodity markets and company-specific performance. Such equity investments are valued using unadjusted quoted market prices and debt securities are valued using internally developed models or methodologies utilizing inputs that may be observable or non-observable. Returns on pension plan assets and the key assumptions that underlay projected benefit obligations, including financial market interest rates, staff expenses, past experience, and management s best estimate of future benefit cost changes and economic conditions. 59

127 The following paragraphs detail significant variances between FY14 Q1 and FY13 Q1, covering the periods included in IFC s FY14 Q1 Condensed Consolidated Financial Statements. Certain amounts in FY13 Q1 have been changed to conform to the current year s presentation. Such changes had no effect on net income or total assets. FY14 Q1 VERSUS FY13 Q1 Net Income IFC has reported income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA of $325 million in FY14 Q1, as compared to $296 million in FY13 Q1. The increase in income before net unrealized gains and losses on non-trading financial instruments accounted for at fair value and grants to IDA in FY14 Q1 when compared to FY13 Q1 was principally as a result of (US$ millions): Increase (decrease) FY14 Q1 vs FY13 Q1 Gains on equity investments and associated derivatives, net... $135 Other-than-temporary impairments on equity investments Foreign currency transaction gains and losses on non-trading activities Provisions for losses on loans, guarantees and other receivables... (42) Income from liquid asset trading activities... (143) Other, net Overall change... $ 29 Net unrealized losses on non-trading financial instruments accounted for at fair value totaled $78 million in FY14 Q1 ($169 million net unrealized gains in FY13 Q1) and there were no grants to IDA in FY14 Q1 and FY13 Q1, resulting in net income of $247 million in FY14 Q1, as compared to $465 million in FY13 Q1. After the net gains attributable to noncontrolling interests of $3 million in FY14 Q1 ($0 in FY13 Q1), net income attributable to IFC totaled $244 million in FY14 Q1 ($465 million in FY13 Q1). Income from loans, realized gains and losses on associated derivatives and guarantees IFC s primary interest earning asset is its loan portfolio. Income from loans and guarantees for FY14 Q1 totaled $267 million, compared with $246 million in FY13 Q1, an increase of $21 million. There were no realized gains on loans and associated derivative in FY14 Q1 ($1 million in FY13 Q1). The disbursed loan portfolio grew by $1,679 million, from $21,919 million at September 30, 2012 to $23,598 million at September 30, 2013 ($22,606 million at June 30, 2013). The weighted average contractual interest rate on loans at September 30, 2013 remained unchanged at 4.5% (4.5% at June 30, These factors resulted in $18 million higher interest income in FY14 Q1 than in FY13 Q1. Recoveries of interest on loans removed from non-accrual status, net of reversals of income on loans placed in nonaccrual status were $4 million lower than in FY13 Q1. Income from IFC s participation notes over and above minimum contractual interest and other income was $2 million lower than in FY13 Q1. Commitment fees and financial fees were $10 million higher than in FY13 Q1. Realized gains on loans and associated derivatives were $1 million lower in FY14 Q1 than in FY13 Q1. Income from equity investments and associated derivatives Income from the equity investment portfolio, including associated derivatives, increased by $148 million from $92 million in FY13 Q1 to $240 million in FY14 Q1. IFC sells equity investments where IFC s developmental role was complete, and where pre-determined sales trigger levels had been met and, where applicable, lock ups have expired. Gains on equity investments and associated derivatives comprise realized and unrealized gains on equity investments and associated derivatives. 60

128 IFC generated realized gains on equity investments and associated derivatives for FY14 Q1 of $176 million, as compared with $115 million for FY13 Q1, an increase of $61 million. Total realized gains on equity investments and associated derivatives are concentrated in FY14 Q1, three investments generated individual capital gains in excess of $20 million for a total of $137 million, or 78%, of the FY14 Q1 realized gains, compared to two investments generating individual capital gains in excess of $20 million for a total of $48 million, or 42%, of the FY13 Q1 realized gains. Net changes in unrealized gains on equity investments and associated derivatives in FY14 Q1 totaled $48 million, as compared with net changes of $(26) million in FY13 Q1. Dividend income in FY14 Q1 totaled $74 million, as compared with $89 million in FY13 Q1, a decrease of $15 million. Dividend income in FY14 Q1 included returns from three unincorporated joint ventures (UJVs) in the oil, gas and mining sectors accounted for under the cost recovery method, which totaled $6 million, as compared with $13 million from three such UJVs in FY13 Q1. One investee company paid a dividend of $19 million in FY13 Q1. Other-than-temporary impairments on equity investments totaled $50 million in FY14 Q1, as compared with $83 million in FY13 Q1, a decrease of $33 million. Income from debt securities and realized gains and losses on associated derivatives Income from debt securities and realized gains and losses on associated derivatives increased to $9 million in FY14 Q1 from a loss of $3 million in FY13 Q1, an increase of $12 million. The largest components of the increase were lower other-than-temporary impairments ($22 million) offset by lower realized gains ($7 million) in FY14 Q1 when compared with FY13 Q1. Provision for losses on loans, guarantees and other receivables The quality of loan portfolio as measured by credit risk ratings, deteriorated marginally at FY14 Q1-end compared to FY13-end but has been broadly stable for the past eight quarters, The average weighted country risk rating improved marginally at FY14 Q1-end relative to FY13-end. Non-performing loans increased from $1,272 million at June 30, 2013 to $1,318 million at September 30, 2013, an increase of $46 million. IFC has recorded a provision for losses on loans, guarantees and other receivables of $29 million in FY14 Q1 (comprising: $49 million of specific provisions on loans; $19 million release of portfolio provisions on loans; and $1 million release of provision on guarantees;) as compared to a release of provision of $13 million in FY13 Q1 (comprising: $43 million specific provisions on loans; $53 million release of portfolio provisions on loans; and $3 million release of provision on guarantees). On September 30, 2013, IFC s total reserves against losses on loans were $1,668 million ($1,628 million at June 30, 2013), an increase of $40 million. Specific reserves against losses on loans at September 30, 2013 of $796 million ($741 million at June 30, 2013) are held against impaired loans of $1,418 million ($1,403 million at June 30, 2013), a coverage ratio of 56% (53% at June 30, 2013). There were no significant loan modifications during the three months ended September 30, 2013 that are considered troubled debt restructurings. Income from liquid asset trading activities Income from liquid asset trading activities comprises interest from time deposits and securities, net gains and losses on trading activities, and a small currency translation effect. The liquid assets portfolio, net of derivatives and securities lending activities, stood at $31.2 billion at June 30, 2013 and $34.8 billion at September 30, The increase in the liquid assets portfolio, net of derivatives and securities lending activities was largely attributable to the investment of the net proceeds of FY14 Q1 market borrowings plus returns made 61

129 on the investment portfolio partially offset by investment disbursements. During FY14 Q1, IFC s financing activities, net totaled $4.6 billion and IFC invested, net of repayments and proceeds from sales, $1.1 billion. At September 30, 2013, the liquid asset portfolio is more heavily invested in short term cash or near cash investments than at June 30, Net income from liquid asset trading activities totaled $106 million in FY14 Q1 ($249 million income in FY13 Q1). Interest income totaled $105 million in FY14 Q1. In addition, the portfolio of ABS and MBS showed fair value gains totaling $9 million in FY14 Q1 while holdings in other products, including US Treasuries, global government bonds, high quality corporate bonds and derivatives generated a loss of $8 million in FY14 Q1. At September 30, 2013, trading securities with a fair value of $43 million are classified as Level 3 securities ($85 million on June 30, 2013). The principal liquid asset portfolio returns are as follows: The P1 portfolio generated income of $66 million in FY14 Q1, or 0.3%. In FY13 Q1, the P1 portfolio generated income of $174 million, or 0.8%. The externally managed P3 portfolio, managed against the same variable rate benchmark as the P1 portfolio, returned $1 million in FY14 Q1, or 0.1%, $10 million lower than the $11 million, or 1.3% in FY13 Q1. The P2 and externally managed P4 portfolios returned $23 million, or 0.5%, and $1 million, or 0.2% in FY14 Q1, respectively, as compared to $59 million, or 1.2% and $3 million, or 0.4% in FY13 Q1. IFC s P0 portfolio recorded an income of $3 million or 0.2% in FY14 Q1, compared to $1 million, or 0.1% in FY13 Q1. The P7 portfolio generated a return of $2 million in FY14 Q1 as compared to a negligible return in FY13 Q1. The P6 local currency liquidity portfolio generated income of $10 million in FY14 Q1, $1 million lower than the $11 million in FY13 Q1. Charges on borrowings IFC s charges on borrowings decreased by $21 million, from $64 million in FY13 Q1 (net of $3 million gains on extinguishment of borrowings) to $43 million in FY14 Q1 (net of $1 million gains on extinguishment of borrowings), reflecting the decrease in average LIBOR rates offset by the increase in borrowings outstanding between FY13 Q1 and FY14 Q1 as mentioned above. Other income Other income of $87 million for FY14 Q1 was $3 million higher than in FY13 Q1 ($84 million). Advisory services income totaled $41 million in FY14 Q1 ($40 million in FY13 Q1) and management fees and service fee reimbursements from AMC totaled $14 million in FY14 Q1 ($6 million in FY13 Q1). Other expenses Administrative expenses (the principal component of other expenses) increased by $11 million from $209 million in FY13 Q1 to $220 million in FY14 Q1. Administrative expenses include the grossing-up effect of certain revenues and expenses attributable to IFC s reimbursable program and expenses incurred in relation to workout situations (Jeopardy Projects) ($5 million in FY14 Q1, as compared with $4 million in FY13 Q1). IFC recorded expenses from pension and other postretirement benefit plans in FY14 Q1 of $43 million, unchanged from FY13 Q1. Advisory services expenses, excluding those included in Administrative expenses totaled $55 million in FY14 Q1 ($57 million in FY13 Q1). 62

130 Net unrealized gains and losses on non-trading financial instruments IFC accounts for certain financial instruments at fair value with unrealized gains and losses on such financial instruments being reported in net income, namely: (i) all swapped market borrowings; and (ii) unrealized gains and losses on certain loans, debt securities and associated derivatives and (iii) substantially all market borrowings. The resulting effects of fair value accounting for these non-trading financial instruments on net income in FY14 Q1 and FY13 Q1 are summarized as follows (US$ millions): Unrealized gains and losses on loans, debt securities and associated derivatives... $ (52) $ 109 Unrealized gains and losses on market borrowings and associated derivatives, net... (26) 60 Net unrealized gains and losses on non-trading financial instruments accounted for at fair value... $ (78) $ 169 Changes in the fair value of IFC s market borrowings and associated derivatives, net, includes the impact of changes in IFC s own credit spread when measured against US$ LIBOR swaps. As credit spreads widen, unrealized gains are recorded and when credit spreads narrow, unrealized losses are recorded (notwithstanding the impact of other factors, such as changes in risk-free interest and foreign currency exchange rates). The magnitude and direction (gain or loss) can be volatile from period to period but do not alter cash flow. IFC s policy is to generally match currency, amount and timing of cash flows on market borrowings with cash flows on associated derivatives entered into contemporaneously. In FY14 Q1 revaluation losses were incurred on market borrowings, on balance, across funding currency portfolios that were not fully offset by gains on related hedges. The after swap cost of borrowing in US dollars became slightly more expensive in the short to medium term maturities and cheaper at longer maturities, with respect to the US dollar benchmark. The cost of borrowing in Japanese yen was little changed since the previous quarter end, while in Australian dollars, it became slightly cheaper to borrow with respect to the Australian Dollar benchmark. As a result, IFC has reported $26 million of unrealized losses on market borrowings and associated derivatives in FY14 Q1 ($60 million of unrealized gains in FY13 Q1). IFC reported net unrealized losses on loans, debt securities and associated derivatives (principally conversion features, warrants and interest rate and currency swaps economically hedging the fixed rate and/or non-us$ loan portfolio) of $52 million in FY14 Q1 ($109 million net gains in FY13 Q1). Grants to IDA There were no grants to IDA during FY14 Q1 and FY13 Q1. Other comprehensive income Unrealized gains and losses on equity investments and debt securities IFC s investments in debt securities and equity investments that are listed in markets that provide readily determinable fair values are classified as available-for-sale, with unrealized gains and losses on such investments being reported in OCI until realized. When realized, the gain or loss is transferred to net income. Changes in unrealized gains and losses on equity investments and debt securities reported in OCI are significantly impacted by (i) the global environment for emerging markets; and (ii) the realization of gains on sales of such equity investments and debt securities. FY14 Q1 FY13 Q1 63

131 The net change in unrealized gains and losses on equity investments and debt securities in OCI can be summarized as follows: Net unrealized gains and losses on equity investments arising during the period: Unrealized gains... $294 $265 Unrealized losses... (212) (140) Reclassification adjustment for realized gains and other-than-temporary impairments included in net income... (80) (9) Net unrealized gains and losses on equity investments... $ 2 $116 Net unrealized gains and losses on debt securities arising during the period Unrealized gains... $ 23 $105 Unrealized losses... (50) (81) Reclassification adjustment for realized gains, non-credit related portion of impairments which were recognized in net income and other-than-temporary included in net income Net unrealized gains and losses on debt securities... $ (24) $ 42 Total unrealized gains and losses on equity investments and debt securities... $ (22) $ 158 FY14 Q1 FY13 Q1 SENIOR MANAGEMENT CHANGES SINCE JUNE 30, 2013 The following changes occurred in the Senior Management of IFC since June 30, 2013: Mr. Rashad Kaldany, Vice President and Chief Operating Officer retired from IFC on September 6, 2013 whereupon the position was not filled. 64

132 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND INTERNAL CONTROL REPORTS June 30, 2013 Management s financial reporting assurance Management s report regarding effectiveness of internal control over external financial reporting Independent auditors report on management s assertion regarding effectiveness of internal control over financial reporting Consolidated balance sheets as of June 30, 2013 and June 30, Consolidated statements of income for each of the three years ended June 30, Consolidated statements of comprehensive income for each of the three years ended June 30, Consolidated statements of changes in capital for each of the three years ended June 30, Consolidated statements of cash flows for each of the three years ended June 30, Consolidated statement of capital stock and voting power as of June 30, Notes to consolidated financial statements Independent Auditors Report Page 65

133 66

134 67

135 68