September 16, 2009 GLOBAL PAYMENTS PRIORITY ASIA Abdul Raof Latiff Managing Director Head of Clearing and Foreign Exchange Asia Pacific JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC. All services are subject to applicable laws and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by J.P. Morgan and or its affiliates/subsidiaries.
This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client s subsidiaries, the Company ) in order to assist the Company in evaluating, on a preliminary basis, certain products or services that may be provided by J.P. Morgan. This presentation contains information which is confidential and proprietary to J.P. Morgan, which may only be used in order to evaluate the products and services described herein and may not be disclosed to any other person. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be used for any other purpose without the prior written consent of J.P. Morgan. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. Notwithstanding anything in this presentation to the contrary, the statements in this presentation are not intended to be legally binding. Any products, services, terms or other matters described in this presentation (other than in respect of confidentiality) are subject to the terms of separate legally binding documentation and/or are subject to change without notice. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability whatsoever to the Company or any other party in respect of the contents of this presentation or any matters referred to in, or discussed as a result of, this document. All services are subject to applicable laws and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by J.P. Morgan and or its affiliates/subsidiaries. J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. J.P. Morgan is licensed under U.S. Pat Nos. 5,910,988 and 6,032,137. JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC. 1
Agenda J.P. Morgan Treasury Services Where We Are Today Emerging Clearing Systems in Asia Growth in Intra-Asia Payment Flows Greater China Market Demands Greater China and Japan J.P. Morgan Innovation U.S. Dollar Clearing - Asia Direct Summary 2
J.P. Morgan Treasury Services Where We Are Today South Korea >40 Japan >240 China >190 # of Accounts in Asia Asia > 1500 (incl. Sri Lanka, Bangladesh, Maldives etc.) India >70 Thailand >50 Singapore >150 Taiwan >110 Hong Kong >210 Vietnam >30 Philippines >70 Malaysia >30 Indonesia >50 Major Banks Countries that we have any of the top 3 banks in the country In-Country USD Clearing Systems Australia >160 Held #1 position in CHIPS and FED for over 10 consecutive years. #1 US dollar clearer with the leading combined CHIPS and FED market share. Average daily volume: 350,000 and Average daily value: $3.7 trillion Peak day volume: 596,000 and Peak day value: 5.05 trillion Closed to 50% Book Transfer Rate One of the highest straight-through processing (STP) rate of 97% New Zealand >30 Extensive global correspondent banking relationships 3 of more than 4,500.
Emerging Clearing Systems in Asia Emerging trend in Asia: Development of in-country or regional USD clearing system in financial hubs: Recognition that payments are faster when settlement occurs locally; To facilitate respective countries commercial flows, thus creating a shift in commercial payments offshore from the US. Driving factors are: Fast growth of Intra-Asia payment flows (i.e. 18%) Market pressure to deliver USD payments to the beneficiary in Asia on same day. Rationale for creating value to expedite payments into Asia: The complexity of payment infrastructures in Asia are hierarchical, thus creating inherent delays in payment delivery. To encourage better account consolidation and cash concentration, thus overcoming the issue of liquidity fragmentation. Creating the optimal funding model for both treasury and commercial payments. 4
Growth in Intra-Asia Payment Flows Greater China #1 US dollar clearer with leading market share; highest book transfer ratio; 4,500+ correspondent banks. Top 10 Countries Making Payments Into 50% 40% 30% 20% 10% 0% Top 10 Countries Receiving Payments From 0% 10% 20% 30% 40% 50% 40.7% 9.1% 8.5% 6.0% 3.0% 1.9% 1.9% 1.5% 1.5% 1.3% USA Japan China Hong Kong Australia Germany France UK Netherlands Spain China China USA Hong Kong Japan Taiwan Korea Singapore UK Germany Australia 9.5% 4.9% 4.6% 4.2% 3.9% 2.8% 1.2% 1.1% 16.4% 40.5% 40% 30% 20% 10% 0% 0% 5% 10% 15% 20% 25% 33.9% USA China 21.6% 14.9% UK USA 12.0% 5.8% Hong Kong UK 11.9% 35% 32.0% 30% 25% 20% 15% 5.5% 4.5% 3.4% 3.2% 2.7% 2.4% 2.1% 10% 5% 8.0% 7.8% 7.0% 6.6% 4.1% 3.6% 2.9% 2.8% 2.2% China Taiwan Japan Singapore Australia Germany France 0% USA Taiwan UK Hong Kong Japan China Korea Singapore Germany Australia Hong Kong Taiwan 5 Hong Kong 11.7% Taiwan 8.8% Singapore 5.5% Korea India Japan Australia 3.4% 2.5% 2.1% 1.8% 0% 5% 10% 15% 20% 25% 30% 35% Taiwan 29.1% USA 16.9% UK 12.3% Hong Kong 9.6% China 7.1% Singapore 4.2% Luxembourg 2.3% Korea 2.3% Japan 2.3% France 1.3%
Market Demands Greater China and Japan Greater China Common challenges - lead time of between 3 to 4 days when making payment to sub-branch level. Geographical barrier to make payment within China on the same day. Japan JPM pioneered Tokyo Dollar Clearing (TDC) in 1986. TDC mitigates FX settlement risk by settling the USD leg of an FX transaction during Tokyo business hours. Difficulty in identifying the growing number of bank branches in provinces, cities and remote areas. Beijing Hong Kong Taipei 6 Growth of commercial payment flows in Asia region resulting in greater demand for same day settlement of commercial payments. Tokyo
Asia Direct Prioritizing Market Demands Market Needs Making US Dollar payments within and into Asia faster than today Opportunity cost due to fragmented liquidity Cost inefficiency related to managing multiple nostro accounts and clearing memberships Creating value-add service for your customers Large investments required to develop state-of-the-art payment technology and lack of scale. 7
J.P. Morgan Innovation U.S. Dollar Clearing - Asia Direct J.P. Morgan Client TRADITIONAL USD CLEARING FLOW Instruction MT103 2 1 J.P. MORGAN NY Time typically taken 3-4 days USD CLEARING - ASIA DIRECT FLOW 3 J.P. Morgan NY Book Transfer BRANCHES 5 2009 4 Book Transfer Book Transfer Same Day Transfers J.P. Morgan JP J.P. Morgan HK TDC 8 FED Regional CHATS & China Cross Border Link Bene Bank Branch at Sub-Level Branch J.P. Morgan NY CHIPS Correspondent Bank CLEARING SYSTEMS Correspondent Bank Bene Bank Branch at Sub-Level Branch
Asia Direct - How It Benefits You Accelerates commercial payments into and within Asia, thus removing time zone barriers Improving liquidity flow by recycling funds for same day use Single account concept creating cost and process efficiency Leveraging your banker s expertise on intelligent routing of payment Enables you to: offer enhanced, value-add service to your customers; generate a new source of fee revenue. Enables your customers to: reduce counterparty risks exposure; negotiate better terms with their suppliers. Leveraging your banker s expertise to determine the quickest way to pay into Asia without the investment in technology. 9
Summary Payment systems have evolved into a borderless payment infrastructure. This creates an interdependence on multiple clearing systems globally. As a result of a borderless community, the need for consistency in timing for settlements of cross-border transactions is a major factor prompting our innovation of US Dollar Clearing Asia Direct. Being a market leader in US Dollar clearing, we consider how the changing payments landscape will impact our client s organization and help our clients to address the change. Provide value-add to our clients organizations by helping them reassess their best practices through continual focus on mitigating payment risks, drive efficiencies through speed of payments and to stay ahead of competition. 10
September 16, 2009 November 21, 2009: Are you COVered? Greg Murray Executive Director Product Executive for US Dollar Clearing JPMorgan Chase & Co. All Rights Reserved. JPMorgan Chase Bank, N.A. Member FDIC. All services are subject to applicable laws and regulations and service terms. Not all products and services are available in all geographic areas. Eligibility for particular products and services is subject to final determination by J.P. Morgan and or its affiliates/subsidiaries.
MT 202 COV Introduction MT202 History Bank to bank transfers used to settle trade, treasury and commercial transactions In case of the latter, sent in cover of a commercial payment (e.g. MT103) These cover payments typically used to bridge time-zone differences and mitigate fees Contain no reference to ordering and/or beneficiary party Implications Lack of transparency to ordering/beneficiary party prevents effective compliance by banks with local regulations related to payment screening In turn, this impacts efforts to control money laundering, terrorist financing and sanctions compliance Industry Response (2007 2009) Private sector recognized need to create workable solution; Wolfsberg Group, Clearing House Association and others take up the initiative. BIS/Basel Committee outlines expectations of banks and their regulators in ensuring cover intermediary banks receive originator and beneficiary information 12
MT 202 COV Introduction Industry Solution New message type MT202COV, to be used in cover of MT102 and MT103 messages To be implemented by SWIFT and major clearing systems in November 2009 13
MT 202 COV Current State Scope of Implementation Specific to MT202COV, but also includes new MT205COV (domestic customer credit transfer) To be used in cover of MT102, 102+, 103, 103+ messages Standard MT202 s remain in effect and are legitimate for treasury and trade settlements. SWIFT requires members be able to receive and process the new message types. SWIFT states that members should use the MT202COV for cover payments Global; applies to all currencies Industry Readiness On schedule for SWIFT 2009 Standards Release Major payment systems/networks (e.g. Fed, CHIPS, SEPA, etc) are ready Interviews with JPM clients indicate majority of clients are planning to implement and are on schedule Some countries systems to be ready 2010 (e.g. Bank of Japan) 14
MT 202 COV Compliance Questions Is use of the MT202COV is mandatory and/or regulated? SWIFT requires members to be able to receive, and that those members using the cover payment method should use, the MT202COV. Governmental regulation and enforcement is country-specific. BIS stipulates supervisory expectations that originating banks must ensure presence of originator & beneficiary information in messages sent to covering intermediary banks Why should we adopt? What will happen if we don t? The underlying rationale for increased transparency is sound, and in keeping with all historical precedents (AML, FATF SR7, EU Reg 1781, etc). Rapid market adoption will moderate regulatory scrutiny Apathy may accelerate and complicate it, possibly including additional measures What are our MT202COV obligations? As originating banks, we must include ordering and beneficiary party information As intermediary banks, we must (1) screen payment information and (2) monitor messages on a post-transaction basis for suspicious activity as is currently done today. 15 As global banks, we must endorse and promote greater transparency
MT 202 COV Other Key Questions Transaction Processing Will MT202COV messages result in delayed payments due to sanctions screening filters? It is possible. Banks obligations to scan all messages remain unchanged. However incidence of true delays beyond value date are rare. Will Beneficiary Banks continue to act on the strength of the MT103 prior to receiving the covering funds? Payment policy varies even today from bank to bank. It is possible the MT202COV may cause banks to take additional precautions. If so, will we be notified and how? The PMPG recommends, upon delay in processing of an MT202COV: The receiver of the MT202COV advise the remitting bank via MT299 The remitting/ordering bank advise the beneficiary bank via MT199 JPMorgan will advise COVDELAYs for overnight holds. Ordering Customer 16 Ordering Customer s bank 299 Sender s Correspondent 103 199 Clearing & settlement 299 Beneficiary Customer s bank Receiver s Correspondent Beneficiary Customer
MT 202 COV Other Key Questions Charges and Advising Will the MT202COV result in additional charges or fees? COV remains an inter-bank transfer and should thus not bear any deductions. It is also unlikely banks will charge an additional fee to avoid penalizing clients for compliance. Will our cover payments be advised by a different or new message type? COV only introduces an additional sequence of data. Methods of advising (e.g. MT910, MT940, MT950) should remain unchanged. What options do we have? If not already done so, update your systems to 202COV to support the use of cover payments. Convert to MT103 serial payments. With 24 hour processing, pre-advising and extensive principal preservation capabilities, rationale for cover payments diminishing. Dialogue with your regulators 17
Thank You 18