03 October 2014

1. Corporate & Institutional Clients Transaction Banking Trade Finance in the context of the global risk landscape Claudia Colic Head Transaction Banking, UBS AG Erwin Freiburghaus Head TEF Consulting Swiss Bank, UBS AG • 03 October 2014

2. Trade flows and the number of participants increase continuously with Asia emerging as a hub for inter-regional trade 3.6% CIS 7.8% 8.8% 4.8% 0.7% Europe 2.0% Asia North America 1.4% 2.3% 2.0% Middle East 5.1% 2.1% 1.0% Africa 0.8% 1.7% South and Central America Notes: Based on 2011 figures. World trade includes intra-EU trade. Trade within regions and with unspecified destinations represented 54% of world trade in 2011 Sources: World Trade Report 2013, Factors shaping the future of world trade; TB BM 1

3. Trade flows grew substantially and so did the risks associated with the supply chain +6.5% +13,2% 2,626 +7.0% 789 146 966 58 71% 706 80% 81% 73% 100% 2,277 65% 0% 20% 19% 29% +10.0% 52% 1,225 548 35% 27% 44% 59% 1990 2000 2011 5,447 48% 56% CIS 1990 2000 2011 41% Europe (excl. EU-intra) +10.3% 46% 3,575 1990 2000 2011 1,089 North America 268 138 51% 91% 90% 94% 6% 9% 10% +8,7% 54% 739 49% 1990 2000 2011 +8,4% 459 58% 120 694 Middle East 74% 149 86% 106 71% 42% 572 91% 94% 82% Extra 14% 26% 29% 1990 2000 2011 Intra 6% 9% 18% Asia 1990 2000 2011 Low risk 1990 2000 2011 South & Central America Medium risk Africa Sensitive risk High risk Sources: Euler Hermes 31 March 2014; World Trade Report 2013, Factors shaping the future of world trade; TB BM 2

4. However, trade flows are impaired by trade barriers existing in various stages of the supply chain Telecom and transport infrastructure Market access Border administration Business environment • Domestic and foreign market access • Quotas • Import fees • Local content requirements • Rules of origin • Technical and sanitary measures or other requirements • Import / export licenses • Efficiency of customs and administration • Efficiency of import-export procedures • Coordination between border agencies • Administrative burden of complying with standards • … • Transparency of border administration • Facilitation of payments • … • Availability and quality of transport infrastructure • Availability and quality of transport services • Availability and use of information and communication technologies • Tracking • Electronic tolls • Communication • … • Regulatory environment • Investment policy • Hiring foreign workers • regulatory and environmental issues • Availability of trade finance instruments • Physical security A reduction of trade barriers, where each country reduces its two most stringent barriers to best practices, would increase the global GDP by 5% A reduction of trade barriersis more effective than a reduction of tariffs as the decrease of trade barriers eliminates a resource waste, while tariffs are just a reallocation In reality, trader barriers increased after the financial crisis due to protectionism and the shift towards the South Source: World Economic Forum in collaboration with Bain & Company and the World Bank, Enabling Trade Valuing Growth Opportunities, 2013; TB BM 3

5. Trade barriers generate cost, thereby reducing the economic value derived from the exchange of goods and services Percentage of consequences for each trade barrier area • Costincrease (operational and investment / working capital) • Volume decrease • Delay • (incl. unpredictability increase) • Political risk • (incl. unpredictability increase) Market access Border administration Transport / comm. Infrastructure Business environment (Direct) decrease in volume Increase in unpredictability Increase in average delay Increase in investment / working capital Increase in operational cost Source: World Economic Forum in collaboration with Bain & Company and the World Bank, Enabling Trade Valuing Growth Opportunities, 2013; TB BM 4

6. Strategic Dimension of Risk management needs to consider all relevant risks in the supply chain not only the financial risks Ten principles of risk management • Risk models suggest pseudo accuracy due to uncertain inputs and correlations • Simple systems including all engagements and applying plausibility checks often perform better • Risk management starts at the top • Risk cannot be managed from the ivory tower • Avoid relying on black boxes • Risk management is strategy, and strategy is risk management • Risk management is more than a policy; it is a culture • A risk-aware culture requires the free flow of information • What matters is the 'talk', not the 'report' • The path is the goal • It is possible to prepare for unknown risks • Avoid the downside, but don't forget the upside • Risk is more than just financial risk • Only 37 of the 100 largest share price declines during the crisis were caused by financial risk. • Identification of all risks is key – not just the ones which are easily quantifiable • Often the most devastating risks are of qualitative nature Company-specific risks The supply chain is an important source of risk, which has to be included into risk and crisis management Sources: BCG, The Art of Risk Management, April 2013; TB BM 5

7. Banks can help reduce some of the risks that may lead to disruption in the supply chain • Sociopolitical risks • Legal risks • Infrastructure risks • Examples: Currency transfer restrictions; sanctions, trade barriers • Technology, process, and organization • Personnel risks • Compliance • Examples: Product / service quality; transport; inventory; fraud Operational risks Geopolitical risks Peripheral risks Company-specific risks Risk • Profitability • Funding • Liquidity • Examples: Funding for subcontractors and suppliers; interest risks; funding for buyer; currency risks • Environmental extremes • Manmade disasters • Violent acts • Examples: Fire; chemical waste; drought Financial risks Cata- strophic risks Market risks Strategic risks • Macroeconomic development • Sales market development • Procurement market development • Examples: Market concentration (supply / sales) • General strategy • Supply chain structure and cooperation • Large-scale strategic projects • Examples: Selection of supplier; concentration risks Market-specific risks Sources: BCG, The Art of Risk Management, April 2013; TB BM 6

8. Supply chain disruption considered the biggest risks and lack of attention at senior management level the highest barrier to trade The biggest risks The highest barriers Treatment / handling of new risk by management Categories with the largest financial impact on corporations Supply chain and infrastructure Natural envrionment Cyber risks Management liability Export Business trips Terrorism and political unrest Missing attention at senior management level Missing staff and skills Inadequate management instruments and processes Missing knowledge about upcoming risks Insufficient budget Limited options to obtain insurance coverage Terrorism and political unrest Swiss SMEs differ from the global view as they fear unpredictable regulatory changes and the consequential reputation damage if violated as the strongest risk Notes: Statistics based on participants responses Sources: ACE Emerging Risk Barometer; TB BM 7

9. Supply chain risk management has to be multidisciplinary – an example • Only focus on own company instead of complete value chain • Not sufficiently interconnected with all areas within the company (expertise remains in silos, such as volatility of natural resources pricing, FX movements or complex regulatory requirements) Typical issues of existing risk management systems • Finance to combine knowledge of risk management instruments and processes with knowledge of supply chain management, procurement, etc. and vice versa • The implementation of a holistic risk management systemfor the supply chain is a senior management task Analysis and risk assessment Implementation Road map Interviews CFO / CRO SWOT Risk map Planning of implementation, KPI controlling Application risk management measurem. criteria Supply chain analysis Alignment with company and risk strategy Application controlling Financial health check analysis Consolidation / portfolio view (financial implications) Optimization processes and organization Risk file Supply chain risk competence center Full control over the global value chain is impossible – uncertainty and fragility of the system have to be accepted and managed Source: BrainNet / KPMG; TB BM 8

10. Multiple risks of supply chain disruptions • Supplier / production / sale • Financing / liquidity / bankruptcy • Production delay • Low inventory • Product quality issues • Infrastructure disruptions • Fraud • Natural disasters • Sanctions / boycott • Regulatory changes • Strike / social unrest • Payment • Unwillingness • FX convertibility • Sanctions / boycott • Infrastructure disruptions (payment related) • Fraud • Dispute (resolution) Potential disruptions • Transportation (shipping) • Financing / liquidity / bankruptcy • Technical defects • Wrong handling of goods • Accidents • Customs restrictions • Document management • Infrastructure disruptions • Fraud • Natural disasters • Sanctions / boycott • Regulatory changes • Strike / social unrest $ Suppliers Abroad Production Domestic SaleDomestic DeliveryAbroad Payment • Full solution • Pre-payment against guarantee • Financing of production • Financing of capital goods • Reduction timing mismatch impact • Solution covers only financial risk solution • Financing of supplier • Financing of inventory • Delay handling / quality assurance • Elimination of currency mismatch issue • Full solution • Payment and cash management Bank Potential Solutions • Insurance coverage through market or captive insurance • N.a. Insur- ance • Monitoring of trades and flows (including risk maps) • Crisis management (defined action plans in case of disruption of value chain) • Diversification of suppliers and inventory management • Local cash collection Other Sources: TB TEF; TB BM 9

11. Clean room manufacturer stopped by fire … • Swiss producer of clean-room technology with suppliers in Europe and the USA • Production of clean-room components in producers factory • Unfinished goods and raw materials were stored in a central warehouse in the same town • Contract with foreign buyer for clean room delivery / installation: Production 50% finished, with 2 weeks delay on the contractually agreed schedule • Contract terms include a contractual penalty for late delivery Background 2 1 3 • Delay and reduction of payment due to penalty • Suppliers abroad were not able to replace the raw materials immediately • A short circuit set the warehouse on fire and fire brigade was not able to save the building • Everything in the warehouse was lost Disruption $ Suppliers Abroad Production Domestic SaleAbroad DeliveryAbroad Payment • Insurance coverage for the whole production process and the shipping and warehousing of the required materials • Split-up of the unfinished goods and raw materials in multiple warehouses • Select or upgrade warehouse with sprinkler system • Agreement with suppliers to establish buffer storage locations for the raw materials • to increase emergency availability • Maintenance of own separate inventory of semi-finished goods and raw materials Beforedisruption Solutions • Crisis management including immediate communication measures to all involved stakeholders • Analysis of open orders vs. available goods and re-prioritization of the deliveries • Contract re-negotiation for a later delivery date • Bridge financing to cover liquidity gap due to late and reduced payment Afterdisruption Sources: efinancial news; blog.acctivate.com; sanisure.com; nfa.com; TB TEF; TB BM 10 X Sequence of disruptions

12. Arab spring lead to port closing … • Swiss producer of food machines with suppliers in China (steel) and Germany (machine parts) • Contract for the delivery of a machine adapted to the highly specific needs of the Eyptian buyer • Incoterm DDP (Delivery Duty Paid) destination Egyptian buyer • Confirmed export letter of credit to secure the payment of the food machine • Timely production, machine ready for dispatch Background • Arab spring spread to Egypt and ships were not able to enter Egyptian ports • Goods could not be delivered as per contract • Buyer was unable to start production and claimed non-performance of contract Disruption $ Suppliers Abroad Production Domestic SaleAbroad DeliveryAbroad Payment • Force majeure clause in the general terms and conditions and / or the sales contract • Pre-shipment risk insurance to insure prime costs in the production phase • Confirmed export letter of credit to secure payment1 • Transport insurance to insure the machine against "all risks" • Monitoring of political situation and preparation of shipping alternatives • (destinations and mode of transportation) Beforedisruption Solutions • Crisis management - immediate communication with buyer, shipping company and involved banks • Agreement on transport to alternative destination for storage and further transport • Amendment of export letter of credit or confirmation that "documents are acceptable as presented" • If necessary, negotiation of a compensation to the buyer Afterdisruption 1) Applied mitigation measure Sources: steamshipmutual.com; netcelerate.com; news9.com; muslimvoices.org; kanesfoods.co.uk; TB TEF; TB BM 11

13. Containers overboard coloring the ocean … • Swiss producer of specialty chemicals with production sites in Europe • Contract for the delivery in containers of dyestuffs for the textile industry in Bangladesh • Incoterm CPT (Carriage Paid TO) Rotterdam Seaport • Unconfirmed export letter of credit, payable 180 days after B/L date, to secure the payment of the goods • Conform documents were presented under the Export Letter of Credit Background 1 3 2 • Buyer did not insure the goods • Container ship hit by a severe storm • Containers with dye went overboard • Buyer's bank claimed discrepancies, not accepted under UCP 600 Disruption $ Suppliers Abroad Production Domestic SaleAbroad DeliveryAbroad Payment • Use of an Incoterm where the insurance will be arranged by the seller (potentially for account of the buyer) • Pre-check of documents before shipping the goodsand insist on confirmation of the export letter of credit • Require buyer to obtain insurance before shipment Beforedisruption Solutions • Advising bank has to fight for acceptance of documents including threat • towards issuing bank to involve ICC Paris • Finally payment under the unconfirmed export letter of credit to producer • Agreement between producer and buyer on conditions for payment of lost goods • and the replacement of the goods Afterdisruption Sources: comofil.it; ftz9.org; tfig.unece.org; maritime-connector.com; TB TEF; TB BM 12 X Sequence of disruptions

14. Unexpected twist to restrict payment abroad … • Swiss molder specialized in plastic injection molding machines • Contract for the delivery of a machine to Nigeria on basis open account • Local legal opinion confirmed open account suitability • Machine was delivered without any problem Background • No payment of invoice because of Central Bank of Nigeria's instructions1 Chosen lawyer offered to change his initial opinion to reflect reality! Disruption $ Suppliers Production Domestic SaleDomestic DeliveryAbroad Payment • Ask for consultancy (bank, export organization (e.g. Swiss Export) or bank) regarding • prevailing payment conditions and restrictions in target market • Select reputable law firm and obtain a second opinion in regard to payment conditions and restrictions • Use one of the various instruments (e.g. guarantee, collection, etc.) to ensure • payment in case of debtors default Beforedisruption Solutions • Bank establishes contact with Central Bank of Nigeria • Documentation of the whole transaction in order to show that transaction qualifies for cross-border payment • Finally approval from Central Bank of Nigeria received to effect payment Afterdisruption 1) Bills of Exchange are needed under an Export Letter of Credit or Documentary Collection in order to allow a foreign currency payment abroad Sources: oldmodelkits.com; midlandsb.com; blog.resumebear.com; jasonkarlawish.com; TB TEF; TB BM 13

15. Conclusions 1. Trade flows and global interdependencies increase with APAC emerging as a major hub for inter regional trade 2. Trade flows are impaired by trade barriers existing in various stages of the supply chain and have a noticeable adverse impact on economic welfare 3. Risk management needs to acquire a more strategic dimension and consider all relevant risks in the supply chain not only the financial risks 4. Introduction of a holistic risk management process needs to be a central leadership task, and needs to be implemented in an interconnected manner across the relevant business segments 5. Banks can help reduce some of the risks that lead to disruption in the supply chain, in particular by injecting liquidity and by mitigating risks 14

16. Contact information www.ubs.com