Global Payment and FX Market Update

1. Global Payment and FX Market Update Presented by: Michael Salerno and Jon Macapinlac

2. Overview • Payment Types • Clearing Systems • Foreign Exchange Market and Rates • Foreign Exchange Risks • Risk Management Tools • Update on the Currency Market

3. Foreign Cash Letter Items • Checks drawn off a Non-US Bank • These items can not be cleared by the Federal Reserve • Takes longer to receive collected funds • Additional Fees to process these items • Can not be imaged, and must present physical item to the bank

4. Check Collections • Checks not drawn off a US Bank • Beneficiary does not receive funds until the bank has received collected funds • Credit could take 2 to 4 weeks • Used for higher value or riskier transactions • Lager fees associated with this service

5. Drafts • Drafts - Issues a check drawn off the country of the beneficiary • Can be issued in USD, local currency, etc. • Clearing process is manual in most countries • Most vendors will not process order until collected funds due to risk of transaction.

6. High vs. Low Low value payments – bulk payments (low value, high volume) settled through clearing house. • Example: ACH High Value Payments - payments cleared and settled in near real-time - Example: Wire or Fed Wire

7. Wire Transfers • Fedwire – US funds transfer system operated by the Federal Reserve Bank that enables its participants clear funds electronically • Over 9289 participants • Average daily value: 2.7 trillion • Average daily volume: 537, 000 payments

8. Sending customer Receiving customer Sending institution Receiving institution Fedwire FED

9. Wire Transfers • CHIPS – Clearing House Interbank Payment System • Used to clear USD International Wires • Owned by Financial Institutions • 47 participants • Netting engine (not real-time) • Over 1 trillion cleared daily • More than 250,000 Interbank payments cleared daily

10. Sending customer Receiving customer Sending institution Correspondent Receiving institution Receiving institution CHIPS Transfer CHIPS Sending Correspondent Receiving Correspondent

11. Wire Transfers • SWIFT - Society for Worldwide Interbank Financial Telecommunication • Member owned cooperative • More than 8,300 members in 208 countries • Standards body • Only provides messaging or communication not settlement

12. Sending customer Receiving customer Sending institution Correspondent Receiving institution Receiving institution CHIPS Transfer Sending Correspondent Receiving Correspondent

13. SWIFT Transfer • SWIFT only is the communication between banks • Settlement is dictated by the SWIFT Message (MT103) • Settlement can occur by book transfer, local wire, local clearing network, etc.

14. What is SWIFT? • A community inspired co-operative founded by and for the financial industry • Provides the platform, products and services that allow our customers to connect and exchange financial information securely and reliably • Act as a catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual concernand interest

15. SWIFT in figures • 2.5 billion messages per year • 8,612 customers • 209 countries and territories • Over 2,000 employees • Average daily traffic 15.1 million messages • Peak day of 17.1 million messages – 30 September 2008 Source: Swift.com

16. SWIFT – A customer centric user community Banks Corporates Payment Systems Clearing & SettlementSystems InsuranceCompanies GovernmentInstitutions Broker-Dealers Stock Exchanges Securities MI’s Depositories Payments MI's Trustees IMI's 16 Mid-America Conference - October 29, 2009

17. FIN message categories • Category 1 – Customer Payments & Cheques (18 messages) • Category 2 – Financial Institution Transfers (17 messages) • Category 3 – Treasury Markets – Foreign Exchange, Money Markets & Derivatives (27 messages) • Category 4 – Collections & Cash Letters (18 messages) • Category 5 – Securities (67 messages) • Category 6 – Treasury Markets – Metals & Syndications (20 messages) • Category 7 – Documentary Credits & Guarantees (29 messages) • Category 8 – Travellers Cheques (18 messages) • Category 9 – Cash Management & Customer Status (29 messages)

18. Bank Identifier Code (BIC) A SWIFT BIC identifies financial institutions on the SWIFT network URBKUS33 Your SWIFT BIC Code (*) Online access to the SWIFT BIC directory via www.swift.com

19. Time and Money Fedwire USD 50,000.00 USD 50,000.00 Originator Originating Bank IBK #1 USD 50.00 FEE Credit account EUR 33,692.72 Beneficiary Beneficiary Bank Convert to local Currency IBK #2

20. Time and Money USD 50,000.00 Convert to local Currency Originator Originating Bank Correspondent Credit account EUR 35,360.68 Beneficiary Beneficiary Bank * Bene receives 1,667.96 more Euro and in less time

21. The Foreign Exchange Market • Global decentralized financial market for trading currencies with the market determining the values of different currencies • Huge trading volumes represents the largest asset class in the world leading to high liquidity • Over 95% of FX market volume consists of speculative trading. • Speculation is the primary cause of market volatility. • Volatility causes exchange rates to change every second of the day, 24 hours a day

22. The Foreign Exchange Market Annual Stock Markets' Volume • Australia $1,062,000,000,000 • Toronto $1,368,000,000,000 • India $1,059,000,000,000 • Korea $1,607,000,000,000 • Germany $1,628,000,000,000 • Tokyo $3,787,000,000,000 • China $9,564,000,000,000 • London $2,741,000,000,000 • NASDAQ OMX $13,439,000,000,000 • NYSE Euronext $19,813,000,000,000 • Total One Year $56,068,000,000,000 (56 Trillion) Source NASDAQ Foreign Exchange Average Totals • One Day $3,098,000,000,000 • One Month $62,000,000,000,000 • FX Total One Year $744,000,000,000,000 (744 Trillion)

23. FX Markets • Over the counter – Majority of foreign exchange is traded over the counter between Financial Institutions and their counterparties. - spot, swaps, and forwards • Exchange Traded – FX is also traded on exchanges such as CME to help reduce counterparty exposure. • Spot, swaps, and futures

24. FX Markets • The two main FX markets are spot and forward market • Spot Market – for the delivery of funds with in one to two business days from the trade • Most payments and wire transfers are spot transactions

25. Forwards vs. Futures • Forwards are completely customizable • Amounts, currency, and value date or date range • Futures – Standardized contracts • Set amounts and value dates • EUR 100k at 1M

26. Exchange Rates • FX rates are quoted in several ways, depending on the currencies and the markets involved Currency Direct Indirect Market AUD 1.0600 0.9434 1.0600 CAD 1.0127 0.9875 0.9875 EUR 1.4150 0.7067 1.4150 GBP 1.6100 0.6211 1.6100 JPY 0.0132 75.85 75.85

27. BID Vs ASK

28. FX Risk What is currency risk? The risk that unexpected changes in exchange rates will: 1) Increase cost 2) Reduce profit margin 3) Create inconsistencies in a company’s balance sheet 4) Create FX gains or losses on company’s income statement

29. FX Risks FX exposure - Companies dealing with foreign currencies face four types of exposure: • Transaction exposure • Translation exposure • Economic exposure • Bid-to-award exposure

30. FX Risks-Transaction Exposure • Occurs when one currency must be exchanged for another • Gain/loss incurred on actual or anticipated currency conversion

31. FX Risk-Translation Exposure • Arises from the need to produce consolidated financial statements due to foreign subsidiaries • Reflects changes in the book value of foreign subsidiaries • No actual conversion of currency involved

32. FX Risk-Economic Exposure • Effects of foreign exchange movements on total corporate value • Can be long term in nature, difficult to hedge and a serious business influence/consideration

33. Forward Market • Forward FX Market – Provides an exchange rate for a future delivery of currencies to be fixed today • Forwards are available in most currencies with standard maturities in one, two, three, six, nine, and 12 months • The relationship between the spot and forward market is based upon the interest rate parity

34. Forward Market • Forward contracts can be used to “lock-in” financial certainty related to future benefits and/or obligations denominated in a foreign currency. • Forward points may be at a discount or at a premium. • Based on the “direction” of the hedge, forward points may be earned or paid.

35. Forward Market • Fixed Date – Contracts with an exact value date • Window – Contracts with a date range for value date. • Typical windows do not exceed 30 day, but can be as long as 90 days • Allows flexibility on settlement for uncertain delivery of payment

36. Forward Market • Important! The forward rate is NOT intended as an estimate or a proxy of the future spot rate. • Hindsight is always 20/20! • The then current spot rate on the forward settlement date is irrelevant to the financial decision. • Forward contracts are intended to bring financial certainty to the transaction, NOT to “out guess” the market. • Forwards enable accurate cash flow budgeting and preparation.

37. Forward Market

38. Non-deliverable Forwards • NDF - are forwards contracts that are net settled on value date. • Settlement is the difference between the contract exchange rate, and the spot rate on the value date. • Are used in markets where there is not an active forward market.

39. Currency Options • Options – gives the buyer the right to buy (call option) or sell (put option) a fixed amount of a foreign currency at a fixed exchange rate (strike price), on or before a specific future date • Plain Vanilla Put/Call: Buyer must pay a premium for the option. Like an insurance policy, you pay an out of pocket cost for protection against some worse case scenario. • Structured Option: Range Forwards (Collars), Participating Forwards

40. Comparison of Hedging Alternatives Do Nothing Plain Vanilla No-Cost Collar (Range Forward) Risk 75% Participating Forward Potential Upside 50% Participating Forward 25% Participating Forward Forward Contracts Fully Hedged Unhedged

41. Why deal in Foreign Exchange? • More competitive in global markets • When pricing in local currency, more appealing to buyers (they can avoid currency conversions and associated risks) • When buying, negotiating in foreign currency can help obtain better price (suppliers may be charging as much as 3% to 12% above normal, hedging against exchange risk) • Increased Control/Improved Fee Structure • USD transfers are often converted by a third party institution resulting in increased rates or fees, and delays in delivery.

42. Currency Update • Euro • Canadian Dollar • Chinese yuan

43. Euro • Debt Crisis • Structural Issues • Will the Euro Survive? • Quarterly Forecast

44. Canadian Dollar • Current economic strength • Commodity based economy and heavily reliant on U.S. growth • Quarterly Forecasts

45. Chinese Yuan • Chinese growth • Trading band for CNY • Future Prospects • Quarterly Forecasts

46. Questions Michael Salerno Director, Foreign Exchange First National Bank 402.602.3561 msalerno@fnni.com Jon Macapinlac Business Development, Foreign Exchange First National Bank 402.602.3560 jmacapinlac@fnni.com