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J.p. morgan iraq and mena trade forum monday 24 september presentation

This document outlines an upcoming Middle East and North Africa Trade Forum hosted by J.P. Morgan from September 23-25, 2012. The forum will discuss changing trade patterns and currency settlement trends in the region, as well as the product landscape, risk management, and corporate perspectives on regional markets. Key topics include the growth of trade between MENA countries and Asia, particularly China, and the increasing use of the Chinese yuan as a trade settlement currency.

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Middle East and North Africa Trade Forum Sunday 23 – Tuesday 25 September, 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
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 is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. It may not be copied, published or used, in whole or in part, for any purpose other than as expressly authorised by J.P. Morgan. The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to the Company or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. In the United Kingdom, JPMorgan Chase Bank, N.A., London branch and J.P. Morgan Europe Limited are authorised and regulated by the Financial Services Authority JPMorgan Chase is licensed under US patent numbers 5, 910,988, and 6, 032 and 137 ©2012 JPMorgan Chase & Co. All rights reserved. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Asif Raza Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan W E L C O M E R E M A R K S J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Agenda Monday September 24 09:15 Welcome Refreshments 09:45 Welcome Remarks Asif Raza, Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan 10:00 Changing Paradigms of Trade and Currency Settlement Patterns Examination of the regional market landscape with identification and analysis of key growth areas and emerging economies allows capitalization of the trade corridors between MENA and Asia and the growing use of RMB as a trade settlement currency. Sonam Kapadia, Global Trade, Middle East and North Africa, J.P. Morgan 11:00 Refreshments 11:30 The Product Landscape in a Growing Trade Environment To accommodate the growing trade patterns the product landscape is simultaneously increasing it’s range and scope of offerings. Analyzing the importance of the Cash Conversion Cycle is a vital exercise when choosing Documentary Credit and Supply Chain. Amr El Haddad, Global Trade Product, Middle East and North Africa, J.P. Morgan 12:15 Compliance Evaluating compliance issues specifically encountered in the MENA region and how we can work in this context to better understand and identify the needs of our clients. Ian Lyall, Compliance, Europe Middle East and Africa, J.P. Morgan 13:15 Lunch Al Saraya Restaurant J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Agenda 14:15 Credit Risk Management in a Challenging Environment Managing credit risk requires in depth analysis of the current challenging environment Florence Coronel, Risk, Europe, Middle East and Africa, J.P. Morgan 15:15 Panel Discussion: Corporate Perspectives on the State of the Regional Market How have Corporates adapted their strategies to cope with the unpredictable nature of regional growth and plan to avoid future liquidity shortages? Examination of opportunities and benefits provided by market diversification in converged cash and trade finance solutions to help improve working capital. Moderator: Zeeshan Khan, Global Trade, Middle East and North Africa, J.P. Morgan Panellists: Azmi Shaban, Shaban Group Santosh Babu Karkera, A. A. Bin Hindi Group Guillermo Arias, General Motors Neeraj Tekchandani, Apparel FZCO 16:30 Close of Day 19:30 Dinner Meet in Hotel Lobby J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Sonam Kapadia Global Trade, Middle East and North Africa, J.P. Morgan C H A N G I N G P A R A D I G M S O F T R A D E A N D C U R R E N C Y S E T T L E M E N T P A T T E R N S J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Changing face of the world  Trade within Europe accounted for 65% of European trade  More than half of Asia’s exports (54%) remained within Asia  28% of North Americas exports remained in North America Trade within regions dominates world trade. Europe and Asia remain their own top trading destinations Slow Growth Accelerating Decelerating Fast Growth <3% <3% ≥3 % ≥3% 2010 – 2017 GDP growth 2003–2007 GDPgrowth Intra/Inter table Origin Destination NA1 SCA2 Europe CIS Africa MENA APAC Total North America1 480.3 643.2 405.3 36.6 97.1 68.1 732.0 2,462.5 South & Central America2 415.7 187.3 152.8 7.3 16.6 9.4 329.1 1,118.3 Europe 311.9 152.4 3,513.8 269.3 185.4 147.8 844.8 5,425.3 CIS 15.1 12.6 176.9 100.2 3.6 2.2 99.5 410.1 Africa 34.9 19.5 172.2 9.5 61.4 36.5 128.9 462.9 MENA 51.1 18.0 177.7 10.9 20.9 52.1 171.1 501.8 APAC 419.3 196.4 580.0 94.6 136.2 419.3 2,753.1 4,598.9 Total 1,728.3 1,229.3 5,178.6 528.4 521.2 735.5 5,058.4 14,979.7 Source: UNCTAD database, 2010 international trade data & JPM Analysis 1 excluding Mexico 2 including Mexico Source: IMF WEO database, JPM Analysis Country as percentage of Region US as % of North America1 76.02% Russia as % of CIS 70.79% China as % of Asia 39.25% Mexico as % of SCA2 25.41% Canada as % of NA1 23.98% Germany as % of Europe 23.31% Brazil as % of SCA2 17.94% India as % of Asia 4.82% Source: UNCTAD database, JPM Analysis NA 28% SCA 24% Europe 18% CIS 1% Africa 2% MENA 3% APAC 24% NA 52% SCA 15% Europe 12%CIS 1% Africa 2% MENA 2% APAC 16% NA 14% SCA 7% Europe 17% CIS 2% Africa 3% MENA 3% APAC 54%NA 9% SCA 1% Europe 20% CIS 1% Africa 5%MENA 7% APAC 57% 19% 3% 35% 1% 12% 4% 26% NA 8% SCA 3% Europe 68% CIS 3% Africa 3% MENA 4%APAC 11% 7% 1% 51% 19% 2% 2% 18% J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Sophistication has increased Middle East North Africa increasing trades with Emerging markets, Asia is especially prominent Intra/Inter table Origin Destination NA1 SCA2 Europe CIS Africa MENA APAC Total North America1 480.3 643.2 405.3 36.6 97.1 68.1 732.0 2,462.5 South & Central America2 415.7 187.3 152.8 7.3 16.6 9.4 329.1 1,118.3 Europe 311.9 152.4 3,513.8 269.3 185.4 147.8 844.8 5,425.3 CIS 15.1 12.6 176.9 100.2 3.6 2.2 99.5 410.1 Africa 34.9 19.5 172.2 9.5 61.4 36.5 128.9 462.9 MENA 51.1 18.0 177.7 10.9 20.9 52.1 171.1 501.8 APAC 419.3 196.4 580.0 94.6 136.2 419.3 2,753.1 4,598.9 Total 1,728.3 1,229.3 5,178.6 528.4 521.2 735.5 5,058.4 14,979.7 Source: UNCTAD database, 2010 international trade data & JPM Analysis 1 excluding Mexico 2 including Mexico Source: IMF WEO database, JPM AnalysisSource: UNCTAD database, JPM Analysis NA 9% SCA 1% Europe 20% CIS 1% Africa 5% MENA 7% APAC 57% NA 19% SCA 3% Europe 35% CIS 1% Africa 12% MENA 4% APAC 26% No surprises here!  Asia continues to be the largest trading partner for MENA region  Energy demand  Trading routes  Manufacturing hubs  The growth rates between these markets continue to be strong  The GCC region leads the growth rates in MENA  North Africa region and Levant have been subdued given the events of 2011  Working with Asian emerging markets presents unique challenges  Differing practices  Clearing timezones  Language  The MENA companies and banks have the sophistication required to conduct this complex trade finance J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Middle East and North Africa – Global Trade Trends Import Trends  The U.A.E. was the top importing Middle East North Africa (MENA) region. (Saudi, Morocco, Algeria & Egypt make up the rest of the top 5)  Algeria and Egypt were the top 2 countries with the highest percentage growth over the last 5 years  In 2010, Saudi’s spending more than doubles that of the previous 2 years  Auto & Transport that experienced the largest percentage decline over the past 5 years  U.A.E.’s spending on the imports of precious stones & artefacts clearly the largest among the MENA countries  Lebanon’s spending on precious stones experiences a growth of nearly 4 times the amount spent in 2007  In 2010, Egypt’s spending in this increases to 10 times the amount spent in 2007 Key Trends and Growth Areas $0 $10 $20 $30 $40 $50 $60 $70 2007 2008 2009 2010 2011 Billions Fastest Growing Importers Algeria Egypt $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 2007 2008 2009 2010 2011 Billions Top 5 Importing Countries U.A.E. Saudi Morocco Algeria Egypt $0 $10 $20 $30 $40 $50 $60 $70 2007 2008 2009 2010 2011 Billions Declining Imports Auto & Transport Electronics & Equipment Source: UN Comtrade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Letters of Credit Activities in Middle East and North Africa 0 20 40 60 80 100 120 140 160 Export LC 2010 & 2011  MENA region continues to be an active user of trade instruments, around 1.5% of the Global LC usage  Average value of issuance is USD 660K, which is comparable to the global average of USD 603K  Total LCs issued from MENA region outside of the region is 491K in 2011, showing a marginal reduction of 0.5% mainly driven by the reduced activities during the Arab Spring events. HY 2012 data shows that a recovery of the volumes is well underway  Algeria is a prolific user of LCs for imports primarily driven by local regulations which require most purchases to be supported by sight LCs  Total Export LCs received in the region are 197K, with a growth of 3.35% driven by UAE which reflects the pick-up in trading activity from Dubai.  UAE continues to dominate the export LC flows, reflecting the strength of Dubai as the primary trading hub for the region. Dubai receives nearly half the export LCs in the region (95K). The match of export/import LCs shows clear trading hub pattern with nearly equal match of exports and imports  The busiest route for LC traffic is Asia, reflecting the volumes of the trades between the countries. The pattern of trade is increasingly shifting towards Open account when on overlays the trade data with the LC volumes data.  The regional trade is primarily conducted on LC terms – 7% of the physical trade is with MENA but accounts for 18% of the import LCs and 44% of the export LC  Exports to Africa are mostly LC backed, while 7% of the physical trade of MENA is with Africa, it accounts for 25% of the export LC  Key look-forward is to see  Dubai to continue to reflect the recovery of the region and show LC growth of ~10%  Accelerated recovery of trade volumes for Libya driven by the reconstruction activities  Iraq to show higher growth of back of increased oil revenues  Decline in Lebanon as the impact of the disturbances in Levant Key Trends and Growth Areas Africa 25% Europe - Euro Zone 3% Europe - Non Euro Zone 2% Asia Pacific 25% Middle East 44% Central Latin America 0% North America 1% Export LCs Africa 5% Europe - Euro Zone 29% Europe - Non Euro Zone 8% Asia Pacific 38% Middle East 18% Central Latin America 0% North America 2% Import LC Source: SWIFT Traffic Watch, JPM Analysis Trade Volumes and Regions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
China is the largest trade partner for MENA Region China is the largest trading partner for the MENA region and has an accelerated growth path for the trade corridor The top commodities, that were imported from China and into the MENA region, from 2007 – 2011 were:  Plant & Machinery (USD 47 billion)  Electronics & Equipment (USD 41 billion)  Clothing & Accessories (USD 21 billion)  Iron & Steel (USD 16 billion)  Auto & Transport (USD 13 billion) This trend is being witnessed globally and has led to an active increase in the use of RMB as the trade settlement currency Banks estimate that 10% China’s trade is now in RMB  The forecast is that in 3-5 years, it will increase to 20% as China’s share of global trade increases SWIFT data shows that Renminbi (RMB) is the third largest currency for Letters of Credit (LCs), after Dollar and the Euro  About 4% of LCs issued were in RMB  Overall it is the 15th largest currency for trade There are challenges to using RMB which are being actively addressed  Strict documentation requirements  Availability of RMB to the company to pay for purchases  Hedging of RMB exposures Trade with China is an incentive for RMB settlement Plant & Machinery 34% Electronics & Equipment 29% Clothing & Accessories 15% Iron & Steel 12% Auto & Transport 10% MENA Imports from China $0 $10 $20 $30 $40 2007 2008 2009 2010 2011 Billions Import Trends from China 2007-2011 Source: UN Comtrade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
RMB Settlement has significant tail winds  China’s central bank is increasing the coverage of the Swap agreements that they have with other central banks  Central Banks of key trading markets like Singapore and Dubai are already on-board  London expected to become an off-shore centre for RMB Liquidity in the Hong Kong market for RMB has increased  Estimates are that the deliverables market in Hong Kong has now increased to USD 3 billion, which provides the ability to purchase/sell large order without moving the market  RMB based bonds are being issued to provide alternatives for managing RMB liquidity Faster processing times  Chinese exports estimate that sales based on RMB are cleared in a day as compared to a week or fortnight for USD Transparency  Typically, Chinese exporters build in a buffer of 3% for currency movements in the sales  RMB invoicing typically shows an improvement of 3%-7% in the cost of goods Benefits of RMB Trade Settlement Scheme  Enhanced relationships with suppliers in China  A shorter turnaround time processing trade documentation improves the supplier’s cash flow  Exporters settling trades in RMB will be better able to grow their client base in China  Transparency in pricing and better management of foreign exchange risk Factors providing support Source: Global Trade Review J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Major Regulatory Events 2008 2009 2010 2011 Jan 2009 Mar 2009 Apr 2009 Jul 2009 PBoC and HKMA signed currency swap agreement for up to RMB200billion. PBoC announced that it will actively facilitate the pilot scheme by “reducing institutional obstacles”. State Council approved 5 cities (Shanghai, Guangzhou, Shenzhen, Dongguan, Zhuhai) for the pilot scheme with HK. PBoC issues initial guidelines for the pilot scheme with HK, Macau and ASEAN countries. It also published Detailed Rules for the RMB Trade Settlement pilot scheme. Mar 2012 Apr 2012 PBoC announced that enterprises with import and export license are permitted to conduct RMB cross-border trade business HKMA guidance note issued on reasonable assurance and due diligence procedures for RMB position squaring with RMB Clearing Bank for trade related conversion. Dec 2008 Premier Wen Jiabao announced the pilot scheme for RMB Trade Settlement with HK and Macau. Feb 2010 Jun 2010 Dec 2010 HKMA announced an important elucidation which essentially expanded scope of RMB banking business in HK. PBoC announced the expansion of the pilot scheme to cover 4 municipalities and 16 provinces in China and overseas pilot locations extended to all countries. PBoC released the 2nd batch of MDE list that can settle merchandise exports in RMB from 365 to 67,359. HKMA enacted further rules to restrict the amount of RMB held by authorized institutions in the RMB settlement scheme: (1) Required AIs to square their RMB net open positions with the RMB Clearing Bank arising from exchange transactions with customers for cross-border trade settlement. (2) AIs can only purchase RMB through the RMB Clearing Bank for their clients in relation to trade transactions due for payments to the Mainland within 3 months. (3) AIs need to limit their net open positions in RMB to 10% of their RMB Assets or RMB Liabilities (RMB NOP was subsequently revised to 20% in Jan 2012 and from 22 May 2012, banks can set its own internal RMB NOP in consultation with HKMA) Mar 2011 Aug 2011 Dec 2011 HKMA released a press announcement welcoming introduction of the RMB Fiduciary Account Service by BOC HK (ie.RMB Clearing Bank in HK) as solution to mitigate its counterparty credit risk issue raised by the industry last year. PBoC announced the extension of RMB cross-border trade settlement scheme to nationwide. PBoC announced enhanced co-operation to develop financial markets between China and Japan in particularly, to promote use of RMB and JPY in cross-border transactions. 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
RMB Trade Settlement Scheme Machinery and transport equipment Geographical coverage Eligible enterprises and transactions Import (payment out of Mainland China) All enterprises Merchandise trade Service trade All enterprises Export (payment into Mainland China) All enterprises All enterprises (subject to establishment of the “surveillance list” ) OffshoreMainland China 20 Provinces All Offshore Locations HK/Macau/ASEAN5 cities All Provinces J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Currency Swap Arrangement China Argentina 70Bn Iceland 3.5Bn New Zealand 25Bn Indonesia 100Bn Malaysia 180Bn Singapore 150Bn Hong Kong 400Bn Belarus 20Bn South Korea 360Bn Australia 200Bn Pakistan 10Bn Mongolia 10Bn UAE 35Bn Thailand 70Bn Ukraine 15Bn Japan Direct Swap China is expanding its bilateral currency swap arrangement Source: PBoC – Bilateral currency swap arrangement (RMB) RMB1,648.5 billion J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Building up Traction, Gaining Momentum Cross-border RMB settlement ¹ RMB Payments ² ³ HKMA publication on RMB deposits in Hong Kong Offshore RMB Deposits ³ 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 RMB Mn RMB553Bn 0 10 20 30 40 50 60 70 80 90 100 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 ² SWIFT – Client initiated and institutional payments, sent and received based on value Hong Kong OthersChina In % 0 100 200 300 400 500 600 700 Q1,2010 Q2 Q3 Q4 Q1, 2011 Q2 Q3 Q4 Q1, 2012 RMB Bn ¹ China Customs, CEIC +288%Total trade settled in RMB (2011/10) RMB535Bn (YTD2010) RMB2,080Bn (YTD2011) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Trade and Supply Chain Flows Facilitating RMB Cross-border Trade • Pricing Transparency • Financing Cost • Exchange Rate • No Currency Mismatch • Working Capital • Availability of Offshore RMB Liquidity • Bonded Warehouse Transactions • Export Verification (“Hexiao”) • Trade Cycle • Pricing Transparency • Financing Cost • Exchange Rate Physical Supply Chain Offshore RMB Market Financial Supply Chain Purchasing Manufacturing Inventory Customs Clearance Sales Working Capital Requirement Receivables Reconciliation J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Case Study I A Hong Kong buyer was asked by its supplier in China which is the dominant party in their business relationship to issue a RMB LC for settlement of their trade. Whilst there has been much media broadcast on RMB cross-border trade settlement and its benefits for parties involved in the scheme, the Hong Kong buyer was unsure how to proceed. There are few issues that the Hong Kong buyer is considering – RMB is not fully convertible and there appears to be regulations on the cross-border trade. What would the solution be for this Hong Kong Buyer? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Case Study I : Proposed RMB Trade Solution 9 Remit payment Hong Kong Buyer Onshore Bank J.P. Morgan Hong Kong Onshore Supplier 2 Issue RMB LC 1 Establish LC issue facility 3 Advise LC 4 Shipped goods 5 Present documents 6 Forward documents 7 Notify documents arrival 10 Credit proceeds  Strengthen relationship with its supplier  Access to credit support  Access to expertise on cross-border trade settlement What are the benefits to YOU? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Case Study 2 A company in Hong Kong which is the trading entity for a PRC Manufacturer arranged with its Ultimate Buyers in Middle East to settle their trade in RMB under LC terms. The company in Hong Kong contemplates to settle its trade with the PRC Manufacturer in RMB to mitigate its FX exposure. The other consideration is the funding needs of its PRC Manufacturer. It is challenged by the increasing onshore interest rates and the lending limits quota. What would the proposed solution be? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Case Study 2 : Proposed RMB Trade Solution PRC ManufacturerJ.P.Morgan China LIB 1) Advise RMB LC J.P.Morgan Hong Kong Hong Kong Trading Company 2) Issue RMB LC 3) Provide import LC bills financing Lower COF offshore 4) Use RMB proceeds received from its Ultimate Buyers to settle loan Ultimate Buyers (Middle East) Enhanced banking relationship Access to credit support  Increase sales opportunities  Access to credit and funding support  Access to expertise on cross-border trade settlement What is it for YOU? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
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Amr El Haddad Global Trade Product, Middle East and North Africa, J.P. Morgan T H E P R O D U C T L A N D S C A P E I N A G R O W I N G T R A D E E N V I R O N M E N T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Blank slide In This Presentation Growth • How have global trade exports grown since the 1950’s? Action • What did banks do to design the right tools for trade financing? Re- action • What’s most suitable for Corporate sector?  Developing trade patterns  Growing product landscape to meet the growth in Trade  Importance of using the Cash Conversion Cycle (CCC) as a criteria to choose the right product J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Section 1 : How did Global Trade Grow? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Blank slide I - Developing trade patterns Despite a post-crisis dip, the current level of world gross exports is almost three times that prevailing in the 1950s  Commodity trade accounted for a declining share of this growth (with some exceptions)  What explains the expansion of global trade? 1) The rise of Emerging Market Economies (EMEs) 2) The growing importance of regional trade 3) The shift of higher technology exports towards dynamic EMEs Systemic important trading nations are increasing  A chief contributor is the growing role of global supply chains in overall trade, facilitated by lower tariffs  With vertical specialization, production of certain goods is fragmented into several stages  Goods cross borders several times before being transformed into final products, further increasing trade interconnectedness  Outsourcing of production stages from advanced “upstream” countries to neighbouring EMEs has also supported a shift in the technology content of exports towards the latter A. The global trade landscape has witnessed dramatic shifts over the past several decades B. Trade expansion was further associated with growing trade interconnectedness J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide II. The Evolving Structure of Global Trade • Trade was dominated by advanced economies • US, Germany, and Japan  1/3 of global trade 1970s • Diversification of trading landscape • EMEs, particularly East Asia 1990s • China became the second largest trading partner after the United States. • China’s trade was 57% of its GDP in 2008. 2010 The Figure shows the evolution of key players in global trade, defined as countries whose trade (exports plus imports) represented at least 2 percent of world trade 0 5 10 15 20 Belgium-… France Germany Italy Netherlands Sweden United Kingdom Canada China, P.R.:… China, P.R.:… Japan Korea,… Mexico Saudi Arabia Singapore Switzerland United States 1970 1990 2010 Figure 2. Exports of Key Players in International Trade Source: DOTS A. The Diffusion of Key Players in Global Trade A1. Emerging market economies have moved from peripheral players to major centres of Global Trade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
II. The Evolving Structure of Global Trade The expansion in global trade took place against growing regional concentration  Interregional trade was unchanged at about 12% of world GDP between 1980 and 2009  Growth in intraregional trade was particularly strong in Europe and Asia The Figure plots the evolution of intraregional trade measured in terms of exports as well as interregional trade, which includes trade among countries in the rest of the world. A2. Growth in trade was strongest for Europe and Asia J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide II. The Evolving Structure of Global Trade  Trade structure has been characterized by a rising share of higher technology goods  Trade in high-technology products tends to grow faster than average  The process of technological absorption is not passive but rather “capability” driven  Country-specific policies for technology learning and import, including those aimed at attracting foreign direct investment (FDI), can create a comparative advantage The Figure shows the contribution of high-technology and medium-high-technology exports such as machinery and transport equipment increased. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
II. The Evolving Structure of Global Trade The volume of trade in relation to GDP increased and took the form of intra-industry trade Intra-industry trade as a share of overall trade has increased steadily  Highest for products such as machinery, chemicals and manufactures  Countries that experienced higher changes in intra-industry trade between 1985 and 2009 are those integrated in a supply chain, such as China, Thailand, and Mexico (Figure 5B) Convergence in Income levels J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide II. The Evolving Structure of Global Trade  With rising vertical specialization, gross exports may not appropriately capture the extent of domestic value added exports  Official trade statistics are measured in gross terms, which include both intermediate inputs and final goods  Given the rising import content in exports, aggregate trade data is increasingly affected by intermediate goods trade flows that cross borders several times  Tracking the extent of FVA in a country’s exports has thus become common in the trade literature to gauge the extent of trade and policy spill-over across countries  In countries that engage heavily in assembly and processing trade such as Singapore, gross exports can be more than twice as high as DVA exports 0 50 100 150 200 United States EU15 Japan India Aus. & New Zealand Brazil Mexico Russia South Africa Canada Indonesia China Korea Philippines Taiwan Vietnam Hong Kong Thailand Malaysia Singapore Gross Exports Value Added Exports Gross and Value Added Exports to the World: 2004 (% of GDP) Source: Koopman and others (2010) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Section 2 : What did Banks do? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Blank slide - Documentary Credit - Doc Prep - Pre Check - Silent Guarantees - Undertakings - LC Financing and Discounting - O/A Payables Financing product - O/A Receivables Financing products - ECA’s - Doc Trade Solutions - Payables & Receivables Finance Solutions - TSU - STC Online SolutionsInnovative Solutions Product Landscape FinancingRisk Mitigation - Bottom line benefits. For Financing Purposes More sophisticated customers Long term relationships Traditional Services J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Product Landscape  Documentary Trade Instruments: Letters of Credit – Letters of Guarantees – Documentary Collection - Others  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?  Silent Guarantees  Undertakings  Services  Document Preperation, Pre Check Buyer Seller Bank (s) Seller Bank (s) Buyer Documentary Credit J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Product Landscape LC Financing and Discounting  O/A Payables Financing Product  O/A Receivables Financing Products  Many forms of longer term Financing; ECA’s Buyer Seller Bank (s) Ins. & Others Finance J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?
nk slide Product Landscape Doc Trade Solutions Payables & Receivables Finance Solutions Trade Services Utility SWIFT Trade for Corporates Bank (s) Buyer Seller Online Solutions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?
nk slide Product Landscape  Think Bottom Line Benefits Innovative Solutions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Section 3 : How should Corporates re-act? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Factors Capabilities Can you do it? Or not? Leverage Who dictates the terms? Can you financially benefit from it? Cost or Benefit? Thinking of the cost? Or bottom line? Factors Affecting Decision Making Product J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide II. The Evolving Structure of Global Trade Why does the Cash Conversion Cycle matter?  Shows a firm’s rate of cash conversion and profitability  Shows a company’s growth and investor’s returns The Cash Conversion Cycle is a meaningful measure of a business’s financial health: Fast-growth companies • Gives insight into growth sustainability Mature Companies • Evaluates a company’s management Declining Companies • Lose control of CCC but also lose clout with suppliers and customers CCC = Cash Conversion Cycle = DIO + DSO – DPO Where: p = # of days in period Cash Conversion Cycle: A useful Financial Metric for your Business J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
nk slide Apple has the leverage. Examples of Cash Conversion Cycle  DSO is 17.9 days When thinking about converting accounts receivable to cash, that is a great number!  McDonalds operates company stores and franchises to others - two separate businesses Adding both together:  If our comparison companies have 100% company-owned stores, then the 17.9 days we calculated will look high compared to theirs.  Conclusion: How does your performance compare to similar companies in the industry? Cash Conversion Cycle 2007 2008 2009 2010 2011 TTM Days Sales Outstanding 22 23 25 25 18 21 Days Inventory 7 7 7 7 5 5 Payables Period 96 90 79 81 75 81 Cash Conversion Cycle -67 -60 -48 -50 -52 -54 Accounts Receivable 1,179.1 Revenue 24,074.6 Days 365 DSO 17.9 Accounts Receivable 1,179.1 Revenue 7,841.3 Days 365 DSO 54.9 Apple Cash Conversion Cycle McDonald’s J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Ian Lyall Compliance, Europe Middle East and Africa, J.P. Morgan C O M P L I A N C E J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Agenda  Sanctions / Recent US Regulatory Actions and Settlements  Trade and AML / Sanctions  International Sanctions  Bureau of Industry and Security (BIS)  Anti-Corruption Program  Questions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Sanctions Recent Regulatory Actions and Settlements Regulatory Body Financial Institution Fine / Penalty Department of Justice Dutch Bank (2012) $ 619 Million Department of Justice UK Bank (2010) $298 Million Department of Justice Dutch Bank (2010) $500 Million Department of Justice Swiss Bank (2009) $536 Million Department of Justice UK Bank (2009) $217 Million US Treasury Department Australia Bank (2009) $5.75 Million J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Trade and AML/ Sanctions  There is much anecdotal information about trade and its high risk for money laundering  Regulatory interest is high  Few public domain case studies  The FATF paper (June 28, 2008) titled “Best Practices Paper on Trade Based Money Laundering” characterizes trade as “one of the main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy” and concludes that “many customs agencies, law enforcement agencies, financial intelligence units (FIU), tax authorities and banking supervisors appear less capable of identifying and combating trade-based money laundering than they are in dealing with other forms of money laundering and terrorist financing.”  The Wolfsberg Group published a paper on Trade Finance Principles in January 2009 setting out the responsibilities for each of the banks in the documentary credit and collection process.  Usually requires collusion between two or more parties  Over/Under Invoicing  Multiple invoicing  Short shipping  Over shipping  Shipping inferior/substandard goods  Deliberate concealment of the type of goods J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
International Sanctions TRADE SANCTIONS2 FLIGHT BANS RESTRICTIONS ON ADMISSION DIPLOMATIC SANCTIONS1 FINANCIAL SANCTIONS3 BOYCOTT SPORTS OR CULTURAL EVENTS SUSPEND COOPERATION WITH A THIRD COUNTRY Sanctions can range from economic/ trade sanctions to more targeted measures. J.P. Morgan Chase and other financial institutions are required to apply financial/ trade sanctions including those issued by the Office of Foreign Assets Control, OFAC. Sanctions may include 1 Diplomatic sanctions such as expulsion of diplomats, severing of diplomatic ties, suspension of official visits 2 Trade sanctions such as general or specific trade sanctions, arms embargoes 3 Financial sanctions such as freezing of funds or economic resources, prohibition on financial transactions, restrictions on export credits or investment J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Definition and purpose of sanctions Sanctions are the economic arm of foreign policy used to influence countries or individuals:  Violating international laws or human rights  Engaging in unlawful activity such as narcotics trafficking, human trafficking or weapons trafficking  That pose a security threat to other nations through the development and proliferation of weapons of mass destruction or chemical and biological weapons or acts of terrorism Purpose of sanctions The goal of sanctions is to penalize the offending country, entity, or individual for their actions and persuade the offender to change their actions. Sanctions are normally used by the international community for one or more of the following reasons  To encourage a change in the behavior of a target country or regime. (e.g. North Korea is subject to sanctions to encourage the cooperation with the international community and abandon its nuclear missile program)  To apply pressure on a target country or regime to comply with set objectives. (e.g. Iran is subject to sanctions aiming to stop the uranium enrichment program)  As an enforcement tool when international peace and security has been threatened and diplomatic efforts have failed. (e.g. Sierra Leone was subject to sanctions in order to stop the civil war)  To prevent and suppress the financing of terrorists and terrorist acts. (e.g. Al-Qaida is an international terrorist organization subject to sanctions in order to stop them perpetrating terrorist acts) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
International Sanctions - Iran 1. CISADA (July 2010) Prohibits the use of a U.S. correspondent account or payable-through account of a foreign financial institution to transact with the Iranian Revolutionary Guard or to conduct transactions related to Iran’s efforts to obtain weapons of mass destruction. 2. Executive Order 13590 (Nov. 2011) (Administered by the Dept. of State) Expanded existing energy-related sanctions on Iran to authorize sanctions on persons that knowingly provide: 1.Goods, Services, Technology, or Support for the Development of Petroleum Resources If a single transaction has a fair market value of $1 million or more, or if a series of transactions from the same entity have a fair market value of $5 million or more in a 12-month period. 2.Goods, Services, Technology, or Support for the Maintenance or Expansion of the Petrochemical Sector: If a single transaction has a fair market value of $250,000 or more, or if a series of transactions from the same entity have a fair market value of $1 million or more in a 12-month period. 3. National Defense Authorization Act (NDAA) (December 31, 2011) Effective 2/29/12, Privately held Financial Institutions could be subject to sanctions if they conducted significant non- petroleum related transactions with the Central Bank of Iran or designated Iranian Financial Institutions, except food, medicine or medical devices sold to Iran. Effective 6/28/12, Privately held Financial Institutions could be subject to sanctions if they are involved with transactions with the Central Bank of Iran or designated Iranian Financial Institutions for the sale of petroleum or petroleum products to Iran, if the President determines that there is a sufficient supply of petroleum from other countries Effective 6/28/12, Government controlled Financial Institutions may be subject to sanctions if they are involved with transactions with the Central Bank of Iran or designated Iranian Financial Institutions for the sale of petroleum or petroleum products to Iran, if the president determines that there is a sufficient supply of petroleum from other countries. If a foreign Financial Institution is sanctioned, the US Financial Institution holding the correspondent relationship will have 10 days to terminate the relationship. 4. Executive Order 13599 implemented NDAA (February 5, 2012) Blocked property and interests in property subject to U.S. jurisdiction of all Iranian financial institutions, including the Central Bank of Iran. (Even if the bank is not designated on the SDN list.) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
International Sanctions - Syria and Sudan 1. Executive Order 13582 (August 17, 2011) Blocked property and interests of the Government of Syria and prohibited (among other things): New investment in Syria; exportation, re-exportation, sale, or supply, directly or indirectly, from the United States; the importation into the United States of petroleum or petroleum products of Syrian origin; and any transaction or dealing by a United States person, wherever located. 2. Executive Order 13606 (April 22, 2012) Blocked the property and suspended entry into the United States of certain persons with respect to grave human rights abuses by the Governments of Iran and Syria 3. Executive Order 13608 (May 1, 2012) Blocked the property and suspended entry into the United States of foreign sanctions evaders with respect to Iran and Syria 1. Executive Order 13067 (November 5, 1997) Blocking Sudanese Government property and prohibited (among other things) : The importation into the United States of any goods or services of Sudanese origin, other than information or informational materials; the exportation or re- exportation, directly or indirectly, to Sudan of any goods, technology (including technical data, software, or other information), or services from the United States; any transaction by a United States person relating to transportation of cargo to or from Sudan. 2. Executive Order 13400 (April 27, 2006) Blocking property of persons in connection with the conflict in Sudan’s Darfur region 3. Executive Order 13412 (October 13, 2006) Blocking property and prohibiting transactions with the Government of Sudan J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM Syria Sudan
Sanctions Impact on Trade? Office of Foreign Asset Control (OFAC) and other sanctions programs have the potential to impact every service and product the firm offers. The variety of cross border legal sanctions can allow a transaction to be permitted in one country and prohibited in another. Attempts to evade or avoid sanctions are prohibited. Trade transactions can also be impacted by a number of other restrictions and prohibitions, such as special import and export licensing requirements relating to sensitive goods and technology, dual use goods, arms regulations, nonproliferation sanctions and antiboycott regulations. The following trade products pose a higher than normal sanctions risk due to the nature of transactions • Commercial and Standby Letters of Credit • Documentary Collections • In-sourcing (White Label) • Participations bought and sold Transactions for these trade products involve many steps with the sale, transportation and financing of goods and services. There are multiple party and entity names in the transaction documentation J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Bureau of Industry and Security (BIS) – Dual Use Goods and Boycott Clauses Bureau of Industry and Security (BIS) – a department within the U.S Department of Commerce charged with the responsibility for U.S national security, foreign policy and economic interests. All U.S. financial institutions, regardless of their locations, are required to comply with BIS regulations. Penalties for violations are severe and include the fines of up to $250,000 per violation or twice the transaction value (whichever is greater) and imprisonment of up to ten years. BIS Activities include •Enforcement of antiboycott regulations – the laws are directed generally against foreign boycotts of countries friendly to the U.S. •Regulation of export of sensitive goods and technology •Enforcement of export controls, including dual use goods and technology – primarily commercial goods which have potential military applications (proliferation, national security and combating terrorism) •Assistance of U.S. industry to comply with international arms control agreements •Requiring compliance with sanctions against imports and exports of goods and cervices to certain Denied / Embargoes Persons Examples of Dual Use Goods •Computers; •Integrated circuits; •High energy devices; •Telecommunications; •Marine acoustic systems and equipment; •Optical equipment (mirrors, components, cable); •Chemical mixtures (e.g. ammonium bifluoride, ammonium nitrate, etc.); •Alloys of metals (e.g. aluminum, lithium, magnesium, metal powder, etc.) •Chemical compounds (e.g. beryllium, indium, etc.); •Uranium, helium, hydrogen BIS Lists •Denied Persons List (DPL) – A list of entities and individuals that have been exporting privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited. •Unverified List – A list of parties where BIS has been unable to verify the end-user in prior transactions. The presence of a party on this list is a “Red Flag” that should be resolved before proceeding with the transaction. •Entity List – A list of parties whose presence in a transaction can trigger license requirement under the Export Administration Regulations. The list specifies the license requirements that apply to each listed party, additional to the requirements under the Export Administration Regulations. Antiboycott Clauses •Examples of prohibited activities: •Agreement to refuse or to refuse to do business with or in Israel or with blacklisted companies. •Implementation of a letter of credit that contains prohibited terms and conditions. •Agreement to discriminate or actually discriminate against a person, based on race, religion, sex, nationality or national origin. •Examples of potential antiboycott language: •Black list: •Shipment of goods originating from Israel is strictly prohibited. •Certificate from the manufacturer stating that they are not blacklisted. •White List: •Certificate from the steamship company or owner or master or their agents stating that the carrying vessel is allowed/eligible to enter U.A.E. ports. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Policy/ Program Overview • A statement of zero tolerance for bribery in all forms • A strong statement from senior management, setting the tone from the top • Facilitation payments prohibited • Pre-clearance required for expenses benefitting government officials • Strong controls governing the engagement of third parties that help develop business or seek government action • Mandatory training to all relevant employees; enhanced training for higher risk employees • Mechanisms provided for employees to self-report issues Risk Assessment/ Monitoring Training • Country Corruption Index • Identification of high risk countries, industries, activities • Increased attention to local legal requirements • Monitoring process to enforce pre-clearance requirement • Generate relevant metrics • Centralization of due diligence for third party engagements • Targeted training for high risk employees • Develop best practices around required due diligence and contractual agreements Third Party Oversight • Third parties (that help develop business or seek government action) can create liability for the firm even if not directly paid by the bank • Most enforcement actions involve third parties that pay bribes for their principals • Regulatory expectation requiring strong controls • Engagement of third parties must be treated as a significant event Governance • Board level reports • Senior level accountability • Increased corporate-level staffing • Senior governance committee • Designated legal and compliance officers Anti-Corruption ProgramJ.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Florence Coronel Risk, Europe Middle East and Africa, J.P. Morgan C R E D I T R I S K M A N A G E M E N T I N A C H A L L E N G I N G E N V I R O N M E N T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Agenda  Risk Management at J.P. Morgan  Pillars of Risk Management  Risk Ratings  Counterparty Credit Risk Analysis  Sovereign Risk  Reputational Risk Management  Market Themes and Risk Management Actions  Eurozone Crisis  Arab Spring  Other issues for risk managers  Q&A J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Pillars of Risk Management Risk Market Risk Loss caused by a change in market prices or rates Operational Risk Loss due to inadequate internal processes or controls Credit Risk Loss due to borrower default Reputational Risk Loss due to negative headlines Legal Risk Loss due to inability to enforce contractual agreements In Emerging Markets, Money Laundering/ KYC issues In Emerging Markets, more volatile and prone to shocks In Emerging Markets, combined with Political Risk In Emerging Markets, creditor protection, enforcement, lack of precedent, no netting or collateral confidence In Emerging Markets similar but less advanced systems and processes; less experience J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Risk ratings are used to manage credit exposures J.P. Morgan risk ratings  Credit risk is the risk of loss from counterparty default  Risk ratings are assigned to differentiate risk levels  J.P. Morgan risk ratings range from 1+ (low) to 10 (worst) Corporate Counterparty Ratings 3 step risk grading process:  Stand-alone grade  Obligor grade  Facility grade Risk Monitoring and Control Credit risk is monitored at an aggregate portfolio, industry and individual counterparty level Risk ratings J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Historical corporate bond and loan defaults 1995-2010 ($ in billions) How does risk of loss rise as you go down market? Height: 2.00” Width: 8.84” Horizontal: 1.67” Vertical: 2.00” Source: Average cumulative issuer-weighted global default rates by alpha-numerical ratings, 1983-2010 0% 0% 0% 1% 1% 2% 3% 4% 8% 10% 19% 30% 39% 1% 2% 3% 7% 8% 17% 20% 26% 37% 49% 51% 68% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca-C One Year Five Year $5 $13 $59 $140 $203 $46 $16 $10 $7 $281 $330 $39 $6 $41 $40 $0 $100 $200 $300 $400 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 50 100 150 200 250 300 $ defaults # of defaults Source: “Corporate Default and Recovery Rates,” Moody’s Investors Service, February 2011 Economic cycles significantly affect default volume J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Credit Risk analysis framework for evaluating counterparties…  Quantitative  Profitability  Asset efficiency  Leverage  Coverage of debt obligations  Equity base  Cash flow/Liquidity  Projections of future performance  Funding  Maturity mismatch  Exchange/Interest rate risk  Valuation  Equity  Assets  Corporate structure  Holding company  Operating company  Security  Priority  Structural  Contractual  Intercreditor  Documentation  Legal risk  Anti-trust  Take over  Legal system  Regulatory risk Business analysis Financial analysis Structural analysis  Business environment  Point of economic cycle  Cyclicality of industry  Industry  Competitive environment  Industry structure  Technology risk/obsolescence  Key drivers of success  Company  Management  Corporate governance  Steady state/transforming  Strengths/weaknesses  Earnings  Reliable or vulnerable  Cash conversion cycle Decision Counterparty risk rating? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Credit Risk analysis framework for evaluating transactions…  Key Credit Risks  Client level  Industry level  Legal risk  Regulatory risk  Operational risk  Market risk  Counterparty exposure vs. limits  Client and Group  Primary and Settlement  Industry exposure  Country exposure  Hedging or secondary sales  Legal lending limit Transaction analysis Risks and Mitigants Portfolio analysis  Legal entity of counterparty  Type and tenor of transaction  Purpose of loan or derivative  Adequacy of facilities  Contractual obligations/rights  Sources of repayment  Effective 2nd/3rd way out  Collateral  Credible assumptions  Probability of default  Loss given default/recovery Decision Transaction approval? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
 Risk that a sovereign event or action alters the terms of contractual obligations of counterparties in the country  Sovereign Ratings – an assessment of a sovereign government’s ability and willingness to service its obligations  Focus on Sovereign Intervention – the risk that the sovereign will take unexpected actions that have a sudden adverse impact on the business environment. These interventions include:  Expropriation  Freezing of deposits  Utility price freezes and other price controls  Undermining of existing laws (contracts, legal codes and regulations)  Delayed or reversed government guarantee  Multiple and dynamic objectives of sovereigns  The sovereign’s potential conflict between its domestic constituents and external counterparts  Lack of bankruptcy procedures  Sovereigns “never” disappear Country Risk J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM Key distinction with counterparty risk:
Reputation Risk  Exists in virtually every activity, transaction and relationship  Reputation risk is hard to measure and difficult to discern  It can lead to lost business and ultimately a failure of confidence by our clients and counterparties. Such failure has in the past resulted in failure of financial firms  It can impair our relationship with our regulators  It can affect our ability to attract the best employees Reputation risk is among the most complex risks facing a financial institution Definition: The potential for loss of confidence in an institution’s integrity resulting from adverse publicity – true or not – over its practices and associations J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Managing Reputation Risk  Individual accountability and responsibility for working in a manner consistent with the highest ethical standard  Vetting clients and transactions  Due diligence  Investigations  Approval process  Internal escalation process  Reputation Risk Committees  LOB Risk Committees  Conflicts Office  Risk Control oversight functions  Compliance  Audit  Policies While we cannot remove reputation risk, we can make efforts to minimize it J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
 Slower economic growth in most developed markets  Sovereign debt default concerns in the Eurozone  Political instability in Middle East and North Africa  Regulatory and political scrutiny of the banking industry  Higher capital and liquidity requirements under Basel III  Emerging markets still transforming  J.P. Morgan expansion into new countries in Sub-Saharan Africa Recent market events are unprecedented and pose tremendous challenges What are the background issues that J.P. Morgan Risk Management are currently dealing with? Credit Challenges in 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Middle East and North Africa Turmoil J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Eurozone Debt Crisis Source: Economist Source: Fitch / ECB Fitch FC/IDR GDP $bn DEBT $bn Debt/GDP % 10yr Sov Yield Austria AAA 419.0 301.0 72% 2.5% Finland AAA 266.3 129.3 49% 1.8% France AAA 2,781.1 2,387.2 86% 2.8% Germany AAA 3,573.9 2,903.6 81% 1.3% Luxembourg AAA 59.5 10.8 18% 1.7% Netherlands AAA 837.0 545.6 65% 2.0% Belgium AA 513.1 503.0 98% 3.3% Estonia A+ 22.2 1.3 6% - Malta A+ 8.9 6.4 72% 4.2% Slovakia A+ 96.0 41.6 43% 4.8% Slovenia A 49.6 23.6 48% 5.3% Italy A- 2,197.7 2,638.3 120% 5.8% Ireland BBB+ 217.5 235.4 108% 7.1% Spain BBB 1,492.9 1,022.2 68% 6.1% Cyprus BB+ 24.7 17.7 72% 7.0% Portugal BB+ 237.7 256.2 108% 11.6% Greece CCC 299.0 494.5 165% 26.9% UK AAA 2,415.5 494.5 85% 1.8% 15,511.6 12,012.2 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
 Impact from slower developed market economic growth – greater emphasis on Emerging Markets?  Sovereign debt default in the Eurozone?  What if interest rates rise rapidly to counter inflation in Emerging Markets?  Will poor corporate governance and transparency hinder bank asset quality in Emerging Markets?  Can Regulators keep up with Basel III and banking product advances in Emerging Markets? Whatever happens – be prepared!  Cash/ liquidity is king  Avoid concentrations  Be ready for the unexpected - think holistically  Sound risk management more important than ever Themes to look out for Near Term Outlook J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
Moderator: Zeeshan Khan, Global Trade, Middle East and North Africa, J.P. Morgan Panellists: Azmi Shaban, Shaban Group Santosh Babu Karkera, A. A. Bin Hindi Group Guillermo Arias, General Motors Neeraj Tekchandani, Apparel FZCO C O R P O R A T E P E R S P E C T I V E S O N T H E S T A T E O F T H E R E G I O N A L M A R K E T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM

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J.p. morgan iraq and mena trade forum monday 24 september presentation

  • 1.
    Middle East andNorth Africa Trade Forum Sunday 23 – Tuesday 25 September, 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 2.
    This presentation wasprepared 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 is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. It may not be copied, published or used, in whole or in part, for any purpose other than as expressly authorised by J.P. Morgan. The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to the Company or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of, this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation. IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties. J.P. Morgan is a marketing name for the treasury services businesses of JPMorgan Chase Bank, N.A. and its subsidiaries worldwide. In the United Kingdom, JPMorgan Chase Bank, N.A., London branch and J.P. Morgan Europe Limited are authorised and regulated by the Financial Services Authority JPMorgan Chase is licensed under US patent numbers 5, 910,988, and 6, 032 and 137 ©2012 JPMorgan Chase & Co. All rights reserved. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 3.
    Asif Raza Head ofTreasury and Securities Services, Middle East and North Africa, J.P. Morgan W E L C O M E R E M A R K S J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 4.
    Agenda Monday September 24 09:15Welcome Refreshments 09:45 Welcome Remarks Asif Raza, Head of Treasury and Securities Services, Middle East and North Africa, J.P. Morgan 10:00 Changing Paradigms of Trade and Currency Settlement Patterns Examination of the regional market landscape with identification and analysis of key growth areas and emerging economies allows capitalization of the trade corridors between MENA and Asia and the growing use of RMB as a trade settlement currency. Sonam Kapadia, Global Trade, Middle East and North Africa, J.P. Morgan 11:00 Refreshments 11:30 The Product Landscape in a Growing Trade Environment To accommodate the growing trade patterns the product landscape is simultaneously increasing it’s range and scope of offerings. Analyzing the importance of the Cash Conversion Cycle is a vital exercise when choosing Documentary Credit and Supply Chain. Amr El Haddad, Global Trade Product, Middle East and North Africa, J.P. Morgan 12:15 Compliance Evaluating compliance issues specifically encountered in the MENA region and how we can work in this context to better understand and identify the needs of our clients. Ian Lyall, Compliance, Europe Middle East and Africa, J.P. Morgan 13:15 Lunch Al Saraya Restaurant J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 5.
    Agenda 14:15 Credit RiskManagement in a Challenging Environment Managing credit risk requires in depth analysis of the current challenging environment Florence Coronel, Risk, Europe, Middle East and Africa, J.P. Morgan 15:15 Panel Discussion: Corporate Perspectives on the State of the Regional Market How have Corporates adapted their strategies to cope with the unpredictable nature of regional growth and plan to avoid future liquidity shortages? Examination of opportunities and benefits provided by market diversification in converged cash and trade finance solutions to help improve working capital. Moderator: Zeeshan Khan, Global Trade, Middle East and North Africa, J.P. Morgan Panellists: Azmi Shaban, Shaban Group Santosh Babu Karkera, A. A. Bin Hindi Group Guillermo Arias, General Motors Neeraj Tekchandani, Apparel FZCO 16:30 Close of Day 19:30 Dinner Meet in Hotel Lobby J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 6.
    Sonam Kapadia Global Trade,Middle East and North Africa, J.P. Morgan C H A N G I N G P A R A D I G M S O F T R A D E A N D C U R R E N C Y S E T T L E M E N T P A T T E R N S J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 7.
    Changing face ofthe world  Trade within Europe accounted for 65% of European trade  More than half of Asia’s exports (54%) remained within Asia  28% of North Americas exports remained in North America Trade within regions dominates world trade. Europe and Asia remain their own top trading destinations Slow Growth Accelerating Decelerating Fast Growth <3% <3% ≥3 % ≥3% 2010 – 2017 GDP growth 2003–2007 GDPgrowth Intra/Inter table Origin Destination NA1 SCA2 Europe CIS Africa MENA APAC Total North America1 480.3 643.2 405.3 36.6 97.1 68.1 732.0 2,462.5 South & Central America2 415.7 187.3 152.8 7.3 16.6 9.4 329.1 1,118.3 Europe 311.9 152.4 3,513.8 269.3 185.4 147.8 844.8 5,425.3 CIS 15.1 12.6 176.9 100.2 3.6 2.2 99.5 410.1 Africa 34.9 19.5 172.2 9.5 61.4 36.5 128.9 462.9 MENA 51.1 18.0 177.7 10.9 20.9 52.1 171.1 501.8 APAC 419.3 196.4 580.0 94.6 136.2 419.3 2,753.1 4,598.9 Total 1,728.3 1,229.3 5,178.6 528.4 521.2 735.5 5,058.4 14,979.7 Source: UNCTAD database, 2010 international trade data & JPM Analysis 1 excluding Mexico 2 including Mexico Source: IMF WEO database, JPM Analysis Country as percentage of Region US as % of North America1 76.02% Russia as % of CIS 70.79% China as % of Asia 39.25% Mexico as % of SCA2 25.41% Canada as % of NA1 23.98% Germany as % of Europe 23.31% Brazil as % of SCA2 17.94% India as % of Asia 4.82% Source: UNCTAD database, JPM Analysis NA 28% SCA 24% Europe 18% CIS 1% Africa 2% MENA 3% APAC 24% NA 52% SCA 15% Europe 12%CIS 1% Africa 2% MENA 2% APAC 16% NA 14% SCA 7% Europe 17% CIS 2% Africa 3% MENA 3% APAC 54%NA 9% SCA 1% Europe 20% CIS 1% Africa 5%MENA 7% APAC 57% 19% 3% 35% 1% 12% 4% 26% NA 8% SCA 3% Europe 68% CIS 3% Africa 3% MENA 4%APAC 11% 7% 1% 51% 19% 2% 2% 18% J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 8.
    Sophistication has increased MiddleEast North Africa increasing trades with Emerging markets, Asia is especially prominent Intra/Inter table Origin Destination NA1 SCA2 Europe CIS Africa MENA APAC Total North America1 480.3 643.2 405.3 36.6 97.1 68.1 732.0 2,462.5 South & Central America2 415.7 187.3 152.8 7.3 16.6 9.4 329.1 1,118.3 Europe 311.9 152.4 3,513.8 269.3 185.4 147.8 844.8 5,425.3 CIS 15.1 12.6 176.9 100.2 3.6 2.2 99.5 410.1 Africa 34.9 19.5 172.2 9.5 61.4 36.5 128.9 462.9 MENA 51.1 18.0 177.7 10.9 20.9 52.1 171.1 501.8 APAC 419.3 196.4 580.0 94.6 136.2 419.3 2,753.1 4,598.9 Total 1,728.3 1,229.3 5,178.6 528.4 521.2 735.5 5,058.4 14,979.7 Source: UNCTAD database, 2010 international trade data & JPM Analysis 1 excluding Mexico 2 including Mexico Source: IMF WEO database, JPM AnalysisSource: UNCTAD database, JPM Analysis NA 9% SCA 1% Europe 20% CIS 1% Africa 5% MENA 7% APAC 57% NA 19% SCA 3% Europe 35% CIS 1% Africa 12% MENA 4% APAC 26% No surprises here!  Asia continues to be the largest trading partner for MENA region  Energy demand  Trading routes  Manufacturing hubs  The growth rates between these markets continue to be strong  The GCC region leads the growth rates in MENA  North Africa region and Levant have been subdued given the events of 2011  Working with Asian emerging markets presents unique challenges  Differing practices  Clearing timezones  Language  The MENA companies and banks have the sophistication required to conduct this complex trade finance J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 9.
    Middle East andNorth Africa – Global Trade Trends Import Trends  The U.A.E. was the top importing Middle East North Africa (MENA) region. (Saudi, Morocco, Algeria & Egypt make up the rest of the top 5)  Algeria and Egypt were the top 2 countries with the highest percentage growth over the last 5 years  In 2010, Saudi’s spending more than doubles that of the previous 2 years  Auto & Transport that experienced the largest percentage decline over the past 5 years  U.A.E.’s spending on the imports of precious stones & artefacts clearly the largest among the MENA countries  Lebanon’s spending on precious stones experiences a growth of nearly 4 times the amount spent in 2007  In 2010, Egypt’s spending in this increases to 10 times the amount spent in 2007 Key Trends and Growth Areas $0 $10 $20 $30 $40 $50 $60 $70 2007 2008 2009 2010 2011 Billions Fastest Growing Importers Algeria Egypt $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 2007 2008 2009 2010 2011 Billions Top 5 Importing Countries U.A.E. Saudi Morocco Algeria Egypt $0 $10 $20 $30 $40 $50 $60 $70 2007 2008 2009 2010 2011 Billions Declining Imports Auto & Transport Electronics & Equipment Source: UN Comtrade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 10.
    Letters of CreditActivities in Middle East and North Africa 0 20 40 60 80 100 120 140 160 Export LC 2010 & 2011  MENA region continues to be an active user of trade instruments, around 1.5% of the Global LC usage  Average value of issuance is USD 660K, which is comparable to the global average of USD 603K  Total LCs issued from MENA region outside of the region is 491K in 2011, showing a marginal reduction of 0.5% mainly driven by the reduced activities during the Arab Spring events. HY 2012 data shows that a recovery of the volumes is well underway  Algeria is a prolific user of LCs for imports primarily driven by local regulations which require most purchases to be supported by sight LCs  Total Export LCs received in the region are 197K, with a growth of 3.35% driven by UAE which reflects the pick-up in trading activity from Dubai.  UAE continues to dominate the export LC flows, reflecting the strength of Dubai as the primary trading hub for the region. Dubai receives nearly half the export LCs in the region (95K). The match of export/import LCs shows clear trading hub pattern with nearly equal match of exports and imports  The busiest route for LC traffic is Asia, reflecting the volumes of the trades between the countries. The pattern of trade is increasingly shifting towards Open account when on overlays the trade data with the LC volumes data.  The regional trade is primarily conducted on LC terms – 7% of the physical trade is with MENA but accounts for 18% of the import LCs and 44% of the export LC  Exports to Africa are mostly LC backed, while 7% of the physical trade of MENA is with Africa, it accounts for 25% of the export LC  Key look-forward is to see  Dubai to continue to reflect the recovery of the region and show LC growth of ~10%  Accelerated recovery of trade volumes for Libya driven by the reconstruction activities  Iraq to show higher growth of back of increased oil revenues  Decline in Lebanon as the impact of the disturbances in Levant Key Trends and Growth Areas Africa 25% Europe - Euro Zone 3% Europe - Non Euro Zone 2% Asia Pacific 25% Middle East 44% Central Latin America 0% North America 1% Export LCs Africa 5% Europe - Euro Zone 29% Europe - Non Euro Zone 8% Asia Pacific 38% Middle East 18% Central Latin America 0% North America 2% Import LC Source: SWIFT Traffic Watch, JPM Analysis Trade Volumes and Regions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 11.
    China is thelargest trade partner for MENA Region China is the largest trading partner for the MENA region and has an accelerated growth path for the trade corridor The top commodities, that were imported from China and into the MENA region, from 2007 – 2011 were:  Plant & Machinery (USD 47 billion)  Electronics & Equipment (USD 41 billion)  Clothing & Accessories (USD 21 billion)  Iron & Steel (USD 16 billion)  Auto & Transport (USD 13 billion) This trend is being witnessed globally and has led to an active increase in the use of RMB as the trade settlement currency Banks estimate that 10% China’s trade is now in RMB  The forecast is that in 3-5 years, it will increase to 20% as China’s share of global trade increases SWIFT data shows that Renminbi (RMB) is the third largest currency for Letters of Credit (LCs), after Dollar and the Euro  About 4% of LCs issued were in RMB  Overall it is the 15th largest currency for trade There are challenges to using RMB which are being actively addressed  Strict documentation requirements  Availability of RMB to the company to pay for purchases  Hedging of RMB exposures Trade with China is an incentive for RMB settlement Plant & Machinery 34% Electronics & Equipment 29% Clothing & Accessories 15% Iron & Steel 12% Auto & Transport 10% MENA Imports from China $0 $10 $20 $30 $40 2007 2008 2009 2010 2011 Billions Import Trends from China 2007-2011 Source: UN Comtrade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 12.
    RMB Settlement hassignificant tail winds  China’s central bank is increasing the coverage of the Swap agreements that they have with other central banks  Central Banks of key trading markets like Singapore and Dubai are already on-board  London expected to become an off-shore centre for RMB Liquidity in the Hong Kong market for RMB has increased  Estimates are that the deliverables market in Hong Kong has now increased to USD 3 billion, which provides the ability to purchase/sell large order without moving the market  RMB based bonds are being issued to provide alternatives for managing RMB liquidity Faster processing times  Chinese exports estimate that sales based on RMB are cleared in a day as compared to a week or fortnight for USD Transparency  Typically, Chinese exporters build in a buffer of 3% for currency movements in the sales  RMB invoicing typically shows an improvement of 3%-7% in the cost of goods Benefits of RMB Trade Settlement Scheme  Enhanced relationships with suppliers in China  A shorter turnaround time processing trade documentation improves the supplier’s cash flow  Exporters settling trades in RMB will be better able to grow their client base in China  Transparency in pricing and better management of foreign exchange risk Factors providing support Source: Global Trade Review J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 13.
    Major Regulatory Events 2008 2009 2010 2011 Jan2009 Mar 2009 Apr 2009 Jul 2009 PBoC and HKMA signed currency swap agreement for up to RMB200billion. PBoC announced that it will actively facilitate the pilot scheme by “reducing institutional obstacles”. State Council approved 5 cities (Shanghai, Guangzhou, Shenzhen, Dongguan, Zhuhai) for the pilot scheme with HK. PBoC issues initial guidelines for the pilot scheme with HK, Macau and ASEAN countries. It also published Detailed Rules for the RMB Trade Settlement pilot scheme. Mar 2012 Apr 2012 PBoC announced that enterprises with import and export license are permitted to conduct RMB cross-border trade business HKMA guidance note issued on reasonable assurance and due diligence procedures for RMB position squaring with RMB Clearing Bank for trade related conversion. Dec 2008 Premier Wen Jiabao announced the pilot scheme for RMB Trade Settlement with HK and Macau. Feb 2010 Jun 2010 Dec 2010 HKMA announced an important elucidation which essentially expanded scope of RMB banking business in HK. PBoC announced the expansion of the pilot scheme to cover 4 municipalities and 16 provinces in China and overseas pilot locations extended to all countries. PBoC released the 2nd batch of MDE list that can settle merchandise exports in RMB from 365 to 67,359. HKMA enacted further rules to restrict the amount of RMB held by authorized institutions in the RMB settlement scheme: (1) Required AIs to square their RMB net open positions with the RMB Clearing Bank arising from exchange transactions with customers for cross-border trade settlement. (2) AIs can only purchase RMB through the RMB Clearing Bank for their clients in relation to trade transactions due for payments to the Mainland within 3 months. (3) AIs need to limit their net open positions in RMB to 10% of their RMB Assets or RMB Liabilities (RMB NOP was subsequently revised to 20% in Jan 2012 and from 22 May 2012, banks can set its own internal RMB NOP in consultation with HKMA) Mar 2011 Aug 2011 Dec 2011 HKMA released a press announcement welcoming introduction of the RMB Fiduciary Account Service by BOC HK (ie.RMB Clearing Bank in HK) as solution to mitigate its counterparty credit risk issue raised by the industry last year. PBoC announced the extension of RMB cross-border trade settlement scheme to nationwide. PBoC announced enhanced co-operation to develop financial markets between China and Japan in particularly, to promote use of RMB and JPY in cross-border transactions. 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 14.
    RMB Trade SettlementScheme Machinery and transport equipment Geographical coverage Eligible enterprises and transactions Import (payment out of Mainland China) All enterprises Merchandise trade Service trade All enterprises Export (payment into Mainland China) All enterprises All enterprises (subject to establishment of the “surveillance list” ) OffshoreMainland China 20 Provinces All Offshore Locations HK/Macau/ASEAN5 cities All Provinces J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 15.
    Currency Swap Arrangement China Argentina 70Bn Iceland 3.5Bn New Zealand 25Bn Indonesia 100Bn Malaysia 180Bn Singapore 150Bn HongKong 400Bn Belarus 20Bn South Korea 360Bn Australia 200Bn Pakistan 10Bn Mongolia 10Bn UAE 35Bn Thailand 70Bn Ukraine 15Bn Japan Direct Swap China is expanding its bilateral currency swap arrangement Source: PBoC – Bilateral currency swap arrangement (RMB) RMB1,648.5 billion J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 16.
    Building up Traction,Gaining Momentum Cross-border RMB settlement ¹ RMB Payments ² ³ HKMA publication on RMB deposits in Hong Kong Offshore RMB Deposits ³ 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 RMB Mn RMB553Bn 0 10 20 30 40 50 60 70 80 90 100 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 ² SWIFT – Client initiated and institutional payments, sent and received based on value Hong Kong OthersChina In % 0 100 200 300 400 500 600 700 Q1,2010 Q2 Q3 Q4 Q1, 2011 Q2 Q3 Q4 Q1, 2012 RMB Bn ¹ China Customs, CEIC +288%Total trade settled in RMB (2011/10) RMB535Bn (YTD2010) RMB2,080Bn (YTD2011) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 17.
    Trade and SupplyChain Flows Facilitating RMB Cross-border Trade • Pricing Transparency • Financing Cost • Exchange Rate • No Currency Mismatch • Working Capital • Availability of Offshore RMB Liquidity • Bonded Warehouse Transactions • Export Verification (“Hexiao”) • Trade Cycle • Pricing Transparency • Financing Cost • Exchange Rate Physical Supply Chain Offshore RMB Market Financial Supply Chain Purchasing Manufacturing Inventory Customs Clearance Sales Working Capital Requirement Receivables Reconciliation J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 18.
    Case Study I AHong Kong buyer was asked by its supplier in China which is the dominant party in their business relationship to issue a RMB LC for settlement of their trade. Whilst there has been much media broadcast on RMB cross-border trade settlement and its benefits for parties involved in the scheme, the Hong Kong buyer was unsure how to proceed. There are few issues that the Hong Kong buyer is considering – RMB is not fully convertible and there appears to be regulations on the cross-border trade. What would the solution be for this Hong Kong Buyer? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 19.
    Case Study I: Proposed RMB Trade Solution 9 Remit payment Hong Kong Buyer Onshore Bank J.P. Morgan Hong Kong Onshore Supplier 2 Issue RMB LC 1 Establish LC issue facility 3 Advise LC 4 Shipped goods 5 Present documents 6 Forward documents 7 Notify documents arrival 10 Credit proceeds  Strengthen relationship with its supplier  Access to credit support  Access to expertise on cross-border trade settlement What are the benefits to YOU? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 20.
    Case Study 2 Acompany in Hong Kong which is the trading entity for a PRC Manufacturer arranged with its Ultimate Buyers in Middle East to settle their trade in RMB under LC terms. The company in Hong Kong contemplates to settle its trade with the PRC Manufacturer in RMB to mitigate its FX exposure. The other consideration is the funding needs of its PRC Manufacturer. It is challenged by the increasing onshore interest rates and the lending limits quota. What would the proposed solution be? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 21.
    Case Study 2: Proposed RMB Trade Solution PRC ManufacturerJ.P.Morgan China LIB 1) Advise RMB LC J.P.Morgan Hong Kong Hong Kong Trading Company 2) Issue RMB LC 3) Provide import LC bills financing Lower COF offshore 4) Use RMB proceeds received from its Ultimate Buyers to settle loan Ultimate Buyers (Middle East) Enhanced banking relationship Access to credit support  Increase sales opportunities  Access to credit and funding support  Access to expertise on cross-border trade settlement What is it for YOU? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 22.
    J.P. Morgan locationsworldwide (alternate) cities Argentina Buenos Aires Bahamas Nassau Brazil Rio de Janeiro São Paulo Canada Calgary Montreal Toronto Vancouver Cayman Islands Georgetown Chile Santiago Colombia Bogotá Mexico Mexico City Monterrey Peru Lima United States Chicago Dallas Houston Los Angeles New York San Francisco Venezuela Caracas Austria Vienna Belgium Brussels Channel Islands Jersey France Paris Germany Berlin Frankfurt Munich Greece Athens Ireland Dublin Italy Milan Rome Luxembourg Netherlands Amsterdam Norway Oslo Poland Warsaw Portugal Lisbon Russian Federation Moscow Spain Madrid Sweden Stockholm Switzerland Geneva Zurich United Kingdom Bournemouth Edinburgh Essex Glasgow Isle of Man London Egypt Cairo Nigeria Lagos South Africa Johannesburg Australia Melbourne Sydney Bahrain Manama China Beijing Hong Kong Shanghai Shenzhen Tianjin Dubai (UAE) India Bangalore Mumbai Indonesia Jakarta Israel Tel Aviv Sri Lanka Colombo Thailand Bangkok Taiwan Kaohsiung Pan Chiao City Taichung Tainan City Taipei Taoyuan Turkey Istanbul Uzbekistan Tashkent Vietnam Hanoi Ho Chi Minh City Japan Osaka Tokyo Lebanon Beirut Malaysia Kuala Lumpur Labuan Pakistan Karachi Philippines Manila Saudi Arabia Riyadh Singapore South Korea Seoul Lagos Lisbon Madrid Rome Athens Istanbul Beirut Tel Aviv Cairo Riyadh Manama Karachi Mumbai Bangalore Colombo Johannesburg Edinburgh Glasgow Isle of Man Dublin Essex London Bournemouth Jersey Paris Amsterdam Brussels Luxembourg Zurich Geneva Milan Munich Vienna Berlin Frankfurt Warsaw Moscow Vancouver Calgary San Francisco Los Angeles Dallas Houston Monterrey Mexico City Georgetown Nassau Caracas Bogotá Lima Rio de Janeiro São Paulo Santiago Buenos Aires Hanoi Bangkok Ho Chi Minh City Kuala Lumpur Singapore Labuan Manila Hong Kong Shenzhen Taoyuan Taichung Pan Chiao City Tainan City Kaohsiung Sydney Melbourne Taipei Chicago Toronto Montreal New York Oslo Stockholm Beijing Shanghai Tianjin Jakarta Tokyo Seoul OsakaTashkent Dubai Americas Europe Africa Asia Pacific/Middle East J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 23.
    Amr El Haddad GlobalTrade Product, Middle East and North Africa, J.P. Morgan T H E P R O D U C T L A N D S C A P E I N A G R O W I N G T R A D E E N V I R O N M E N T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 24.
    Blank slide In ThisPresentation Growth • How have global trade exports grown since the 1950’s? Action • What did banks do to design the right tools for trade financing? Re- action • What’s most suitable for Corporate sector?  Developing trade patterns  Growing product landscape to meet the growth in Trade  Importance of using the Cash Conversion Cycle (CCC) as a criteria to choose the right product J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 25.
    nk slide Section 1: How did Global Trade Grow? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 26.
    Blank slide I -Developing trade patterns Despite a post-crisis dip, the current level of world gross exports is almost three times that prevailing in the 1950s  Commodity trade accounted for a declining share of this growth (with some exceptions)  What explains the expansion of global trade? 1) The rise of Emerging Market Economies (EMEs) 2) The growing importance of regional trade 3) The shift of higher technology exports towards dynamic EMEs Systemic important trading nations are increasing  A chief contributor is the growing role of global supply chains in overall trade, facilitated by lower tariffs  With vertical specialization, production of certain goods is fragmented into several stages  Goods cross borders several times before being transformed into final products, further increasing trade interconnectedness  Outsourcing of production stages from advanced “upstream” countries to neighbouring EMEs has also supported a shift in the technology content of exports towards the latter A. The global trade landscape has witnessed dramatic shifts over the past several decades B. Trade expansion was further associated with growing trade interconnectedness J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 27.
    nk slide II. TheEvolving Structure of Global Trade • Trade was dominated by advanced economies • US, Germany, and Japan  1/3 of global trade 1970s • Diversification of trading landscape • EMEs, particularly East Asia 1990s • China became the second largest trading partner after the United States. • China’s trade was 57% of its GDP in 2008. 2010 The Figure shows the evolution of key players in global trade, defined as countries whose trade (exports plus imports) represented at least 2 percent of world trade 0 5 10 15 20 Belgium-… France Germany Italy Netherlands Sweden United Kingdom Canada China, P.R.:… China, P.R.:… Japan Korea,… Mexico Saudi Arabia Singapore Switzerland United States 1970 1990 2010 Figure 2. Exports of Key Players in International Trade Source: DOTS A. The Diffusion of Key Players in Global Trade A1. Emerging market economies have moved from peripheral players to major centres of Global Trade J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 28.
    II. The EvolvingStructure of Global Trade The expansion in global trade took place against growing regional concentration  Interregional trade was unchanged at about 12% of world GDP between 1980 and 2009  Growth in intraregional trade was particularly strong in Europe and Asia The Figure plots the evolution of intraregional trade measured in terms of exports as well as interregional trade, which includes trade among countries in the rest of the world. A2. Growth in trade was strongest for Europe and Asia J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 29.
    nk slide II. TheEvolving Structure of Global Trade  Trade structure has been characterized by a rising share of higher technology goods  Trade in high-technology products tends to grow faster than average  The process of technological absorption is not passive but rather “capability” driven  Country-specific policies for technology learning and import, including those aimed at attracting foreign direct investment (FDI), can create a comparative advantage The Figure shows the contribution of high-technology and medium-high-technology exports such as machinery and transport equipment increased. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 30.
    II. The EvolvingStructure of Global Trade The volume of trade in relation to GDP increased and took the form of intra-industry trade Intra-industry trade as a share of overall trade has increased steadily  Highest for products such as machinery, chemicals and manufactures  Countries that experienced higher changes in intra-industry trade between 1985 and 2009 are those integrated in a supply chain, such as China, Thailand, and Mexico (Figure 5B) Convergence in Income levels J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 31.
    nk slide II. TheEvolving Structure of Global Trade  With rising vertical specialization, gross exports may not appropriately capture the extent of domestic value added exports  Official trade statistics are measured in gross terms, which include both intermediate inputs and final goods  Given the rising import content in exports, aggregate trade data is increasingly affected by intermediate goods trade flows that cross borders several times  Tracking the extent of FVA in a country’s exports has thus become common in the trade literature to gauge the extent of trade and policy spill-over across countries  In countries that engage heavily in assembly and processing trade such as Singapore, gross exports can be more than twice as high as DVA exports 0 50 100 150 200 United States EU15 Japan India Aus. & New Zealand Brazil Mexico Russia South Africa Canada Indonesia China Korea Philippines Taiwan Vietnam Hong Kong Thailand Malaysia Singapore Gross Exports Value Added Exports Gross and Value Added Exports to the World: 2004 (% of GDP) Source: Koopman and others (2010) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 32.
    nk slide Section 2: What did Banks do? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 33.
    Blank slide - Documentary Credit -Doc Prep - Pre Check - Silent Guarantees - Undertakings - LC Financing and Discounting - O/A Payables Financing product - O/A Receivables Financing products - ECA’s - Doc Trade Solutions - Payables & Receivables Finance Solutions - TSU - STC Online SolutionsInnovative Solutions Product Landscape FinancingRisk Mitigation - Bottom line benefits. For Financing Purposes More sophisticated customers Long term relationships Traditional Services J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 34.
    nk slide Product Landscape Documentary Trade Instruments: Letters of Credit – Letters of Guarantees – Documentary Collection - Others  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?  Silent Guarantees  Undertakings  Services  Document Preperation, Pre Check Buyer Seller Bank (s) Seller Bank (s) Buyer Documentary Credit J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 35.
    nk slide Product Landscape LCFinancing and Discounting  O/A Payables Financing Product  O/A Receivables Financing Products  Many forms of longer term Financing; ECA’s Buyer Seller Bank (s) Ins. & Others Finance J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?
  • 36.
    nk slide Product Landscape DocTrade Solutions Payables & Receivables Finance Solutions Trade Services Utility SWIFT Trade for Corporates Bank (s) Buyer Seller Online Solutions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM  Did they meet the growth?  The more demanding customers?  Today’s technical sophistication?  Were they flexible enough to meet today’s demands?
  • 37.
    nk slide Product Landscape Think Bottom Line Benefits Innovative Solutions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 38.
    nk slide Section 3: How should Corporates re-act? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 39.
    Factors Capabilities Can you doit? Or not? Leverage Who dictates the terms? Can you financially benefit from it? Cost or Benefit? Thinking of the cost? Or bottom line? Factors Affecting Decision Making Product J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 40.
    nk slide II. TheEvolving Structure of Global Trade Why does the Cash Conversion Cycle matter?  Shows a firm’s rate of cash conversion and profitability  Shows a company’s growth and investor’s returns The Cash Conversion Cycle is a meaningful measure of a business’s financial health: Fast-growth companies • Gives insight into growth sustainability Mature Companies • Evaluates a company’s management Declining Companies • Lose control of CCC but also lose clout with suppliers and customers CCC = Cash Conversion Cycle = DIO + DSO – DPO Where: p = # of days in period Cash Conversion Cycle: A useful Financial Metric for your Business J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 41.
    nk slide Apple hasthe leverage. Examples of Cash Conversion Cycle  DSO is 17.9 days When thinking about converting accounts receivable to cash, that is a great number!  McDonalds operates company stores and franchises to others - two separate businesses Adding both together:  If our comparison companies have 100% company-owned stores, then the 17.9 days we calculated will look high compared to theirs.  Conclusion: How does your performance compare to similar companies in the industry? Cash Conversion Cycle 2007 2008 2009 2010 2011 TTM Days Sales Outstanding 22 23 25 25 18 21 Days Inventory 7 7 7 7 5 5 Payables Period 96 90 79 81 75 81 Cash Conversion Cycle -67 -60 -48 -50 -52 -54 Accounts Receivable 1,179.1 Revenue 24,074.6 Days 365 DSO 17.9 Accounts Receivable 1,179.1 Revenue 7,841.3 Days 365 DSO 54.9 Apple Cash Conversion Cycle McDonald’s J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 42.
    Ian Lyall Compliance, EuropeMiddle East and Africa, J.P. Morgan C O M P L I A N C E J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 43.
    Agenda  Sanctions /Recent US Regulatory Actions and Settlements  Trade and AML / Sanctions  International Sanctions  Bureau of Industry and Security (BIS)  Anti-Corruption Program  Questions J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 44.
    Sanctions Recent Regulatory Actionsand Settlements Regulatory Body Financial Institution Fine / Penalty Department of Justice Dutch Bank (2012) $ 619 Million Department of Justice UK Bank (2010) $298 Million Department of Justice Dutch Bank (2010) $500 Million Department of Justice Swiss Bank (2009) $536 Million Department of Justice UK Bank (2009) $217 Million US Treasury Department Australia Bank (2009) $5.75 Million J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 45.
    Trade and AML/Sanctions  There is much anecdotal information about trade and its high risk for money laundering  Regulatory interest is high  Few public domain case studies  The FATF paper (June 28, 2008) titled “Best Practices Paper on Trade Based Money Laundering” characterizes trade as “one of the main methods by which criminal organizations and terrorist financiers move money for the purpose of disguising its origins and integrating it into the formal economy” and concludes that “many customs agencies, law enforcement agencies, financial intelligence units (FIU), tax authorities and banking supervisors appear less capable of identifying and combating trade-based money laundering than they are in dealing with other forms of money laundering and terrorist financing.”  The Wolfsberg Group published a paper on Trade Finance Principles in January 2009 setting out the responsibilities for each of the banks in the documentary credit and collection process.  Usually requires collusion between two or more parties  Over/Under Invoicing  Multiple invoicing  Short shipping  Over shipping  Shipping inferior/substandard goods  Deliberate concealment of the type of goods J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 46.
    International Sanctions TRADE SANCTIONS2 FLIGHT BANS RESTRICTIONS ONADMISSION DIPLOMATIC SANCTIONS1 FINANCIAL SANCTIONS3 BOYCOTT SPORTS OR CULTURAL EVENTS SUSPEND COOPERATION WITH A THIRD COUNTRY Sanctions can range from economic/ trade sanctions to more targeted measures. J.P. Morgan Chase and other financial institutions are required to apply financial/ trade sanctions including those issued by the Office of Foreign Assets Control, OFAC. Sanctions may include 1 Diplomatic sanctions such as expulsion of diplomats, severing of diplomatic ties, suspension of official visits 2 Trade sanctions such as general or specific trade sanctions, arms embargoes 3 Financial sanctions such as freezing of funds or economic resources, prohibition on financial transactions, restrictions on export credits or investment J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 47.
    Definition and purposeof sanctions Sanctions are the economic arm of foreign policy used to influence countries or individuals:  Violating international laws or human rights  Engaging in unlawful activity such as narcotics trafficking, human trafficking or weapons trafficking  That pose a security threat to other nations through the development and proliferation of weapons of mass destruction or chemical and biological weapons or acts of terrorism Purpose of sanctions The goal of sanctions is to penalize the offending country, entity, or individual for their actions and persuade the offender to change their actions. Sanctions are normally used by the international community for one or more of the following reasons  To encourage a change in the behavior of a target country or regime. (e.g. North Korea is subject to sanctions to encourage the cooperation with the international community and abandon its nuclear missile program)  To apply pressure on a target country or regime to comply with set objectives. (e.g. Iran is subject to sanctions aiming to stop the uranium enrichment program)  As an enforcement tool when international peace and security has been threatened and diplomatic efforts have failed. (e.g. Sierra Leone was subject to sanctions in order to stop the civil war)  To prevent and suppress the financing of terrorists and terrorist acts. (e.g. Al-Qaida is an international terrorist organization subject to sanctions in order to stop them perpetrating terrorist acts) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 48.
    International Sanctions -Iran 1. CISADA (July 2010) Prohibits the use of a U.S. correspondent account or payable-through account of a foreign financial institution to transact with the Iranian Revolutionary Guard or to conduct transactions related to Iran’s efforts to obtain weapons of mass destruction. 2. Executive Order 13590 (Nov. 2011) (Administered by the Dept. of State) Expanded existing energy-related sanctions on Iran to authorize sanctions on persons that knowingly provide: 1.Goods, Services, Technology, or Support for the Development of Petroleum Resources If a single transaction has a fair market value of $1 million or more, or if a series of transactions from the same entity have a fair market value of $5 million or more in a 12-month period. 2.Goods, Services, Technology, or Support for the Maintenance or Expansion of the Petrochemical Sector: If a single transaction has a fair market value of $250,000 or more, or if a series of transactions from the same entity have a fair market value of $1 million or more in a 12-month period. 3. National Defense Authorization Act (NDAA) (December 31, 2011) Effective 2/29/12, Privately held Financial Institutions could be subject to sanctions if they conducted significant non- petroleum related transactions with the Central Bank of Iran or designated Iranian Financial Institutions, except food, medicine or medical devices sold to Iran. Effective 6/28/12, Privately held Financial Institutions could be subject to sanctions if they are involved with transactions with the Central Bank of Iran or designated Iranian Financial Institutions for the sale of petroleum or petroleum products to Iran, if the President determines that there is a sufficient supply of petroleum from other countries Effective 6/28/12, Government controlled Financial Institutions may be subject to sanctions if they are involved with transactions with the Central Bank of Iran or designated Iranian Financial Institutions for the sale of petroleum or petroleum products to Iran, if the president determines that there is a sufficient supply of petroleum from other countries. If a foreign Financial Institution is sanctioned, the US Financial Institution holding the correspondent relationship will have 10 days to terminate the relationship. 4. Executive Order 13599 implemented NDAA (February 5, 2012) Blocked property and interests in property subject to U.S. jurisdiction of all Iranian financial institutions, including the Central Bank of Iran. (Even if the bank is not designated on the SDN list.) J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 49.
    International Sanctions -Syria and Sudan 1. Executive Order 13582 (August 17, 2011) Blocked property and interests of the Government of Syria and prohibited (among other things): New investment in Syria; exportation, re-exportation, sale, or supply, directly or indirectly, from the United States; the importation into the United States of petroleum or petroleum products of Syrian origin; and any transaction or dealing by a United States person, wherever located. 2. Executive Order 13606 (April 22, 2012) Blocked the property and suspended entry into the United States of certain persons with respect to grave human rights abuses by the Governments of Iran and Syria 3. Executive Order 13608 (May 1, 2012) Blocked the property and suspended entry into the United States of foreign sanctions evaders with respect to Iran and Syria 1. Executive Order 13067 (November 5, 1997) Blocking Sudanese Government property and prohibited (among other things) : The importation into the United States of any goods or services of Sudanese origin, other than information or informational materials; the exportation or re- exportation, directly or indirectly, to Sudan of any goods, technology (including technical data, software, or other information), or services from the United States; any transaction by a United States person relating to transportation of cargo to or from Sudan. 2. Executive Order 13400 (April 27, 2006) Blocking property of persons in connection with the conflict in Sudan’s Darfur region 3. Executive Order 13412 (October 13, 2006) Blocking property and prohibiting transactions with the Government of Sudan J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM Syria Sudan
  • 50.
    Sanctions Impact onTrade? Office of Foreign Asset Control (OFAC) and other sanctions programs have the potential to impact every service and product the firm offers. The variety of cross border legal sanctions can allow a transaction to be permitted in one country and prohibited in another. Attempts to evade or avoid sanctions are prohibited. Trade transactions can also be impacted by a number of other restrictions and prohibitions, such as special import and export licensing requirements relating to sensitive goods and technology, dual use goods, arms regulations, nonproliferation sanctions and antiboycott regulations. The following trade products pose a higher than normal sanctions risk due to the nature of transactions • Commercial and Standby Letters of Credit • Documentary Collections • In-sourcing (White Label) • Participations bought and sold Transactions for these trade products involve many steps with the sale, transportation and financing of goods and services. There are multiple party and entity names in the transaction documentation J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 51.
    Bureau of Industryand Security (BIS) – Dual Use Goods and Boycott Clauses Bureau of Industry and Security (BIS) – a department within the U.S Department of Commerce charged with the responsibility for U.S national security, foreign policy and economic interests. All U.S. financial institutions, regardless of their locations, are required to comply with BIS regulations. Penalties for violations are severe and include the fines of up to $250,000 per violation or twice the transaction value (whichever is greater) and imprisonment of up to ten years. BIS Activities include •Enforcement of antiboycott regulations – the laws are directed generally against foreign boycotts of countries friendly to the U.S. •Regulation of export of sensitive goods and technology •Enforcement of export controls, including dual use goods and technology – primarily commercial goods which have potential military applications (proliferation, national security and combating terrorism) •Assistance of U.S. industry to comply with international arms control agreements •Requiring compliance with sanctions against imports and exports of goods and cervices to certain Denied / Embargoes Persons Examples of Dual Use Goods •Computers; •Integrated circuits; •High energy devices; •Telecommunications; •Marine acoustic systems and equipment; •Optical equipment (mirrors, components, cable); •Chemical mixtures (e.g. ammonium bifluoride, ammonium nitrate, etc.); •Alloys of metals (e.g. aluminum, lithium, magnesium, metal powder, etc.) •Chemical compounds (e.g. beryllium, indium, etc.); •Uranium, helium, hydrogen BIS Lists •Denied Persons List (DPL) – A list of entities and individuals that have been exporting privileges. Any dealings with a party on this list that would violate the terms of its denial order are prohibited. •Unverified List – A list of parties where BIS has been unable to verify the end-user in prior transactions. The presence of a party on this list is a “Red Flag” that should be resolved before proceeding with the transaction. •Entity List – A list of parties whose presence in a transaction can trigger license requirement under the Export Administration Regulations. The list specifies the license requirements that apply to each listed party, additional to the requirements under the Export Administration Regulations. Antiboycott Clauses •Examples of prohibited activities: •Agreement to refuse or to refuse to do business with or in Israel or with blacklisted companies. •Implementation of a letter of credit that contains prohibited terms and conditions. •Agreement to discriminate or actually discriminate against a person, based on race, religion, sex, nationality or national origin. •Examples of potential antiboycott language: •Black list: •Shipment of goods originating from Israel is strictly prohibited. •Certificate from the manufacturer stating that they are not blacklisted. •White List: •Certificate from the steamship company or owner or master or their agents stating that the carrying vessel is allowed/eligible to enter U.A.E. ports. J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 52.
    Policy/ Program Overview • Astatement of zero tolerance for bribery in all forms • A strong statement from senior management, setting the tone from the top • Facilitation payments prohibited • Pre-clearance required for expenses benefitting government officials • Strong controls governing the engagement of third parties that help develop business or seek government action • Mandatory training to all relevant employees; enhanced training for higher risk employees • Mechanisms provided for employees to self-report issues Risk Assessment/ Monitoring Training • Country Corruption Index • Identification of high risk countries, industries, activities • Increased attention to local legal requirements • Monitoring process to enforce pre-clearance requirement • Generate relevant metrics • Centralization of due diligence for third party engagements • Targeted training for high risk employees • Develop best practices around required due diligence and contractual agreements Third Party Oversight • Third parties (that help develop business or seek government action) can create liability for the firm even if not directly paid by the bank • Most enforcement actions involve third parties that pay bribes for their principals • Regulatory expectation requiring strong controls • Engagement of third parties must be treated as a significant event Governance • Board level reports • Senior level accountability • Increased corporate-level staffing • Senior governance committee • Designated legal and compliance officers Anti-Corruption ProgramJ.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 53.
    Florence Coronel Risk, EuropeMiddle East and Africa, J.P. Morgan C R E D I T R I S K M A N A G E M E N T I N A C H A L L E N G I N G E N V I R O N M E N T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 54.
    Agenda  Risk Managementat J.P. Morgan  Pillars of Risk Management  Risk Ratings  Counterparty Credit Risk Analysis  Sovereign Risk  Reputational Risk Management  Market Themes and Risk Management Actions  Eurozone Crisis  Arab Spring  Other issues for risk managers  Q&A J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 55.
    Pillars of RiskManagement Risk Market Risk Loss caused by a change in market prices or rates Operational Risk Loss due to inadequate internal processes or controls Credit Risk Loss due to borrower default Reputational Risk Loss due to negative headlines Legal Risk Loss due to inability to enforce contractual agreements In Emerging Markets, Money Laundering/ KYC issues In Emerging Markets, more volatile and prone to shocks In Emerging Markets, combined with Political Risk In Emerging Markets, creditor protection, enforcement, lack of precedent, no netting or collateral confidence In Emerging Markets similar but less advanced systems and processes; less experience J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 56.
    Risk ratings areused to manage credit exposures J.P. Morgan risk ratings  Credit risk is the risk of loss from counterparty default  Risk ratings are assigned to differentiate risk levels  J.P. Morgan risk ratings range from 1+ (low) to 10 (worst) Corporate Counterparty Ratings 3 step risk grading process:  Stand-alone grade  Obligor grade  Facility grade Risk Monitoring and Control Credit risk is monitored at an aggregate portfolio, industry and individual counterparty level Risk ratings J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 57.
    Historical corporate bondand loan defaults 1995-2010 ($ in billions) How does risk of loss rise as you go down market? Height: 2.00” Width: 8.84” Horizontal: 1.67” Vertical: 2.00” Source: Average cumulative issuer-weighted global default rates by alpha-numerical ratings, 1983-2010 0% 0% 0% 1% 1% 2% 3% 4% 8% 10% 19% 30% 39% 1% 2% 3% 7% 8% 17% 20% 26% 37% 49% 51% 68% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca-C One Year Five Year $5 $13 $59 $140 $203 $46 $16 $10 $7 $281 $330 $39 $6 $41 $40 $0 $100 $200 $300 $400 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 50 100 150 200 250 300 $ defaults # of defaults Source: “Corporate Default and Recovery Rates,” Moody’s Investors Service, February 2011 Economic cycles significantly affect default volume J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 58.
    Credit Risk analysisframework for evaluating counterparties…  Quantitative  Profitability  Asset efficiency  Leverage  Coverage of debt obligations  Equity base  Cash flow/Liquidity  Projections of future performance  Funding  Maturity mismatch  Exchange/Interest rate risk  Valuation  Equity  Assets  Corporate structure  Holding company  Operating company  Security  Priority  Structural  Contractual  Intercreditor  Documentation  Legal risk  Anti-trust  Take over  Legal system  Regulatory risk Business analysis Financial analysis Structural analysis  Business environment  Point of economic cycle  Cyclicality of industry  Industry  Competitive environment  Industry structure  Technology risk/obsolescence  Key drivers of success  Company  Management  Corporate governance  Steady state/transforming  Strengths/weaknesses  Earnings  Reliable or vulnerable  Cash conversion cycle Decision Counterparty risk rating? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 59.
    Credit Risk analysisframework for evaluating transactions…  Key Credit Risks  Client level  Industry level  Legal risk  Regulatory risk  Operational risk  Market risk  Counterparty exposure vs. limits  Client and Group  Primary and Settlement  Industry exposure  Country exposure  Hedging or secondary sales  Legal lending limit Transaction analysis Risks and Mitigants Portfolio analysis  Legal entity of counterparty  Type and tenor of transaction  Purpose of loan or derivative  Adequacy of facilities  Contractual obligations/rights  Sources of repayment  Effective 2nd/3rd way out  Collateral  Credible assumptions  Probability of default  Loss given default/recovery Decision Transaction approval? J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 60.
     Risk thata sovereign event or action alters the terms of contractual obligations of counterparties in the country  Sovereign Ratings – an assessment of a sovereign government’s ability and willingness to service its obligations  Focus on Sovereign Intervention – the risk that the sovereign will take unexpected actions that have a sudden adverse impact on the business environment. These interventions include:  Expropriation  Freezing of deposits  Utility price freezes and other price controls  Undermining of existing laws (contracts, legal codes and regulations)  Delayed or reversed government guarantee  Multiple and dynamic objectives of sovereigns  The sovereign’s potential conflict between its domestic constituents and external counterparts  Lack of bankruptcy procedures  Sovereigns “never” disappear Country Risk J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM Key distinction with counterparty risk:
  • 61.
    Reputation Risk  Existsin virtually every activity, transaction and relationship  Reputation risk is hard to measure and difficult to discern  It can lead to lost business and ultimately a failure of confidence by our clients and counterparties. Such failure has in the past resulted in failure of financial firms  It can impair our relationship with our regulators  It can affect our ability to attract the best employees Reputation risk is among the most complex risks facing a financial institution Definition: The potential for loss of confidence in an institution’s integrity resulting from adverse publicity – true or not – over its practices and associations J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 62.
    Managing Reputation Risk Individual accountability and responsibility for working in a manner consistent with the highest ethical standard  Vetting clients and transactions  Due diligence  Investigations  Approval process  Internal escalation process  Reputation Risk Committees  LOB Risk Committees  Conflicts Office  Risk Control oversight functions  Compliance  Audit  Policies While we cannot remove reputation risk, we can make efforts to minimize it J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 63.
     Slower economicgrowth in most developed markets  Sovereign debt default concerns in the Eurozone  Political instability in Middle East and North Africa  Regulatory and political scrutiny of the banking industry  Higher capital and liquidity requirements under Basel III  Emerging markets still transforming  J.P. Morgan expansion into new countries in Sub-Saharan Africa Recent market events are unprecedented and pose tremendous challenges What are the background issues that J.P. Morgan Risk Management are currently dealing with? Credit Challenges in 2012 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 64.
    Middle East andNorth Africa Turmoil J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 65.
    Eurozone Debt Crisis Source:Economist Source: Fitch / ECB Fitch FC/IDR GDP $bn DEBT $bn Debt/GDP % 10yr Sov Yield Austria AAA 419.0 301.0 72% 2.5% Finland AAA 266.3 129.3 49% 1.8% France AAA 2,781.1 2,387.2 86% 2.8% Germany AAA 3,573.9 2,903.6 81% 1.3% Luxembourg AAA 59.5 10.8 18% 1.7% Netherlands AAA 837.0 545.6 65% 2.0% Belgium AA 513.1 503.0 98% 3.3% Estonia A+ 22.2 1.3 6% - Malta A+ 8.9 6.4 72% 4.2% Slovakia A+ 96.0 41.6 43% 4.8% Slovenia A 49.6 23.6 48% 5.3% Italy A- 2,197.7 2,638.3 120% 5.8% Ireland BBB+ 217.5 235.4 108% 7.1% Spain BBB 1,492.9 1,022.2 68% 6.1% Cyprus BB+ 24.7 17.7 72% 7.0% Portugal BB+ 237.7 256.2 108% 11.6% Greece CCC 299.0 494.5 165% 26.9% UK AAA 2,415.5 494.5 85% 1.8% 15,511.6 12,012.2 J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 66.
     Impact fromslower developed market economic growth – greater emphasis on Emerging Markets?  Sovereign debt default in the Eurozone?  What if interest rates rise rapidly to counter inflation in Emerging Markets?  Will poor corporate governance and transparency hinder bank asset quality in Emerging Markets?  Can Regulators keep up with Basel III and banking product advances in Emerging Markets? Whatever happens – be prepared!  Cash/ liquidity is king  Avoid concentrations  Be ready for the unexpected - think holistically  Sound risk management more important than ever Themes to look out for Near Term Outlook J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM
  • 67.
    Moderator: Zeeshan Khan, GlobalTrade, Middle East and North Africa, J.P. Morgan Panellists: Azmi Shaban, Shaban Group Santosh Babu Karkera, A. A. Bin Hindi Group Guillermo Arias, General Motors Neeraj Tekchandani, Apparel FZCO C O R P O R A T E P E R S P E C T I V E S O N T H E S T A T E O F T H E R E G I O N A L M A R K E T J.P.MORGAN MIDDLEEASTANDNORTHAFRICATRADEFORUM