© first national bank global payment and fx market update presented by: michael salerno and jon...

© FIRST NATIONAL BANK

Global Payment and FX Market Update

Presented by:

Michael Salerno and

Jon Macapinlac


Overview

• Payment Types

• Clearing Systems

• Foreign Exchange Market and Rates

• Foreign Exchange Risks

• Risk Management Tools

• Update on the Currency Market


Foreign Cash Letter Items

• Checks drawn off a Non-US Bank

• These items can not be cleared by the Federal Reserve

• Takes longer to receive collected funds

• Additional Fees to process these items

• Can not be imaged, and must present physical item to the bank


Check Collections

• Checks not drawn off a US Bank

• Beneficiary does not receive funds until the bank has received collected funds

• Credit could take 2 to 4 weeks

• Used for higher value or riskier transactions

• Lager fees associated with this service


Drafts

• Drafts - Issues a check drawn off the country of the beneficiary

• Can be issued in USD, local currency, etc.

• Clearing process is manual in most countries

• Most vendors will not process order until collected funds due to risk of transaction.


High vs. Low

Low value payments – bulk payments (low value, high volume) settled through clearing house. - Example: ACH

High Value Payments - payments cleared and settled in near real-time

- Example: Wire or Fed Wire


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

Wire Transfers


Fedwire

Sending institution

Receiving institution

Sendingcustomer

Receivingcustomer

FED


Wire Transfers

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

cleared daily


CHIPS Transfer

Sending institution


Sendingcustomer

Receivingcustomer

CHIPS

Correspondent


Sending Correspondent

Receiving Correspondent


Wire Transfers

• SWIFT - Society for Worldwide Interbank Financial Telecommunication

• Member owned cooperative– More than 8,300 members in 208 countries– Standards body– Only provides messaging or communication

not settlement


CHIPS Transfer

Sending institution


Sendingcustomer

Receivingcustomer

Correspondent


Sending Correspondent

Receiving Correspondent


SWIFT Transfer

• SWIFT only is the communication between banks

• Settlement is dictated by the SWIFT Message (MT103)

• Settlement can occur by book transfer, local wire, local clearing network, etc.


What is SWIFT?

• A community inspired co-operative founded by and for the financial industry

• Provides the platform, products and services that allow our customers to connect and exchange financial information securely and reliably

• Act as a catalyst that brings the financial community together to work collaboratively to shape market practice, define standards and consider solutions to issues of mutual concernand interest


SWIFT in figures

• 2.5 billion messages per year

• 8,612 customers

• 209 countries and territories

• Over 2,000 employees

• Average daily traffic 15.1 million messages

• Peak day of 17.1 million messages – 30 September 2008

Source: Swift.com


16

SWIFT – A customer centric user community

Banks

IMI's

Corporates

InsuranceCompanies

Payments MI's

GovernmentInstitutions

Trustees

Broker-Dealers

Payment Systems

Clearing & SettlementSystems

Depositories

Stock Exchanges Securities MI’s

Mid-America Conference - October 29, 2009


FIN message categories

• Category 1 – Customer Payments & Cheques (18 messages)• Category 2 – Financial Institution Transfers (17 messages)• Category 3 – Treasury Markets – Foreign Exchange,

Money Markets & Derivatives (27 messages)• Category 4 – Collections & Cash Letters (18 messages)• Category 5 – Securities (67 messages)• Category 6 – Treasury Markets – Metals & Syndications (20

messages)• Category 7 – Documentary Credits & Guarantees (29

messages)• Category 8 – Travellers Cheques (18 messages)• Category 9 – Cash Management & Customer Status (29

messages)


URBK US 33Your SWIFT BIC Code (*)

Online access to the SWIFT BIC directory via www.swift.com

Bank Identifier Code (BIC)

A SWIFT BIC identifies financial institutions on the SWIFT network


Time and Money

Originator

IBK #2

IBK #1Originating Bank

Beneficiary Bank

Beneficiary

USD 50,000.00Fedwire USD

50,000.00

USD 50.00 FEE

Convert to local

Currency

EUR 33,692.72Credit account


Time and Money

Originator

Correspondent

Originating Bank

Beneficiary Bank

Beneficiary

USD 50,000.00

Credit account

Convert to local Currency

EUR 35,360.68

* Bene receives 1,667.96 more Euro and in less time


The Foreign Exchange Market

• Global decentralized financial market for trading currencies with the market determining the values of different currencies

• Huge trading volumes represents the largest asset class in the world leading to high liquidity

• Over 95% of FX market volume consists of speculative trading.

• Speculation is the primary cause of market volatility.

• Volatility causes exchange rates to change every second of the day, 24 hours a day


The Foreign Exchange MarketAnnual Stock Markets' Volume • Australia $1,062,000,000,000• Toronto $1,368,000,000,000• India $1,059,000,000,000• Korea $1,607,000,000,000• Germany $1,628,000,000,000• Tokyo $3,787,000,000,000• China $9,564,000,000,000• London $2,741,000,000,000• NASDAQ OMX $13,439,000,000,000• NYSE Euronext $19,813,000,000,000• Total One Year $56,068,000,000,000 (56 Trillion)

Source NASDAQ

Foreign Exchange Average Totals• One Day $3,098,000,000,000• One Month $62,000,000,000,000• FX Total One Year $744,000,000,000,000

(744 Trillion)


FX Markets

• Over the counter – Majority of foreign exchange is traded over the counter between Financial Institutions and their counterparties.- spot, swaps, and forwards

• Exchange Traded – FX is also traded on exchanges such as CME to help reduce counterparty exposure.– Spot, swaps, and futures


FX Markets

• The two main FX markets are spot and forward market

• Spot Market – for the delivery of funds with in one to two business days from the trade

• Most payments and wire transfers are spot transactions


Forwards vs. Futures

• Forwards are completely customizable– Amounts, currency, and value date or date

range

• Futures – Standardized contracts– Set amounts and value dates

• EUR 100k at 1M


Exchange Rates

• FX rates are quoted in several ways, depending on the currencies and the markets involved

Currency Direct Indirect Market

AUD 1.0600 0.94341.0600

CAD 1.0127 0.98750.9875

EUR 1.4150 0.70671.4150

GBP 1.6100 0.62111.6100

JPY 0.0132 75.85 75.85


BID Vs ASK


FX Risk

What is currency risk?

The risk that unexpected changes in exchange rates will:

1) Increase cost2) Reduce profit margin3) Create inconsistencies in a company’s

balance sheet4) Create FX gains or losses on

company’s income statement


FX Risks

FX exposure - Companies dealing with foreign currencies face four types of exposure:

• Transaction exposure

• Translation exposure

• Economic exposure

• Bid-to-award exposure


FX Risks-Transaction Exposure

• Occurs when one currency must be exchanged for another

• Gain/loss incurred on actual or anticipated currency conversion


FX Risk-Translation Exposure

• Arises from the need to produce consolidated financial statements due to foreign subsidiaries

• Reflects changes in the book value of foreign subsidiaries

• No actual conversion of currency involved


FX Risk-Economic Exposure

• Effects of foreign exchange movements on total corporate value

• Can be long term in nature, difficult to hedge and a serious business influence/consideration


Forward Market

• Forward FX Market – Provides an exchange rate for a future delivery of currencies to be fixed today

• Forwards are available in most currencies with standard maturities in one, two, three, six, nine, and 12 months

• The relationship between the spot and forward market is based upon the interest rate parity


• Forward contracts can be used to “lock-in” financial certainty related to future benefits and/or obligations denominated in a foreign currency.

• Forward points may be at a discount or at a premium.

• Based on the “direction” of the hedge, forward points may be earned or paid.

Forward Market


Forward Market

• Fixed Date – Contracts with an exact value date

• Window – Contracts with a date range for value date.– Typical windows do not exceed 30 day, but

can be as long as 90 days– Allows flexibility on settlement for uncertain

delivery of payment


Forward Market

• Important! The forward rate is NOT intended as an estimate or a proxy of the future spot rate.

• Hindsight is always 20/20!– The then current spot rate on the forward settlement

date is irrelevant to the financial decision.– Forward contracts are intended to bring financial

certainty to the transaction, NOT to “out guess” the market.

– Forwards enable accurate cash flow budgeting and preparation.


Forward Market


Non-deliverable Forwards

• NDF - are forwards contracts that are net settled on value date.

• Settlement is the difference between the contract exchange rate, and the spot rate on the value date.

• Are used in markets where there is not an active forward market.


Currency Options

• Options – gives the buyer the right to buy (call option) or sell (put option) a fixed amount of a foreign currency at a fixed exchange rate (strike price), on or before a specific future date

• Plain Vanilla Put/Call: Buyer must pay a premium for the option. Like an insurance policy, you pay an out of pocket cost for protection against some worse case scenario.

• Structured Option: Range Forwards (Collars), Participating Forwards


Comparison of Hedging Alternatives

Unhedged Fully Hedged

Do Nothing

Plain Vanilla

No-Cost Collar (Range Forward)

75% Participating

Forward50%

Participating Forward 25%

Participating Forward Forward

Contracts

Risk

Potential Upside


Why deal in Foreign Exchange?

• More competitive in global markets• When pricing in local currency, more appealing

to buyers (they can avoid currency conversions and associated risks)

• When buying, negotiating in foreign currency can help obtain better price (suppliers may be charging as much as 3% to 12% above normal, hedging against exchange risk)

• Increased Control/Improved Fee Structure– USD transfers are often converted by a third

party institution resulting in increased rates or fees, and delays in delivery.


Currency Update

• Euro

• Canadian Dollar

• Chinese yuan


Euro

Debt Crisis

Structural Issues

Will the Euro Survive?

Quarterly Forecast


Canadian Dollar

Current economic strength

Commodity based economy and heavily reliant on U.S. growth

Quarterly Forecasts


Chinese Yuan

Chinese growth

Trading band for CNY

Future Prospects

Quarterly Forecasts


Questions

Michael Salerno

Director, Foreign Exchange

First National Bank

402.602.3561

[email protected]

Jon Macapinlac

Business Development, Foreign Exchange

First National Bank

402.602.3560

[email protected]

© first national bank global payment and fx market update presented by: michael salerno and jon...

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