Elyse WeinerGlobal Head of Liquidity and Investments

Global Transaction Services, Citi

Managing Liquidity & Other Risks

Through Changing Times

2

Corporate Finance Dynamics in 2011: Recovery

The global corporate sector enters 2011 in a position of strength. The overarching corporate finance challenge will be

deciding when and where to deploy this spending power – on organic growth opportunities, on M&A, on further

balance sheet strengthening or increased capital distribution.

Balance Sheet Trends

High cash buffers remain,

but much of it offshore or

trapped in regulated

environments

Tapping into attractive EM

capital and debt markets

Continued

de-leveraging and capital

building

Surge in shareholder

distributions

Corporate Recovery

Strategic Trends

Focus on delivering

sustained earnings

growth

Investment in high-growth

& emerging markets

Increase in M&A – buy

and sell side

Advanced trading and

treasury models

Diversification as a risk

mitigant

Pre-crisis operating margins

Surging cash levels

Decline in leverage

3

Recent events confirm continued inter-connectivity of risk triggers…

Liquidity Lessons Learned

Risk triggers are always present, with varying degrees of prominence - regulatory, political, supply chain,

commodity prices currently in the forefront

Increasing importance of due diligence – know your counterparties and suppliers

Diversify sources of funding and other critical business drivers

Maintain flexibility

Develop contingency plans

Right size buffers to insure against unforeseen and stress events; balance against cost

Optimize internal utilization of resources

Monitor risk triggers through enterprise risk management process e.g. regulatory, fiscal, market,

geopolitical, environmental

Leverage local expertise

Optimize internal utilization and release trapped cash

Risk Assessment processes typically address direct risks and often neglect tangential or indirect risks.

Technology

4

Evolving Economic & Business Landscape…

The economic environment remains challenging as a result of slower growth across developed markets,

concerns with European sovereign debt and impacts from changing market structures…

…As enterprises expand across markets adding complexity, and risk, to business processes

Foreign Exchange Custody Payments Collections Supply Chain

Increased in cross-border

transactions

Evolving regulatory landscape

adds complexity

Oversight and control to address

heightened risk profile

1 2 3

5

…Driving Evolution of Business Models

Treasury functions and operating models re-engineered to address increased complexity and risk.

Corporate

Objectives

Trading Model

Legal and Tax Structure

Supply Chain Models

Manufacturing Models

Sales / Distribution Models

Treasury ModelWorking Capital

Management Model

Liquidity

Structure &

Forecasting

Treasury / Risk

Management Processes

Regional Treasury Centre

In House Bank

Legal entity

Risk

Management

AP / AR Processes

SSC

Netting Centre

Payments Factory

“…on Behalf of..”

Process

Execution

External Environment /

Factors

Customers, suppliers and

partners

Banks, equity stakeholders

and providers of capital

Regulatory, statutory/

compliance

6

Challenges of Operating Cross-border1

Country Rules and Regulations

Keep Changing

When sending Kazakhstan Tenge,

the beneficiary’s 12-digit Tax ID

Number is required for every

payment

All Tunisian Dinar wires under

10,000.000/TND must include the

beneficiary’s 20-digit account

number

Payments (>USD1,000) in KRW

must include beneficiary phone

number; bank must contact the

beneficiary to receive acceptance

of the flows

Cross-border invoicing and

settlement in RMB now feasible

Dynamic Risk Environment

The Challenge

Keeping current with changing

rules, regulations and practices –

in some cases creating

opportunity

Understanding local clearing

systems (payments/securities)

Mitigating market and supply

chain exposures

Management of foreign currency

accounts and exposures

Transparency into transaction

fees and spreads; FX rates; lifting

fees

Rise in social unrest linked to political & economic climate

Localized and pan-regional regulatory and payment

infrastructures

Increasing state intervention

Trapped flows

Liberalization of capital constraints in some markets

Commodity risk and price volatility

5

Dynamic Risk

Environment

Hidden Costs &

High Fees

Complex

Country

Rules &

Regulations

The Challenge

Overseas

Payments

7

Case Study: Global Electronics Co. RMB Re-invoicing Center

Issues

China factories have cost inputs mostly in RMB, while

sales (mostly intercompany) were USD

Significant costs due to fragmented foreign exchange

exposure management, trapped liquidity

RMB deregulation appeared to offer potential to address

inefficiencies – the challenge was of establishing a viable

solution, given the new regulatory frontier, with few

precedents

In 2011, the company established a re-invoicing entity in Hong Kong to actively manage settlement of cross border

trade flows between their China operations and other entities. Citi has been selected as the trade settlement bank for

their China related supply chain flows.

Solution

Established an innovative Re-invoicing Center in

Hong Kong – consolidating trading flows through the

Re-invoicing center, with RMB cross-border trade

settlement.

Benefits:

– Reduces payments costs/fees; allows coordinated timing for

better liquidity management

– Centralizes and improves FX exposure management

– Reduces trapped liquidity, with transparent costing throughout

the supply chain with the use of local currency

Citi’s Role

Helping in defining and implementing the solution, from

concept to execution

Delivering an integrated approach covering China, Hong

Kong and HQ through Citi’s solution and relationship

teams

Negotiations with Chinese regulators to ensure

transparency and buy-in from regulators

Banking partner for all China-related flows

Re-invoicing

Center

RMB A/C

&

USD A/C

China

Factory 1

Invoice in USD

Hong KongChina Worldwide

China

Factory 2

Etc.

Sales US

Sales EU

Etc.

Invoice in

RMB

6

8

Changing Regulatory Landscape2

Regulatory evolution reshaping the Financial Services industry and consequently bank interaction with clients.

Drivers Summary

Basel III

Comprehensive reform of international accord on capital adequacy and liquidity to

improve the banking sector’s ability to absorb shock arising from financial and economic

stress

Measures include:

– Consistency & transparency of regulatory capital base

– Higher capital standards and capital conservation buffers

– Strengthening cross-border bank resolution framework

– Internationally harmonized leverage and liquidity ratios

U.S. Dodd-

Frank

Comprehensive reform involving:

– Restrictions on certain business activities, e.g. proprietary trading

– Mandatory clearing requirements for OTC derivatives

– Amendment of Regulation Q

– More stringent prudential regulatory standards; expanded role of FDIC

– Enhanced corporate governance and executive compensation requirements

– Increased consumer protections

Accounting &

Tax Reform

Reform intended to create future accounting standards that are principles-based,

internally consistent and internationally converged, e.g. GAAP to IAS

FBAR and FATCA

EU Activity Comprehensive reform of financial institutions with similar aspects to Dodd-Frank

Solvency II: Regulatory requirements impacting (Re)insurance industry

Other Markets Limited country-level reform of financial institutions in Asia, including changes to capital

requirements, compensation and derivatives; ring-fencing

Relaxation of capital controls, e.g. RMB cross-border invoicing & settlement

Implications

Significantly higher capital

and liquidity requirements

Drift toward national ring-

fencing and inconsistent

regulatory regimes

Expanded set of

restricted/priced out

activities

More stringent regulatory

oversight; increased

compliance and reporting

requirements

7

9

Implications of Regulatory Reform

Regulatory evolution reshaping the Financial Services industry and consequently bank interaction with clients.

Banks Clients

Increased capital requirements; liquidity and capital

buffers; higher provisions for trade finance and

contingents

Regulatory capital mix changes

Balance sheet valuations shift ; preference for term

and structural funding with greater reliance on

capital markets over wholesale funding

Cost of entry and maintaining infrastructure

increases

ROA/RORC hurdles harder to achieve

Refocus on strategic activities; exit non-core

businesses

Balance sheet efficiencies critical to offset higher

capital levels and costs

Bank borrowing and services , e.g. trade, become

more expensive as competition for capital market

sources increases

Rules on derivative clearing and collateral imply higher

cost of hedging

Balance sheet and operational efficiencies to offset

higher capital and banking costs

Timely information delivery and analytics critical to

improving performance

Rationalize bank relationships to ensure support for

global expansion & operational efficiency initiatives

Re-evaluate investment options in view of new bank

valuation models, regulatory and accounting treatment

and risk profile.

Increased reporting requirements and infrastructure

8

10

Dealing with Increasing Complexity3

With CEO/CFO priorities shifting from crisis management to “risk aware” sustainable growth, the role of the Treasurer

has been re-defined as a strategic partner and “gatekeeper” of the balance sheet..

*Global Growth Generators, Citi, February 2011

Strategic Focus – Optimizing capital allocation & funding structure

Acting as gatekeeper of the balance sheet

Addressing the treasury and funding implications of internal processes, policies and capital actions

Identifying appropriate level of liquidity to support operations vs. strategic cash available for investment and expansion

Extracting value from working capital / supply chain financing options to create in-house liquidity

Rationalize account structures, processes and technology

Cash consolidation

Centralized treasury operations and services

Release cash from working capital cycle

Improve cash forecasting

Improve Risk Management Manage Growth

Develop firm-wide view of exposures

Implement policies and governance framework to monitor compliance

De-risk supply chain

Centralize decision-making

Plan ahead

Evaluate options to free trapped cash

Tap into local knowledge and expertise in growth markets

Extend best practice

Integrate treasury management as a “functionally centralized/globally distributed” process

Leverage technology to drive efficiency and de-risk processes

Maximize Cash Efficiency

Key Challenges – Increasing Complexity

High proportion of expansion into EM countries and currencies; increasing importance of managing currency risk

“Beware of any proclamations of an end to volatility”*

Restrictive regulatory and operational environments

Proliferation of systems and data formats; insufficient global visibility into positions

Aggregating critical information for real-time decision support

9

11

Advanced Treasury Structures

In-house bank, housed within a Global Treasury Center

(may be in a tax-favorable location)

Global Treasury Center becomes exclusive owner of

external credit limits and management of bank relationships

Intercompany commercial flows are settled from Netting

Center through In-house Bank (cashless settlement) and

physical payments

Trading model may use (for example) Limited Risk Distributors

and Contract Manufacturing, where feasible

Global Treasury Center provides Treasury support services

to non-IHB participants

▲ Minimizes external transaction volumes, reducing banking

fees and processing costs

▲ Aggregates cash for most efficient use by the enterprise,

optimizes use of external credit lines with banks

▲ Optimizes FX risk management and reduces external

spreads taken

▲ Liquidity structure overseen by Global Treasury Center:

Automates liquidity concentration

Optimizes Interest earned

Supporting “risk-aware” business growth and performance with advanced treasury and liquidity management

structures, e.g., In-house Banks, global pooling structures, netting and payment factories.

Global

Treasury Center

Netting

Center &

Payments

Factory

Banks

In-house Bank

BU

BU

Liquidity

Structures

Payments

I/C

Trade Flows

MM and

FX Trades

Stand-

alone

accounts

BU

JVs

I/C T

rad

e F

low

s

10

12

Global

Treasury Center

(NA)

Case Study: Global Consumer and Health Care CompanyCompany (revenue $20bl) with Global Business Strategy aligned Global Treasury organization to support a 5%

CAGG revenue growth strategy.

Single

Global

Netting

Center

(Based in

WE SSC)

Citi

WE

NA

Single

Integrated

Global

Liquidity

Structures

Payments

I/C

Trade Flows

MM and

FX Trades

Stand-

alone

accounts

Asia

(New)

Latam

(New)

I/C T

rad

e F

low

s

Issues

Emerging growth markets identified

Net borrower with debt concentrated in US; untapped cash of

$600mm residing globally.

Existing centralized treasury function for NA and WE and in-

country finance support covering Asia and Latam.

Significant real and opportunity costs due to localized liquidity

and Foreign Exchange processes.

Solution

Extend treasury structure aligned to further centralize working

capital management across all regions.

Global consolidation through IHB and additional RTC for non-

IHB participants.

Deploy single instance TWS, KPI identification and

measurement processes to all newly established RTC’s.

Design and deploy global liquidity structure to minimize bank relationships and standardize bank communications.

Establish Global Netting Centre to minimize payments and FX volumes and costs.

Citi’s Role

Helping in defining and implementing the solution, from concept to execution

Delivering an integrated approach covering 80 countries of

operation for liquidity and payments in both Treasury and

SSC.

11

In-house Bank

13

Keep abreast of changing market conditions

Supporting Growth: 2011 and Beyond Execution Imperatives

Continued volatile market conditions and evolving regulations

require real-time information management and improved

monitoring and reporting capabilities

Maintain financial, process and supply chain flexibility to

respond to changing conditions

Implement robust control processes to monitor

operational & financial risks that come with growth

Reassess banking relationships with a view towards

future growth strategies and plans

Company-wide cash and liquidity management programs are a

must

Rethink trading models; legal and tax structures

“Piggyback” treasury objectives on organization-wide

technology/process initiatives to help drive the business case

Close coordination with businesses, regions and partners to

identify issues and mitigants

Implement functionally centralized policies and controls

Establish governance framework, KPI’s and alerts

Ensure ability to monitor

Long-term view of requirements across a broader network

Rationalize providers to improve operating and cost efficiency

Think strategically of treasury transformation

opportunities

Technology and Infrastructure Investment to support

global complexityContinuous Process Improvement

Industrialize global reparative processes through deployment of

technology to support working capital management

Increase ability to generate actionable information, risk

management and analytics from global business flows

Streamline connectivity to suppliers, customers and banking

partners to minimize cost and maintenance

Implement structures and processes to continuously align

business, capital and liquidity requirements

Mitigate risk through centrally administered processes and

policies

Streamline and standardize; eliminate repetitive and parallel

processing

12

14

What are others doing?

Working Capital Treasury

Treasury Involved in Working Capital Management – 60%

Operate Netting Centre – 61%

Have Centralized Payments Processing – 60%

Deploy single or minimal number of ERP systems – 55%

Centralized Treasury Policies - 93%

Centralized Risk Management Processes - 72%

Cash Concentration to Global or Regional level – 69%

Utilize TWS – 65%

The centralization paradigm continues to underpin risk-aware operating efficiency. Companies continue to develop

and extend organizational structures within which the supply chain operates.

Identifying Best In Class: Citi Treasury Diagnostics

0

1

2

3

4

5

Policy &

Governance

Liquidity

Working Capital

Sub Funding &

Repatriation

Risk Management

Systems &

Technology

My score

Peer scores (average)

Universe scores (average)

My score

Peer scores (average)

Universe scores (average)

Performance

Top 25% of responses

Core 50% (25-75%) of responses

Bottom 25% of responses

Average response

My Score Top 25% of responses

Core 50% (25-75%) of responses

Bottom 25% of responses

Average response

My Score

Benchmarks

Risk Management

4.6

4.6

4.1

4.0

2.6

2.6

4.4

0.5

1.6

My Score

Peer Group

Universe3.2

3.4

BetterBetterInterest rate risk

My Relative Performance+/-

BetterBetterForeign Exchange

(Transactional)

BetterBetterLiquidity/funding risk

Against UniverseAgainst Peer GroupProcess Area

BetterBetterInterest rate risk

My Relative Performance+/-

BetterBetterForeign Exchange

(Transactional)

BetterBetterLiquidity/funding risk

Against UniverseAgainst Peer GroupProcess Area

Identify where you stand relative to peers - Learn what

counts as best in class

Systems & Technology

Policy & Governance

Subsidiary Funding &

Repatriation

Risk Management

Cash Management –

Working Capital

Management

Cash Management –

Liquidity

Celent Model Bank Award

Alexander Hamilton: Silver Winner, Solution of the Year, Treasury & Risk Winner, Innovative Product

13

15

Information as a Key Enabler: Looking Ahead

Integrity – quality and timeliness of data

Transparency – Easy to understand, standardized data

Holistic – encompassing all available data points and positions

Flexible – customize ways of gathering and examining data

Integrated – within risk and business management processes to quickly evaluate impact and take action

In an increasingly complex environment, the aggregation and review of enterprise wide data is critical to effective risk

management.

Transforming to actionable data management

Fundamentals of an operational visibility program

Companies initially focus on utilizing enterprise-wide data aggregation to improve operating efficiency, cut costs

and raise returns

Visibility provides an added measure of control and oversight to ensure regulatory and corporate compliance

Top-performing companies move up the value chain, adopting data-driven decision making practices

Transformed companies utilize data to optimize business performance across a broad range of functions.

14

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