80091 JPMOR Compedium Final OR - FX-MM magazine · best-in-class solutions to their own growing clients. ... predicament for financial institutions Ð ... consumer protection wire

Keep Up or Catch UpThe FI predicament

Dodd-Frank 1073A new world for cross-border remittances?

Collateral ManagementIndustry reforms to spark change

Views from J.P. Morgan

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October 2012 Publication

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Keep Up Now, or Catch Up LaterMargaret Yao

A New World for Cross-border Remittances under Dodd-Frank 1073Roy DeCicco

The Evolution of Asia's Financial Market StructureMasayuki Tagai

Balancing Growth with CostsMark Burrough

Competing for LiquidityDavid Li

Driving Trade Efficiency with BPOs Dan Taylor

Transformation through Technology George Fong

Forging a New Collateral Management PathO'Delle Burke

The New Frontier Vipul Shah

360° Ð Views from J.P. Morgan I 3

Foreword

The world in which we do business is evolving fast Ð from new regulations and new legislation through to new technology and new client imperatives. The world's banks are rushing to re-evaluate their own offerings and improve and enhance the services that they offer to their clients.

The industry's best and brightest are debating and acting on industry-defining themes such as global shifts of economic power, regulation and technology. To further this important conversation, we're pleased to present 360°360° Ð a compelling collection of insights from J.P. Morgan's global team of transaction banking experts, who take a concise look at some of the biggest issues affecting our industry.

Inside the pages of 360°360°, you'll read our take on the opportunities and challenges that financial institutions face in building a global presence and serving their growing corporate clients, including key themes around regulatory developments and their implications, evolving market structures, foreign exchange and liquidity management, trade finance, collateral management and technology and innovation.

Globally, we stand at a point of uncertainty. Markets and economies are slowing, growth is moderating and Europe continues to create international headwinds. However, it is often said that from uncertainty comes opportunity. At J.P. Morgan, we stand ready to help our partner financial institutions capitalize on that opportunity, by leveraging our industry expertise, global capabilities and local knowledge to provide best-in-class solutions to their own growing clients.

Sincerely,

Tom DuCharmeTom DuCharmeChief Executive Officer, Asia PacificJ.P. Morgan Treasury & Securities Services

4 I 360° Ð Views from J.P. Morganp 4 I Thought Leadership Compendium 4 I 360° Ð Views from J.P. Morgan


Keep Up Now, or Catch Up LaterBy Margaret YaoRegional Sales Executive, Asia PacificJ.P. Morgan Treasury Services 01In an era of global connectivity, rapidly improving technology, faster transport and increasingly real-time communication, it is little wonder that globalization appears set to maintain its staggering pace. Add to that the emergence of the renminbi (RMB) and a complex and changing regulatory environment, and you have a clear predicament for financial institutions Ð keep up now or catch up later.

In the years ahead, the dialogue around the evolving transaction banking landscape is likely to be dominated by two themes Ð the impact that corporate globalization will have on financial institutions, and the internationalization of China's currency, the renminbi. For financial institutions, these themes present challenges on several fronts. From navigating a complex and evolving regulatory landscape through to how we partner to find the most cost-effective path to growth, our success as banks will become even more closely tied to our ability to keep pace with the internationalization of the clients we serve.

Going Global

As the world's emerging and developed economies grow and expand, many domestic enterprises are venturing beyond their home markets and building their overseas business. From a small emergingmarkets apparel supplier through to one of the

world's largest consumer-oriented conglomerates in the U.S., companies around the world are moving further afield faster than they ever have before to drive business growth. These markets offer new revenue streams, efficiencies around production processes, geographic foothold and access to a growing base of wealthy consumers.

For financial institutions, this shift poses fundamental opportunities and challenges in the way we serve our corporate clients across borders.

From an opportunity perspective, banks that have a regional and global infrastructure already in place can more readily support their clients, helping them with their working capital requirements, improving efficiency and mitigating risk across the full cash management, trade finance, foreign exchange and securities services spectrum.

But there are also significant challenges. The costs of establishing a footprint to follow our clients can be intimidating and ultimately prohibitive. Understanding and complying with what are often complex local regulations can be daunting. There are challenges in emerging markets when it comes to executing cross border payments, effecting connectivity to local clearing systems and tapping local liquidity. Financial institutions are all acutely aware of the tremendous capital investment and resource dedication required to enter each new market.

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Dawn of a New Currency

China's increasing prominence in the global economy also sees the internationalization of the RMB take center stage. Although not yet a major international settlement currency, the RMB is beginning to play a more central role in how financial institutions are aligning their offerings to ensure they are ready to meet the rising demand from their corporate clients.

While there is much interest and excitement around the rise of the RMB, its emergence as a new, viable and acceptable currency choice for international settlement is not a fundamentally uncharted development in terms of the global currency landscape. More than 30 years ago, the Yen grew to become a major international trade settlement currency, and in 1999, we saw the introduction of the Euro. Financial institutions therefore have a unique opportunity to draw on their past experience for the benefit of their corporate clients, leveraging their global payment processing and clearing expertise to ensure the seamless adoption of the RMB into the fold of international payments processing.

Navigating Regulatory Complexity

Against this backdrop of client globalization and the commercialization of the RMB, financial institutions are facing a swathe of new and revised regulations that are challenging and far-reaching. With capital and liquidity regulations around Basel III gathering pace and ongoing conversations around Dodd-Frank's consumer protection wire transfer pricing provisions and the reporting requirements of FATCA, financial institutions are scrambling for deeper insight into the implications for their own organizations and their clients.

The results of a recent banking survey from market research firm, FImetrix, underscore the growing importance that corresponding banking clients place on insight and advice from their clearing banks. When asked whether it was Ìmportant that USD Provider Bank Supports (Respondent) Bank in U.S. Government Regulation Compliance', 72 percent of respondent banks cited their response as either `Very Important' or Ìmportant', compared with 66 percent in 2010. Likewise, the percentage of responding banks that selected `Very Important' or Ìmportant' to the question Ìmportant That Provider Banks Assist with KYC & Other Compliance Regulatory Issues' surged to 64 percent in 2012 from 43 percent in 2010. Respondent banks are also seeking more general information and guidance around payments (73 percent in 2012 versus 64 percent in 2010); trade finance (72 percent in 2012 versus 63 percent in 2010); and other operational issues (69 percent in 2012 versus 41 percent in 2010).

Regular education, guidance and thought leadership represent an important opportunity for financial institutions to share our collective local and global experience in an increasingly complex regulatory environment. A deeper and more holistic banking partnership will define our success in the future of transaction banking.


A Partnership Approach

Given the rapid growth of a new class of emerging market multinational companies, the banks that serve them have an unique opportunity to deepen their existing relationships and expand their business to include new solutions matching their clients' growth plans. Naturally, the client's preference is to work with a familiar banking partner they know and trust as they expand into new markets.

When financial institutions look at how best to keep up and serve their clients, a partnership approach merits consideration. Financial institutions have long been aware of the benefits of forging and nurturing strong and healthy correspondent banking relationships, leveraging each other's branch network for executing cross- border remittances, advising letters of credit, settling treasury transactions and offering custodial services, among others. This cooperation across cash management, trade finance and securities safekeeping and processing will continue to be a fundamental pillar of partnership globally.

And while these banking relationships have been largely transactional in nature in years past, today and in the future, the real value will be around a deeper sharing of expertise required to address footprint expansion, evolving regulations, risk management and the future of global payments. Client solutions will be powered by technology, partnership and robust system connectivity between financial institutions.

The Last Word

When we look at what the future holds for the transaction banking industry, it is clear that we will continue to face many challenges in the years to come. Playing catch up with our clients in an increasingly competitive global landscape is simply not an option. Inaction today will have deep and far-reaching consequences for our client relationships tomorrow.

As banks, we need to continue investing for our clients, helping them with their challenges and delivering innovative solutions that drive real and measurable results. By leveraging our combined expertise and building deeper, more robust correspondent banking relationships, we can harness our collective strengths, benefit from economies of scale and deliver cost-effective solutions to ensure we are all keeping up with our clients.

Margaret Yao is Managing Director and Regional Sales Executive, Asia Pacific for J.P. Morgan Treasury Services. Currently based in Hong Kong, Yao has been with J.P. Morgan in Asia and the U.S. since 1994, with roles ranging from sales to product management across cash and liquidity management.

Playing catch up with our clients is simply not an option

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A New World for Cross-border Remittancesunder Dodd-Frank 1073By Roy DeCiccoIndustry Issues Executive, AmericasJ.P. Morgan Treasury & Securities Services 02With new regulations increasingly a part of everyday life within the financial services sector, banks are investing significant time, effort and money into setting up new structures and frameworks that address a more challenging regulatory landscape. However, one of the new regulations poses significant challenges to the financial services industry in developing a global payments model that meets its expanded requirements. It is Section 1073 of the Dodd-Frank Act.

In a bid to improve financial markets' stability and transparency following the financial crisis, regulators and lawmakers around the world are revisiting, reviewing and revising the already extensive regulatory and legislative frameworks that essentially govern how the world's finance industry operates. Financial institutions are already preparing for many of these regulations, installing new processes, adopting new benchmarks and further enhancing their operations to meet these new requirements.

However, one piece of regulation in particular has caught the eye of international payments banks Ð Section 1073 of the Dodd-Frank Act (Dodd-Frank 1073).

Dodd-Frank 1073 Key Takeaways

Aimed at providing greater transparency into cross-border electronic payments sent by U.S. consumers, Dodd-Frank 1073 will require significant changes to the industry's end-to-end payment processing model, thus impacting both U.S. financial institutions and their correspondent partners around the world.

The regulation Ð which will be effective on February 7, 2013 Ð will be applicable to international electronic payments valued at USD 15 or higher and where the payment is originated by a U.S. consumer to a recipient based in a foreign country. The requirements apply to providers of international wire transfer services in the U.S. who exceed a threshold of 100 consumer-initiated cross-border transactions in the prior calendar year, and include international ACH payments, online bill payments and loads onto some prepaid cards. The regulations will not apply to payments originated by U.S. companies.


Disclosure Requirements

Dodd-Frank 1073 will require U.S. remittance transfer providers (RTP) to give consumers two disclosure documents. A pre-payment disclosure must be provided when the sender/consumer requests an international electronic payment. The regulations provide for a 30 minute period during which a sender may cancel the payment. A post transaction receipt must be provided to the sender after the payment is made:

{ The first disclosure must include the transfer amount, all transaction fees, the foreign exchange rate, taxes, and the amount the recipient will receive in their receipt currency;

{ The second disclosure must include all the information from the first disclosure plus the delivery date, the phone number or address of the recipient, error resolution rights, and contact information for the provider, regulators and the Consumer Financial Protection Bureau (CFPB);

{ The two disclosures can be combined into one pre-payment disclosure and receipt as long as a separate proof of payment is given by the RTP to the consumer at the time of initiation;

{ The regulation also outlines rights and timelines for cancellations, disputes and errors. In addition to the 30 minute right to cancel the transfer, senders have 180 days to claim an error.

Exceptions and Estimations

Dodd-Frank 1073 has one temporary exception and two permanent exceptions. The temporary exception, which expires on July 21, 2015, allows estimates of some disclosures for transfers when exact amounts are unknown for reasons beyond the provider's control. The two permanent exceptions permit providers to estimate the foreign exchange rate and amounts in two circumstances: the first for countries that have foreign currency control laws that prevent a provider from knowing the foreign exchange rate; and the second for some international ACH services offered by Federal Reserve Banks.

Implications for U.S. and Foreign Financial Institutions

Dodd-Frank 1073 will have a significant impact on payment processing between U.S. financial institutions and foreign correspondent banks. While the regulation applies specifically to U.S. providers, its implementation will also affect their foreign correspondent banks, which will need to provide information on their specific fees and that country's exchange rates, which will ultimately form part of the provider's disclosure requirements. Providers will therefore need the support of their foreign correspondent banking partners to determine all the information required for the disclosure.

In addition, Dodd-Frank 1073 has no direct extraterritorial implications, since it only applies to providers in the U.S. which offer cross-border remittance services to consumers.

Dodd-Frank 1073 will require significant changes to the industry's end-to-end payment processing model, thus impacting both U.S. financial institutions and their correspondent partners around the world


However, the information and support for error resolution that providers need will come from foreign financial institutions.

In some cases, disclosure requirements may conflict with local privacy and antitrust regulations, which may prohibit financial institutions from disclosing customer pricing. Financial institutions are also usually not willing to disclose existing contracted customer pricing.

The CFPB has published a safe harbor list of countries that qualify for an exception to the disclosure requirements because these countries have restrictive foreign exchange practices which prevent a provider from determining the exact exchange rate on the date of availability for a transfer involving a currency exchange. The initial safe harbor list, which may be updated from time to time, includes: Aruba, Brazil, China, Ethiopia and Libya. For countries with laws that prevent a provider from knowing the fees other banks will charge, providers may look to negotiate predictable fee arrangements so they can send transfers that comply with the Act.

Adapting to the New Landscape

U.S. providers are now developing the most efficient processing model to ensure compliance with these disclosure requirements, and will be reaching out to their overseas correspondents for their support. Providers are exploring alternative routing and charging methods to facilitate compliance, with more providers also reevaluating the overall process they use for transferring currency.

Some providers may decide to convert their transfers within their own FX business or through a contracted provider, and others may opt to send Dodd-Frank transfers as U.S. dollars. Providers may also askconsumers if they know the currency the beneficiary will receive or the beneficiary's account currency, and if receipt will be in the beneficiary's local currency, the provider will most likely perform the foreign exchange conversion themselves since they will be required to disclose an FX rate.

SWIFT is working with The Clearing House, the Federal Reserve Bank and the Payments Market Practice Group to define a common set of code-words to identify payments requiring compliance. Initially, SWIFT will recommend the use of field 26T of MT103 for a three character code-word which will identify the payments subject to the 1073 disclosure requirements to overseas correspondents.

However, while work continues around adapting to the new Dodd-Frank landscape, many U.S. financial institutions are evaluating the strategic importance of providing international electronic payment services to consumers relative to the cost of complying with the new regulations. In some cases, it is possible that a financial institution may decide that the best strategy is to exit the business. For those that remain, the international payments business will continue to be a viable part of their business, but the key to success Ð both for U.S. financial institutions and their global correspondent banks Ð will be strong and robust partnerships based on transparency and visibility.

Roy DeCicco is Managing Director and Industry Issues Executive, Americas for J.P. Morgan's Treasury & Securities Services Global Markets Infrastructure group. Based in New York, DeCicco coordinates the firm's activity with industry associations, public policy authorities, international market infrastructures and other financial institutions, with a focus on issues and initiatives that impact the payments business.

Note: This article draws on information in the "White Paper on Dodd-Frank Section 1073 Ð Cross-border Remittance Transfers," by the Clearing House Association in the U.S. and the Payments Market Practice Group (PMPG).



The Evolution of Asia's Financial Market StructureBy Masayuki TagaiIndustry Issues Executive, AsiaJ.P. Morgan Treasury & Securities Services 03As a complex and diverse geographic region, Asia continues to present many challenges to financial markets participants. However, despite these challenges, the future looks positive. Intra-regional trade barriers are coming down with increasing speed, paving the way for greater regional cooperation across Asia's growing economies, a move which could hasten the arrival of significant integration across the region's financial markets and its infrastructures.

From differing country regulations and varying levels of market sophistication through to more granular, daily challenges around fragmented domestic financial messaging standards, formats and even languages, financial institutions are faced with a raft of obstacles requiring careful management when doing business in Asia. From these challenges flow a range of issues, including increased costs, a greater need for customization, inconsistencies around the timeliness of execution and higher levels of risk stemming from a multitude of local frameworks layered on top of globally recognized standards.

However, in recent years, many initiatives have taken root, led by a cross-section of financial regulators, governments, market infrastructure stakeholders, industry groups and associations and the broader private sector. These initiatives are exploring ways to further enhance and indeed reform Asia's regional financial market landscape, to deliver new efficiencies, reduce risk and boost cross-border

cooperation. In this article, we examine some important public sector led initiatives that may impact and influence the governance of market structure dialogue in the region.

Southeast Asia Leads the Way

On the back of increasing integration and relaxation of barriers around trade flows, many of the most progressive initiatives for integration are emanating from the Association of Southeast Asian Nations (ASEAN), which currently consists of the 10 member states of Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR, Myanmar and Cambodia. Under the ASEAN Economic Community Blueprint, according to the ASEAN Secretariat, "ASEAN envisages to achieve integrated financial and capital markets by 2015". While not necessarily implying the introduction of a single ASEAN currency or regulatory framework, this objective does point towards greater cooperation

among the ASEAN countries.

ASEAN envisages to achieve integrated financial and capital markets by 2015


A Broader Focus

The positive progress around the deeper intra-regional integration of trade may also prove something of a catalyst for greater standardization across the region's broader financial markets infrastructures. ASEAN+3, which comprises the 10 ASEAN countries plus China, Japan and Korea, has been involved in ongoing discussions on financial cooperation as a collective reaction to the Asian Currency Crisis in 1997−98. While keeping sight of the greater efficiencies that deeper integration can deliver, it actually began with a need for macroeconomic surveillance and a response mechanism for further crisis situations.

The ASEAN+3 group has been effective in driving regional financial cooperation. This push includes the development of multilateral, self-supporting mechanisms such as the Chiang Mai Initiative, a framework that pools foreign currency reserves to better prepare for any future crisis, the development of a Credit Guarantee and Investment Facility (CGIF) and the creation of a policy-oriented bond market discussion forum, the ASEAN+3 Bond Markets Forum (ABMF). Formed in 2010 as a common platform to foster standardization of market practices and harmonization of regulations on cross-border bond transactions in the region, the ABMF includes key market players, agencies and institutions in the region. The forum also plays a unique role in bridging the private and public sectors with support from the ASEAN+3 policy makers.

As a first step, the ABMF has published a comprehensive bond market guide together with a set of cross-border transaction flow charts to close the information gap that still exists in the market. It currently continues to discuss ways of developing better functioning cross-border intra-regional bond markets with a long-term objective of developing a common bond issuance framework (AMBIF: ASEAN+3 Multi-currency Bond Issuance Framework) and the adoption of global financial messaging standards.

There are also signs that ASEAN+3 members are re-examining the need for a regional settlement intermediary (RSI: a concept for a settlement system that could be a regional clearing house or a connected network of existing settlement systems) as a common bond settlement platform in the region. Although previously rejected because of soft demand and a less promising business case for such a platform, the concept is once again receiving attention on the back of growing local currency bond markets and lingering public sector interest for a public policy delivery mechanism in the form of a common settlement infrastructure.

Another sign of closer financial cooperation is the establishment of the ASEAN+3 Macroeconomic Research Office (AMRO), formed in April 2011 as an independent regional surveillance unit to monitor and analyze regional economies. While AMRO currently just conducts regional surveillance and watches for signs of economic stress or financial shocks, some observers see AMRO as a potential IMF-like body for Asia.

Integration initiatives in Asia are occurring fast...and creating opportunities for dialogue between the public and private sectors


Masayuki Tagai is Managing Director and Industry Issues Executive, Asia for J.P. Morgan's Treasury & Securities Services Global Market Infrastructures group. Based in Tokyo, Tagai coordinates the firm's activity with industry associations, public policy authorities, international market infrastructures and other financial institutions, monitoring regulatory trends and market practice issues that affect financial market structure development.

The Significance of ASEAN+3

These ASEAN+3 initiatives are important because of the economic strength of this group. While the 10 countries in ASEAN alone cover less than 30 percent of the supply chain in the region in terms of intra-ASEAN trade, adding in China, Japan and Korea raises coverage to over 60 percent. This level is comparable to Europe, where intra-European Union trade is over 60 percent of total trade. This scale implies that initiatives from ASEAN+3 are likely to have the greatest impact in Asia.

However, other broader regional initiatives are also enabling regulators to work together on key issues such as the cost of fragmented implementation of global standards. One key forum for central bankers to gather more often is the Executives' Meeting of East Asia-Pacific Central Banks (EMEAP), a cooperative organization consisting of central banks and monetary authorities mandated to drive closer relationships among the 11 member economies.

Financial authorities are also meeting regularly under the Financial Stability Board (FSB) Regional Consultative Group for Asia. Established in November 2010, the group is one of six regional consultative groups that "bring together financial authorities from FSB member and non-member economies to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial

stability." At its second meeting in May 2012, members discussed issues such as the impact of European financial institutions deleveraging on the macro-economy, markets and funding liquidity.

Future Dialogues

Integration initiatives in Asia are clearly occurring faster than many realize, with the pace of development opening an important opportunity for dialogue between the public and private sectors. Through active and engaging dialogues, financial institutions can help raise awareness among regulators, better communicate our clients' collective voice and facilitate the smooth implementation of important new policies.

Financial institutions have a key role to play in owning the issues and providing information and advocacy to key stakeholders such as regulators and policymakers, so that policy objectives can be implemented in an optimal and well functioning manner. Those initiatives can help ensure that financial integration increases the safety, visibility and accountability that policymakers and financial institutions alike agree is critical to the future of the financial system.



Balancing Growth with CostsBy Mark BurroughHead of Treasury Services FX, Asia PacificJ.P. Morgan 04With foreign exchange market activity continuing to become more global, cross-border transactions on the increase and a continued drive for efficiency and cost reduction, financial institutions around the world are under pressure to support their clients' intra-regional and global growth. But balancing that growth against the cost of expansion need not be an obstacle to future success.

The international foreign exchange (FX) market represents one of the most active and liquid markets in the world and with the strides in technology and e-commerce over the past few years, arguably the most efficient. Or is it? While price discovery has certainly become highly sophisticated and transparent with the advent of multi-bank portals and the ubiquity of information, the end-to-end processes of transactional FX remain disaggregated and challenging, offering opportunities for further improvements in efficiency and growth.

Challenges for Corporates

For the corporate there is a need to distinguish between two very distinct yet entwined elements of foreign exchange − risk management and cross-currency transaction processing.

From a strategic risk management perspective, hedging has become more systematic and underpinned by a defined policy, representing an important part of the treasurer's day. How that policy is executed is very much on an ìt depends' basis, while at the same time, it can be driven as much by market and regulatory dynamics as by the corporate itself.

It is when we consider cross-currency transaction processing that we strike on common themes across all corporates regardless of their over-arching risk management policy Ð efficiency, growth and globalization. Introducing efficiency into the cross-currency payment element of the business enables treasurers to focus on what matters Ð core competencies, strategies for growth and how they will continue to compete and build their own business. Simplifying and streamlining the ability to pay and receive globally in multiple currencies with ease and with clear visibility on all embedded costs Ð while simultaneously making it low touch Ð represent the ideal of fully integrated cross-currency transaction processing.

Corporate and regulatory challenges present market share opportunities for financial institutions


Implications for Financial Institutions

The same challenges are ultimately faced by financial institutions Ð reduce cost, eliminate risk, expand globally and grow the bottom line. Institutions need to adapt to the changing requirements of their customers and provide products and services which make the corporate's international journey a smooth and cost-effective one. Global banks have invested significant sums in their e-commerce, FX and cash management platforms to meet the increasingly sophisticated demands of their customers.

Local and regional financial institutions face significant cost pressures in offering similar solutions, particularly if cross-border FX capabilities are not part of their core offering. The costs associated with building new, integrated FX and payment platforms, and rolling these platforms out in-country can be high, not to mention the significant resources required to comply with new regulatory jurisdictions, navigate clearing and settlement systems, and issues around different languages. Yet without these capabilities, banks' ability to retain their business, let alone target new flows and opportunities, can be limited.

These challenges would be significant at any time, but the advent of Basel III is making it even more so. To meet the additional requirements around these new regulations, financial institutions around the world are exploring capital raising opportunities, shedding certain business operations and scaling back their expansion plans, reducing capital expenditures

around technology, customer service and branch expansion, and focusing more intently on improving

efficiency and attracting operational liquidity.

The Way Forward

These corporate and regulatory challenges however can present market share opportunities for those financial institutions that focus on enhancing efficiency, reducing their cost and better managing FX risk on behalf of their underlying corporate clients. By addressing and overcoming these obstacles, banks can ensure a stronger and more robust relationship with their clients, increased business performance and an improved market share relative to their banking peers. Differentiation needs then to be created through counterparty stability, access to global clearing networks, client service models, currency range and more.

The solutions a financial institution can offer are wide and varied, and yet need to focus on speed of delivery, access to alternate settlement channels, automated straight-through-processing of payments and receipts, better pricing on dealing costs and minimizing FX line usage.

The fundamental question facing financial institutions, though, is whether they build the necessary Ð and costly Ð infrastructure themselves, or whether they seek out a correspondent banking relationship with a well-matched global provider. Each approach has its benefits.

Mark Burrough is Executive Director and Head of Treasury Services FX, Asia Pacific for J.P. Morgan. Based in Singapore, Burrough leads a product management team responsible for the delivery of integrated cash and foreign exchange solutions to corporates, financial institutions and non-bank financial institutions.

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Competing for LiquidityBy David LiHead of Liquidity, Asia PacificJ.P. Morgan Treasury & Securities Services 05As liquidity management becomes even more challenging and complex in light of Basel III requirements and global market shifts, financial institutions will need to set a strategy to enhance their funding structures while competing more effectively for increasingly valuable client deposits.

With a range of new Basel III requirements around capital coming into effect in January 2015, regulators and financial institutions are already preparing for a new world that places a premium on a deposit base which is resilient during times of stress. Banks are reviewing how they manage their own liquidity, while at the same time helping their corporate clients handle their liquidity.

The Impact of Basel III

One of the key liquidity issues facing financial institutions is how they position their own funding structures in light of impending Basel III requirements. While these will come into effect in just over two years' time, numerous banks are already setting up and reporting for Basel III, either of their own volition or as a result of the local introduction of select regulatory requirements.

A key difference when compared with previous iterations of Basel Ð which focused on asset valuation and capital allocation Ð is Basel III's added emphasis on funding stability and liquidity. Under Basel III, a key measure is the Liquidity Coverage Ratio (LCR), which focuses on the stability of a bank's deposit funding

base and, in particular, which deposits a bank can depend on during 31 days of financial stress.

LCR-friendly deposits are considered resilient for 31 days if they are either contractual (i.e. have at least 31 days remaining maturity) or operational (i.e. it takes time to switch banks for services such as clearing and custody). As such, banks can deploy LCR-friendly deposits for various lending and investment activities. By contrast, deposits that are not LCR-friendly Ð and thus non-resilient Ð have to be placed into treasury instruments which are highly liquid and thus lower yielding. Accordingly, these deposits become much less valuable.

This focus on funding stability means banks are increasingly discerning about the value of deposits,while at the same time, clients are being selective around who they choose as counterparties. This combination will likely increase rate competition and new offerings for operational balances linked to cash management, custody and other banking services.

Banks that hold funds without offering additional and complementary services to make deposits 'operational', or that have a purely wholesale business without a natural commercial or retail deposit base, may well see an increased cost of deposit funding. We also expect increased caution on reliance on inter-bank funding due to its periodic volatility in availability and pricing. The increasingly frequent and broad-based downgrades of many banks will accentuate these trends.


The Liquidity Squeeze

A key shorter-term issue here is whether liquidity in Asia is constrained for some financial institutions. While actual evidence of a liquidity shortage is unclear, there have been significant shifts in how financial institutions manage liquidity. Financial institutions have become more cautious about inter-bank placements, even at times for highly-rated counterparties, and some have reduced their exposure to other banks, particularly where downgrades result in ratings that no longer meet risk policies.

Banks are therefore placing a greater emphasis on attracting liquidity from the corporate sector. While many banks have looked at operating balances as an attractive cross-sell product from a profitability lens, there is increased recognition of its importance for funding.

Competing for Liquidity

Historically, some banks considered deposits as a side effect of a banking relationship. However, this has changed. Many banks are now increasingly focused on deposits as a primary objective, and are developing client liquidity solutions to attract new business.

So what are some of key strategies and solutions a financial institution can consider offering to its clients to better draw in such balances while enhancing its own liquidity structure in the lead-up to Basel III?

First and foremost, banks have to understand the objectives of their clients. These clients are looking to optimize their liquidity across markets, access liquidity generated by their businesses and enhance their yield / funding costs. However, a fundamentalchallenge that these clients face is gaining visibility

over a cash position and aggregating that position across entities and geographies. A subsequent priority then emerges Ð how can that cash be redeployed into areas that will fund their further growth.

Organizing Client Liquidity

A popular banking solution is to create a cash concentration structure where cash balances are concentrated from various accounts and locations into a single account. This provides the corporate with a single, physical position to use for its cash needs. By organizing cash in this way, the client can fund internally as well as facilitate investment for superior yields.

Another option is notional pooling. This is the notional counterpart of cash concentration and achieves largely similar financial outcomes (internal funding and investing for superior yields). The key difference is that the pool derives a single position based upon the notional net total across a set of accounts, as opposed to concentrating into a single physical account. Although currently less common than concentration structures in Asia, notional pools could penetrate perhaps 20 to 25 percent of corporates over time in Asia.

Other solutions are designed to help clients address specific market conditions. For example, in markets where intercompany funding attracts stamp duties, banks can help clients if they are able to automate administration of such loans in a manner which minimizes the amount of intercompany funding and thus their associated stamp duties.

For clients with surplus funds, a primary focus is to place the funds in investments which combine

When organizing liquidity, clients are interested in approaches which improve the yield / liquidity mix


attractive yields with acceptable levels of access to liquidity. In Asia, money market funds are rather earlier in take-up compared to Europe, and in particular to North America, with vanilla time deposits remaining the most popular. Although simple, time deposits necessitate effective forecasting to avoid breaking them and incurring breakage charges. As many companies find forecasting challenging, particularly beyond seven days, this can lead to a phenomenon of short-term deposits (i.e. seven days) being repeatedly rolled over, whereas with more effective forecasting, the client could have invested out for a month or even longer.

When organizing liquidity, clients are interested in approaches which improve the yield / liquidity mix. Unitized Time Deposits (UTDs) provide some daily access to liquidity, while yielding returns often out to one month. The bank achieves this by slicing the client's investable funds into a series of time deposit strips which each yield a term return. As these strips overlap in sequence, every day a strip of liquidity will be naturally maturing. And if there is a need for additional liquidity, the client can break an appropriate number of strips, which reduces breakage charges compared to breaking a larger, single deposit.

Moving Client Liquidity

Banks recognize that the effectiveness of their liquidity solutions is highly influenced by their ability to move liquidity into or out of these liquidity solutions, while optimizing value-dating and cut-offs for their clients. Their larger clients are generally becoming more centralized in their liquidity

approach, moving beyond the (typically) regional approach towards globalized structures.

As such, cross-border and even cross-regional mobility without float loss becomes a larger focus. While this is comparatively straightforward to achieve for "follow the sun" (East to West) movements, "against the sun" can be more challenging. Moving money from New York to Sydney, for example, means a client can lose a day's float, as during New York business hours, Sydney has already closed for the day. Global banks have generally addressed this by treating them as book transfers, enabling the different branches to behave as if they are acting on a common balance sheet.

The Future Pay-off

A combination of regulatory changes, ongoing market uncertainty and bank rating downgrades have led banks to place an increased focus on gaining client deposits, particularly operating balances. LCR-friendly balances such as operating balances or longer term deposits are becoming increasingly valuable to banks and as such will be associated with more aggressive bank pricing as well as increasing product innovation as banks strive harder to attract such balances. This combination will likely increase the pay-off to those clients that have implemented a liquidity management structure, particularly if on a regional or global basis.

David Li is Head of Liquidity, Asia Pacific for J.P. Morgan Treasury & Securities Services. Based in Singapore, Li is responsible for the firm's liquidity and investments businesses across the region.



Driving Trade Efficiency with BPOsBy Dan TaylorIndustry Issues Executive, AmericasJ.P. Morgan Treasury & Securities Services 06Bank Payment Obligations are an efficient, electronic solution and represent a potential alternative to paper-based Letters of Credit (LCs) or even open account. While the BPO is in its infancy, additional catalysts could soon move adoption to a tipping point, accelerating an industry shift to the new framework.

While Letters of Credit (LCs) have been around for centuries as a reliable mechanism for trade, corporates are now looking for ways to reduce paper and increase efficiency. Prior to the financial crisis in 2008, corporates were moving in increasing numbers towards open account, but as risk spiked, many in the industry reverted to the security of LCs.

Today, the macroeconomic environment is comparatively stable, and corporates are turning back to open account. However, they are concurrently seeking new platforms that allow them to shift away from the perceived inefficiencies of LCs and the risks associated with open account Ð once and for all. Bank Payment Obligations (BPOs) are a viable and appealing option, particularly once new rules and standards governing trade involving BPOs are finalized and implemented.

The Benefits of BPOs

One of the most significant benefits of BPOs is that they remove paper from trade and eliminate manual processes. While both a BPO and a traditional LC require matching key pieces of information from the purchase order and invoice underlying the transaction, a critical difference is that with a BPO, electronic data, rather than paper documents, are used for the matching. The financial institution matches the purchase order with the data electronically rather than manually Ð a much quicker process Ð and can then make payment to the recipient bank. Essentially, any paper still used by the buyer and seller stays out of the banking channels.

Dealing with paper is a huge cost of trade and complicates the processes involved, both for the seller who has to prepare the documents and the financial institution that has to review and manage the paper. Financial institutions and corporates alike stand to save tremendous amounts of time and reduce costs by using BPOs.

While the efficiencies of using electronic data rather than paper are clear, having electronic data also means there is a wealth of reporting available that adds value for financial institutions and corporates alike. In addition to using electronic data to speed up processes in the supply chain, corporates may also use it to improve their cash management, better link internal processes, and improve management of their supply chain.


Reluctance to Change

While financial institutions have been able to process BPOs for several years, actual transactional flow has remained light. Though BPOs combine the benefits of electronic efficiency with the comfort of an LC-like structure and rules, corporates are still reluctant to change. In many cases they are used to existing processes around paperwork, invoices, packing lists, bills of lading and other documentation that have been in place for many years. Consequently, corporate systems and processes have been designed for LCs, the logistics in the supply chain revolve around LCs, and LCs are familiar to both counterparties in the transaction Ð and so end up being the preferred way corporates do business Ð regardless of any inefficiencies or added costs. Large importers also employ literally hundreds of people to process LCs in some cases, meaning changing to a more streamlined process could effect staff assignments and workload. Perhaps most importantly, using BPOs requires a change to the entire thought process around trade, which is at least as significant as the idea of getting rid of paper.

Catalysts for Change

While many corporates are sticking with LCs and taking a "wait and see" approach to the BPO solution, others see huge potential benefits from making a change and are analyzing how best to do it. Financial institutions are working with corporates to design standardized systems and that make it easier to move data from corporate to bank, and from bank to corporate, so that clients can convert to BPOs seamlessly, without implementing new systems.

Two important catalysts are likely to push the industry to a tipping point that will drive the shift to BPOs:

{ An established framework. Standardized industry rules on how banks handle BPOs will ensure consistent, transparent handling of all transactions and resolution of issues. The International Chamber of Commerce (ICC) BPO Working Group in conjunction with SWIFT is focusing on setting up these rules.

{ First movers. A shift by several significant global trading counterparts from LCs to BPOs will provide momentum, set a precedent, and create a competitive imperative for market participants to match their 'rivals' gains in speed and efficiency, and reduction in costs.

While many corporates are sticking with LCs for now, others see huge potential benefits from making a change and are looking at how best to do it


Dan Taylor is Managing Director and Industry Issues Executive, Americas for J.P. Morgan's Treasury & Securities Services Global Markets Infrastructure group. Based in New York, Taylor coordinates the firm's activity with industry associations, public policy authorities, international market infrastructures and other financial institutions. He is also a member of the Treasury Services Trade Management Committee.

ICC/SWIFT Solutions

One of the most important current initiatives for both the ICC and SWIFT is the development and implementation of new operating rules and processes around BPOs. A drafting group is working on a set of rules that will govern BPOs, targeting to have these rules approved as early as 2013.

Along with drafting the rules, the ICC is leading two other initiatives to help pave the way for faster conversion to BPOs. One focuses on industry education, with a dedicated thought leadership group developing significant education resources that can be used as part of the broader BPO conversation. A second initiative comprises a commercialization group, which is involved in smoothing out operational bumps around the BPO process, better communicating the relevant information to target stakeholder groups, and disseminating information around the scope of the new incoming rules and gaining industry endorsement.

Preparing for the Tipping Point

Many larger financial institutions are already prepared for BPOs. Systems are in place and trade finance teams have been trained. Financing mechanisms have been established, so that ultimately, there is little difference in how financing will work between LCs and BPOs. Some financial institutions, on the other hand, have decided that the investment to put the infrastructure in place may be too costly or may represent a non-core business or product. To service clients who want to switch from LCs to BPOs, these institutions can partner with those financial institutions that already have the processes in place.

As the benefits of the BPO become apparent, and the industry framework is more clearly established, the stage is set for a significant increase in BPO transactions. The key, of course, is for corporates to change their processes. Once corporates do reach a tipping point, financial institutions could well face a sudden rush for BPOs. With the rules and commercialization practices coming along soon, financial institutions need to make sure that they are ready for this shift.

One of the most important current initiatives for both the ICC and SWIFT is the development and implementation of new operating rules and processes around BPOs



Transformation through TechnologyBy George FongHead of Trade Product Management and FI Trade Advisory, Asia PacificJ.P. Morgan Treasury Services 07Following the financial crisis in 2008, companies around the world refocused their sights on mitigating various types of risk and optimizing the amount of working capital within the supply chain in a bid to lessen the impact of challenging credit markets. Today, with global economic uncertainty ongoing, these companies are turning to technology to gain a competitive edge, placing increased demands on their banking partners to deliver the right solutions at the right time.

For hundreds of years, trade finance has been instrumental in driving global economic growth. Lubricating the gears of commerce, trade finance's risk management and financing benefits have ensured that as companies expand into new markets, new segments and new products, they have the necessary infrastructure in place to ensure that goods move swiftly and seamlessly from their place of production to their point of sale.

However, the challenges posed by doing trade in an increasingly interconnected global marketplace are driving corporates to look further afield when it comes to seeking a competitive edge, a push that could have significant implications for their banking partners.

Changing Needs

As Asia continues to write its dynamic growth story, the region's largest and most progressive companies are pushing towards new benchmarks that could set the industry's trade finance tone for many years to come. Spurred by the financial crisis, which saw credit markets tighten around the world, corporates have focused on mitigating a range of risks and optimizing working capital across the supply chain, thereby freeing up capital for alternate growth areas, and importantly, reducing financing expenses.

When it comes to financing, banks and financial institutions continue to play a central role in facilitating the trade finance cycle. From simple financing products through to complex structured finance solutions, banks today are bridging the gap between buyers and sellers, who are themselves becoming users of sophisticated financial instruments on both the payables and receivable sides.

Along with better managing their working capital, corporates are also focussing on increasing their efficiency and enhancing their access to timely information and analytics in order to improve the ways in which they handle their increasingly complex trade business. As their businesses grow, clients are demanding more efficient transaction workflow management, electronic transaction initiation, increased integration, reduced documentation and more robust inquiry and reporting capabilities.


Open Account and Letters of Credit

Despite softening during the financial crisis, usage of open account has picked up again and is once more prevalent in certain Asian countries. In line with their desire for increased efficiency, large corporates in Asia are switching to open account so they can simplify documentation, rationalize processing and reduce costs. Another driver for open account in the region is demand by their counterparties, with large corporates in the U.S. and other markets requiring their suppliers in Asia to use open account.

Letter of Credit (LC) usage has held steady and remains common in emerging markets, particularly given that in many markets, LCs continue to be a common financial instrument while some regulations around open account remain less clear. Even though the processes for LCs can remain cumbersome, financial institutions are developing new ways to meet client needs for increased efficiency, primarily through electronic document presentation on internet platforms or other secure channels that make documentary fulfillment under LCs more efficient and cost effective. Third party service providers are also collaborating with financial institutions to enable streamlined LC processing and reporting through the provision of electronic communication channels.

One example is electronic Uniform Customs and Practice for Documentary Credits supplement for Electronic Presentations (eUCP), which enables electronic document submission and streamlines processing. Other initiatives include enabling exporters to present documents directly to the issuing bank and automating the handling of SWIFT for Corporates transactions.

Gaining a Competitive Advantage

To meet corporate clients' demands in an increasingly competitive market, financial institutions will need to focus on four areas to gain a competitive advantage and ensure they deliver the highest levels of service to their clients.

The first client demand is around information, insight and reporting. As Asia continues to raise its profile on the world stage, corporates are not only entering new markets, segments and products, but are becoming increasingly complex enterprises themselves, with far more counterparties and touch points in their supply chain. Therefore, corporates are placing a heavy premium on information management, insight around their transactions and customized, on-demand reports. This complexity means it is crucial for a partner bank to offer the latest information architecture in order to deliver robust information in a real-time environment.

The second imperative revolves around technology as a whole. Whether it is eUCP, SWIFT for Corporates or multi-bank solutions, banks are increasingly pushing the envelope to develop new solutions that will make a difference to a corporate's operations. By building regional or centralized technology hubs that can handle the new wave of technology requirements Ð from mobile banking and imaging processing, for example Ð banks are better positioned to help their clients achieve operational efficiencies. Rather than growing their own capabilities and incurring high costs, some financial institutions are instead partnering with another financial institution that can provide support ranging from straightforward correspondent banking relationships for LCs all the way through to more sophisticated trade partnerships and value sourcing.


A third important development will be the continued integration between trade finance and cash management. With corporates around the region establishing regional treasury centers, shared service centers or centralized trading hubs, all of which are increasingly incorporating elements of both trade and treasury-related activities, it will be incumbent on a banking partner to support the client with cash and trade services that match the objectives of that corporate. By leveraging a bank's cash and trade technology and process infrastructure, a corporate can gain significant cost and efficiency advantages.

Finally, service quality is a critical factor for both competitiveness and profitability. More than just responding to a customer inquiry, superior service means having the right expert provide the right solution in the right language. That service needs to be easily accessible to the client, wherever they are, and issues need to be resolved the first time. And as technology pushes out richer information to clients, financial institutions are developing far more robust online systems so that service staff can track the client's inquiry and access the right information from the right systems.

George Fong is Managing Director and Head of Trade Product Management and FI Trade Advisory, Asia Pacific, for J.P. Morgan Treasury Services. With more than 20 years' trade finance experience, Fong is based in Hong Kong where he leads the firm's regional team in the development and management of traditional trade and supply chain solutions.

Whether it is eUCP, SWIFT for Corporates or multi-bank solutions, banks are increasingly pushing the envelope to innovate new solutions



Forging a New Collateral Management PathBy O'Delle BurkeSenior Product Manager, Collateral Management, Asia PacificJ.P. Morgan Worldwide Securities Services 08Amidst sweeping changes to the global regulatory and infrastructure landscape around collateral management, financial institutions are facing a raft of new requirements that will result in a renewed focus on counterparty credit risk, operational efficiency, transparency and liquidity. This evolution will impact how Over-the-Counter (OTC) derivatives are settled, collateralized and cleared, but it is the changing balance between centrally-cleared and non-centrally-cleared derivatives which is likely to redefine the global collateral management markets.

In September 2009, the G-20 leaders agreed that standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by the end of 2012. Prompted by calls to enhance the transparency of the OTC derivatives market, the broad mandate has since been supported with new legislation and regulations, including parts of the Dodd-Frank Act, the European Market Infrastructure Regulation (EMIR), Basel III and several local regulatory requirements throughout Asia.

A New Issue

One of the interesting chapters in the global OTC derivatives reform story that could emerge in 2013 is the focus on non-centrally-cleared derivatives. While some assume that almost all OTC derivatives will transition to be cleared centrally Ð either through a local or an offshore CCP Ð this may not ultimately

be the case. The International Monetary Fund has estimated that approximately one quarter of interest rate swaps, one third of credit default swaps and two thirds of all other derivatives will not be eligible to be cleared through a CCP, translating into around a third of the market. This is significantly more than what many may have expected.

In light of this fact, there are several potential impacts which sell-side and buy-side market players may need to consider with respect to centrally-cleared and non-centrally-cleared derivatives trades. Since there are different regulatory requirements to mitigate the risk, it will warrant further evaluation of how to manage margin for both types of trading activity. The practical complication of bifurcated trade portfolios may significantly reduce opportunities for counterparty exposure netting. Another consideration is that while the Basel III framework incentivizes central clearing by relieving banks from the Credit Valuation Adjustment (CVA) charge for CCP trades, the CVA charge for non-centrally-cleared trades can be minimized through appropriate collateralization. Furthermore, it is expected that non-centrally-cleared contracts could have comparatively more flexible collateral eligibility requirements compared with very conservative collateral eligibility schedules for CCPs, despite the fact that regulation is increasingly trying to align the collateral eligibility rules for cleared and non-cleared transactions. This means that collateral selection to cover trading for both portfolios will be an important decision. The shortfall in available collateral means collateral allocation needs to be prioritized in a manner that balances cost with the collateral requirements.


To tackle this challenge, collateral transformation programs and collateral optimization technology, which are already seen as vital, will become even more inextricably linked to derivatives trading. Thus, both buy-side and sell-side players will need to implement comprehensive operational workflows that cover execution (trade capture, matching and settlement) as well as post-execution (trade valuation, exposure calculation and collateral management). Finally, both centrally-cleared and non-centrally-cleared trades will need to be reported to a Trade Repository, which can cover reporting requirements concerning the collateral composition as well. Investment in technology will be required to reconcile and streamline data, formats and reports, requiring significant investment in time and resources.

Enhancing Collateral Management

In this new era which combines broad industry reform with the need for better counterparty risk management, effective and optimal collateral management will play a more prominent role with respect to capital and liquidity efficiencies. The following key collateral management components will need to be considered:

Valuation and Eligibility Testing

{ Daily mark-to-market of contracts and collateral

{ Active screening of collateral profile to ensure continued eligibility

Transformation and Optimization

{ Collateral transformation through repo and securities trades to obtain CCP eligible collateral using non-CCP eligible collateral

{ Prioritize collateral according to cheapestto deliver

Securities Recall and Substitution

{ Ability to replace collateral with equivalent eligible assets in order to meet returns, maturity or corporate action events

{ Perform simultaneous replacement of collateral to improve flexibility and efficiency

More diligence, discipline and thought is required around execution, clearance and collateral management in terms of ensuring that both the right people and a robust infrastructure are in place


O'Delle Burke is Vice President and Senior Product Manager of Collateral Management, Asia Pacific for J.P. Morgan Worldwide Securities Services. Burke is responsible for managing the firm's securities and derivatives collateral management business across the region.

Margin Call Administration

{ Daily assessment of potential collateral shortfalls due to price changes or eligibility (i.e. ratings, maturity, etc)

{ Initiate and/or respond to counterparty margin collateral calls

{ Coordinate requests and the delivery of additional collateral

Asset Servicing and Corporate Action Management

{ Trade settlement, cash reinvestment and interest distribution

{ Monitor and process income and corporate action events

Data Access and Reporting

{ Comprehensive detail downloadable and machine-readable real-time reports

{ Client and counterparty segregatedaccount structure

{ Complete assets reference data including valuation, haircuts and concentration

Seeking New Efficiencies

One of the most important considerations as the industry moves forward will be how to draw new efficiencies out of collateral management. As a result of the requirements around the quality and eligibility of collateral to be used in a CCP trade, buy-side and sell-side parties will need to look for new efficiencies and thus mitigate some of the impact around the more stringent requirements of CCPs. This will mean that more diligence, discipline and thought is required around the entire execution, clearance and collateral management process in terms of ensuring that both the right people and a robust infrastructure are in place.

While the issue around centrally-cleared and non-centrally-cleared transactions has not yet reached an end state in terms of complete certainty for the industry, it does promise to be a fundamentally important market development. The broader objectives though Ð mitigating operational, counterparty and credit risk Ð remain clear.



The New FrontierBy Vipul ShahStrategy & Business Development ExecutiveJ.P. Morgan Treasury Services 09As technology burrows deeper into our daily lives as consumers, the pace of change and innovation makes it difficult to keep up Ð let alone get ahead. Financial institutions too, face the same problem. Whether new strides in technology are driven by external factors or spurred by an internal agenda, what is clear is that banks can no longer ignore the new technology frontier.

When compared with the fleet footed consumer technology markets where the only constant is change, innovation within the transaction banking sector has historically been limited at best. For the most part, treasuries are operating the same way as they did many years ago; trade finance remains heavily based on paper in many markets, and automation is still not yet as common as it could be.

However, there have been improvements as the finance sector increasingly understands that clients want their lives to be easier, faster and cheaper. Accounts Receivable Conversion and Check 21 helped further electronify payments in the U.S.; Faster Payments in the U.K. drove efficiencies in low value payments clearing; and the Single Euro Payments Area (SEPA) paved the way for improvements in credit transfers and direct debits across markets.

A new wave of technology, with early success in retail commerce, may also significantly improve treasury services in areas ranging from client experience improvement to risk management and cost reduction. Furthermore, it offers an opportunity for the treasurer to drive more value towards the firm's strategic objectives.

Mobile Solutions

Mobile solutions have swept through the retail domain, transforming the way individuals communicate with one another, buy goods and services, and gain control over their financial lives.

In the corporate domain, mobile solutions present several opportunities. For example, companies such as food distributors faced with the challenge of collecting payments in the field can improve funds availability and operational risk by replacing cash/coin/check collections with mobile capabilities. The operational risk improvements take on more importance in emerging markets where electronic clearing systems have not penetrated large swathes of commerce, and where mobile phones are ubiquitous.

Companies are also burdened by expensive and inefficient disbursement systems that can be improved with mobile technologies. For instance, an institution seeking to disburse payments to individuals (be it a government with benefits or a company with rebates or claims), can replace a check with a mobile payment, leveraging the speed and ubiquity of mobile. The mobile medium also allows for more robust messaging Ð and a seamless and enjoyable client experience Ð that can transform a simple payment into a brand champion for the company. As treasurers seek to drive more strategic value from payments, mobile offers unique opportunities.


Big Data

Another transformative force is that of data and analytics. This is not new; companies have been trying for years to create business intelligence from the data available to them. What is different now is the massive amount of data flowing around organizations (an exponential increase over the years), the proliferation of unstructured data (i.e. emails, voicemails and documents, among others), and the emergence of new technologies (i.e. Hadoop, machine learning and new presentation methods) to create insights from this data and drive action.

It is common for multinational corporations to struggle with different forms of reporting from banks and employ people in the back office to do nothing but compile, translate and analyze information. New technologies offer the opportunity to better amalgamate, associate and present information so that it can be acted upon to drive positive business outcomes.

Financial institutions are developing ways to drive value for their clients by leveraging information to improve operations, reduce risk and reduce costs. The digitization of information in services such as lockbox can not only reduce costs associated with paper, but also allow companies to gain insights from the large amounts of information accompanying the payment. Hospitals and insurance companies, for example, may benefit from imaging and character recognition capabilities to better resolve claims, improve A/R matching, and even gain insights about treatments and costs to drive core business improvement outside the treasury. Once the information is captured, commonly performed analytical operations such as trending, exceptions analysis, benchmarking and risk analysis across various areas (i.e. collections, disbursements, liquidity and trade) can be significantly improved with the new capabilities augmenting existing bank portals, workstations, and enterprise software.

Cloud Services As treasury services move beyond pure "widget" processing to more sophisticated software and data solutions, the burden of companies to integrate with banks and maintain complex software in their environment has increased significantly. Today, enterprise software is increasingly being delivered as a service from the cloud (Software as a Service, or SaaS), relieving the company of complex integration and maintenance. Salesforce.com is a pioneer in the space of cloud Customer Relationship Management (CRM) software, and new companies like Workday are revolutionizing HR software services. Banks and companies now have an opportunity to leverage new delivery models to create new value.

Financial institutions are developing ways to drive value for their clients by leveraging information to improve operations, reduce risk and reduce costs


Starting a Community

Connecting nodes on a network has unleashed significant value in the retail arena, as the likes of eBay, PayPal, Facebook, LinkedIn, Twitter and others have demonstrated. Traditional wholesale banking models are focused on a hub/spoke system delivering products and services manufactured in the bank hub to clients in the network. Banks with large, global client networks have an asset in the network itself, and can create value for clients by bringing the capabilities of the broader client community network to bear for each client.

Additionally, the community can be leveraged to innovate on a platform of basic services provided by the banks, extending innovation beyond the walls of the banks and liberating it from the limitations of technology resources. PayPal, Amazon, Apple and others have pioneered the concept of such open platforms, allowing them to leverage the insights, creativity and entrepreneurship of the broader community to create new solutions and value, and accelerate innovation.

Finally, as payment system complexity increases and various forms of risk (i.e. money laundering or terrorist financing, for example) grow in sophistication, the community may be leveraged to solve problems and create a continuous and proactive counter to illicit activities.

Making Change Happen

Innovation is not always easy, but it is always necessary. Financial institutions stand to benefit by leveraging the transformative forces of mobile, big data, cloud and community to enable clients to reduce cost, reduce risk, and drive operational excellence. These technologies may also extend the corporate treasurer's value beyond traditional and tactical back office support to strategic objectives in the area of client experience improvement and growth, a business imperative that further underscores the importance of being able to navigate technology's ever-changing frontier.

Vipul Shah is Managing Director and Strategy & Business Development Executive for J.P. Morgan Treasury Services. Shah is responsible for driving innovation globally across the firm's Treasury Services business.

Innovation is not always easy, but it is always necessary

J.P. Morgan is a marketing name for the investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. To the best of J.P. Morgan's knowledge and belief all information contained herein is accurate, however J.P. Morgan accepts no liability for any inaccuracy or incompleteness of any data or information contained herein. References herein to "J.P. Morgan" shall mean J.P. Morgan Chase & Co. or any of its affiliates or subsidiaries including, but without limitation to the generality of the foregoing, J.P. Morgan Securities LLC, J.P. Morgan Securities plc, J.P. Morgan Chase Bank, N.A. and J.P. Morgan Securities (Asia Pacific) Limited. ©2012 J.P. Morgan Chase & Co. All rights reserved.

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