MULTILATERAL NETTING: PAYMENT OPTIMIZATION FOR MULTINATIONALS

Transcription

1 MULTILATERAL NETTING: PAYMENT OPTIMIZATION FOR MULTINATIONALS June 16, 2016, 3:30 p.m. EDT Aaron: Bob Celata: Robert Giannone: And with that let s go ahead and begin today s PNC Advisory Series Event. It is my pleasure to turn today s call over to our moderator for today and that is Mr. Robert Celata (ph), Managing Director, Foreign Exchange, PNC s Capital Markets Group. Bob, with that I ll turn the floor over to you. Thank you, Aaron, and good afternoon, everyone. Welcome to PNC s Advisory Series Webinar, Payment Optimization for Multinationals. I m delighted that you all choose to join us today. As Aaron said, I m Bob Celata, I m a Managing Director in PNC s Foreign Exchange Group and I ll be your moderator today. Before we get started with the presentation, I wish to highlight PNC s ongoing commitment to providing market insights, new ideas and best practices similar to the one that you re about to hear today. Our commitment is reflected in the types of conversations our bankers are having with companies like yours every day. It s also reflected in our PNC Ideas Thought Leadership series, which features a monthly e-newsletter, live webinars and a dedicated website at pnc.com/ideas. From brief videos, articles and economic reports to financial market commentary and webinar replays, we continue to choose topics and formulate our ideas based on the input that we get from you. So at the end of today s session, please provide us the feedback that we need to keep focusing in on the right information for you and for your company. Let s get started with today s presentation. I m excited to have Rob Giannone and John Stock (ph) as our presenters today. Rob is a Managing Director responsible for managing PNC s Foreign Exchange Sales Team. And John is a Director responsible for managing PNC s Foreign Exchange E-Products Group. Both of these individuals have a depth of experience with international business activities. Rob and John will review with you payment optimization for multinationals. They re going to focus on the use of multilateral netting services as a means to improve your internal cash flows, reduce foreign currency exchanges and increase visibility and control. As Aaron said, I ll moderate a question-and-answer session at the end of the presentation. You may submit your questions anytime throughout this presentation using the window found at the lower portion of your screen. So, why don t I hand this over to Rob to begin our session today. Rob? Thanks, Bob, for the introduction and thanks to everyone for taking some time out of each of your schedules to join us for an hour here this afternoon. As Bob mentioned in the introductory comments, we re going to focus today on multilateral netting and the advantages it can bring a multinational treasury operations as it relates to more efficiently settling and organizing primarily intercompany transactions but also, as we ll touch on later, the ability to also incorporate payments to third parties as well. So first I thought it would be helpful to kind of talk about some of the challenges we often hear from our clients with regards to global treasury needs as it relates to large organizations, especially those that are in acquisition mode, acquiring companies, adding new ERP systems, not all being on one platform from an 1

2 ERP counting package perspective, maybe having more than one treasury office, group treasury offices that also could be on different TMS applications and some of the complexities that creates. So, the first one is really helping to improve the visibility in that backdrop of global activities across a large organization with a framework that s light and sits somewhat outside of an ERP system or a TMS system. So that when you re not all in one application and even sometimes when you are on one very robust application sometimes getting the information that you need is complex and cumbersome especially for large packages like SAP for example, so that is one of the challenges that we often hear about. Operational efficiency or should I say a challenge being operational in efficiency whereby maybe you don t have the best control, visibility or execution of the settlement activity. Maybe everyone is kind of doing it all on their own speed and pace and through different methods, through different banks so that is one of the challenges we often hear as well with regards to these sorts of activities. Kind of follows then, having a better understanding and appreciation and also visibility into global cash management needs, funding needs, use of cash and efficiency of the cash that you have available. Other challenges, you know, kind of falling in line after that is then understanding the nature of the activity without the visibility to it, it makes it then hard for someone in a central treasury role or a central risk management role to really understand the types of exposures that aggregate up at the central level for a company when you don t have access to the information that gives you that composite view. A lot of times that is one of the bigger challenges that we face when we talk with corporates in more of the risk management FX risk management discussions we often have is really getting access to the information so they know exactly what to hedge and they re hedging the right types of exposures and the right amounts. So multilateral netting in effect, and we re going to talk about this over the next 30 to 45 minutes or so and make sure I leave time for some questions is really something that can answer and be a solution to a lot of these challenges. So I m going to go a bit more in detail on some of the specifics of challenges on the next slide that arise from some of the macro challenges I explained, just get more into the nuts and bolts of what tends to happen when you re not using something like multilateral netting or you may be using multilateral netting but you re not using it from a system you might have built a homegrown Excel spreadsheet and so a system can do the netting but also make it much more efficient and visible and transparent as well. So obviously, you know, you might have a lot of transactions occurring where you have entities in the normal course of you going to market and selling products and services that might be creating what I call current account activity where they re billing each other or the way you re going to market or the way your transfer pricing schemes are working, it could also include transactions from subs [dipperance] regarding loan activity, dividends, royalties and that kind of activity. When you handle that kind of at a decentralized way and a kind of bilateral way, everybody kind of paying each other, you result in a lot of payment activity and there s ways to kind of reduce that payment activity down, which we re going to talk about in multilateral netting. Also, when it s more ad hoc and decentralized, people are kind of paying each other, you know, when they want and get around to it so there s really no discipline in the payment of intercompany obligations so therefore sometimes what happens is we see those balances begin to enlarge and be bigger than they ought to be, which then also increases some additional currency exposure to the consolidated entity because they then, if their balances are larger and it s an asset balance and of course that mark-to-market with increase to consolidated FX volatility of the parent company. So to the extent that you can pay down those balances and keep them lower, it s an easy way to kind of right tout of the bat minimize your currency exposure on a consolidated basis. The lack of visibility, as I mentioned earlier being on different systems whether it s different ERP systems or different TMS systems and having access to the information to be able to hedge makes it cumbersome and costly to hedge when you can t figure out exactly what your exposures are. Time-consuming reconciliation, since everyone s kind of doing their own thing using different rates, for example, whereby the payer is using 2

3 one assumed rate in their ERP booking and the other receiver is using a different rate, you know, you have sometimes an overpayment and underpayment so you don t have really a matching up on both the payer and receiver side on the intercompany transaction. Same thing with regards to mismatches on the intercompany booking rates. And a lot of times companies will kind of do this in a very manual workload process and I say workload and I really mean workload across all of the activities you have to do so not just even the treasury activity that most people on this call are probably more on the treasury organizations of companies but there s even additional work that s done in the whether it s in the quasi-treasury like the AR and AP groups or whether it s in the accounting groups where they re doing additional work on the same activity. So when you look across all of the activity you need to do, it s really all of that activity that could be greatly enhanced and automated and more streamlined than just even with the treasury teams need to do with regard to the activity. So on the right we kind of go through and match up kind of what are some of the benefits of netting and how it overcomes some of these very specific challenges. So, on the payment side we can net down the activity on the inner company stuff between subsidiaries to one transaction per entity in their base functional currency. You immediately are lowering the number of wires you re sending, you re immediately reducing the numbers of currency conversions or currency transactions. You or your affiliated companies and treasury centers are doing, sometimes you re probably on both sides of the same currency pairing and probably don t even know it and obviously making the payment procedures much simpler and giving you all of that visibility at the central level in very easy reports that are very easy to work with and a lot less clunky than maybe trying to get some of that data element out of a very complex ERP system is sometimes hard to do. Obviously bringing structure to the process. You know, everyone is kind of on a set schedule, everyone is kind of marching to the same drumbeat so to speak so it creates a lot of discipline on the process, which also helps to kind of reduce those balances and facilitate more settlement of the activity and obviously having access to the data and the storage of the historical data kind of real time as well. It improves looking forward approach, you can start to see a trend of the company s, you know, position against the market, against certain currency pairs and start to begin to see an exposure trend develop that makes it easier than to do some of the risk management activities we often talk about. So a lot of what I talked about will probably make more sense as I get a little bit more into the next slide, next slide or two, and drill a little bit more into what multilateral netting is. Before I do that I just want to take a moment to talk. A lot of times we talk about netting, people first think about netting from an accounting perspective like we all learn, like accounts payable. You know, you owe me, I owe you, we re going to bilaterally settle the difference instead of settling the gross amount I owe you and the gross amount you owe me. That s more bilateral netting and a lot of companies will do that. That s more like the ad hoc approach where each treasury group or subsidiary is kind of paying and settling on either a net basis or some basis with one of its sister companies. Contrasted against that is really more multilateral netting where you re basically putting all of the activity at the same time amongst and between all of the related entities and putting a common set of exchange rates against that activity to net it all down at the same time. So greatly enhancing the efficiency of the netting not only at the bilateral level but for the entire organization; so much more efficiency in terms of the benefits of multilateral netting. There are a couple of ways to do netting and netting has been around a while, this is not necessarily new. I think the toolsets used to do netting have become much more robust over time, and we ll talk about that as we go later into the presentation. You know, years ago, it was really all payables driven, so what I mean by that is the payer, the subsidiary who owes the money, would go in and say who they owed money to as a related entity and which currency they owed it in. That s the easiest one to adopt because it s all on the ability to pay model or sometimes the willingness to pay and use cash model. So the subsidiary participant companies like that better. It s not as efficient from a treasurer s perspective because sometimes people have more ability 3

4 to pay than they want to pay but it is often the first step most companies will kind of elect a payables-driven approach. When you want to become more efficient and really get down more of those balances, then you might look at a receivables-driven where you re going to have the person who s owed the money drive the settlement and payment. Obviously that does create some issues as far as ability to pay, which would need to be accommodated for and there s ways to accommodate for that but it does result in a greater reduction in settlement of the activity, which has some unique benefits. The more recent evolution of this is really combining these and really putting all of the activity in at both the payables and the receivables because, remember, on a transaction that s being settled, you have two parties, two affiliates, one owes money and one is going to receive money for the same transaction. So by putting in both the AR and the AP, even at the invoice level, you know, what is driving the actual payment, so not even at the [I owe] party A 1,000 Euros for ten invoices, I could even put in all ten invoices and in that scenario match up the activity at the invoice level from both the payer and the receiving side, again, making the reconciliation and clearing of the accounting records much more robust and easy. That s not for everyone but the netting systems have become sophisticated enough to net at a matched basis and really reconciliation and clearing becomes very easy in those situations. So multilateral netting the best way to really kind of grasp this more than what I ve just kind of given you in words is really to look at the two schematics we have here on the right. Without netting, without multilateral netting even, your activity may look more like this where you have a number of different subsidiaries with different functional currencies that owe each other for various activities that they are generating in a normal course or whether it s dividends and royalties and how you re doing your transfer and tax planning that s kind of generating this activity. Without netting it s kind of the chart where it s kind of more of the bilateral movement of funds, kind of ad hoc buying and selling and selling in different currencies amongst and between each other all at the same time. When we take that activity and run it through a multilateral netting system, we really result in something that looks like the bottom schematic, which obviously is a lot less confusing looking, much more organized looking, and in essence becomes the netted down of the payment of each participant company. It s either going to be a net payer for the month into the netting cycle in their functional currency or they ll be a net receiver from the netting center in their functional currency. So obviously that is in essence would drive a lot of the benefits we spoke of on some of the previous slides. And, again, this can be intercompany activity related to trades, trade payables, receivables, it could be interest payments, loans, dividends, really any kind of intercompany activity really can fit into this. As I mentioned, touched on a bit earlier, another enhancement to gain even more of those efficiencies, more visibility to your underlying composite risk not only of your intercompany activity but also of your more macro activity is really incorporating that third-party activity, your third-party payables. Then you have even that much more of a broader view of your exposure and can even further net down those currency positions when it comes time to accessing the currency market and buying and selling a particular currency. So, that s another efficiency you can pick up but that in essence is really what multilateral netting does. On the next slide, we go into an example of one participant s view. This is an Australian entity that has both payables and receivables in different currencies amongst and between its related entities for which we apply a common set of exchange rates to basically then net down that activity to a net position or a net payment or receipt, a receipt in this example, of Australian dollars. So this is what happens and when you, you know, when you do this at an invoice level and you can pull this back out at an invoice level and you can then update your ERP systems with that cleared rate, that settlement rate, and you have a 100% matching then as far as what rate you actually received or actually paid for the currency as opposed to sometimes there s some mismatch on either side of that transaction because when you do a decentralize, you re using different rates because you re accessing the banking markets in different places at different times. 4

5 So that s an example of what it would look like for a particular participant who is Australian dollar functional giving you a view to what they would see at the end of a cycle. So I m just going to wrap up here and just go over and drive home a few more of the benefits we talked about with regards to a couple areas of cash management, foreign exchange and visibility and control and efficiency. You know, so obviously allowing you to integrate payables and receivables information for intercompany activity and third-party activity with regards to payables allows you to get better centralized view of your cash flow and your cash needs and demands. Obviously it helps you organize and streamline the settlement, the reconciliation and the processing of intercompany activity. It s not the sexiest thing we all do but it is something that does need to be done especially in a lot of cases we see companies that aren t yet settling this and letting large balances occur. We do sometimes see the accountant start to lean on companies to really either characterize these balances as something different than kind of working capital or current account activity or begin to settle it. So, this is a way to also accommodate that when you start to receive those pressures on your transfer pricing programs that you actually are demonstrating a settlement of the activity. Obviously it allows you to quickly and easily reconcile and make sure that all parties have paid and all liabilities and receivables have been cleared. Again, we talked about reducing transactional FX needs, applying one exchange rate on both the payable and the receivable and giving you that broad visibility to the exposures. Given that it s system-based, user-based, you have lots of control visibility over the activity and who does what and can even take advantage of various automation and using files to fully automate that. We re going to touch on this as we go further into the presentation as far as how it actually works, and I m going to let my colleague John take over from there and get into some more of the details of actually how netting would work. John Stock: Thank you, Rob. So, you know, after going through the good description of what multilateral netting is and the benefits of that, we get into really how is it being used today for companies? What are some of those examples? And we put a few examples here on the slide. These certainly aren t all of the applications for a multilateral netting system or a process within the organization but these are just some of common examples of how companies are using that and the first would be manufacturing companies, companies that manufacture goods. They may be doing something with diversified sales products, moving those products around the organization but they re generally doing something with physical goods, and they have multiple subsidiaries around the globe, and these subsidiaries are moving goods between each other, which is causing cash flows to occur between each of these entities. And as a result, you know, these goods will create these invoices, and when they are in different countries, that is causing a lot of back and forth of invoices being paid versus invoices being received. Sometimes these may be going between subsidiary and parent. Sometimes they may be going back and forth between the subsidiaries themselves but there is a mismatch of activity that is going around the organization. And because of that, you know, that is what s causing these intercompany payables and receivables and these transfer pricing challenges within the organization. Another example that we will see is more on the service side. So maybe they re law firms, consulting firms, firms that provide project management services, and they have global offices around the globe and those offices are performing services for each other. So a law firm may be performing services, you know, in the UK for a law firm in the United States and as a result there is a billing that occurs between those two entities and then invoices need to be paid and some of those will go back and forth and, again, causing the mismatch of activity that is occurring within the organization and also causing, you know, a lot of cash flow to take place and requiring to have structure around the settlement of that activity to try to streamline and grasp some of the benefits of a multilateral netting process. 5

6 In addition to some of the more common netting examples, which is that mismatch of activity that is going around the organization from subsidiary to subsidiary or subsidiary to parent, we do sometimes see some, what we would consider more nontraditional uses of netting because a netting system, especially some of the more formalized software applications, can provide an extremely powerful tool that would allow a centralized location to consolidate that activity and to consolidate that payment flow and that allows them to provide to the corporate visibility, communication of all of that activity and then provides control of the activity of the settlement of that and the distribution of those payments. And one of the examples we would, you know, may see that in is really a one-way push from the netting center, and when we say one-way push from the netting center, we mean the corporate parent may always be making payments out to the participants. So it s always generally a one-way flow, there s a funding happening from corporate but what it allows them to do is load all of that activity into the system maybe they re using multiple ERP systems but they can load all of that activity into the system and you can see it all in one place. The system aggregates the payments and settlements all in one place and it would allow them to then manage that activity more efficiently and all at one time. The second scenario is the inverse of that, which is a one-way pull from the netting center, and we can see this being applicable where, again, the parent tends to be in a funding position that they are funding subsidiaries or entities within the organization but in this case there is more of a request system that needs to be managed. Those subsidiaries need to enter in requests, essentially accounts receivable requests, to the parent and by using a structured system those items could be loaded into the system and all requests can be reviewed, the details of those requests can be reviewed and they can also have an approval process within the system that would allow the corporate headquarters to review and settle and distribute the funding around the organization. So, getting into how the system works, if we were to implement a netting system what would the what types of things, what do I need to do to do that? The first few steps here really are more on the implementation side. So, number one, decide on the type of methodology that you would use. As Rob had said, there is some more general ways of using a bilateral netting, which can accommodate, you know, some efficiencies for the company up to a point, and then there is multilateral netting that can be selected to be used. The next would be to determine how you want to manage that system, so you may need to look at your organization, look at the structure of the parent to the participants and, you know, the control that is within the organization at the participant level versus at the headquarter level, and you may make the business decision to run this as an AR-driven model, you may make the decision as AP or, you know, you may find value in the AR/AP matched model that we had described and talked about. And then next is, once we make those decisions, on what framework do we want to run this netting application? It could be done as simply as using a spreadsheet and doing calculations with that but oftentimes that certainly creates audit and compliance issues sometimes and it can also be very challenging to manage. There is also treasury platforms that can be used that have netting components to them and then there s also bank providers that may be using this, providing a system that can accommodate your multilateral netting process. And then lastly, as you re setting up your netting system, it is getting into defining that schedule for your program. Are you going to net once a month? Are you going to net quarterly? Do you need to maintain more than one netting cycle per month? Maybe you want to net your intercompany activity at one time in the month and net your third-party vendor payments at another time within the month. So there can be some structure that you may want to define based on your organization and how you manage the accounting within your organization. The next few steps here, and I ll go through these more quickly, because these are more defined on the process of running a netting cycle and we do get into a little bit more detail of that on the next slide which 6

7 we ll go into but, you know, just looking at these you re gathering the information so now you ve defined your cycle and your schedule and you re in that cycle so you have to collect the invoice information, the interest payments, dividend payments, anything that you would be selling within your intercompany netting program. You need to collect that, load that into your process, and then you need to start to perform those calculations, determine what those net settlements are for each of your entities. Once you ve made those determinations, you may find that there is foreign exchange that needs to occur to accommodate those payments and then lastly you need to execute and deliver those payments. So the subsidiaries would need to remit payments into your netting center and the netting center would have to remit payments out to any of your participants that are net receivers. And then lastly, each of the participants would need to perform any type of any reconcilement that needs to take place, whether that s using reporting, using files but performing the AP and AR reconcilement within the ERP systems. So moving on to the next slide, which then gets into a little bit more detail and it also gives you a little visual on the flow of what takes place, so, you know, starting from left to right, the first step on the left is entering your information within the system. Now, this is a little bit more descriptive in that if you are running an AR and AP driven model the first thing that you would want to do is load in your accounts receivable; all the AR would get loaded into the system. Then you can load in your AP information; accounts payable information. And if you are performing A matching, this system can pair the AR and compare the AP to determine your matches and any unmatched items can be reviewed and cleared based on your netting procedures. Usually we will see that entry period take about a week so within your calendar oftentimes we ll see the calendar laid out such that you have about a week to load that information but that can be as long or as short as is necessary for your organization. But once all of the information is loaded into the system and now you can start seeing the net settlements and you can start seeing not only the accounts receivable that have been loaded in but then the AP that is now coming in to the participant. There is usually a period of time that discussions or disputes can occur where maybe within your software or maybe it s by , you are discussing invoice items that have been loaded into the system. Generally we will see that this takes about a few days that a discussion period would take place, and I think it s important to note too that this is the broader scenario. In some companies, you may not have a discussion and disputes model. You may elect to not use discussions and disputes, maybe you are running more of an AP driven model, you re loading in the items that you want to pay. There s less comments that are taking place on there and so you re just really performing your calculations and then moving on to the settlement portion of the netting cycle. So that we finish up with the discussion and disputes. We now get into, I think it s that red arrow there, which is the netting that is taking place so that s where you would then have a process to lock in any foreign exchange that would be required to affect all of these net payments from your netting center and once all of those are all of the foreign exchange has been locked in all of the items would be calculated and the net settlements would be determined. So every participating entity would either be a net payer or a net receiver based on the inflows and outflows of the invoices for that participant. At that point, you would then need to execute your settlements. So the netting center would have to affect the payments out to anyone who is a net receiver of funds and then anyone that is a net payer would have to affect that payment into the netting center. All of that would take place usually two business days before your final settlement date. That s the day that the delivery of currency takes place so everything settles on the same day, all of your net receivers will receive their funds, all of the net payers will pay in on the same value date. And then lastly is determining how you want to do that reconcilement depending on using your system, whether you re using spreadsheets, whether you re using a formalized system, and you re pulling out reports or pulling out data files that will allow you to accommodate that reconcilement, but you would want to pull the reconcilement out so that you can perform those in your ERP system. 7

8 And one another topic that we just want to touch on, and this does go to the component of setting up the system and this is something that we often hear and it s a big discussion item that we often will talk about and it s related to some restrictions that sometimes occur depending on the country that your subsidiary may reside. There are over 50 countries that do permit full netting with no restrictions so, you know, those can be configured and can participate into a netting program without any issues. There are some countries that have some restrictions on them, and those restrictions do not necessarily prohibit them from participating but it sometimes causes them to have to manage their netting settlements a little bit differently, and we ll get into a little bit about that when, as I go down to the bottom of this and talk about the different types of calculation methods that can be used to accommodate those restrictions. And then of course lastly there are some countries out there that just prohibit netting outright and unfortunately those part, those entities, cannot participate in the settlement of the netting but oftentimes what, depending on the system that you use, you may still be able to configure them to still load their information so load their invoices in whether they re a receiver of funds or a payer of funds, those still can be loaded into the system and it s possible to have your systems make the determination whether they can participate and then provide you and those participants reporting to let them know what was excluded from the netting calculations. And that s when we get into, you know, different types of calculation methods that can be used within a netting system. Full netting calculations is simply all settlements that are loaded in all invoices so all of the AP and all of the AR are calculated to one net settlement for each of the participants and that net settlement will be in the home currency or the base currency of that participant. So a UK entity will either be paying a net payment into the netting system or making a net receipt out of the netting system. Currency netting is a little bit more restrictive but what that is is that, for every currency that participant settles, they will do a net currency delivery on that so a single entity who may be paying a group of participants in the UK may be a net payer of sterling and they will make that payment. They may also be paying a participant in Australian dollars and they will make a net payment of Australian dollars but they may have a net receipt of another item. So essentially they are netting every currency that they have an obligation for and they re settling each currency on a netted based. Okay, home is where all invoices that are in the system are really grouped by their AP and AR. They re all calculated back to the base currency of the participant and those are entities where they will settle a single payment into the netting center for the total of all of their AP and they will receive a payment from the netting center for the total of all of their AR. So, they re settling their AR and AP in full but they re settling it in their home currency. And then there is gross, where all invoices and currencies are settled at the gross level. It is there is less consolidation of payments with this method but it is a method that sometimes is required based on the countries. And then lastly is selectable. So it may be a combination of the items, these different methods above. So, moving on to and I ll pass it back to Rob to talk a little bit more about solutions that we can use. Robert Giannone: Great. Thanks, John. I ll just make one quick comment on the previous slide and that is that sort of information regarding which countries permit, don t permit, restrict, don t restrict, it s something that is subject and often does change as regulatory changes occur with regard to country, so it is something that you we always encourage you to check with your accounting and legal professionals in those more complex jurisdictions. Thanks, John. If you ll indulge me for a few minutes, this is the message from our sponsor portion of the program, which is me and the PNC FX group here at PNC so, you know, PNC has been offering multilateral netting services for about 15 years. We are fully committed to offering a very robust multilateral platform as well as services that go along with it. Almost in a sense enabling you to just about fully outsource netting to 8

9 us with either very limited demand on your treasury professionals at one end or have you as involved as you have the capacity or the interest to be involved in the netting and settlement and administration of the netting programs. As I mentioned, we re fully committed to this business. A number of banks, quite a few more banks, have historically been in the business. A few have recently gotten out of the business so there aren t a lot of banks left that fully offer netting solution and the netting services that banks provide along with it, but we are, like I said, fully committed. We just rolled out a greatly enhanced application and platform that has lots of, and supports, complexity and robust features to really accommodate a lot of the things and challenges that we just talked about with regards to areas that John touched on regarding currency restrictions and disputes and resolution and third-party payments and the like. So there are some unique benefits to partner with the bank and since I m a bank I m going to talk to you about those unique benefits. And really that falls into a couple of categories. One is by partnering with a bank you can really eliminate the need to have these currency clearing accounts so as you might have picked up on, there is settlement and clearing of these activities whereby the net positions are being paid and received so those net positions go into clearing accounts in each of the underlying currencies and in essence clears that activity down to a zero dollar amount on the netting programs based currency, which is typically either Euros or dollars. So with all of that clearing activity that occurs to clear those obligations and pay those net payments, we can leverage our accounts and payment and clearing structure to do that kind of taking that burden off of companies to either open more accounts or have that kind of activity go through their operating accounts. In line with that, since we re using our platform to effect payment and clear the activity, that will dramatically minimize the reconciliation burden that you might have in the activity since we re going to confirm receipts were paid and receipts were made into us and track down those fail to delivers either for whatever reason payment we are making out as the netting center payer to your net receiver isn t received or if one of your subsidiaries who owes into the netting center fails to deliver, we have a group of operating professionals dedicated to our team in FX that works with us in order to resolve those fails and track down those items. Also by partnering with PNC you can greatly reduce, as I mentioned, the burden on you and your treasury team with regard to the activities that you would have to do if you were not to use a bank provider; a lot of the things that John talked about previously and I mentioned just a few minutes ago, really the activities taken over by the bank, so in essence your responsibilities can be as simple as in a highly automated netting program, which we support, where you would have a group of individuals who would do nothing more than upload data, whether it s payables, receivables or both, whatever method you choose into the system, go into the system and approve those net payments and invoices, and we do the rest as far as making all of the outbound payments. We could even automate with MT101 (ph) drawdowns, the payments that are owed in from your participants. We do have the ability to support MT101 drawdowns but outside of that you would be left with remitting funds in for the net payers. And then really just pulling your reports out so really we can whittle your activity down to something as little as that as well as the admin and user activity that you may need to do as far as maintaining your end user access rights, you know, who you want to have access to the system. So there are some unique benefits to partnering with PNC. Obviously we re a strong relationship-based bank. As many of you know who have more broad relationships with PNC, we focus on trying to develop very broad relationship-based kinds of client relations, so that s a strong benefit to working with PNC. It s a way for you to help, you know, the balance balance the relationship out sometimes when they re very credit-oriented banks in this day and age, to look at the balance as relationships to some operating activities, so this is something that PNC is very good at and can kind of fill a need and relieve a burden from the company. Obviously PNC invests a lot in technology so we feel as though we re a technology leader and technology as it relates to not only the functional aspects of the system but also with regard to things like privacy, security 9

10 standards, cyber security standards, you know, as a regulated large bank we have lots of robust programs around those topics of security, end user navigation rights, like you re used to seeing in robust bank platforms exist in this platform as well. And obviously we have broad financial and operational stability, which provides a lot of value and obviously being a large bank, lots of deep talent intellectual capital, payment expertise and settling currencies in sometimes very challenging locations. Almost done with the sponsor message, bear with me, and then we ll open up for some good questions. I m not going to go through all of this slide in detail but as I mentioned we have a very robust platform we call PINACLE FX Netting, it s completely web-based, you need nothing more than a web browser to access the site so it s very thin. Typically we get someone up and running in the six to eight week time frame. The application can be as fully automated and centralized and all file-based, and we have the ability to support flat file formats that work with a number of different ERP systems so typically this is a very low MIS burden on all of you, and we often know that treasury teams aren t typically high up on the MIS support side at any organization so we built this to be very thin in terms of MIS support on your end and also it has a very robust and very easy to navigate end user front end as well for either ad hoc payments or people that do want to take more of a manual approach and has a very good interface for that as well. Very flexible in terms of we mentioned either AR, AP or a matched basis. It has an embedded discussion and dispute module with automatic notifications so if an invoice goes in and Party A is disputing Party B, it enters a dispute and it triggers an to the other party saying the party wanting to pay is disputing the amount or the invoice or what have you. That dispute and all of the activity regarding the dispute is all remained contained in the application and creates an audit log of the resolution of it, which is really neat. We talked about being able in the netting challenges, country restrictions slide, we talked about some of the challenges of some countries so we can obviously support setting up a more complex subsidiaries that have issues around how they can settle or what they can settle so it has very robust features there and I ve already mentioned like a lot of bank systems, very robust end-user authentication, dual authorization and the ability to really be very flexibly deployed with a lot of secure security as well. Then finally we ve touched on gaining more benefit out of netting by looking to potentially incorporate third-party payments as well, and the system does support third-party payments as well. So I ll stop the commercial for now. Thank you all and I m going to ask I m going to turn it back over to Bob to open up the Q&A session. Bob Celata: Robert Giannone: Thanks, Rob and John, appreciate your time taking us through this. We have about five more minutes left before the top of the hour so I ll remind everybody that there is a question-and-answer window located on your screen. Please continue to submit your questions. We ve had some good ones so far while Rob and John were presenting. So, Rob or John, whichever one wants to jump in, is there a particular reason why someone would either use or not use an ERP system or the netting modules contained in treasury management workstations? Ah, the tough questions always come first. That s a great question and it s one that we talk a lot with about companies as we re looking to talk about using like a netting system like PINACLE FX Netting, and there are some benefits to using those systems. There are some challenges as well. I think they kind of fall into a couple of key categories so if I look in terms of ERP system, those systems obviously are the furthest removed from really being purpose built for anything regarding this type of activity and settling and cash management and all of that like so for example I say SAP, I know SAP has a netting component. It s like I always say, it s like trying to kill a fly with a bazooka. You re using this very big, clunky, complicated, high consultant spend product to do something that is, that can be, a lot simpler, a lot lighter and a lot more flexible than using 10

11 something like SAP. Also keep in mind is if you re an acquirer, a company who likes to acquire companies, the moment you start doing acquisitions that aren t SAP related, and they could be big ones, all of that then would fall out of that SAP environment. So using something standalone has a lot of value. The same things kind of fall under the treasury applications that do also have netting components again, it s not their core, it s not what they were built to do but they do, some, have that, have some basic netting capabilities. You know, what s challenging about the TMS system is, remember, they re typically built and deployed to be used centrally, so user access and user navigation and letting them into this treasury system or into certain portions of your treasury system sometimes creates some challenges that you might not want that level of subsidiary interaction with your treasury application. And, again, they often don t have the degree of flexibility and robustness of some of the things that we ve talked about that our system supports. Most of the treasury-embedded applications support very basic netting configurations. Good question, though it s the one we often talk about when we re talking with clients about alternatives. Bob Celata: Robert Giannone: Great. Well, we have time for one more question, Rob, and since you opened the door with the message from the sponsor, we are getting some questions about PNC and PNC system and one of the questions has to do with whether or not the system has real-time reporting when transactions are being entered, or does it work on a batch system or maybe an overnight system? Great question again. The beauty of our system is it s live in real time. So, you know, it s web-based and when a netting cycle opens, you re typically going to open a netting cycle with preloaded rates, kind of like indicative rates, so that as entities enter payables or receivable information in multiple currencies, it s automatically going to calculate their net amount due or to be received in their functional currency. So, that allows them the kind of real-time approximate visibility into their final amount to be paid or received and then when you get ready to close out your preliminary and get into finally settling, of course, you need to then work with realtime current exchange rates to affect that. So there will be some slight deviation to the net amounts of, but the beauty of it is it all is web-based and all updates real time. Bob Celata: Great. Thank you, Rob. I m going to wrap this up now for the questions simply because we re right on 3:00. Appreciate both Rob and John, you ve both given us great insights and perspectives. I want to thank all of our attendees for joining us this afternoon. A PDF of today s presentation as well as a CTP certification credit is available for you to download from the green resource list file folder in the lower center portion of your screen. You ll also see a link to a short survey on the screen. We appreciate you taking the time to give us your feedback on today s session. And with respect to those of you who have submitted questions that we didn t get a chance to answer, we will be follow up directly with you and help you answer those questions. This concludes our presentation today, so, again, thank you for joining us and have a great afternoon. The materials that you are viewing were prepared for general information purposes only and are not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in those materials or video be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any opinions expressed in those materials or videos are subject to change without notice. Investment banking and capital markets activities are conducted by PNC through its subsidiaries PNC Bank, National Association, PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC. Services such as public finance advisory services, securities underwriting, and securities sales and trading are provided by PNC Capital Markets LLC and Red Capital Markets, Inc. Merger and acquisition advisory and related services are provided by Harris Williams LLC. PNC Capital Markets LLC, Red Capital Markets, Inc., and Harris Williams LLC are registered brokerdealers and members of FINRA and SIPC. Harris Williams & Co. is the trade name under which Harris Williams LLC conducts its business The PNC Financial Services Group, Inc. All rights reserved. CIB ENT PDF