Citi TTS Seminar BASEL III Intraday Liquidity Carolina Caballero Global Clearing Risk & Regulatory Strategy Manager

2 Intraday Liquidity Management – New Basel Spotlight Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) Monitoring tool for Intraday Liquidity Mgmt  30 day funding ratio  Banks required to hold high-liquid assets amounts equal to or greater than their net cash over a 30 day period  Intraday cash and collateral sufficient to survive net cash outflows caused by crisis events  Deadline: 2015  Relationship between bank’s settlement obligations (longer term) and funding  Requires stable funding available amount to exceed required amount over a one-year period of extended stress  Assesses value of all asset types held  Deadline: 2018  Set of monitoring tools intended for reporting banks’ intraday liquidity risk in normal and stress conditions  Enable banking supervisors to monitor banks’ intraday liquidity risk and its ability to meet payment and settlement obligations on a timely basis  Deadline: 2015 (Coincide with LCR) Basel Liquidity Risk Management Framework End of Day

Basel Monitoring Indicators – How we got here Sept 2008 – Lehman Brothers filed for Chapter 11 bankruptcy Sept 2008 – Basel Committee on Banking Supervision (BCBS) published it Principles for Sound Liquidity Management and Supervision Principle 8: “A bank should actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions and thus contribute to the smooth functioning of payment and settlement systems” July 2012 – BCBS released a consultation paper on Monitoring Indicators for Intraday Liquidity Management April 2013 – Monitoring tools for intraday liquidity management Jan 2015 – Implementation Date?? 3

Intraday Liquidity Monitoring Objectives 4 Significance of New Rules Key objectives are: –Promote further sound intraday liquidity management and complement the qualitative guidance of the Sound Principles to ensure that a bank can meet payment and settlement obligations on a timely basis under both normal and stressed conditions –Enable banking supervisors to monitor Internationally active banks’ intraday liquidity risk and their ability to meet payment and settlement obligations on a timely basis under both normal and stressed conditions –Intraday liquidity should lead to closer co-operation between banking supervisors and the overseers in the monitoring of banks’ payment behaviour –Promotion of sound liquidity management practices for domestic banks. Prescriptive application of the tools will be at discretion of national supervisors

The Monitoring Tools All Banks 1) Daily max intraday liquidity usage (Largest net negative position) 2) Available intraday liquidity at the start of the day 3) Total payments 4) Time Critical Obligations Provide dimension on banks payments activity and intraday liquidity usage and availability in normal times Correspondent Bank Service Providers 5) Value of payments made on behalf of correspondent banking customers 6) Intraday credit extended to correspondent banking customers. Assess concentration in Bank’s correspondent activity and extent of exposure on intraday credit lines Direct Participants 7) Intraday throughput – daily average across a bank’s settlement account with an average hourly view reported as a percentage of overall payments Establish trend on Bank’s average payment settlement to identify any changes that might occur 5 Stress Scenarios (Guidance)  Own Financial Stress: a bank suffers or is perceived from suffering from a stress event  Counterparty Stress: Major Counterparty  A Customer Bank’s stress – Correspondent Bank  Market-wide credit or liquidity stress

Intraday Liquidity Reporting Challenges 6 RTGS Participants Interdependence Correspondent Banking Daily Credit Facilities Participants Time Critical Obligations Central Bank Reserve Management Meaningful supervisor engagement has not yet occurred with industry focus to date primarily on LCR and NSFR Focus is on monitoring as opposed to controls with significant opportunity cost to creating required reporting infrastructure Data is backward looking and may not be timely in identifying stress points. Uncertainty remains as to how data will be applied by relevant supervisors Level of transactional detail required to facilitate reporting is more significant than other Basel liquidity requirements. Data collation efforts are very significant Visibility in correspondent banking space is an issue Internationally active banks need to tackle reporting requirements across currency, multiple clearing system and correspondent relationships (often for same currency) and across home and host regulators based on legal entity structure Risk of certain banks ‘gaming the system’ exists by delaying payments to improve intraday liquidity positions While efforts to promote sound intraday liquidity practices across the industry should be welcomed, there remain implementing challenges

Intraday Liquidity – Changing Landscape 7 RTGS Participants Interdependence Correspondent Banking Daily Credit Facilities Participants Time Critical Obligations Central Bank Reserve Management DODD Frank and EMIR continue to mitigate counterparty and settlement risk on OTC derivatives by pushing settlement into clearing system but these times payments place additional strain on intraday liquidity Regulators are placing restrictions around co-mingling of collateral pools across different legal entities. Economies of scale are therefore lost and collateral becomes more expensive General pressure on banks net income lines are triggering banks to review collateral cost where there are massive differences across the industry in terms of efficiency management and potentially significant savings Momentum in discussions around intraday liquidity is causing Banks to re-think their internal transfer pricing policy where charge was not previously not passed back to the business Emerging currencies can often initially have heightened intraday liquidity constraints that need to be carefully managed There are numerous factors outside of Basel Monitoring Tools that are changing the landscape and increasing focus on Intraday Liquidity

Client Intraday Analysis: Practical Examples Client AClient B Payment flows are consistent and closely aligned throughout most of the day Account balance is large enough to cover spikes in the day Client ends the day with a positive account balance on par with the start of day balance No additional collateral pledging required with RTGS system Payment flows are inconsistent and misaligned over the day Early inflows provide a positive balance but subsequent outflows and spikes require liquidity utilization Client ends the day with a zero or positive balance Additional collateral pledging required with the RTGS system due to large peak usage $2B Peak ($800MM) Net Account Balance Liquidity required for outgoing payments $750MM starting balance EOD balance on par with SOD Closely aligned payment flows 8

Implications for the Banking Industry  Banks looking to mitigate risk through active liquidity management  Catalysts to break down Business units silos and apply end to end Business Management principles to Intraday Liquidity  Optimize workflows and matching incoming and outgoing flows at a more granular and business level. Become more efficient and Rethink FIFO approach  Assess underlying costs and risk for intraday funding  Focus on transfer charges (within entity) and pledging costs  Reassess payments mandates considering: –Transaction processing requirements (e.g. urgency) –Flow volume impact on intraday  Challenges to develop in-house: tech spend, resource availability, data and reporting complexity and deadline (Jan 2015)  Certain Correspondent Banks developing tools to meet reporting requirements and provide reporting capabilities to clients  Technology Vendors also developing monitoring dashboards Re-thinking Intraday Liquidity Developing Monitoring Tools Pricing Liquidity 9

Where is Citi in terms of Intraday Liquidity Requirements? 10 Investing in development of Intraday Liquidity Monitoring tools –Monitoring capabilities available in USD, EUR, GBP and CHF –Provide regulatory reporting capabilities to FI clients per BASEL requirements Continuing discussions with regulators to gain insight on interpretation of BASEL III guidance Working with Industry Groups to raise awareness on complexity of new requirements with Central Banks

11 Citi expanding internal capabilities to meet BASEL reporting requirements Offer intraday liquidity reporting capabilities to clients in USD, EUR, GBP and CHF Engaged with regulators and industry groups to raise complexity and fine tune requirements scope Background Industry Implications Citi Strategy 2013 BCBS Intraday Liquidity Monitoring impact direct and indirect clearing participants All participants to develop monitoring dashboards and reporting capabilities Local regulators still interpreting of BASEL and defining compliance deadlines Possibility for deadline to be extended or phased out Industry will manage liquidity utilization tighter and assume less credit exposure Look to achieve payment flow alignment and minimize collateral pledging costs Pricing through the banking chain for intraday liquidity value is inevitable Development of monitoring and reporting tools complex and cost intensive We aim to be at the forefront of Intraday Liquidity Management space, engaged with regulators, industry groups and service providers Summary

Thank you 12