Intercompany Netting Rocky Mountain AFP May 2017 ROCKY

Inter-company Netting Rocky Mountain AFP May 2017 ROCKY MOUNTAIN SUMMIT

Goals of today’s session • Gain an understanding of when a multi-currency intercompany netting system may be needed and how it works • Learn the benefits and savings of a multi-currency intercompany netting system • Hear about limitations of a netting system and tips for a successful implementation 2017 ROCKY MOUNTAIN SUMMIT

What creates a need for intercompany netting? • For multi-national corporations, services and/or products sold among affiliated entities can create inter-company balances across many countries and currencies – Inter-company balances can also be generated from transfer pricing, cost sharing and intellectual property allocation • For treasury, tax, accounting and legal reasons, these inter-company balances should be paid periodically (monthly/quarterly), much like any other arms-length transaction – Avoid Section 956 tax risk and potential deemed dividend issues • Once the number of inter-company balances and transactions reach a certain scale it can become difficult to manage the settlement of these transactions separately • An inter-company netting system or solution can help efficiently settle multiple inter-company transactions at the same time 2017 ROCKY MOUNTAIN SUMMIT

Address Global Challenges Netting Goals • Small/numerous/costly FX transactions at subsidiaries • Less payments – ideally, one per participant • Lots of payments with high bank charges • Fewer transactions resulting in lower costs • Uncertainty on the payment date • Simplified payment procedures across the group • Difficult/costly to hedge • Visibility of intercompany exposures • Time consuming reconciliation work • Brings structure and discipline to intercompany procedures • Big mismatch on intercompany bookings • Uses same exchange rate for related payables/receivables • Considerable manual workload at the parent and every subsidiary • Central storage of all AR and AP data • No overview on volume • Access to historical data improves forecasting 2017 ROCKY MOUNTAIN SUMMIT

Multilateral Netting Overview Description Multilateral netting facilitates cross-border settlements among affiliates, increases productivity, and simplifies and reduces the cost of settling inter-company transactions Uses/Goals of Netting • • Consolidate payables and receivables between international entities within an organization Gain control, efficiency, and visibility in foreign exchange transactions across the globe Reduce exposure to foreign exchange fluctuations by taking advantage of natural offsets Simplify reconcilement and transfer pricing Typical Transactions • • • Intercompany: trade payments, interest payments, royalties, dividends, internal/external hedge contracts, service-fees, management fees, loan repayments, investments Third party supplier payments Surplus cash (participants can offer or request it within a netting cycle) 2017 ROCKY MOUNTAIN SUMMIT

Multilateral Netting: How it Works 1 2 3 4 5 6 7 8 9 Decide on the type of netting methodology to use within the organization Determine the underlying driver (payables, receivables, or both) Establish a platform (treasury platform, bank provider, or a manual spreadsheet) Define the schedule for the organization Enter and collect payment information Perform netting calculations: determine the net settlements for your participants Execute foreign exchange trades Effect payments for delivery on the settlement date Accounting and reconciliation 2017 ROCKY MOUNTAIN SUMMIT

Multilateral Netting: How it Works 2017 ROCKY MOUNTAIN SUMMIT

Case Study – IHS Markit • IHS Markit implemented a multi-lateral netting system in 2013 • IHS Markit runs one netting cycle each month • • • Benefits • • Over 50 entities are set up for netting Typically have ~ 30 entities/month having some settlement 12 – 15 different currencies ~ 150 separate payments are included in monthly netting cycle Able to reduce 150 separate transactions into one FX trade per currency and 12 -15 outgoing payments Reduces foreign currency fluctuations on inter-company balances, avoiding FX risks Assists accounting in reconciliation and tax for transfer pricing policies Limitations • • Some currencies and entities cannot participate, such as India, Brazil, Korea, China Still need to maintain some spreadsheets to manage, causing some risk for errors 2017 ROCKY MOUNTAIN SUMMIT

Case Study – IHS Markit • Currency AED AUD CAD EUR GBP HKD JPY MXN NOK QAR SEK SGD USD # of entities 1 1 2 8 1 1 1 2 1 19 # of transactions 6 6 10 26 8 4 2 5 4 1 7 1 47 Total 40 127 Gross FX Traded without netting 2, 129, 215 1, 393, 264 2, 909, 444 6, 051, 212 5, 785, 965 4, 584, 136 84, 254, 759 5, 928, 573 2, 954, 212 88, 705 6, 481, 750 4, 000 64, 983, 640 Net FX Traded with netting 2, 129, 215 934, 311 284, 373 5, 013, 579 1, 718, 183 1, 438, 115 16, 969, 975 3, 301, 487 2, 941, 538 88, 705 1, 057, 888 4, 000 8, 221, 800 Difference in Gross vs. Net 0 458, 953 2, 625, 071 1, 037, 633 4, 067, 782 3, 146, 021 67, 284, 784 2, 627, 086 12, 674 0 5, 423, 862 0 Estimated price on fx trade in bps 0. 0005 0. 0005 Savings in USD from netting 0 229 1, 313 519 2, 034 1, 573 3, 364 1, 314 6 0 2, 712 0 13, 064 With multi-lateral netting, IHS Markit has taken ~130 separate inter-company balances among 40 entities in 13 currencies: – – • Trade amount prior to netting FX Need to Buy FX Need to Sell 2, 129, 215 0 1, 163, 787 229, 476 1, 312, 535 1, 596, 908 5, 532, 396 518, 816 3, 752, 074 2, 033, 891 3, 011, 126 1, 573, 011 33, 642, 392 50, 612, 367 1, 313, 543 4, 615, 030 2, 947, 875 6, 337 88, 705 0 3, 769, 819 2, 711, 931 4, 000 0 28, 380, 920 36, 602, 720 If settled bi-laterally, then would have bought/sold currency amounts in gross column With netting, was able to reduce amount bought/sold to net column The difference column is the reduction in the notional amount of currency that was needed to be bought/sold The savings is the spread on the reduction in the notional amount of FX that did not have to buy/sell Instead of 127 separate wires to initiate, would only need to send ~ 10 wires 2017 ROCKY MOUNTAIN SUMMIT

Case Study – IHS Markit Intercompany Payables: Aust Co. Intercompany Receivables: 150 K AUD from Mexican Co. (converted from MXN) 170 K AUD from UK Co. (converted from GBP) 200 K AUD to Swiss Co. (converted to Swiss Franc) 300 K AUD from Swedish Co. (converted from SEK) 250 K AUD from German Co. (converted from EUR) 330 K AUD from Japanese Co. (converted from JPY) Intercompany Billings: 6 Transactions Payer of 200 K AUD Receiver of 1. 2 M AUD Netting System Determines Payer of 200 K AUD Net 1 Transaction to Settle Per Participant 2017 ROCKY MOUNTAIN SUMMIT Net Receipt of 1 M AUD

Benefits of Netting INTER-COMPANY NETTING integrates payables and receivables from all international entities in one global structure. The benefits of netting include: • Organizes and streamlines settlement of intercompany payments to ensure all parties are paid/have paid • Reduces transactional FX needs by allowing one exchange rate to be applied to the payable and receivable • Provides better visibility to intercompany FX exposures and cash balances • Can set-up interface capabilities for import and export to ERP systems such as SAP and Oracle • Lowers transaction costs by reducing the number of payments • Can include vendor payments with your intercompany activity 2017 ROCKY MOUNTAIN SUMMIT

Limitations and Restrictions • There are currently over 50 countries that permit full netting with no restrictions. About 30 countries permit netting in some form, but have restrictions and policies regarding its use. Some countries prohibit netting. • Country restrictions may be accommodated within your inter-company netting program by adjusting the calculation method for the participant according to the policy of the country. • Unless there is an automatic interface with an ERP system, some keying in of data will still be required to populate the invoice/payment amounts into the netting system. This keying of data does have risk of error. 2017 ROCKY MOUNTAIN SUMMIT

Implementation Tips • Coordinate with accounting and tax teams • Establish roles and responsibilities • Define deadlines and due dates • Have a consistent process across entities • Automate where possible • Develop program with limited entities and expand scope with experience 2017 ROCKY MOUNTAIN SUMMIT

Questions? Doug Thompson – Director of Treasury at IHS Markit • • • Doug has worked at IHS Markit since 2009 and has served in corporate treasury roles for 3 public companies over the past 20 years. IHS Markit is a world leader in critical information, analytics and expertise for the major industries and markets that drive economies worldwide. IHS Markit has revenue of ~$3. 5 B and is a global company that operates in over 40 countries. Heather Alger – Managing Director at PNC Bank • • Heather has worked at PNC Bank in Chicago since 2011, providing FX risk management services for multinational corporations. She has worked in financial markets for 20 years. PNC Financial Services group is one of the largest diversified financial services institutions in the United States. PNC offers specialized services for corporations and government entities as well as offering full retail, wealth management and business banking services. 2017 ROCKY MOUNTAIN SUMMIT