0. North American Treasury The U.S. – Canada connection
Nick Orchard
Vice President, Wells Fargo Global Product Management
TEXPO, 4 April 2011

1. Agenda Trade and economics Geography Canadian banking landscape
Regulatory environment
Clearing systems
Payables and receivables
What does the future hold? 1

2. Trade and economics 2

3. Trade and economics
Trade with Canada supports over 8 million U.S. jobs*
U.S. and Canada are world’s largest trade partners - $596bn
Accounts for 4.4% of total U.S. employment; 1 in 23 U.S. jobs
Canada is one of the few developed countries that is a net exporter of energy*
U.S. imports 2X as much oil from Canada as from Saudi Arabia
U.S. is largest market for Canada agriculture produce*
Less than 1% of U.S. companies export – significantly lower than all other developed countries**
58% export to only one country
*Government of Canada
**U.S. Commerce Department 3

4. Trade and economics
Canada leads all G7 countries in ease of doing business
2009 World Competitiveness Yearbook
Canada forecasted to be the #1 place to do business in the G7 for the next five years
Economic Intelligence Unit
Canada ranks in the top 3 for investment and trade opportunities
World Trade Magazine 4

5. Trade and economics Canada U.S. Growth
Relatively strong economic growth; managed to avoid worst effects of global recession
Uneven economic recovery; trends are increasingly positive, but some sectors continue to struggle
Interest rates
Rates moving higher; three 25bp increases in 2010
Low interest rates expected to continue
Jobs
Strong job creation; employment back to pre-recession levels
Unemployment remains high; recovery is sporadic
Housing
Little impact from recession; strong sales activity and price stability; banks very conservative
Construction of new homes and sales of existing homes still depressed
Income
Household debt to disposable income ratio close to all-time high; low savings rates
Income growth remains slow; spending recovering; high household debt
Federal debt
Federal debt to GDP ratio is half of G7 average
Government debt is high and increasing as a consequence of stimulus 5

6. Geography 6

7. Geography Canada is the world’s 2nd largest country
U.S.
Area (sq. miles)
9,984,670
9,161,966
Population
33,487,000 (80% urban)
307,212,123 (82% urban)
Population growth
0.817%
0.975%
GDP (US$)
$1.3 trillion
$14.3 trillion
Canada is the world’s 2nd largest country
Slightly more area than the U.S.
Only one tenth of the U.S. population
GDP running at around 10% of U.S.
80%+ of Canadians live within 100 miles of the U.S. border
A similar proportion of those people lives in the main urban areas of Montreal, Toronto, Calgary, Edmonton and Vancouver
Source: Government of Canada and U.S. Census Bureau 7

8. Canadian banking landscape8

9. Canadian banking landscape
Highly efficient – same day clearing of paper and electronic payments
Progressive – world leader in ATMs, debit cards and internet banking
Electronic – 75% of payment transactions in Canada are processed electronically; dominated by debit cards, credit cards, and ACH (EFT)
Nationwide – operates across Canada in 6 time zones
Stable – one of world’s soundest banking systems
Scale – all major Canadian banks have 1,000+ branches 9

10. Canadian banking landscape U.S. and Canada comparison
Over 150 deposit taking institutions; over $2 trillion in assets
Over 9,000 financial institutions; $12.6 trillion in assets
Top 5 banks control 80% of the assets
Top 5 banks control 30% of the assets
Centrally regulated by OSFI; 12 direct clearers with direct exchange
Federal Reserve Board, OCC, the Office of Thrift Supervision, 50 state regulatory bodies
Highly regulated: strict privacy, KYC, AML
Check volumes decreasing, 85% of retail transactions are electronic. World’s largest ATM and debit card users.
Consumers still issue significant volume of checks, but usage is now decreasing at faster rate than in Canada
Cross country network; no processing float
Limited interstate banking; processing float
6 Clearing Centers. Consolidated check processing through 2 processors
Federal Reserve has single check clearing center
Clearing and settlement of checks and low-value payments occurs overnight
Specified intra-day clearing times
No national image exchange
Check 21 image capture and exchange
Same day value for CAD deposited items
Multiple days for clearing; generally 1–3 days 10

11. Regulatory environment11

12. Regulatory environment
Canada
U.S.
Governance
Bills of Exchange Act and Canadian Payments Association
Treasury Department; Federal, State and Case Law
Governance: electronic items
Canadian Payments Association
NACHA
Central bank
Bank of Canada
Federal Reserve
Market supervision
Office of the Superintendent of Financial Institutions (OSFI)
Treasury Department; regulatory and supervisory areas of the Federal Reserve
Deposit insurance
Canadian Deposit Insurance Corporation (CDIC)
Federal Deposit Insurance Corporation (FDIC)
Anti-money laundering
Financial Intelligence Unit (FIU) and Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
Office of Foreign Assets Control (OFAC) 12

13. Anti-money laundering policy in Canada
Policy controlled and enforced by Canada’s FIU and FINTRAC
Account Opening – Formal identification required for:
Account holder
Corporate customers and directors
Beneficial ownership of companies, and percentage thereof
Reporting – FINTRAC reporting required in respect of:
Deposits of $10,000 or more in any 24 hour period (15 days)
Suspicious activity reporting (30 days from initial detection)
Customers making cross-border wire transfers, buying life insurance or money orders over $3,000
Formal policies on transactions for non-clients
Source: FINTRAC – Financial Transactions Reports Analysis Centre of Canada 13

14. Clearing systems 14

15. Canadian clearing systems
Canadian clearing and settlement systems are operated by the Canadian Payments Association (CPA)
Automated Clearing Settlement System (ACSS)
Low value payments (Checks, ACH (EFT))
Batch processing
Large Value Transfer System (LVTS)
Collateralized Real-Time Gross Settlement System
Wire payments and interbank settlements
US Bulk Exchange
Next day (ACH Style) settlement of USD items between Canadian banks; positions settled via U.S. correspondents 15

16. Large Value Transfer System (LVTS)
RTGS introduced by CPA in February 1999
Facilitates the simultaneous transfer of irrevocable payments in Canadian dollars between participants
15 direct participants
Other CPA members connect via a direct participant
All payments are final and irrevocable
LVTS is a hybrid RTGS
Combines real-time payment finality with lower collateral costs of a netting system
End of day settlement on books of Bank of Canada 16

17. Automated Clearing Settlement System (ACSS)
ACSS is the retail clearing system through which most Canadian payments are cleared (by volume)
ACSS is a deferred net settlement system
Clears paper items (checks) and electronic items (EFT)
Maximum dollar value limit on checks of $25 million
End of day batch process determines the net positions of the direct clearers
The 11 direct clearers maintain settlement accounts at the Bank of Canada
Posting to direct clearers’ customer accounts occurs overnight; value date given is the transaction date 17

18. Canadian clearing and settlement statistics 2010
LVTS
ACSS
Value (Average $ per day)
$149,000,000,000
$20,000,000,000
Value (%)
88%
12%
Transactions
(Average per day)
24,000
24,000,000
Transactions (%) 1%
99%
Transaction Value
(Average $)
$6,200,000
$825
Source: Canadian Payments Association 18

19. Payables and receivables19

20. Payables Canada U.S. Controlled disbursements
Not available – overnight check clearing
Available
Wire payments
Checks
$25 million limit;
No conversion to ACH
Unlimited $ value;
Check conversion to ARC
Positive pay
Payee match
Emerging
ACH/EFT
Electronic Funds Transfer (EFT)
CAD and USD
Remittance information not exchanged
Automated Clearing House (ACH)
USD only
Remittance information available
Debit block
Emerging (ACH)
Account balancing
Overnight check clearing; no advance knowledge of clearing amounts 20

21. Canadian check clearing process
Day 1:
Date of Deposit
Encashing Branch – Bank A
Data Centre Bank A – (Symcor or Intria)
Day 1: Evening
Overnight Processing (Toronto)
Data Centre Bank A
Data Centre Bank B
Bank A receives value for the cleared item when it is delivered from the local Data Centre of Bank A to local Data Centre of Bank B
Day 2:
Vancouver
Drawee Branch Bank B
Data Centre Bank B
Bank B receives check and forwards to drawee bank branch 21

22. Receivables Canada U.S. Branch network Nationwide State or regional
Lockbox
Nationwide lockbox sites:
Vancouver, Calgary, Winnipeg, Toronto (primary), Montreal, Halifax
Accepts and processes Canadian and US dollar items
Mail is delivered to the lockbox once per business day; no weekend activity
Imaging available
Nationwide lockbox service available
Limited availability of foreign currency items
Mail is delivered throughout the day, including Saturday
Remote capture
Truncation and Electronic Cheque Presentment (TECP) initiative cancelled in 2008;
No remote capture available
Check 21; remote deposit solutions 22

23. Accounts, liquidity and fraud considerations
Canada
U.S.
Canadian dollar accounts
Available
Limited availability
U.S. Dollar accounts
Foreign currency accounts
Overdrafts
Permitted (as approved)
Debit interest charged
Not permitted
Overdraft fees apply
Credit interest
Credit interest earned
Earnings credits not available
Credit Interest not available
Earnings credits
Cash concentration
Notional pooling
Zero balancing
Sweep accounts
Electronic return time
Unauthorized B2B PAD with agreement: 10 days
Without agreement: 90 days
Unauthorized B2C PAD: 90 days
Unauthorized B2B PAD: 24hrs
Unauthorized B2C PAD: 60 days
Check return time
Altered item: 90 days
Counterfeit item: 24 hours
Forged endorsement: 6 years
Altered Item, counterfeit Items, forged endorsement: 24 hours*
* Note UCC varies from state-to-state so this timeline varies. 23

24. What does the future hold?24

25. CPA payment strategy: Vision 2020
Vision 2020 is the CPA’s strategic plan for the development of the Canadian payments market
The plan anticipates that automation and increasing national and international regulations will shape market
Focus will be on five key areas
Supporting electronic payments
Driving payments efficiencies
Modernizing the legal framework
Enhancing exchange, clearing and settlement technology
Expanding value-added services 25

26. Payment System Task Force
June 2010 – Canadian Minister of Finance announced launch of the Payments Systems Review Task Force
Mandate of task force is to review:
The safety, soundness and efficiency of the payments system
Whether there is sufficient innovation in the payments system
The competitive landscape
Whether businesses and consumers are being well served by the payments system, and
Whether the current payments system oversight remains appropriate
Task force recommendations expected by end of 2011 26

27. Check imaging developments
Truncation and Electronic Cheque Presentment (TECP) initiative cancelled in 2008
TECP was intended to deliver an image-based nationwide clearing capability in Canada
Duration, complexity and continuing emergence of electronic payment options in Canada led to cancellation
TECP did deliver consistent cheque formats and standard image capabilities for customer reporting
No plans to resurrect the TECP initiative
Banks are exploring bi-lateral agreements for exchange and are continuing to introduce image enabled services
June 2010: images recognized as legal equivalent of cheques
Established legality of images supplied to customers with statements, online, etc. 27

28. Bill payments
Electronic bill payment is an 18-year old industry in Canada with extremely high adoption rate
Canada has no online, real-time, end-to-end process to support electronic bill payments
Government expressed concerns regarding the efficiency of the electronic bill payment system
Bill Payment Task Force created to focus on credit transfers (cleared through the CPAs systems) between two financial institutions resulting from a customer-initiated bill payment to a biller 28

29. Expectations for the future
Continuing migration away from cash and paper
Check usage in Canada is very low compared to U.S.
Pace of check decline in U.S. is now faster than in Canada
Convergence of consumer and business payments
B2B payment alternatives, T&E, purchasing cards
Online payments for businesses and consumers
Online bill payments
Online tax payments
Increased e-presentment of bills
Real-time payments
Chip technology for cards
Mobile payments 29

30. Questions? 30