Fx Whitepaper Jja

TODAY AND TOMORROW FOR THE FOREX MARKET

OCTOBER 2006

INDEX

Introduction Page 3

Market Overview 2006 Page 4

Human Capital Management Strategy Page 6

Where Business Has Come From Page 7

What Clients Have Demanded Page 10

Salary Survey Page 11

Brief Summary 2007 Page 13

Market Overview 2007 – The Future Page 14

Company Profile Page 18

Contact Details Page 20

2

INTRODUCTION

At this time of year, when almost every bank is concentrating on budgets and headcounts, many
recruiters are asked their opinions on what type of employees will be in demand in the coming year
ahead and for guidance on market salaries, what types of bonus can be expected, or what
expectations have to be managed.

These questions are more difficult to answer today than they were some years ago. For example,
walking into a dealing room even ten years ago, one would be greeted by noise and lots of it.
Traders were not just shouting down one phone, but two. Today, however, much trading is
electronic and conducted by means of desktop systems.

In the past, traders had a position clerk, whose job it was to write tickets, confirm trades, and keep a
check on the trader’s position and profit/loss situation. Today, a trader has several screens with
multiple windows monitoring constantly changing prices, news, positions, limits and profit/loss
potential. One has to question whether today there are any real spot traders left or are they now
“risk managers”? As recently mentioned in an industry magazine, the 1980s and 1990s markets
allowed a spot trader to express themselves more. The good traders not only knew how to shift
large amounts discretely, but they also knew how to price all types of business in all market
conditions , Now, to all intent and purposes, spot traders just sit there waiting for a large ticket to
price, or risk manage a position they have no control over.

In addition, not so long ago only the most Darwinian bank employee seriously felt an obligation to
“add value” and “be proactive”. These days, with even top employees having to work hard to justify
their pay cheques, nobody is laughing at the clichés or making jokes about survival of the fittest.

The aim of this paper is to try and answer some of the questions that have been posed by looking at
the key drivers that are likely to affect the foreign exchange markets in the coming year and
ultimately how they could possibly influence hiring. The aim is to identify trends as well as analyze
how the market and market participants are evolving, or, in some cases, not.

It is important to note that this paper is not intended to go into a deep technical level of explanation
as to why certain trends or changes have and are taking place or what products or structures will be
in vogue in the coming months. The intention is to simply highlight certain issues. Nobody can
predict with absolute certainty what will happen in 2007, but there will be several interesting points
which should provide the foundation for further discussion.

3

MARKET OVERVIEW 2006

Looking back over the past couple of years, the bulk of the revenue was generated in the first half of
the year with the second half being a struggle. The optimism that was created in those first few
months coupled with banks being understaffed resulted in strong hiring across the board which then
eased up in the second half of the year.

Coming into 2006, the market was anticipating a benign interest rate environment with little or no
movement in the UK and Europe and potentially some tightening in the US, which ensured that
trading conditions were flat and difficult. Coupled with this, the Central Banks have learnt to
communicate their intentions far more effectively which has resulted in a better informed
marketplace, resulting in a tactical trading environment. Traders have adopted a “hit and run”
trading style, where entry and exit points have become crucial to maximize revenue generation from
smaller moves.

In addition, this year more so than before, volumes and profits are up, as is the number of
participants in the market. Although the balance of power in the market has shifted significantly from
the banking industry to the client, banks still wield considerable power in the market. As far as
liquidity is concerned, for the client the market has never been better, but for the bank traders it has
become more haphazard. Put simply, a client is unlikely to face a gap in the market but the bank
trader could. The leveraging of trades has become far riskier as traders have looked to make the
same sort of money with larger positions in far more difficult and overcrowded markets. Flows have
become more important and the ability to win a large trade and position a book accordingly to
maximize the revenue has been a major factor in the markets. This capturing of flows has also
meant an ability to access the higher margin structured trades.

Over the year, some banks have moved towards establishing trading units that act as quasi-hedge
funds with the spot traders taking a proprietary role as well as looking after the ship if it hits stormy
seas. However, there are some who would question this move when so many are making good
money out of the existing ‘client first’ ethos and settling into a new role of being major liquidity
providers. In addition it means that the banks have been free to provide liquidity through more
traditional means in the higher value emerging market currencies, where spreads have not been as
tight as in the majors. Thus, the banks have been able to target their resources better and achieve
higher returns into the bargain.

As for sales personnel, there is undoubtedly still demand for the traditional sales service based
around market information and execution. However, this is very much on the decline, unless you
happen to have a sale role surrounding advice and structuring where times are good, where you
can express yourself through ideas. As a result, this means that a proportion of traditional
salespeople will either have to evolve or leave the industry. The trend of the year has been for client
numbers utilizing the eTrading to grow with salespeople now rarely selling their individual expertise,
but selling their bank’s advisory services and resources, especially their trading platforms. But it has
to be remembered, the skill set is slightly different and above all, the salesperson must believe in
the benefits of eCommerce. Additionally, from an eCommerce sales perspective, competition is
fierce, margins are being driven down, the spend on technology is becoming larger and banks are
scrapping for every potential fee.

What has become noticeable over the past months is that the multi-participant players have been a
little shy in announcing to the markets how well they are doing in volume terms, which suggests that
the majority of the growth in turnover is going through the banks’ own platforms. The specialist
platforms, for example CME, are achieving strong growth (in volume terms), whilst some owners of
platforms are probably starting to wonder why they are not growing as fast as they should be.

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In talking to a couple of buy-side clients, times have never been better. The banks have been more
or less willing to quote any price in any currency pair and at any time. It is the belief of the clients
that the banks have been warehousing the risk in some emerging market currency until the local
market opens, but of course the spread has been adjusted accordingly. Pure systematic traders
have also done well this year as they have plugged into liquidity providers. Against this though, the
banks have appeared to lose patience with the high frequency, black box community, who are now
viewed as competitors. The result has been the emergence of a new breed of trader, one to
challenge the banks, although they would not probably exist today if it wasn’t for the benefits of
technology.

There is a general happiness with the way margins have been heading due to competition and a
belief that the quality of service and product has generally increased as banks have lifted their
game. However, they have been a little wary of the sell-side’s belief of the wholesale demand for
structured products - not to be force-fed products but instead should be providing an educated
solution based on a client’s needs.

In speaking to a number of sell-side participants, there appears to be a general consensus that
structured products and in particular the credit markets have been key areas of growth and revenue
this year, especially as the buy-side has been in need of yield enhancing instruments. Not
surprisingly, given the continued level of competition within the flow market, many banks are
counting on the higher margin products to be the source of significant revenue in 2007 (especially
from retail) - even then we will see the continued attrition of margins in structured products due to
technology, client demand and competition.

What has been of interest this year, which has not really been noticeable before, is that a number of
banks have been scathing in their comments towards the competition who had sought to ‘buy’
market share (at the expense of profitability). This view, is perhaps, a little harsh but shows the
extent of competition and the lengths some banks will go to dominate the market. Additionally, the
trend for bank traders to move into sales roles within their banks, join buy-side companies as
execution experts or as principles, or join the ever expanding service industry has continued
throughout the year. Couple this with the tremendous growth in the number of buy-side companies
offering foreign exchange services, not to mention the emergence of the broker/dealers, actually
means that the market is probably the same in terms of number of participants but that volumes are
higher.

During 2006, it has become evident that, although there has been a dependence upon revenues
generated from trading, the ability to capture a trade and then position oneself to take advantage of
it is just as important as ever. The banks have and will need to continue to position themselves as a
provider of choice with a focus on developing deep relationships with clients. Those banks that are
in a position to capture client business through flow, which can obviously lead into the more
lucrative structured world, will see the benefits transfer through to their own trading activities.

In summary, 2006 has effectively been a year whereby a new market has evolved (and will continue
to evolve), one where there is a lot more democratic than the bank dominated market of the 1980s
and 1990s. The high frequency community may believe they no longer need the banks and will
seek to succeed them. Equally, the banks criticize the high frequency market as a short-term
wonder. The fact is that both are equally important and both are contributing to an environment in
which more and more people want to trade foreign exchange and that can only be good for the
industry as a whole. Above all, 2006 has been a year where FX has emerged as an asset class and
it is recognized as a source of uncorrelated portable alpha that is now part of every portfolio.

5

HUMAN CAPITAL MANAGEMENT STRATEGY

During 2005 and 2006, the small number of banks who have been proactively hiring to position
themselves to significantly capture market share have been viewed with some cynicism by the
market as following the historical two to three year cycle, thus implying that there is no real long-
term strategy and investment in their FX business. While it is understandable to view perhaps one
to two organizations in this way, as a rule these hiring banks have been perceived as not having
performed to their potential in the last few years and are thus viewed as ‘sleeping giants’. As such,
several senior market participants are of the opinion that these banks now have strong
management in place with a carefully planned hiring strategy; they have positioned themselves to
hire some of the market’s top performers and start to leverage the balance sheet and private side
capability. In addition, there has been continued investment in technology to narrow the gap
between the market and the leading banks in the eCommerce space.

At the same time, other market participants argue that while banks have been trying to buy market
share, they question the sustainability of this and ask if the high costs of hiring will justify the
revenue in the long term, given spread compression within the institutional community and
restrictive regulations around corporate structuring. While some banks are focused and to a certain
extent, reliant on the lending and M&A business, others question the real FX revenue levels which
can come from this. The only differentiator between some of the major banks is narrower prices in
order to buy market share, and as such, the banks need to decide what kind of business they wish
to transact. Ideally, the banks need to be a built to transact not only the bulk of volume but also
different sizes and structures. In addition, is the client base fully aware of the full range of FX
services on offer, and is there not potentially more long-term revenue to be generated from
maximizing business with existing client levels?

Senior market participants would generally agree that the majority of banks have insufficiently
invested in the FX business in recent years in terms of both technology and human capital. There
has been little investment in the education and training of FX headcount, therefore when more
revenue has been created from structured derivatives, most banks have not been well-positioned to
react.

The infrastructure of the bank is also very important, namely eCommerce, Prime Brokerage,
Lending, DCM, Corporate Finance. These are the foundations of the FX business. However, the
most important elements are the people and their relationships, and the client’s perception of the
banks as a whole. There needs to be a good balance of hiring the right people with the right
relationships but who can also offer balance to the team and be flexible in the client base. There is
more of a trend towards multi-currency and multi-segment producers rather than specialists, which
is one of the main changes from previous years. This will increase productivity and allow the natural
development of the FX business. Obtaining more productivity from the same headcount going
forward will also reduce demand levels for human capital.

6

WHERE BUSINESS HAS COME FROM

Corporates - it is fair to say that the corporate market has experienced a tough run for a number of
years with the larger relationships increasing their dominance and lending banks have continued to
be maximized. However, there is also a school of thought that in areas such as M&A, traditional
lenders have lost out to advisory driven investment banks, as experience and quality of advice and
execution supersedes balance sheet. A report recently on Bloomberg suggested that banks such as
Merrill Lynch, Goldman Sachs and Lehman Brothers had in fact increased fees and also increased
market share. As has been the trend, leading banks have also been more selective with whom they
deal with and are ring-fencing quality clients or sectors that they can bring expertise to.

From a coverage point of view, a solution oriented service more similar to the coverage provided to
the insurance sector has been favoured. Whilst capturing the flow has been important particularly
from a trading perspective, the real target for banks has been to capture the more lucrative advisory
driven work including balance sheet, M&A, tax and investment mandates. It is impressive the way in
which one or two of the larger investment banks have created structured, multi-product corporate
advisory businesses within their investment banking divisions in order to provide a genuine solution
approach to corporate clients.

A counter argument to consider is that, in general, the corporate market has always been and still is
cash rich. This has had and will continue to have a direct effect on the issuance pipeline and also
suggests that corporates do not necessarily need structured solutions at present. Coupled with this,
a large proportion of the corporate market either is not set-up for structured products or still doesn’t
understand them, or are simply not comfortable with them. Following on from such incidents as
Parmalat, several bankers have commented that corporates are far less likely to enter into a
transaction unless they fully understand it. What is more likely is that they will execute a vanilla
transaction to lock in a rate rather than undertake anything else more substantial and sophisticated.

Leveraged - the hedge fund market has underpinned the revenue generated by banks for the last
couple of years and it will continue to be the major focus going into 2007. Some market participants
suggest that this market was by far the single largest revenue source for banks with some
committing more and more resources to servicing them.

As a client base, hedge funds understand the structured product market more than any other and
so banks have evolved and will continue to evolve in order to provide a cutting edge level of service
that will separate them from the pack. Fact - hedge funds themselves are developing and are
becoming increasingly more demanding in terms of the service, products and support that they
want. The hedge fund coverage sector is the area most aggressively fought over at present.

Real Money - it would appear that this is one sector of the financial markets which has been at a
crossroads, whereby some institutions have and will continue in the same directions whereas others
are looking to develop. This sector, more than any other, has faced a large challenge from hedge
funds and the market expects a crucial couple of years ahead for the industry. Just as we have
witnessed over the years the development of different tiers of banks, we are now seeing a tiering
system emerging within funds. The main reason for this is that the larger funds are becoming even
larger, more sophisticated and more diverse in terms of product offering. As a result, they are
receiving greater amounts of the money available for investment. Thus the emergence of these
funds will provide an even greater challenge to traditional real money managers.

Retail - this is one sector that has offered prospects of growth through the year and it is an area
where increased resources will be invested in the coming year. For instance, while banks have
been happy to take the flows that have been offered, they have been less enthusiastic about the

7

opportunities for arbitrage that they have presented to the more aggressive market players. Banks
have had to put significant resources into monitoring potentially 'toxic' flow. In general, banks have

been able to do this relatively successfully, with one major bank claiming it had turned off $1 trillion
of less-profitable flow last year while reporting that their overall volumes are higher than ever. So we
are now back at a stage where banks want to adopt a twin approach going right down the value
chain to retail investors. In addition, there has been and will continue to be increased demand for
structured or yield enhancement products from more sophisticated private investors, purely
because rates will stay relatively low and other avenues of investment need to be sought. This past
year has seen a number of banks partnering the less sophisticated and smaller retail institutions
and assisting them with product design and distribution. This is undoubtedly a sector where banks
will see an opportunity to prosper in 2007, especially as this is a market place which offers the
opportunity for widening spreads.

UK and Continental European Institutions – within the UK institutional world, hedging and
currency overlay is growing in importance and has had a large impact organizationally. Fund
managers have needed to add more products to their existing portfolios and FX has been the
product with the volatility for which they have opted, in order to add more ‘alpha’, in addition to
hedging their existing exposures. With this in mind, revenue from UK funds both real and leveraged
has grown in 2006 and will continue to do so in 2007. Significantly, volumes have increased this
year, with the mandates of real money managers expanding to give them more freedom from a
currency point of view, leading to more opportunity to generate alpha. Fund managers no longer
have the same restrictions in which currencies they can take long or short positions, and as such,
have a broader mandate to take positions in G20 currencies.

In Europe, as a whole, more fund managers have incorporated a hedge fund element to offer their
investors increased returns, and this trend is likely to continue. There is a very positive outlook for
the European investor market. Successful countries in 2006 have been Switzerland, the Nordic
region, Germany, France and Italy, with currency overlay activity in Benelux increasing. In
particular:

• Italy has seen an increased focus on the mid cap corporate market, given the relatively
small number of large cap corporates from which to generate revenue. The Italian corporate
clients expect value-added solutions and risk advisory services and the market is derivative
friendly. However, transactions completed are more vanilla as opposed to a large number
of structured solutions. Italian banks have also been a very strong target market where
there is strong potential towards ePlatforms, whereas the real money sector has strong
established banking relationships.
• France has seen the emergence of several equity hedge funds with the real money
business continuing to be macro-research and currency overlay driven, with long
established relationships with certain banks. It is thought that French asset managers prefer
London based banks that can offer research, strategy, risk advisory and overlay advice.
From a corporate perspective, this business still remains fairly restricted to French banks in
France.
• Benelux has seen growth in structuring opportunities and quantitative modeling, even
though, in the past, banks have held a rather unsophisticated approach to this region.
Similar to other European countries, there is a growing interest in FX on behalf of
institutional investors who are gearing up for more currency products as their mandates
become more sophisticated.
• Germany continues to be a market where revenue expectations continue to grow
significantly, as more products are traded. The German market is more optimistic than ever
that a wider range of derivative products will be traded soon, especially from emerging
market currencies. Especially of interest is the retail market space in Germany, where many
banks are now focusing their distribution efforts on.

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• Nordic region has seen increased usage of derivatives to enhance investments and 2006
has seen some very advanced users of derivatives, for example AP funds. Some funds
outsource currency overlay and there are increasing numbers of overlay mandates coming
from the insurance companies and the pension funds. The general feeling in the region is

that there will be increased FX revenue in 2007, not only will wallet size increase but there
will also be a drive to capture market share.

In summary, Germany will continue to be a market where individuals are in demand due to strong
potential of the business in the near future. Relationships and revenue will be originated from value
added research and trade ideas / solutions, and of particular interest is the growth of currency
funds. These are small at the moment and are building a track record, however the development of
these funds is indicative of the undergoing change within the German financial markets, and the
optimism for the future.

However, the UK remains the highest revenue generating area in Europe, as it is the central
location of the main talent and headcount, and is expected to generate three or four times more
revenue than Continental Europe, which is anticipated not to change in the future.

eCommerce and Prime Brokerage – during 2006, from a transactional point of view, eCommerce
has made significant advances, with expectations that most deal sizes less than $50 million will be
transacted electronically. More and more share has been taken away from telephone dealing,
leading to the new style FX salesperson and even more away from the ‘old school’. This has
enabled the sales force to be more consultative, more advisory focused and continually providing
the client base with trade ideas or creative solutions, and focus on relationship building. The
continued rise of eCommerce will lead to more transactional visibility, less errors, more focus on
business development (on the part of the salesperson) and other factors and services of the bank
will become more important, for example advisory, structuring and research.

It is worth mentioning, that according to a recent report by the *TowerGroup:

• The FX market has moved away form traditional voice methods and left a forwarding
address to electronic trading.
• Electronic FX trading will be utilized for more than 44% of FX transactions by 2007.
• The maturing FX marketplace will see a consolidation of execution venues over the next
two to three years and they expect that only two or three FX multibank portals will remain
when the dust of market consolidation settles.
• Electronic FX trading is following a path similar to the path of electronic trading in the equity
and bond markets as a bifurcated market emerges, with very few customers leveraging
both multibank portals and single-dealer portals.
• Electronic communication networks (ECNs), which serve as bid-and-offer markets with
electronic integration, will be instrumental in consolidating a fragmented marketplace.
• Trading FX as an asset class will be enhanced by the migration of equity trading tools and
methods as institutional investors seek opportunities for alpha and as trading venue
aggregation and algorithms become commonplace.

We shall see.

Prime brokerage has and will continue to assume more importance, as more and more hedge funds
come into existence, as prime brokerage will give them the leverage, credit facilities and support in
order for them to solely focus on their trading activity. Prime brokerage is now naturally seen as a
fundamental component of the eCommerce business and will only continue to grow.

9

*TowerGroup report by analyst author Tom Price, September 2006

WHAT CLIENTS HAVE DEMANDED

It has always been the case that clients have only ever wanted their sell-side to take the time to try
and understand their businesses and have wanted to be partnered by their providers. Of course,
this is common sense but it is amazing, even today, how many salespeople seem to offer little value
to their clients and try to push the bank’s latest products rather than working with them to
understand how a trade needs to be tailored in order to meet their required needs and objectives.
Those salespeople that do take the time to get to know their clients needs are winning the lion’s
share of the business.

In terms of the individual client classes, it has become obvious through the year that hedge funds
have been focusing on pricing, liquidity, funding and coverage by salespeople who understand their
trading style and have very good relationships with their traders. The best hedge fund salespeople
are able to add value through technical product knowledge and relevant idea generation. Hedge
funds really don’t care about research that the banks produce, as they pride themselves on their
own intellectual capital and feel that if they want something done properly, they will do it
themselves.

The real money community has perhaps become the poor cousins of the hedge funds in 2005.
Banks understand the nature of the hedge fund business and have gravitated towards it, which has
resulted in asset managers being neglected in the process. As asset managers become wiser they
will be demanding the quality of service and tight pricing that hedge funds have demanded in recent
years.

Overall, what is obvious, is that across all client sectors, the best salespeople not only have
exceptional relationships (built on having a genuine understanding of the client’s needs rather than
being able to get tickets to the best sporting events) but they also have excellent product skills,
which empower them to partner the client in designing solutions to meet those client’s needs. Even
today, it is surprising how few people have the full spectrum of skills.

Quality of pricing and management of risk has been key in 2006. Banks have had no option but to
keep on top of this area and some have very quickly been left behind. This has meant that the
banks have had to undertake significant investment in technology on an ongoing basis. Perhaps the
largest proprietary trade some banks have undertaken in 2006 so far has been the investment in
their technology. Surprisingly, it is frightening to hear that there are still firms out there in the
markets who have little or no consultation process between IT and the business heads regarding
what the business actually needs in order to remain competitive.

Another area where there appears to be a lack of response is in product development and idea
generation. Yes, the majority of banks now have “strategists” on the desk, but there is still an
inability to generate innovative trading strategies and product ideas which set the banks apart, both
in terms of what they can deliver to clients and how effectively they can profit from trading.

10

SALARY SURVEY

The news does seem good for the foreign exchange industry with volumes and profits higher than
last year, as is the number of participants in the market. 2006 will be remembered as a year
whereby the banks have been paying more attention to keeping hold of the staff they have already
got and not about attracting people with large salaries and even larger bonuses. In addition, the
banks’ have a newfound enthusiasm for non-monetary benefits.

Over the last couple of years, the market has witnessed the changing of European pay awards. Not
only have base salaries peaked (in some cases even fallen back) but now most major financial
institutions are paying bonuses as a combination of both cash and stock options. This stock option
portion varies between the banks, but in general the market has experienced anywhere between
15% and 40% of a bonus being paid in stock options. In addition, these stock options generally
have a three-year total vesting period with the amount of the option also increasing over the period.

Some spot traders have, over the course of the year, been busy trying to reinvent themselves into
proprietary traders or sales/traders but the largest salaries will be among those able and willing to
trade emerging market currencies or exotic derivatives - the more hybrid, the better.

Banks have been hiring in this sector as part of the structured products bubble and demand for
traders to price the underlying options has been high as well.

Banks added to their trading capacity last year (2005) and for 2006 it has been the turn of sales.
Foreign Exchange sales to hedge funds and to corporates in Europe, especially France, Germany,
Scandinavia and Southern Europe were strongly in demand and it is predicted that this trend will
continue through to 2007. Another area of focus for 2007 will be emerging markets plus multi-asset
structured product sales.

With top banks dominating in research and technology rankings, with a boom time for research staff
and a shortage of overlay staff, 2006 promises to be a rewarding year for FX professionals and, in
particular, in FX derivatives/structuring.

In general, the job market is liquid, young talent and quantitative skills are very much in demand
and guarantees and financial inducements to move is likely to re-emerge in the New Year.

The salary estimates represents the median salaries being paid by financial institutions in London,
and the bonuses are subject to wide variations depending upon the performance of the individual,
the desk, the business and often, the entire room’s revenues. There are also variations between
large and mid-sized banks, which may not be reflected in the table.

It should be noted that salaries in America tend to be lower in terms of base pay, but with larger
bonuses. So as a general rule, the numbers are roughly the same, only the currency symbol differs.
Asia is slightly different, as it varies across the region, depending on where a bank’s profit centre is
located. Pay in Singapore is probably in line with London, while Tokyo and Hong Kong are slightly
better paid, with Sydney less so.

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LONDON BASED FOREIGN EXCHANGE TRADING AND SALES – MEDIAN SALARIES

London Based FX Trading

Tier 1 £000’s Package
Spot Forward Options Structuring
Head of Desk 110 + 325 110 + 300 120 + 375 120 + 425
Senior Trader 85 + 130 85 + 140 90 + 225 100 + 300
Junior Trader 65 + 70 60 + 70 80 + 90 80 + 120

Head of Desk 100 + 200 100 + 200 110 + 320 110 + 350
Senior Trader 85 + 120 85 + 130 85 + 200 95 + 200
Junior Trader 55 + 60 60 + 70 70 + 90 80 + 100

Head of Desk 100 + 170 100 + 170 100 + 250 110 + 250
Senior Trader 70+ 90 75 + 100 80 + 100 95 + 150
Junior Trader 50 + 50 55 + 55 65 + 75 80 + 90

London Based FX Sales

Hedge Institutional Corporate Derivatives
Fund
Head of Desk 120 + 300 110 + 200 110 + 150 125 + 400
Senior Trader 85 + 110 80 + 90 75 + 85 95 + 285
Junior Trader 70 + 70 60 + 60 55 + 50 85 + 120

Fund
Head of Desk 110 + 250 100 + 160 90 + 125 125 + 300
Senior Trader 80 + 100 75 + 75 70 + 70 90 + 190
Junior Trader 65 + 65 55 + 50 50 + 40 80 + 100

Fund
Head of Desk 100 + 200 90 + 120 80 + 80 100 + 200
Senior Trader 75 + 90 65 + 65 60 + 50 85 + 120
Junior Trader 55 + 55 50 + 50 50 + 30 65 + 80

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BRIEF SUMMARY 2007

The FX business has continued to evolve with increased money making opportunities within the
asset management and the hedge fund world. More and more real and leveraged funds see
currency as a developing asset class in itself, and continue to see the advantages of actively
managing currency risk. FX revenue from this client segment has increased and for many banks will
exceed budget. Market conditions are favorable with increased FX volatility leading to higher
volumes. In particular, there will also be improved opportunities to generate FX structured products
revenue, which will be a differentiator between banks. Previously, not all banks had structuring
capabilities but now there are few banks which do not have a credible structured products offering.
However, there is still certain stratification between banks in terms of FX solutions provision and the
market has seen an increase in demand for FX structurers, mostly off the back of clients looking for
ways to enhance yields, mostly via FX and commodities.

It is generally felt that demand in 2007 will be for more emerging markets, Southern Europe and
Middle East / Islamic foreign exchange and also increased demand within European asset
managers and hedge funds. There will also be continued investment within the UK institutional
business as a result of increasing volumes, profitability and volatility. Naturally, volatility will be key
to revenue within institutional investors next year, and the signs are that this volatility will be there.

In addition, it is generally felt there will be more corporate revenue generated from the UK and
European corporate world as we move through 2007. The economy and M&A activities are not
slowing down, there is pressure on the hedge fund world, and lending activities should increase. It
is a different market from 2004 where it was believed that credit was restricted and participants felt
that accounting regulations were too prohibitive. Now it is felt that people have a solid
understanding of the new regulations, and is now aware of what can and can’t be done from a
structured derivatives point of view. Thus, there will be more opportunities for structured products
not only across corporates but also financial institutions. The lending business is obviously very
beneficial to gain the attention of the corporate, however, perception of the bank and their market
share is also a major factor.

In terms of how banks position themselves to capture this increased revenue, there will have to be
increased effectiveness of the eCommerce business and the skill-sets of the sales team have also
had to become more sophisticated. Whereas it used to be the case on the corporate side that 90%
of salespeople were cash focused and 10% derivative, this is now being reversed.

The general consensus is that the healthy market conditions of 2006 will continue into 2007. There
will be continued development of relationships, technology, increased lending and currency overlay.
Banks who do not lend will continue to have strong relationships on the real and leveraged side and
with strong bank franchises. Corporate revenue will come from private side activity, relative value
structuring ideas, aggressive derivative pricing and further marketing of eCommerce platforms.
Other banks will continue to grow their loans business by aggressively hiring bankers and enhance
the FX business through growth of DCM and M&A. Institutional business will be generated as a
result of established relationships, relative value trading ideas and producing ways to ensure the
funds successfully manager their FX exposures or currency portfolios.

13

MARKET OVERVIEW 2007 – THE FUTURE

Crystal ball gazing is never a good start for developing an organization’s strategy but a certain
degree of looking into the future to identify new trends is a must for institutions who want to lead the
pack. Being able to track and understand the potential impact of current and future changes in the
banking industry (and financial services industry as a whole) is a key requisite to maintaining a
competitive advantage.

Client Needs - All financial institutions must build a high performance culture centered on the client.
Staff incentives linked to client satisfaction and service levels will become more prevalent. Timely
and insightful metrics on client attitudes will become a greater priority. Successful institutions will
think about the client experience first and their internal processes second.

The Economic Cycle - Because the world economy in 2004 recorded its fastest growth for twenty
years, the financial services industry can expect leaner times over the medium term in developed
markets. Economic forecasters expect the next few years to be characterized by a gradual
deceleration in output and demand growth, with the slowdown being most marked in the USA.
However, by historic standards, growth will still be relatively robust but banks will have to overcome
a number of challenges to make money over the next few years. Competition and disintermediation
caused by the arrival of new entrants in various markets will further erode margins.

In their search for growth, expansion by banks into new markets is a certainty. Already, as we know,
catching most eyes are China and India, although other less mentioned markets, such as, perhaps,
the Middle East, and Russia (Turkey is behind the curve but one perhaps to watch) may come to
the front over the medium term. But the challenges of successful and sustainable entry into
emerging markets will encourage most financial institutions to adopt an incremental approach to
geographic expansion.

On the product front, financial institutions will keep their eyes peeled for innovative sources of
revenue. The continued rise in alternative investments available, for example structured products
offering guaranteed returns, will reflect the demands of a growing class of client hungry for greater
returns than those afforded by conventional financial products, especially amongst the retail/private
investor sector of the market. The pressure to innovate will again be balanced by the need to offer
transparent products that are both easy for clients to understand, account for, and acceptable to
regulators.

Thus rising competitive pressures will force various financial institutions to differentiate themselves
more aggressively, whether via their product mix, their market focus, or their branding proposition.
Restructuring will focus on entrenching existing areas of strength, not developing entirely new ones.

In addition, cost-efficiency will remain key. As is already being seen, outsourcing of non-core
functions will accelerate and there will be even greater emphasis on performance improvement as
banks seek to increase the efficiency of back-office processes. As has been experienced already in
certain functions over the past few years, compensation packages will be more closely tied to
performance than ever before.

Politics - The ethics and responsibilities of the financial services are already under close political
scrutiny and the level of this scrutiny will intensify. Over the past few years, much attention has
been paid by regulators to transactions involving “financial engineering” and in the future, financial
institutions will need to ensure that such transactions are considered carefully in the light of the
views being expressed by regulators and other parties. It may be that some elements of business
will no longer be appropriate. However, in the main, financial institutions should expect their
products, pricing and policies to be judged through the eyes of the client.

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Regulation and Reporting - As has already been seen with Basel II and the American Patriot Act,
banks in developed markets can expect a growing volume of regulation and more rigour in the
application of these rules. The intensity of regulatory scrutiny will be milder in emerging markets, but
here too the trend will be towards a heavier compliance weight. New regulations bring new risks,
most drastically closure and loss of income in the event of a severe failure of compliance. Other
risks include potential loss of reputation from non-compliance, product offerings cramped by
changing and uncertain regulatory frameworks and potentially more volatile earnings resulting from
fair-value accounting.

On a positive note, liberalization should and will open new markets and financial institutions with
strong reputations for ethical behaviour may derive competitive advantage as a result. The focus on
governance will foster enhanced risk management, improved management processes and more
risk-aware performance cultures.

As a result of these changes and expected changes in the future, banks will either abandon low-
return businesses or seek to improve margins via automation and process improvement. Risk
management systems will mature and grow and employees will be incentivised and assessed
against measures of good governance.

Technology - According to estimates from the World Bank, e-Finance penetration among internet
users will increase from between 40% and 50% in major markets in 2005 to 90% by 2010, with
penetration rates in emerging markets rising from less than 20% in 2005 to 60% to 70% by 2010.
Thus, financial institutions that do not offer an efficient multi-channel distribution strategy will not be
competitive.

In an environment of increasing client sophistication, technology is both a problem and a solution.
Electronic distribution will continue to enable easier price comparisons and changes of financial
provider. But technologies improving client experience will assume much greater importance as
financial institutions seek to build new client relationships in fast changing mass market segments.

Risk management has implications too. The use of predictive models will continue to expand fast
throughout the financial industry over the coming years, for example, honing the trading strategies
of investment banks and hedge funds.

In the future, upgrading technology to track risk exposure accurately and swiftly across the whole
business will be crucial. Gone are the days when a currency option position could be written on the
back of a cigarette package. Allocating capital to maximize returns relative to risks, real-time
knowledge of the bank’s total risk exposure and an effective, transparent dialogue with regulators
will represent the minimum standards for the well-governed financial institution.

The People in Demand – As 2006 has been positive in terms of volumes and net contribution, FX
is being regarded as an alternative asset class, even, to some, an ‘arbitrage’ product. As a result,
the market has seen increases in deal volumes, volatility and demand for human capital. This has
led to expectations of future revenue which has obliged banks either to build or expand their FX
platform in order to capture this revenue. Wealth generation will continue to grow, challenging
banks either to aggressively capture market share, or further secure and extend their existing
market position.

The key theme for 2007 will continue to be partnership with clients and quality of product and
pricing. It is therefore apparent that there will continue to be demand for technically strong
salespeople and structurers in particular. For those banks with a corporate client base, demand will
continue to exist for multi-product salespeople as clients look for (and banks aim to deliver) the one-
stop structured solution. As banks look to focus on their geographical and sector strengths, they will
aim to cherry pick the best coverage people to facilitate this.

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Given the need for quality pricing, demand for quants will continue. They are increasingly becoming
an invaluable piece of the trading desk jigsaw and can make the difference between being mediocre
and being a centre of excellence. The desire for innovation will not just be driven by banks; hedge
funds will also be very active in the market. Having seen hedge funds raiding banks for traders over
recent years (maybe in 2007 we will see a flow of people returning to the banks?), and more
recently quants and systems staff, there will be a shift in focus which will see them coming after the
strategists and researchers. Despite the much heralded return to City banks for some, the fact
remains that there are more start-ups than closures and defections from the City will continue to
outweigh those returning to the fold.

On the flip side, there is a feeling from some quarters that demand for traders from hedge funds has
turned a corner and the market is likely to see a flow of people returning to banks. In next year’s
market, a lot of people may see the benefit of the safety of a bank relative to that of a hedge fund.
As one hedge fund recently commented, a number of traders who moved across in the last four
years had the advantage of riding large flow on bank books before they made the transition. Without
that help at a hedge fund, they will struggle in the environment expected in 2006. Banks have also
begun to respond to the threat from hedge funds by establishing their own internal and external
funds, and proprietary traders are being remunerated on a formulaic basis in a number of cases.

From a trading perspective, there will be some demand for flow traders, particularly those that can
price to win flow business and then can manage the position to maximize the potential for a
profitable trade. However, the significant demand will be for emerging market, exotic, hybrid and
structured traders as banks throw their weight behind trying to capture higher margin business.

When it comes to the structured products, it is very much to do with pricing capabilities and the
range of products banks can offer their clients. That is why the banks are looking for structurers to
create new and exotic pay-offs, the new innovative products are consistently selling with clients at
the moment.

Finally, interest in the retail end of the market has been growing steadily over the past year and
tapping into this flow has become and will become an undertaking for many throughout the various
financial institutions. With today’s technology, retail players are becoming more sophisticated and
more demanding in their expectations of product offerings (including having products tailored to suit
themselves) and levels of servicing. In the past, investment managers have been the ones who
have been set-up to cater for this client base. They have armies of relationship managers with the
technology to allow individuals to access and control their own portfolios. But, with margins running
between 10 and 50bps per client per “exotic trade”, it won’t be long before there is more competition
amongst these institutions and the banks, especially those with strong wealth management
divisions. Therefore, in 2006, there will be a demand for structured products sales professionals
who will focus on the distribution of retail structured products either via direct channels or via third
party wealth management distribution channels.

[As an aside, it will also be interesting to see how many investment managers and asset managers
draw which mainstream banks into wanting to provide them with structured products and who
enters into “strategic partnerships” with whom. In addition, it is likely that these managers will design
products to best fit their clients’ needs and then invite their banks to price and provide the best
execution rather than look to the banks to design products which best fit their own trading books]

The Financial Institution of the Future - One question which is not asked of recruiters, and
perhaps should be is “what will the successful financial institution of the future be characterized by
or driven by”? Quite simply, the financial institution of the future will be characterized by an all-
encompassing client-centric culture with three broad trademarks:

• Focus on its areas of competitive advantage.

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• Adaptation to forces of fragmentation.
• Flexibility to exploit new opportunities.

It must be noted that focus does not mean the end of convergence or consolidation. Instead of
seeking to dominate in every segment and territory in which they operate, many financial institutions
will temper their ambitions, looking to expand regionally instead of globally or focusing on particular
client segments. Size will still be important to many financial institutions but the upshot will be the
rise of competency-led enterprises, financial institutions that develop and excel in particular areas.

As well as honing their strengths, tomorrow’s leading financial institutions will also have the
flexibility to seize opportunities. Flatter markets, heavier regulation and fiercer competition mean
that financial institutions will have to think laterally and move lightly to define and defend market
niches.

17

COMPANY PROFILE

The Company - After considerable research into the Executive Search and Recruitment industry,
Jared James Associates was established in March 1996, to fill what was identified as a need within
the sector for an integrated approach to the recruitment of key personnel. Since then, Jared James
has become a key partner to a number of leading global companies across a broad range of market
sectors.

Jared James Associates have successfully completed assignments in the UK, Europe, Asia and
North America, outlining our global reach and capabilities.

Our successful track record has been achieved by employing professional consultants with
outstanding experience of specific market sectors, working closely with clients to fully understand
their corporate strategy, philosophy and recruitment needs.

Philosophy - Jared James’ philosophy can best be described as “Partnership in Business”. This
involves working closely with our clients, to include line managers and the human resources
function. In fully understanding the mandate, we are then able to provide a consistently high caliber
of candidate, employing our successful search processes. In this way, we aim to become an
indispensable partner, building a long-term mutually beneficial relationship.

Market Position - we see ourselves positioned among the top companies in our areas of expertise,
as evidenced by our ability to win mandates ahead of many of our larger competitors. This has
been accomplished by successfully completing assignments in a timely and diligent manner. Our
work on retained search, selection or contingency assignments is all handled with the same high
level of professionalism.

Research - the key to any successful Executive Search company is its’ ability to identify suitable
candidates who will fit the clients’ job specification. This involves the initial identification of target
companies and selection of individuals therein with the requisite experience. We then conduct in-
depth interviews with candidates, to fully ascertain their suitability for a position, taking into account
not only their technical skills, but also their personality and cultural fit. Our thorough processes in
this area are proven, as evidenced by our high completion rate on assignments undertaken.

Company Strengths – Jared James sees their strengths as:

• Ability to represent our clients in a professional manner, in order to attract the best candidates,
from both a technical and cultural perspective.
• Consultants who fully understand the sector in which they are recruiting.
• Successful track record as evidenced by repeat business from clients.
• Thorough documentation processes, keeping line managers, human resources departments and
candidates fully informed at all stages of the recruitment process.
• In-depth research capabilities and global reach.
• Professional and personal service ensuring consistently successful results.
• Lateral thinking to provide alternative recruitment solutions.

Value Proposition - Jared James Associates is committed to being the most client-focused,
consultative search firm in the industry, with top search professionals and a marketing strategy that
is competitive, consistent and differentiating.

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Mission - to enhance and sustain our client’s performance and enable the building of high-impact
leadership teams, through consultative search that identifies professionals of uncommon ability who
fit specific business needs and cultural environments.

Vision - the global executive search firm of choice for Clients who want a consultative, personalised
approach to building great organisations and we are search professionals who aspire to have
fulfilling careers in a high-impact, collaborative, creative environment.

Operating Principles - these principles highlight the unique attributes of Jared James Associates
and serve to differentiate the firm to clients:

• Approach to Client Service - we always put the client first.
o We select our clients strategically and build strong relationships with them. This
focused approach with a limited number of clients provides a greater universe of
executive talent in companies from which we can recruit.
o Each assignment is directed and executed by an experienced Director and team of
search professionals.
o We provide greater resources in executing our assignments and complete most
assignment in less time than our competition.
o Our integrity and high standards of professional ethics set us apart. As a result, our
business comes through trusted relationships.
o We apply extensive, original research and creative thinking to every search we
perform.
• Senior Leadership Team Focus - we work as partners with our clients to recruit the best
senior leadership teams that can truly impact the client’s organization and provide full
service solutions for our established clients.
• Competitive Advantage:
o Depth of industry experience in the financial services arena.
o State of the art innovation, systems and tools that support each professional with
deep functional expertise.

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CONTACT DETAILS

Jared James Associates Ltd

One Coldbath Square
London
EC1R 5HL

Switchboard: +44 (0) 207 841 3700
Fax: +44 (0) 207 841 3707

www.jaredjames.com

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