Global Rates & FX Research

11 February 2014

The audacity of bitcoin

Risks and opportunities for corporates and investors

 Unlike other asset markets, FX rarely welcomes newcomers for the Global FX Strategy
simple reason that launching a widely-used currency traditionally John Normand
AC

required creating a sovereign or supra-sovereign entity with a central (44-20) 7134-1816

bank to issue the unit and manage its supply over time. john.normand@jpmorgan.com
J.P. Morgan Securities plc
 Hence the audacity of bitcoin: it is a stateless, virtual and peer-to-peer
currency, so exists only digitally and is associated with no sovereign,
central bank or bank payments system. It is also incredibly illiquid
extremely volatile and often caricatured.

 After a brief Economics 101 refresher on the required functions of

money, this research note addresses various frequently-asked questions
around this virtual currency: what is it; how is it created and
transferred; what are its advantages and disadvantages for corporates and
investors compared to fiat currencies; is it a serious contender for a
global payments system; and can it prove more durable long-term than
other somewhat fixed-supply currencies like gold.

 At the risk of sounding like a luddite, bitcoin looks like an innovation

worth limiting exposure to. As a medium of exchange, unit of account
and store of value, it is vastly inferior to fiat currencies. Since
governments are quite unlikely to accord it the status of legal tender,
bitcoin or other virtual currencies would not reach the scale and scope to
render them worthwhile for widespread commerce, payments or
investment.

 Bitcoin’s greatest appeal is the apparent cheapness of peer-to-peer

fund transfers, though it is unclear how economical these transactions
truly are when the virtual world interacts with the real world. As
provocative as its underlying technology may be, bitcoin’s practical role
may be no larger than that of an emerging markets currency subject to
exchange controls.

 For corporates, bitcoin’s appeal is two-fold: no or low transaction costs

from a peer-to-peer payments system, and the potential brand recognition
from trialing a new technology. These advantages must be weighed
against extreme illiquidity and volatility, both of which impede risk
management. All-in transaction costs may also be higher once the fees
from transferring bitcoins to fiat currencies are included.

 Investors normally avoid an instrument with bitcoin's trading properties.

The unit's main investment appeal is the potential long-term price rise
due to limited supply, much like some commodities when the market
balance tightens.

See page 7 for analyst certification and important disclosures.

www.jpmorganmarkets.com/GlobalFXStrategy
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com

Introduction: the most audacious Chart 1: Bitcoin’s daily turnover has averaged about $20mn over the
past year with extreme volatility
currency since the euro Bitcoin price in USD versus average daily turnover in $mn. Turnover is based on
Unlike other asset markets, FX rarely welcomes newcomers the sum of three largest bitcoin exchanges (mtgoxUSD, bitstampUSD and
bitceUSD) comprising about 70% of exchange-traded activity.
for the simple reason that launching a widely-used currency
traditionally required creating a sovereign or supra- 1400 250
sovereign entity with a central bank to issue the unit and Bitcoin price, $
1200
manage its supply over time. The world’s last new currency Bitcoin daily turnover, $mn 200
was the euro launched in 1999, though it has simply 1000
replaced 18 national ones as countries joined EMU.1 Hence 150
the audacity of bitcoin: it is a stateless, virtual and peer- 800
to-peer currency. It exists only digitally rather than 600 100
physically; it is created via an algorithm and a network of
programmers rather than by a central bank; and it is 400
transferred directly amongst this network of programmers, 50
200
consumers and corporates rather than through the traditional
third-party banking system.2 It is also incredibly illiquid 0 0
(daily turnover equivalent to the Mauritius Stock 10 11 12 12 13 14
Exchange), extremely volatile (20 times more so than the
Source: J.P. Morgan
yen) and often caricatured (allegedly only preferred by
criminals, libertarians and anarchists). Chart 2: Bitcoin is over 20 times more volatile than USD/JPY
3-mo realised volatility; note difference in scales
After a brief Economics 101 refresher on the required
functions of money (medium of exchange, unit of account, 450 18
store of value), this research note addresses various 400 Bitcoin, 3-mo realised vol
16
frequently-asked questions around this virtual currency. USDJPY 3-mo realised vol
350
These include: what is it; how is it created and transferred; 14
300
what are its advantages and disadvantages for corporates
250 12
and investors compared to fiat currencies; is it a serious
contender for a global payments system; and can it prove 200 10
more durable long-term than other somewhat fixed-supply 150
currencies like gold. At the risk of sounding like a luddite 8
100
unable to recognise the transformative effects of evolving 6
50
technologies – similar to the late 1970s prediction that
“there is no reason for any individual to have a computer in 0 4
his home”3 – bitcoin looks like an innovation worth limiting 2011 2012 2013 2014
exposure to. As a medium of exchange, unit of account and
Source: J.P. Morgan
store of value, it is vastly inferior to fiat currencies. Their
greatest appeal is the apparent cheapness of peer-to-peer which impede risk management. A consumer’s trade-off is
fund transfers, though it is unclear how economical these between lower transaction costs and the risk of operating in
transactions truly are when the virtual world interacts with a payments system which lacks deposit insurance.
the real world. Investors would normally avoid an instrument with
bitcoin's trading properties. The unit's main investment
For corporates, the cost-benefit around bitcoin must weigh
appeal is the potential long-term price rise due to limited
low transaction costs plus brand recognition from trialing a
supply, much like some commodities when the market
new technology against extreme illiquidity and volatility,
balance tightens.
1 Making money the old fashioned way
We ignore the trivial case of the South Sudanese pound created
in 2011 when South Sudan gained independence from Sudan. A discussion of bitcoin should begin with an Economics
2
The euro's launch was rather audacious too. Who would have 101 refresher on money – what it is, how it is created
thought to form a currency union without a central fiscal and and why we hold it. The classic definition of money is
political authority? Critics lined up in the early 1990s well before anything that serves as medium of exchange, unit of
the euro's launch, though their predictions of inherent instability account and store of value. A medium of exchange can be
required ten years and two recessions to be proven correct. anything deliverable for a good or service, whether a
3
Ken Olsen, founder of now-defunct computer maker Digital mundane object, a precious metal or piece of paper. In all
Equipment Corporation in 1977.

2
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com
cases, users value the medium because employing it is more
efficient than bartering. A unit of account is a way of
measuring value from a common reference point, thus also
facilitating commerce because goods can be compared more
easily. (Recall the euro’s usefulness in this regard since now
prices in Europe are comparable across 18 countries.) A
store of value is just a way of holding wealth until it is
exchanged for goods and services or lent or given to
someone else.
For centuries precious metals, or paper currencies
convertible into metal at a fixed rate, served these three
functions. But followers of financial history know the
limitation of a system based on a fixed or slow-growing
money supply: it imposes uncomfortable financial
discipline on governments, households and corporates.
Hence the progressive debasement of pure gold coins with
alloys; the global abandonment of the gold standard during
the financial strains during World War I; and the US
government’s suspension of the dollar’s gold convertibility
given fiscal and balance of payments pressure from the
Vietnam War.4
Today most countries employ fiat currencies, or paper
and coins with no intrinsic worth whose perceived value
stems from government declaration (or fiat5) and
collective belief. The government creates demand for a
currency by declaring it legal tender, meaning it must be
accepted as payment for all debts and it will be used in any
transactions between the government and other agents.
Consumers and corporates accept this fiat currency because
it is a requirement for settling all debts public (paying taxes)
and private. The government attempts to guard the value of
money by maintaining a monopoly on its production to
avoid counterfeiting, and by establishing a central bank with
a mandate to manage its supply responsibly over time.
While this system may sound like blithe existence in The
Matrix, this relationship amongst government, central bank,
households, corporates and fiat currencies is much more
efficient than an alternative like barter. It also makes
macroeconomic shocks much easier to manage than an
alternative like the gold standard (recall the deflation of the
Great Depression and more recently peripheral Europe).
Bitcoin as better money
Bitcoin proposes an alternative, however. If – despite
their mandates – the world's biggest central banks risk
inflation and currency debasement via the rapid expansion
of their balance sheets (chart 3), and if even European
4
Foreign exchange market participants should celebrate this day
in August 1971, since it led to the collapse of the Bretton Woods
system of fixed exchange rates and the advent of floating
currencies.
5
The Latin command meaning "let it be done".
Chart 3: Amongst the G4 economies, only the ECB’s balance sheet
is shrinking
Central bank assets in the US, Euro area, UK and Japan indexed to 100 in 2006
500 Fed
450 ECB
BoE
400 BoJ
350
300
250
200
150
100
50
2006 2008 2010 2012 2014
Source: J.P. Morgan
governments still impose capital controls (Cyprus), couldn’t
a non-state entity more responsibly supply a fiat-like
currency to the world? And if this currency were created
and exchanged digitally amongst peers of consumers and
corporates, it would have the additional advantage of
avoiding the fees imposed by financial intermediaries as
well as the loss of privacy inherent in third-party payments
systems. Hence the purported appeal of a virtual
currency: a medium of exchange, a unit of account and a
store of value without the alleged recklessness,
capriciousness, siphoning and snooping inherent in
traditional systems. Even leaving aside this caricature of
bitcoin's underlying philosophy, there is something
compelling about the idea.
Simple in theory, but more complex in practice. Consider
the infrastructure of a traditional monetary and payments
system to highlight what bitcoin attempts to replace. A
traditional financial system is a national network
comprising a central bank owned by a government, which
creates money by physically printing currency and minting
coins, or by electronically creating bank reserves6. That
money is used by households, consumers and the
government to facilitate trade and investment via a
payments system of banks and other financial
intermediaries (think PayPal, Visa, Western Union and in
some countries, the post office). Financial intermediaries
provide numerous services of varying complexity, but their
role in the payments system is simple: verify that Customer
A has sufficient funds to pay Customer B, then securely
transfer ownership of that money between accounts. For
6
Quantitative easing practiced by the Fed, BoJ and Bank of
England created bank reserves (a liability of the central bank, just
like cash) to purchase financial assets, thus boosting money in
circulation.
3
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com
assuming that verification and transfer risk, intermediaries
levy a fee.
Bitcoin performs these functions of money creation,
payment verification and fund transfer quite differently.
Its network is international and comprises miners who
create the currency and users who obtain the currency to
buy goods and services. There is no central monetary
authority or regulator. There is also no financial
intermediary for exchanging bitcoins for real products. The
closest to an intermediary is an exchanger who will swap
bitcoins for traditional fiat currencies like dollars, euros,
yen or renminbi, like a forex dealer or futures exchange.7
Miners create bitcoins electronically by solving a
mathematical algorithm released in 2009 by an unidentified
programmer (or perhaps group of programmers) known by
the pseudonym Satoshi Nakamoto. Anyone can be a miner;
they simply need to download the software required to
interact with others on the network, and acquire hardware
powerful enough to run the multitudinous calculations to
solve the algorithm. Since the technology required to solve
an increasingly complex algorithm grows over time, miners
will probably be programming specialists rather than the
average consumer or businessperson.
Any individual or business can be a bitcoin user, however,
by establishing an electronic account know as a wallet. This
wallet is associated with a user's electronic address but not
to any other identifying information such as their name,
phone number or physical address. Thus bitcoin is a
pseudonymous system rather than an anonymous one in
that every user is known by something other than the legal
names associated with traditional banking.
To provide security as well as transact with other users,
bitcoin employs cryptography which assigns two keys
(alphanumeric codes) to each account – a private one
known only to them and a public one known to all other
users in the network. When two users wish to transact, they
send a message to the network using their public keys
signed by their private keys. This transaction forms part of a
block chain or bundle of transactions entirely in the public
domain along with all other historical bitcoin transactions
performed in the network.
Miners compete to verify that this trade is authentic via
algorithms to confirm that indeed a user possesses the
bitcoin and did not previously spend it. Programmers
(miners) who solve the equations to authenticate a block of
7
About 75% of bitcoin trading is done versus USD, 13% vs CNY
and 5% versus EUR.
4
transactions receive 25 bitcoins8 in exchange, thus
increasing the money supply. Whenever the algorithm is
solved, it becomes computationally more difficult so that
the next attempt requires more time an effort (i.e.
computing power). This feedback mechanism limits the
growth rate of bitcoin supply, so is somewhat analogous to
the production constraint on gold. The more that is mined,
the greater the requirement to dig deeper pits, the greater
effort required to extract the marginal ounce and the higher
the price of the marginal ounce (or coin). The stock of
bitcoins is arbitrarily set at 21 million units to be mined by
2140, 12 million of which have already been mined. At
early-February market prices of about $700 per unit, the
current bitcoin money supply has a value of about $8.5bn,
equivalent to the market capitalisation of the Mauritius
Stock Exchange.
As complicated as this process is, it begins to address
several acknowledged deficiencies of fiat currencies. It
provides steady, predictable growth in the money supply. It
eliminates the risk of capital controls because the network
lacks a central authority. It provides verification of fund
balances to avoid fraud. And it eliminates or at least
significantly reduces transaction costs for payments because
verifiers are rewarded through bitcoin creation. As fanciful
– and indeed Matrix-like – as this bitcoin creation system
sounds, perhaps it requires no more suspended disbelief
than the traditional fiat system in which a government
declares paper to have value and a central bank or national
mint thus issues the specie. One doesn’t need to be the
caricatured miscreant, Austrian economist or anarchist to
appreciate the appeal of such a system.
Bitcoin as inferior money
What’s not to like about this system? A lot. Recall each
of the three functions of money – medium of exchange, unit
of account and store of value. As a medium of exchange
bitcoin initially seems no better or worse than fiat
currencies, since anything portable (like paper or an
electronic data file) can be used as that medium so long as
enough agents agree to use it. Therein lies bitcoin's
limitation: with due apology to anarchists, there is no
common power like a government to compel the public to
use bitcoin as universally as its own fiat currency. Recall
that currencies don’t become widely used spontaneously or
through a grass-roots campaign. They become widely used
nationally because a government declares them legal tender,
and they become widely used internationally because they
are legal tender in a significant economic area with large,
unrestricted capital markets. Hence the primacy of the US
8
The current reward of 25 coins (worth $17,500 at the early
February exchange rate of about $700), but that prize falls by half
every four years.
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com

dollar and euro in line with the economic significance of the Chart 4: Certain currencies are widely used internationally because
US and Euro area, and the prospects for the renminbi as a government compels their use in large, open economies
Nominal GDP (x-axis) versus average daily FX turnover for reference currency
China pursues capital market liberalisation (chart 4). In the
versus all other currencies (y-axis)
area of transactional demand for a currency, incumbency is
1400
an incredibly high hurdle to jump.
1200 y = 0.07x - 31.44
USD
A virtual currency’s transactional use will always be R 2 = 0.88

average daily FX turnover

limited unless it performs the other two functions of 1000

money better than a fiat currency. As a unit of account 800

EUR
and store of value, bitcoin also falls well short of fiat 600
currencies given its extreme volatility. As highlighted
400 JPY
earlier in chart 2, bitcoin's realised volatility has averaged GBP
120% over the past three years, with a range of 50% to 200 AUD
CAD CNY
400%. By comparison, typical G10 currency volatility is 0
8% with a range of 7% to 16% over the past three years. - 5,000 10,000 15,000
-200
Typical emerging markets FX volatility is about 9% with a nominal GDP, $bn
range of 7% to 20% over the past three years. Even during
periods of extreme financial market stress such as the Asian Source: J.P. Morgan, BIS

Crisis of 1997/98 and the Argentine Default of 2002, Chart 5: The Nasdaq bubble – prices doubled in two years and
currency volatility reached levels closer to 50% (Asia) or quintoupled in three years
120% (Argentina), and then only persisted for a few weeks. Nasdaq indexed to 100 in 1997
True, these swings may represent simply normal 600
volatility for a start-up currency just like the fluctuations 550
of start-up companies’ share prices during the 1990s. Even 500
by dot-com standards, however, these moves are brutal. The 450
Nasdaq only quintoupled in value in three years (1997- 400
2000), while bitcoin's price has risen 50-fold in the past 350
year (charts 5 and 6). Such price fluctuations make it 300
impossible to seriously consider bitcoin as a unit of account 250
or store of value for an material amount of corporate or 200
investor exposure. 150
How much does illiquidity due to lack of fiat currency 100
status contribute to such volatility? That is unclear, but 50
here are a few comparative statistics. Bitcoin’s market value 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
and turnover are trivial by currency standards. There are Source: J.P. Morgan
currently about 12mn bitcoins in circulation, which at a
current price of $700 given them a value of about $8.5bn. Chart 6: The Bitcoin bubble – prices have increased 50-fold over the
This figure compares to currency in circulation of about past year
Bitcoin price indexed to 100 on January 1, 2013
$1.2trillion for US dollars, €950billion for euros and
£360bn for sterling. Relative to frontier stock markets and 10000
the smallest investable bond markets, the current market 9000
value of bitcoins is similar to the market capitalisation of 8000
the Mauritian Stock Exchanges or Peruvian government 7000
bonds. Bitcoin’s average daily trading volume across major 6000
exchanges is about $20mn, compared to average daily
5000
trading volume of FX futures on the Chicago Mercantile
4000
Exchange of about $33bn for EUR, $17bn for JPY and
3000
$1.4bn for MXN (chart 7). Recall as well that over-the-
counter volumes in FX are about ten times that of 2000
exchange-traded activity. Still, none of these tiny asset 1000
markets nor lowest-liquidity fiat currencies exhibits the 0
outstanding volatility of bitcoin. Perhaps the decision to Feb 13 Apr 13 Jun 13 Aug 13 Oct 13 Dec 13 Feb 14
limit bitcoin supply has consequences not imagined at the
Source: J.P. Morgan
time.

5
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com

Ironically the lack of external oversight may prove an Chart 7: Average daily turnover on bitcoin is trivial compared to FX
obstacle to significant market deepening, since many futures on the CME, and CME volumes are only 10% of over-the-
market participants would prefer the accountability of counter volumes
Average daily turnover on bitcoin across the three major exchanges versus
known but fallible entities to one based on a mathematical turnover by currency pairs on the Chicago Mercantile Exchange. Figures in US$ bn
code. (Query: who does one call when there is a problem
40
with bitcoin?). In exchange for its low-cost peer-to-peer
34
system, bitcoin’s network contains no recourse if bitcoins 35
are lost or hacked. At least traditional fee-charging banks 30
provide deposit insurance and other fall-backs. With fixed
25
supply, bitcoin’s deflationary bias should also be clear.
That quality serves owners well when exchanging into 20 18
foreign currency, but it would be onerous for any economy 15
operating with it as legal tender. Indeed Weimar Germany 10
10 8
was unpleasant, but so was the Great Depression. 7
5
5 1 1
Implications for corporates and investors 0.02
0
For corporates, bitcoin’s appeal is too fold: no or low EUR JPY GBP AUD CAD CHF MXN NZD Bitcoin
transaction costs from a peer-to-peer payments system, and
potential brand recognition from trialing an innovative Source: J.P. Morgan, CME and bitcoin exchanges
technology. These advantages must be weighed, however, Table 1: Bitcoin correlations with other currencies and with gold
against the currency’s extreme volatility. Focusing on Based on daily data over past year and past two years. All series are expressed as
saving 1% on transfer fees seems misguided when currency USD dollars per unit of foreign currency, gold or bitcoin
volatility runs at more than 100%, and when exchanging Past two years
JPY EUR GBP CHF CNY Gold Bitcoin
bitcoins to fiat currencies could cost a few percent too.
JPY 1 -0.66 0.11 -0.37 -0.93 0.85 -0.60
Cash management therefore would remain problematic
EUR 1 0.45 0.92 0.77 -0.50 0.57
since there are no financial assets in which to hold bitcoin GBP 1 0.64 0.15 -0.01 0.48
receipts as a store of value. If cash should be liquid and CHF 1 0.52 -0.27 0.50
stable to provide corporates with maximum financial CNY 1 -0.83 0.67
flexibility, bitcoin provides corporates with neither. Finally, Gold 1 -0.69
risk management around bitcoin exposure would remain Bitcoin 1
difficult. Also correlations with other currencies appear
higher (table 1), they are quite erratic over various sample Past year
JPY EUR GBP CHF CNY Gold Bitcoin
periods. All-in transaction costs may also be higher once the
JPY 1 -0.34 -0.53 -0.26 -0.82 0.78 -0.71
fees from transferring bitcoins to fiat currencies are
EUR 1 0.92 0.97 0.65 -0.49 0.63
included. Consumers face similar tradeoffs: lower
GBP 1 0.90 0.77 -0.58 0.79
transaction costs but extreme price risk, while forgoing the CHF 1 0.56 -0.41 0.63
benefit of deposit insurance offered by traditional banking. CNY 1 -0.90 0.72

Of course many corporates operate regularly in countries Gold 1 -0.60

with volatile, illiquid currencies subject to exchange
controls, of which bitcoin could be considered another
variant. But in other markets, restrictions may diminish as
the country's financial markets develop (think China). It is
unlikely that bitcoin could ever achieve meaningful scale
relative to government-issued currency since a government
would not grant it legal tender status. Transactional demand
can persist, but perhaps on a scale comparable to a minor
emerging markets currency rather than the basis for a
company’s global payments.
Investors would normally avoid an instrument with
bitcoin's trading properties. The unit's main investment
appeal is the potential long-term price rise due to limited
supply. How much could the price rise? All traditional
models of exchange rate determination are useless in
Bitcoin 1
Source: J.P. Morgan
answering this question. Purchasing power parity
frameworks cannot be used because there is no sufficiently
large consumption basket of goods in the bitcoin economy
to compare against the inflation rate of fiat-currency
economies. Fundamental exchange rate models cannot be
constructed for similar reasons: there is no meaningful
bitcoin economy on which to base productivity or terms of
trade calculations. The best framework is to consider the
behavior of supply-constrained commodities when the
market balance tightens due to rising demand: price trends
turn exponential until supply increases (impossible with
bitcoin unless network users collectively agree to alter the
protocol), or high prices curb demand.

6
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com

Disclosures

Analyst Certification: The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan–
covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgan’s Strategy, Technical, and Quantitative Research teams may
screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
research.disclosure.inquiries@jpmorgan.com.
Analysts' Compensation: The research analysts responsible for the preparation of this report receive compensation based upon various
factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf

Legal Entities Disclosures

U.S.: JPMS is a member of NYSE, FINRA, SIPC and the NFA. JPMorgan Chase Bank, N.A. is a member of FDIC. U.K.: JPMorgan Chase N.A., London
Branch, is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and to limited regulation by
the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from J.P. Morgan on
request. J.P. Morgan Securities plc (JPMS plc) is a member of the London Stock Exchange and is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England & Wales No. 2711006. Registered Office 25
Bank Street, London, E14 5JP. South Africa: J.P. Morgan Equities South Africa Proprietary Limited is a member of the Johannesburg Securities
Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated
by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong. Korea: J.P. Morgan Securities (Far East) Ltd, Seoul
Branch, is regulated by the Korea Financial Supervisory Service. Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS Licence
No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is regulated
by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a
participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private
Limited, having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina, Santacruz East, Mumbai - 400098, is a member of the National Stock
Exchange of India Limited (SEBI Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI
Registration Number - INB 010675237/INF 010675237) and is regulated by Securities and Exchange Board of India. Thailand: JPMorgan Securities
(Thailand) Limited is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange
Commission. Indonesia: PT J.P. Morgan Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK.
Philippines: J.P. Morgan Securities Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing
Corporation of the Philippines and the Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P.
Morgan S.A. is regulated by the Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de
C.V., J.P. Morgan Grupo Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and
Securities Exchange Commission. Singapore: This material is issued and distributed in Singapore by J.P. Morgan Securities Singapore Private Limited
(JPMSS) [MIC (P) 049/04/2013 and Co. Reg. No.: 199405335R] which is a member of the Singapore Exchange Securities Trading Limited and is
regulated by the Monetary Authority of Singapore (MAS) and/or JPMorgan Chase Bank, N.A., Singapore branch (JPMCB Singapore) which is regulated
by the MAS. Japan: JPMorgan Securities Japan Co., Ltd. is regulated by the Financial Services Agency in Japan. Malaysia: This material is issued and
distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa Malaysia Berhad and a
holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan Broking (Pvt.) Ltd is a
member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P. Morgan Saudi Arabia
Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent, arranging, advising and
custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad
Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by the Dubai Financial
Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551, Dubai, UAE.

Country and Region Specific Disclosures

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA by JPMS plc.
Investment research issued by JPMS plc has been prepared in accordance with JPMS plc's policies for managing conflicts of interest arising as a result of

7
John Normand Global Rates & FX Research
(44-20) 7134-1816 11 February 2014
john.normand@jpmorgan.com

publication and distribution of investment research. Many European regulators require a firm to establish, implement and maintain such a policy. This
report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49 of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (all such persons being referred to as "relevant persons"). This document must not be acted on or relied on by persons
who are not relevant persons. Any investment or investment activity to which this document relates is only available to relevant persons and will be
engaged in only with relevant persons. In other EEA countries, the report has been issued to persons regarded as professional investors (or equivalent) in
their home jurisdiction. Australia: This material is issued and distributed by JPMSAL in Australia to "wholesale clients" only. This material does not take
into account the specific investment objectives, financial situation or particular needs of the recipient. The recipient of this material must not distribute it to
any third party or outside Australia without the prior written consent of JPMSAL. For the purposes of this paragraph the term "wholesale client" has the
meaning given in section 761G of the Corporations Act 2001. Germany: This material is distributed in Germany by J.P. Morgan Securities plc, Frankfurt
Branch and J.P.Morgan Chase Bank, N.A., Frankfurt Branch which are regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht. Hong Kong: The
1% ownership disclosure as of the previous month end satisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for Persons
Licensed by or Registered with the Securities and Futures Commission. (For research published within the first ten days of the month, the disclosure may
be based on the month end data from two months prior.) J.P. Morgan Broking (Hong Kong) Limited is the liquidity provider/market maker for derivative
warrants, callable bull bear contracts and stock options listed on the Stock Exchange of Hong Kong Limited. An updated list can be found on HKEx
website: http://www.hkex.com.hk. Japan: There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading, and
that a loss may occur due to the exchange rate in the case of foreign share trading. In the case of share trading, JPMorgan Securities Japan Co., Ltd., will be
receiving a brokerage fee and consumption tax (shouhizei) calculated by multiplying the executed price by the commission rate which was individually
agreed between JPMorgan Securities Japan Co., Ltd., and the customer in advance. Financial Instruments Firms: JPMorgan Securities Japan Co., Ltd.,
Kanto Local Finance Bureau (kinsho) No. 82 Participating Association / Japan Securities Dealers Association, The Financial Futures Association of Japan,
Type II Financial Instruments Firms Association and Japan Investment Advisers Association. Korea: This report may have been edited or contributed to
from time to time by affiliates of J.P. Morgan Securities (Far East) Ltd, Seoul Branch. Singapore: JPMSS and/or its affiliates may have a holding in any of
the securities discussed in this report; for securities where the holding is 1% or greater, the specific holding is disclosed in the Important Disclosures
section above. India: For private circulation only, not for sale. Pakistan: For private circulation only, not for sale. New Zealand: This material is issued
and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment of money or who, in the course of and for the
purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to members of "the public" as determined in
accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any third party or outside New Zealand without
the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an
advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer to buy securities described herein, in Canada or any
province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to
file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively,
pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. The
information contained herein is under no circumstances to be construed as investment advice in any province or territory of Canada and is not tailored to
the needs of the recipient. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the
laws of Canada or a province or territory of Canada, any trades in such securities must be conducted through a dealer registered in Canada. No securities
commission or similar regulatory authority in Canada has reviewed or in any way passed judgment upon these materials, the information contained herein
or the merits of the securities described herein, and any representation to the contrary is an offence. Dubai: This report has been issued to persons regarded
as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-7700847 / ouvidoria.jp.morgan@jpmorgan.com.

General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the
securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised December 7, 2013.

Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of J.P. Morgan. #$J&098$#*P