Sibos ICC UR BPO briefing

ICC briefing on supply chain finance

and UR BPO

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Sibos Osaka 29 October 2012

Welcome!

• To update the Trade bankers on the progress on UR BPO rules

• To share our next steps in view of formal adoption of UR BPO rules in April 2013

• To suggest your joining this industry innovation and increase corporate awareness

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Speakers

• Kah Chye Tan, Global Head of Trade and Working Capital, Barclays Corporate and Chair ICC Banking Commission

• Dan Taylor, Managing Director, J.P.Morgan and Vice-Chair ICC Banking Commission

• Daniel Schmand, Head of Cash Management and Trade Finance EMEA, Deutsche Bank and Vice-Chair ICC Banking Commission

• David Vermylen, Global Credit Manager Chemicals, BP

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http://www.sibos.com/conferencedata/pages/speakers_details.page?speakerID=725




Agenda

• Introduction • New Uniform Rules for Bank Payment Obligation • The ICC BPO Project Deliverables and Timeline • The accounting and capital treatment of BPO • The corporate need for new rules for open account trade • A BPO Corporate Case study: BP Chemicals - Octal • The ICC Banking Commission team and projects • Conclusion

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Cooperation Sibos Toronto

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Both the ICC and SWIFT believe that by

working together and leveraging their

respective positions across the trade finance

community, the BPO will have an important

role to play in supporting the development of

international trade in the 21st century in

addressing cost pressures in the face of

increased automation and changes in the

regulatory environment.

Kah-Chye TAN

Chair

ICC Banking Commission

Gottfried LEIBBRANDT

CEO SWIFT

Roles of ICC and SWIFT

To help banks provide innovative trade and supply chain services that enable their corporate customers to:

– reduce risk – enhance process

efficiency – improve liquidity

management. More than 9,000 financial institutions in 209 countries.

The ICC Banking Commission is a leading global rule-making body for the banking industry, producing universally accepted rules and guidelines for international banking practice, notably letters of credit, demand guarantees and bank-to-bank reimbursement. Over 500 members in 85 countries.

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Agenda


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The current instruments

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Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Doc

umen

ts

Advi

ce

Application

Issuance

Payment

Letter of Credit

Bank risk / financing services based on paper document

processing

Seller Buyer

Seller’s Bank

Buyer’s Bank

Contract

Payment

Open Account

Documents

Bank services limited to payment processing.

If any risk, Credit Insurance or Payment Guarantee is added

Continuous shift

The opportunity for banks

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Seller Buyer

Seller’s Bank

Buyer’s Bank

Contract

Payment

Open Account

Documents

Bank services limited to payment processing

Seller Buyer

Recipient Bank

Obligor Bank

Contract

Documents

Payment

Bank Payment

Obligation

Bank risk / financing services based on electronic trade data

Data

Dat

a

Dat

a

Bank-assisted open account

The BPO enables bank-assisted Open Account trade

BPO is an alternative instrument

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Seller Buyer

Buyers' Bank

Seller's Bank

Purchase Order Transport docs Certificates Invoices

Transaction data facilitating the provision of risk & financing services

ICC SWIFT

Established B2B

practices

Irrevocable and conditional inter-bank payment

obligation (BPO)

A legally binding rulebook owned by the ICC and based on

ISO 20022 standards

An industry-wide messaging and matching platform that implements

the BPO in a multi-bank way

BPO is a new payment term in the ICC Int’l Sales Model

Contract

BPO LC

Dat

a/Pa

per

Dat

a

The Bank Payment Obligation

A BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of rules. Therefore, a BPO offers:

• An assurance of payment • Risk mitigation for all parties • Possible use as collateral for finance

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An alternative instrument for trade settlement

Industry standards

• Trade Finance instruments (UCP600, URDG758, URC 522, URBPO, …)

• MT standards (for L/Cs, Demand Guarantees, Collections)

• ISO 20022 standards (for BPO) • ISO 9362 Business Identifier Code (BIC) • ISO Country codes, Currency codes, …

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Industry standards are industry-owned and technology-neutral. They coherently address legal and operational aspects.

Agenda


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Organisational structure BPO Working Group

Co-chairs: ICC and SWIFT

Legal Drafting

Drafting Group Chair: ICC

UR BPO rules

Consultative Group Co-chairs:

CITI & FirstRand

Reviews of Draft UR BPO rules

Education

Education Group Co-chairs:

JPM and Vale

Bank and Corporate case

studies

Collaterals and Training

Accounting and Regulatory Treatment

Commercialisation

Commercialisation Group

Coordination: SWIFT

Bank-to-bank tests

Corporate on-boarding

Consultancy

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Group

Activities

Deliverables

ICC UR BPO Rules Timeline

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DATE MILESTONE

March 2012 First review by ICC BPO Consulting Group

End March 2012 Presentation to ICC Banking Commission in Doha

May 2012 Second review by ICC BPO Consulting Group

May 2012 Drafting Group review comments from Consulting Group

May 2012 Send draft version to National Committees

August 2012 Review of comments from ICC National Committees

September 2012 Drafting Group to issue revised version

November 2012 Full presentation of ICC UR BPO Rules to ICC Banking Commission

December 2012 Review of additional comments from ICC National Committees

January 2013 Drafting Group distribute proposed final version of ICC UR BPO Rules to National Committees

April 2013 Targeted approval at ICC Banking Commission

Agenda


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BPO Accounting Treatment Party Transaction flow Liability Accounting

(All) Obligor Bank(s) Confirming obligor role Contingent • Off Balance sheet

• Unfunded

Recipient Bank In case of “silent

confirmation” Contingent • Off Balance Sheet

• Unfunded

• Obligor Bank • Recipient Bank

(in case of “silent confirmation”)

Payment at sight after Dataset Match Report

End of liability End of liability



Deferred Payment Undertaking after

Dataset Match Report

Direct • On Balance Sheet • Unfunded



Discount of Deferred Payment Undertaking

Direct • On Balance Sheet • Funded

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BPO Capital Treatment • Many arguments in favour of similar treatment as

Commercial Letters of Credit – Contingent, self-liquidating instruments – Low losses (see ICC Trade Finance Default Register) – A BPO should not be treated as a (performance related) Guarantee or

Stand-By Letter of Credit as a Guarantee is not a payment instrument and BPO is a self-liquidating payment instrument

– A BPO should not be treated as a lending instrument as BPO is contingent and (initially) unfunded

– Capital treatment similar for the Obligor Bank(s) and the Recipient Bank (in case of “silent confirmation”)

Agenda


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Key benefits for the seller

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Cash flow

Optimization

Get paid on time Improve DSO and DIO

Mitigate payment default risk of OA Improve liquidity forecasts

Improve discrepancy management Reduce processing effort Syndicate payment risk

Supply Chain

Finance

Pre-/post shipment finance Alternative to credit insurance Extension of reverse factoring

Key benefits for the buyer

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Cash flow optimization

Control payment time execution

Optimize use of credit lines Pay key suppliers on time

Reduce administrative costs Reduce investigations & disputes

Outsource payables Processing

Supply Chain Finance

Extend payment terms (DPO) Negotiate commercial terms Reduce supplier default risk

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Easier access to risk / financing services

E-invoicing Approved Payables Financing

Payment processing

Today's data-driven invoice-based processing and financing services

Factoring

Current “e” services

Ordering of goods

Production of goods

Shipment of goods

Issuance of the invoice

Payment & cash management

Invoice Transport Documents

Approved Invoice Certificates Payment

Initiation

Payment assurance

Pre-shipment finance

Post-shipment finance

Tomorrow's data-driven risk mitigation and financing services using the Purchase Order

New “e” services

Timely Payment

Purchase Order

Agenda


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BP Petrochemicals

• 2010 Revenues of USD 14 billion

• Revenue created for approx. 50% in Asia

• Trade account receivables of EUR 1.4 billion (consolidated receivables only)

• More than 600 clients worldwide

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Key challenges

• Trade account receivables of EUR 1.4 billion (consolidated receivables only) • Competitive commodities market requires a secure and cheaper alternative to

L/Cs • About 50% of exposure on secured terms – typically interacting with around

50 banks • High processing and confirming costs (0,8% of transaction value in average) • LCs process limits commercial possibilities and reduces the competitiveness

of the offering • LCs administration weakens compliance under certain conditions • Reduced need for specialized LC training and specialized LC vetting

personnel

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Long, costly and cumbersome doc. credit process

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Purchase Order

L/C issuance and acceptance

Production Shipment Delivery

Fina

ncia

l Sup

ply

Cha

in

Phy

sica

l Sup

ply

Cha

in

Documents presentation and compliance verification

PO BOL Invoice

…..or storage at port of destination Delayed delivery

Documentation standards require buyer to send L/C much earlier than

the anticipated shipment date

… or risk due to a waiver

Re-route ships in case of refusal of

documents

L/C issuance and acceptance



Trade Post-Trade Pre-settlement Settlement T T+1 T+10 S > T+20

Buyer cannot free its credit limits

Payment

BPO based on transport & invoice data

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Seller Buyer

BPO Obligor Bank

BPO Recipient

Bank

Carriers Delivery of goods

1 Purchase order

Transport and invoice data

5 6 Transport and invoice data (match report)

7 Advise payment is due on agreed date 10 Transfer funds at maturity

2 Request BPO based on PO

3 Inform of BPO establishment

Use minimum fields

4 Shipment

Documents sent directly to the client

Shipping documents (BOL) immediately 8

Trade Services

Utility (TSU)

Established baseline BPO is

due

Trade Services

Utility (TSU)

9 Invoice and certificates (authenticated and legalized)

BPO establishment and obligation

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Buyer and seller agree on the BPO terms and the Buyer sends a purchase order to the seller

Buyer provides the minimum data from the PO and the BPO conditions to the Obligor bank

Seller confirms the data from the PO and the BPO conditions to the Recipient bank

If the submitted data matches on the TSU, the “baseline” is established. Buyer and Seller receive the matching report from their banks

Seller ships the goods to the port of destination

Seller provides the shipment and invoice data to its bank, which submits it to TSU for matching

Buyer receives a match report from its bank and is invited to accept mismatches, if any

Seller’s bank informs of the successful dataset match to the Seller

BPO is irrevocable but conditional (subject to the electronic matching of agreed datasets)

Seller sends the bill of lading immediately by courier to the Buyer (eventually with a copy to the Buyer) Seller sends the invoice and required certificates (authenticated and legalized as required) to the buyer so that he can receive the goods

On the due date, the Obligor bank debits the proceeds from Buyer’s account and remits the funds to the Recipient bank. The Recipient bank credits the seller’s account

BPO becomes operative and due according to the agreed payment terms

Bas

elin

e es

tabl

ishm

ent

Mat

chin

g

Settl

emen

t

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1

8

6

4

2

3

5

7

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Benefits

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• Get paid on time and avoid judicial proceeding • Easier access to banks to secure transactions • Easy to exercise tool for liquidity • Possibility to spread the risk with multiple obligors • Free up banking lines

Risk mitigation

• Leaner operations and improve speed of handling • Reduce the risk of discrepancies, limit to relevant trade information only • Quicker resolution of deviations (amendments) • Remove costs due to confirmation, vetting and presentation

Operational efficiency

• Reduce complexity – removal of paper trail • Reduce cost for customers due to vetting and presentation • Quicker assurance for buyers in terms of security of supply • Improve customer offer by allowing for flexible options

Enhance competitiveness

Agenda


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The leading and trusted authority for banking and trade finance

• Global standard setter and policy forum • Commercially oriented value proposition • Think tank for research and intelligence

ICC Banking Commission

5 Major Initiatives Undertaken 1. Human capital

• ICC, National Committees, Banking Commission • Banking: Advisory Board, Executive Committee, Secretariat • Roles and responsibilities

2. New products • Rule-drafting: Forfaiting, supply chain financing, ISBP • Market intelligence: ICC Surveys, ICC Register, etc.

3. Regulatory policy engagement • Leading voice for Basel III, KYC, sanctions, etc. • Basel, WTO, IMF, UN, MDBs, ECAs…

4. New sources of revenue and outreach • ICC Banking Academy • Regional Banking Commissions

5. Strengthen the value proposition

ICC BC Business Plan 2012-2015

The ICC Banking Commission has structured its strategy around the following service lines:

AREA 1: Traditional Trade Services

AREA 2: Open Account & Supply Chain Financing

AREA 3: Global Regulatory

AREA 4: Legal & Compliance

AREA 5: Special projects involving multilaterals, export

credit agencies and insurance, focused on emerging markets

Agenda


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Next steps for you

• Join the BPO Community (44 banks today)

• Test BPO with your correspondent banks (TSU)

• Engage with corporate clients

• Develop your business case and readiness plan

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Get ready now as ICC will launch UR BPO in Q2 2013

4 banks are live on BPO Banks with live transactions + 1 corporate case study

Live Banks Region Intra / Inter-bank transations

Locations of live corporate supply chains

Corporate case study

Bank of China APAC Intra in China Inter

CN Ito Yokado’s Chinese suppliers

Bank of Tokyo Mitsubishi UFJ

APAC Intra Inter

JP, HK, CN, TW Ito Yokado

Korea Exchange Bank

APAC Inter KR Automotive industry (in development)

Standard Chartered Bank

EMEA Intra BE, OM BP Chemicals Octal

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12 banks are ready for live use Banks ready to go live but with no live BPO transactions yet

• Bank al Etihad (Jordan) • Barclays • Byblos Bank (Lebanon) • Commercial Bank of Dubai • Commerzbank • Deutsche Bank • Hua Nan Bank (Taiwan) • J.P. Morgan • Kasikornbank (Thailand) • Siam Commercial Bank (Thailand) • Standard Bank of South Africa • Sumitomo Mitsui Banking Corporation (SMBC)

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A total of 44 banking groups have

confirmed their adoption of the BPO

This week’s BPO sessions

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Open Account Trade and the Bank Payment Obligation Wednesday 31 October 14:00 - 15:00 in Conference room 1

BPO by Bank of Tokyo Mitsubishi UFJ Tuesday 30 October 15:00 - 15:45 in SWIFT auditorium

BPO by Standard Chartered Bank and BP Chemicals Wednesday 31 October 10:45 - 11:45 in Hyatt Room 1

Main Conference

SWIFT@Sibos

Sibos ICC UR BPO briefing

Economy & Finance

open account trade

bank payment obligation

icc banking commission

ur bpo rules

obligor bank

recipient bank

match report

capital treatment