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Opinion Piece Supply Chain Finance and ICC Rules
1. espite the crisis of
D
the past two years,
the industry has
continued to innovate
in financial supply chain
management to enhance value for trading
counterparties and improve efficiency.
Banks recognise that the tightening
of credit globally represents both a
short-term challenge and a medium-
term business opportunity. Although
the majority of cross-border open
account trade is conducted corporate-
to-corporate, evidence suggests that a
significant percentage will migrate to a
bank-assisted model over the coming
years. Corporates and in some countries
regulators have voiced their demand
for banks to provide greater innovation
through bank-intermediated supply chain
solutions.
According to various studies, there is
at least USD 400 billion trapped in the
working capital cycle of corporates.
Historically, cash management and
trade have been housed in separate
departments within banks. Indeed, there
has been limited attempt to align the
centralised management of cash with
the often decentralised management of
Collaborative supply chain finance
A few more steps to go
In recent decades, banks have successfully developed industry-wide collaborative
solutions in traditional trade finance. André Casterman, head of trade and supply
chain, SWIFT, argues that the challenge now is to extend those best practices to
supply chain finance and deliver improved services to buyers and suppliers.
18 Dialogue Q4 2010 Join the dialogue at: www.swiftcommunity.net/dialogue
2. Opinion – André Casterman, SWIFT
A set of ICC rules
Figure 1: BPO information flows
governing collaborative
supply chain finance will
be a key milestone for the
trade banks as such rules
will offer a legally binding,
valid and enforceable
risk mitigation instrument
for financing open
account transactions.
André Casterman, SWIFT
Physical presentation of Electronic presentation of
compliant documents compliant data
trade. However, from a working capital The voice of the customers buyer and not the supplier. As a result a
perspective, cash and trade clearly Declining to accept paper and invoices buyer-driven receivable programme is less
converge in their impact on the cash in PDF format is already a reality in some complex than other structures and funding
conversion cycle (Days Sales Outstanding countries. Large corporations such as is likely to be less expensive for suppliers
+ Days Inventory Outstanding – Days UPM and Kone are Nordic examples of where the buyer’s credit is stronger than
Payables Outstanding). It is estimated buyers that have publicly announced that that of its suppliers. The benefit to suppliers
that companies that optimise their cash they will no longer accept paper from their also feeds back as a benefit to buyers in
conversion cycle can reduce their working suppliers. Electronic invoicing has proven terms of better relationships with suppliers
capital requirements by as much as 40%. its value but only represents a first step to and a reduction in possible financial
There is no doubt that supply chain link up the financial supply chain with the weakness/instability of suppliers. The study
finance represents a major opportunity for physical supply chain, as transaction data also concluded that supply chain finance
banks to generate revenue and increase is automatically reconciled with inventories. structures have developed to suit a variety
liquidity in the market. It represents the When intermediated via banks, electronic of needs and that no one structure should
most prominent example of open account invoices enable financing opportunities on be singled out as the preferred option.
services directly linked to the merger both sides of the supply chain – the buyer In order to offer such open account
between cash and trade. and its suppliers. financing services in support of
With close to 90% of global trade A recent study initiated by the Bank of international supply chains, the buyer’s
being transacted on open account, England and published by the Association bank is dependent on industry-wide best
banks have had an increased focus on of Corporate Treasurers (ACT) concluded practices, similar to today’s UCP600, to
how to intermediate and finance those that supply chain finance, in particular work cost effectively with the suppliers’
transactions. In order to deploy such buyer-driven receivables programmes, banks and indirectly reach the suppliers.
services globally though, banks need a offers opportunities to expand lending
cost-effective network and legally binding to smaller and mid-tier companies, while Integrating innovation into today’s
collaborative model, such as those the larger companies – the ‘buyers’ – can best practices
existing for documentary trade, in order to play a significant role to the benefit of their For decades, banks have built efficient
engage with dozens, if not hundreds, of supply chains. In this case, the funding networks of partner banks to carry out
correspondent banks at acceptable cost. is based on the credit standing of the a variety of financial transactions. Even
Join the dialogue at: www.swiftcommunity.net/dialogue Dialogue Q4 2010 19
3. Opinion – André Casterman, SWIFT
global banks with a presence in dozens Re-using SWIFT to implement new
of countries around the world recognise instruments such as the BPO represents a global
the need for such partner networks. As
an example, Citibank recently referred
and cost-effective solution for trade banks.
on gtnews.com to its network of 3,000 André Casterman, SWIFT
banks covering 100 countries for trade
services. In order to leverage those The ICC Banking Commission has transactions amongst trade banks who
networks for supply chain finance, banks traditionally been the leading, global exchange close to 200,000 trade finance
now need collaborative market practices rule-making body for the banking messages on a daily basis. Re-using SWIFT
and operational rules similar to those industry, producing universally accepted to implement a new instrument such as the
developed over the recent decades to rules and guidelines for international BPO represents a global and cost-effective
conduct traditional trade business. banking practice, notably letters of credit, technical solution for trade banks. This
In the traditional world of the letter of credit demand guarantees and bank-to-bank is the intended role of the Trade Services
(L/C), an obligation is placed on the issuing reimbursement. It is widely recognised that Utility (TSU), which provides an inter-bank
bank to pay the beneficiary, subject to the ICC’s voluntary market-based approaches communications platform in support of
presentation of compliant documentation. have led to best practices in trade finance. collaborative supply chain services.
Until now, there has been no such equivalent At the ICC Banking Commission Combining the use of the SWIFT with
instrument to enable an exporter to trade meetings of November 2009 and extended ICC rules will offer banks the
on open account with the same degree of September 2010, major trade banks ideal technical, operational and legal
confidence that payment will be executed in presented their progress in deploying framework to roll out innovative services
accordance with the terms of the contract. supply chain finance services to to their corporate customers. This is now
Banks have attempted to plug the gap corporate customers in a global and seriously progressing through SWIFT’s BPO
through the issuance of conditional payment collaborative way using the BPO. The Commercialisation Group which gathers
guarantees or standby letters of credit and time has come for the ICC Banking 18 trade banks. Banks just have a few
have also developed a new instrument: the Commission to embrace the BPO rules, more steps to go in order to move from the
Bank Payment Obligation (BPO). The BPO and help the industry establish best proven concepts and available BPO rules to
is an inter-bank instrument as it places an practices in supply chain finance. A set of enabling the majority of trade banks to offer
obligation on the issuing bank to pay the ICC rules governing collaborative supply innovative financing services to the benefit
receiving bank, subject to the presentation of chain finance will be a key milestone for of their customers’ supply chains. Major
compliant data (See figure 1). the trade banks as such rules will offer a global and regional banks have anticipated
In placing reliance on this guarantee of legally binding, valid and enforceable risk the opportunity and will demonstrate
payment, banks are better able to develop mitigation instrument for financing open their new supply chain finance services in
alternative forms of supply chain financing account transactions and will remove the Amsterdam as part of the Sibos Trade and
solutions, mapped against the matching of need for individual bilateral agreements Supply Chain stream.
data which is consistent with the movement between correspondent banks.
of goods along the physical supply chain. Join the debate at Sibos!
A role for SWIFT
A role for the ICC Banking SWIFT also has a major role to play. As Practical finance in an open account
Commission part of its mandate to bring the financial world
As part of its mandate to be a leading community together to work collaboratively Tuesday 26 October – 09:00-10:00
forum for the banking industry and its to shape market practice, define standards
goal of determining the ways banking will and consider solutions to issues of mutual Optimising working capital efficiency:
be conducted in the future, the Banking interest, SWIFT is ideally placed to help The integration of cash and trade
Commission of the International Chamber banks extend services from traditional Tuesday 26 October – 16:00-17:00
of Commerce (ICC) aims to develop new trade finance to supply chain finance.
projects to account for new practices, SWIFT’s FIN messaging service today For the full details on the Trade
such as supply chain finance, e-trade and facilitates the exchange of L/Cs, demand and Supply Chain stream, go to
open account trading. guarantee and documentary collection www.sibos2010.com
20 Dialogue Q4 2010 Join the dialogue at: www.swiftcommunity.net/dialogue