This document discusses trade finance operations from a solutions perspective. It notes that trade finance is often overlooked within banks and trade operations are undervalued. However, traditional trade products can still provide value when viewed as part of business solutions for clients. Taking a holistic view of the trade finance business and understanding client needs from a solutions perspective can set a constructive way forward. The document emphasizes looking beyond individual transactions to understand how trade products and operations address client business objectives.

1. Trade Finance Operations
A Solutions View on Traditional Trade Products
Beirut, Lebanon, March 2010
Alexander R. Malaket, CITP, President
OPUS Advisory Services International Inc.

2. Summary
 Trade finance is often “lost” in a bank, and trade operations is undervalued
in the trade finance value proposition
 Innovations in trade finance, coupled with the profile gained since
September 2008, have highlighted the importance to global business
 Traditional products still add value: Even more so, as part of a business
solution!
 A holistic view of the trade finance business, within banks, together with a
solutions view of client needs, will set a constructive way forward
Trade Ops Staff: Look Beyond the Documents to the Business Solution!

3. We could say this today, too…!
“Short-term credit/trade finance has been associated
with the expansion of international trade in the past
century, and has in general been considered as a
routine operation, providing fluidity and security to
the movement of goods and services. Short-term
finance is the true life-line of international trade.”
Improving the Availability of Trade Finance
During Financial Crises
WTO Publications, 2003
The current crisis has generated unprecedented profile for Trade Finance

4. Yet, Trade Finance is often “Lost” in a Bank…
“We have excellent profile in the Bank: our division head reports
directly to the vice-chair, and often helps us make the case for trade
finance”
“…support from the Bank’s executive? Well, the Board will leave us
alone as long as we are making money…”
“Our chairman recently briefed the CEO of a major global client on
what we believe is a key trend in trade finance. That kind of senior-level
communication is invaluable..”
…and Trade Finance Operations even more so!

5. Trade Finance as a Business
 Mature business, established product offerings and shared practices
across the globe. Some innovation
 Credit-driven, with four main pillars: payments, financing, risk
mitigation and information
 Highly commoditized despite complexity and expertise
 High fixed-cost business, increasing margin and profitability
compression
 Value & profitability to banks – P&L – is very poorly understood
 Increasing demands related to compliance, globally
 Internally fragmented: Sales & Operations rarely in optimal
alignment

6. Trade Operations: Undervalued Asset
“I don’t care if you have a bunch of hamsters in the back-office processing the
transactions, as long as the client-facing system looks good and we bring in the
business”
- Senior Trade Executive, New York, circa 1998
“Whenever I ask a bit deeper question about the operational side of the issue,
people are stuck…from the operational side, their know-how is very poor.
Reporting & booking is very, very important. You might end up with a very bad
working capital structure, or a worsening of return on invested capital. This
is a point which blocks the deal, where we end up with no transaction at all.”
- AGM Finance, Istanbul, 2010

7. Trade Operations: Linking Product & Relationship
Relationship
Proven ?
TE Open Account
LE
SO
OB Collections
Evolving
L/C
New
Expertise
Low Medium High
New relationship, low expertise in trade,
represents highest risk, all else being equal
This model looked obsolete, but traditional products/features are back

8. Every Trade Finance Product…
…Provides some combination of:
 Payment Facilitation
 Financing
 Risk Mitigation
 Information
Including the emerging Supply Chain Finance & Working Capital Solutions

9. To Illustrate: Documentary Credits
Sales Contract and
Delivery of Goods
Exporter
Importer
(Seller/Beneficiary)
(Buyer/Applicant)
Exporter
Importer Documents,
Payment, Exchange for
Exchange for Payment
Documents
Verification & Transmission of
Documents, Remittance of Funds
Issuing Bank Advising Bank
(Confirming Bank)

10. Documentary Credits
 Documentary Credits are typically used between trading partners wishing to
ensure mutual security in a transaction
 They may also be required as the basis for financing; Banks will often
discount or advance funds due under a Letter of Credit. The need to use
L/C’s may arise out of financial arrangements independent of the
buyer/seller relationship (to access FX, for example)
 Banks have extensive and well-established roles and obligations to ensure
that the terms and conditions of these instruments are met
 The Issuing Bank structures and issues the Letter of Credit on behalf of the
Applicant, but the Credit, once issued, represents a "promise to pay" by the
Issuing Bank

11. Documentary Credits
 The Advising Bank receives, authenticates and verifies the L/C, then
“Advises" it to the exporter
 Documentary Credits may include a separate payment undertaking by a
Confirming Bank, which may be sought by the exporter
 Discrepancies in the Shipping Documents against the L/C terms can cause
the transaction to fail, or they may be waived to permit conclusion of the
transaction. 60-70% of documents tendered by exporters under L/C's have
some type of discrepancy
 Governed by the Uniform Customs and Practice for Documentary Credits
(UCP 600), International Chamber of Commerce, Paris, and periodic
revisions thereto

12. Documentary Credits: Back-to-Back
Master = Collateral
Back-
Back-
Master
Master to
to
L/C
L/C Back
Back
L/C
L/C
Sales Contract and Sales Contract and
Delivery of Goods Exporter Delivery of Goods
(Seller/Beneficiary)
Importer Exporter Becomes Importer Exporter
(Seller/Beneficiary) (Seller/Beneficiary)
(Buyer/Applicant) Importer/Applicant (Buyer/Applicant)
Exporter Exporter
Importer Documents, Importer Documents,
Payment, Exchange for Payment, Exchange for
Exchange for Payment Exchange for Payment
Documents Documents
Verification & Transmission of Verification & Transmission of
Documents, Remittance of Funds Documents, Remittance of Funds
Issuing Bank Advising Bank Issuing Bank Advising Bank
(Confirming Bank) (Confirming Bank)
…which also offer some uniquely useful & flexible features

13. Trade Products & Operations: A Solution View
 Trade financiers – including Operations Specialists – need to look beyond
the flow of documents and the processing of transactions
 This is a business solution for trade clients
 Once such a view is adopted, it is much easier to take an integrated
approach to trade finance – where sales/relationship specialists AND
operations specialists work together
 Look to the future: if you process documents, you shuffle paper. If you
provide a client solution, you create value

14. The L/C as a Risk Mitigation Solution
Commercial Risk
Political/Country
Risk
Importer Exporter
(Buyer/Applicant) (Seller/Beneficiary)
Issuing Bank Advising Bank
(Confirming Bank)
Bank Risk

15. The L/C as a Risk Mitigation Solution
Importer ECA Cover Importer
(Buyer/Applicant) (Buyer/Applicant)
Payment type/timing
Exporter
Exporter
(Seller/Beneficiary) Incoterm (Seller/Beneficiary)
L/C
Issuing Bank Issuing Bank
Confirmed L/C
Advising Bank Guarantee/IFI Programs
Advising Bank
(Confirming Bank) (Confirming Bank)
Confirmed L/C
Confirmed L/C
Country 1 Payment Terms Country 2
ECA Cover

16. The L/C as a Financing Solution
ECA Cover
UCP ECA Cover
Negotiations Contracting L/C Issuance Document Shipment Settlement
Preparation
Payment Terms Bank Re-Finance
Pre-shipment
TF as a competitive Finance Buyer Credit
advantage Invoice Financing/
Factoring
Financing shifts the timing of Financial Flows & Risks between parties
Importer/Buyer Exporter/Seller

17. The L/C as a Financing Solution
 Warehouse receipt financing: Pre-shipment collateralized loan, using goods stored
in independent warehouse
 Trust Receipt Financing: Financing of the importer after the release of the Bill of
Lading and the goods, on the basis of a trusted relationship and the expectation of
repayment after sale
 Financing based on a Banker’s Acceptance: tenor, discount rate – can finance the
beneficiary/exporter, or either Bank
 Financing of foreign receivables – transactionally or on a ‘pooled’ basis: advance a
percentage of the receivables, with full recourse
 Factoring: purchase of invoices on a non-recourse basis; factors must conduct
effective credit assessments, therefore often become very involved in the Exporter’s
credit analysis and bookkeeping
 Aval: The act of having a third party (usually a bank) guarantee the obligations of a
buyer to a seller per the terms of a contract such as a promissory note or purchase
agreement.

18. The Client View: Solution, not Product!
‘We take a ten-year view of our trade banking relationships, assess the
direction of the Bank and the compatibility of our value systems…’
‘Open Account is increasingly important to us, but the products and
services available simply do not meet our needs….
‘We are in a highly competitive and volatile commodity business. If I have to operate 24/7
to meet the needs of my clients across the globe, my trade bank has to keep up’
‘We are not interested in technology for its own sake. If the tool adds value, we
will look at it, however, our processes in L/C transactions are optimized to the
point where we prefer to use letters of credit than to shift to Open Account, or
some other option’
The last speaker claims to process 20,000 transactions/year with 2 FTEs

19. The Solution View Links to TF Ops
Trade Bank Client Organization
Finance, Treasury
Sales and/or O
B
Structured Trade J
E Functions
C Supporting
Channels T
International Client Supply Chain
I
V Trade
Trade Services E
S
Operations
Traffic Dept.,
Business Objectives/Solutions P.O. Processing
Integrated Trade Finance Model
Holistic approach with broad access
Channels for client information, to Client Organization
Internal communications and staffing
Service delivery based on client objectives
And business solutions OPUS Advisory, 2004

20. Operations & the Client/Solution Connection
 Trade operations capabilities are expensive to maintain
 IT implementations can cost up to US $30 Million
 Technology solutions from TradeCard to TSU are still working to
“virtualize” some or all of the trade transaction flow
 Staff shortages have been an issue, though the crisis & resulting
exit of banks from trade finance has mitigated this issue
 Staff development is critical: timelines vary from 5-7 YEARS to 6
MONTHS (Consider the CDCS Program)
 Productivity among trade banks can vary by 700%
 Compliance is a complex and increasingly critical issue in trade
finance
Response to these issues determines success in client solutioning

21. Client Solutions & Compliance
The Boarder
Bank Regulations Commercial Regs KYC OFAC BIS Environmental Regs Foreign Regs
Advising Bank Exporter Importer
(Confirming Bank) Insourcing Bank Issuing Bank
(Seller/Beneficiary) (Buyer/Applicant)
 Limited understanding of trade
among auditors & compliance specialists
 Lack of clarity about the nature of
transactions & their associated risk
 Limited communication & MIS
specific compliance issues
“The only way we can be fully compliant today, is to turn off the lights, close the door and go home”
- Senior European Trade Banker, 2006

22. Bottom Line?
Trade Operations:
P & L: Is the Business Is the Model Effective &
Profitable? Leveraged?
RM’s & Sales: Does Trade
Have the Necessary Profile? Client Value:
Do Clients See a
Business Solution?
Trade Operations is an important piece of the puzzle: Leverage an Undervalued Asset!

23. Thank You.