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Trade Finance

Bank Payment Obligation – January 2013

The landscape of world trade has changed dramatically during the past decade. The notion of geography and of a defined marketplace is becoming increasingly irrelevant as international trade continues to transform.  Widespread liberalisation in emerging markets combined with the pressures of globalisation and the internet have accelerated consolidation, specialisation and innovation.

Statistics show that the volume and value of international trade has grown and that there has been a significant shift away from the use of traditional trade instruments such as letters of credit, in favour of trading on open account. An open account transaction means goods are shipped and delivered before payment is due. It is now estimated that over 80% of global trade is conducted on an open account basis.  The market has therefore demanded new solutions to help deal with increasing cost pressures and changing risk dynamics. The main risk being the risk of default or delayed payment by the buyer. Under an open account trade, the entire risk in the transaction is borne by the seller since the payment is made by the buyer only after the latter has taken possession of the goods. 

The situation has lead to the development of the Bank Payment Obligation (BPO) by SWIFT and the ICC Banking Commission. By working together the two organisations will be leveraging their respective positions across the trade finance community. SWIFT has started rolling out its platform and increasing adoption by Banks. It has also signed a very important agreement with the ICC Banking Commission with both parties jointly undertaking to  produce a set of contractual rules on BPO. The two organisations are aiming to establish the payment method as a market-wide standard, with uniform rules and messaging protocols, and have now formed a working group in conjunction with 11 banks and two corporates – BP and Brazil’s Vale – that has been tasked with developing the rules that underpin the BPO. This set of contractual rules will establish uniformity of practice in the market adoption of the BPO very similar to the UCP 600 which are the most successful drafted rules by the ICC.

Justifying the need for the creation of BPO, Andre Casterman, Head and Banking, Trade and Supply Chain stated “Conditional payments like L/Cs are an important payment method as they offer the seller certainty of payment, however, inefficiencies in using L/Cs – whereby goods are commonly received before paperwork – as well as the risks of using open account, means corporates require a more efficient alternative for securing international trade transactions”. Forty five Banking Groups have already adopted BPO and four, Standard Chartered Bank, Bank of China, Bank of Tokyo Mitsubishi and Korea Exchange Bank have already gone live. During Sibos 2012 Casterman also provided an update regarding the confirmed that “The market is getting what we promised, which is a coherent set of ICC rules supported by ISO 20022 standards,” The BPO rules are expected to be approved during a media conference that will take place in Lisbon during the third week of April 2013.

The Bank Payment Obligation rules and the related ISO 20022 messaging standards will mean a strong foundations for banks to provide modern risk and financing services aligned with today’s technology evolution and addressing cost pressures in the face of increased automation and changes in the regulatory environment. BPO will also enable banks to mitigate the risks associated with international trade to the benefit of both buyers and sellers. BPO also enables flexible financing propositions across the supply chain, from pre-shipment to post-shipment, where the BPO may be used as collateral in each case.

Trade finance is a critical banking service supporting the world economy and it is vital that the financial industry is aligned on improved rules and tools in support of trading counter-parties. The BPO is an opportunity for a positive evolution of trade finance in an increasingly online industry. The market now eagerly awaits the ICC BPO Rulebook to be approved and released in Spring of 2013.