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Appointed as Chair of the ICC Banking Commission in September 2010, Tan Kah Chye is the Global Head of Trade and Working Capital at Barclays Corporate in London. Prior to joining Barclays in 2011, he spent six years at Standard Chartered Bank as the Global Head of Corporate Trade and Cash

DCI: You became chair of the Banking Commission a few months ago. Was there anything about the Commission that surprised you?

Tan Kah Chye: What most impressed me was the dedication of the Banking Commission members, especially the non-bank members, those who have been previously associated with banks or who have worked in banks but no longer do so. They are contributing their time and resources, even their own personal finance, for the well-being of the Commission and the general well-being of the industry.

I also give full credit, not only to the Banking Commission, but equally to the Asian Development Bank, which is a partner in the Global Trade Finance Registry aimed at collecting data on trade finance defaults to provide solid evidence to regulators. This project has propelled the Banking Commission to a different level and engaged it with the wider community.

DCI: The Commission had been accused in the past as being dominated by its European members, but now it seems that Asia is playing a larger role in its membership. What do you attribute that to?

Tan Kah Chye: I think that is a reflection of the underlying economic situation. As Asian trade flows become more robust, as Asian banks leave more important footprints, it is only natural that our membership reflects these changing trends.

This will not change overnight. There are a lot of Chinese banks that attend the Commission meetings, but they have a language handicap. In the next five years, we will see more Korean and Japanese banks that have overcome this language barrier, and that will change things.

DCI: The Commission has been very active in advising the Basel Committee on Banking Supervision with regard to its proposals on trade finance. Are you satisfied with its latest proposals?

Tan Kah Chye: Let me put it this way. I am satisfied with the level of engagement of ICC with Basel III. We have extended the Banking Commission's engagement, not only in the banking area but in the regulatory space as well. I am happy from one perspective, and I believe I have reasons to be happier from other perspectives as well.

I am happy because there's been progress with regulators, particularly in recognizing the importance of global trade, not just for the banking and trade finance sectors, but overall - in job creation, in sustaining emerging markets and so forth. This is a step in the right direction.

With regard to the specific changes that have been put in place, again, there are some steps in the right direction, but I think we have only touched the tip of the iceberg of what needs to be done. There are a lot more very important things to be accomplished.

The removal of the 360-day maturity flow for trade finance transactions is good news. Whilst trade finance is usually short-term in nature, based on between 0 to 180 days maturity, the original Basel proposals applied a one-year maturity floor for all lending facilities. Since capital requirements (naturally) increase with maturity length, the capital costs of trade financing with a one-year floor would have been artificially inflated as a result.

What is of great concern is that the proposed credit conversion factor (CCF) does not make sense. The CCF, which is used to calculate the potential future credit exposure for off-balance sheet (i.e., contingent) items, would be raised to 100% from the 20% under Basel II. This and other points need to be refined. I feel that if we do not tackle those issues sooner rather than later we will see a contraction in the availability of trade in emerging markets, even before the full implementation of Basel III.

DCI: If the Basel Committee's proposals go into effect, what will be the impact on small and medium-sized enterprises and small and medium-sized banks?

Tan Kah Chye: It will not be very pretty at all. I was just speaking to a very large clothes manufacturer. The company obviously outsources the production of these clothes to suppliers from Pakistan, Hungary, China and Indonesia. I think it is important to realize that compared with all these suppliers, or the farmers who grow the wheat or soya, etc., we are very fortunate. We all have salaries to be able to live comfortably.

But a lot of these SMEs work on very thin margins. The slightest increase in financing costs that they have to pay could wipe out their profit margins. It's a question whether they can stay in business or not. It has nothing do with whether the bank is properly capitalized or about the bank's liquidity ratio. It all boils down to the question of whether they can continue to operate at all.

DCI: In that connection, you mentioned earlier the Banking Commission, along with the ADB, has set up the Trade Finance Default Register to provide data on the defaults that banks suffer on trade finance transactions. The data so far shows there is little risk of loss on these transactions. Why is that the case?

Tan Kah Chye: First, it should be said that the Register has been set up to provide regulators with precise data on the level of defaults on trade finance transactions. And it is encouraging to know that the level of loss on these is very low despite the three years of the crisis we have been going through. The latest figures from the Register, in which the Banking Commission surveyed over five million trade finance transactions, showed a loss rate of 0.058%; for export confirmed L/Cs, 0.282% (or 0.008%); for standbys and guarantees, 0.010%; for import loans, 0.124% (corporate risk) and 0.293% (bank risk); for export loans, 0.168% (corporate) and 0.023% (bank).

I find it difficult to explain to my clients why I have to put a 100% CCF when there is such a low loss rate.

One reason the default levels are so law is that generally we are not financing billion-dollar projects like building a nuclear plant in the middle of Asia. We are talking of transactions generally involving thousands of dollars that go through the system every day. You have to look at the trade finance business as a jumbo credit card business. Most people pay their credit card bills because if you don't pay them on a monthly basis, the credit card company will shut down your credit source. It is no different with trade finance.. We use the trade finance facility for daily purchase and daily sales. If it is not paid the next month, the bank will shut it down.

Exporters and importers know very well that there is a need to repay the bank on a monthly basis in order to keep their credit line open.

DCI: The Commission has also been working with SWIFT on the so-called Bank Payment Obligation (BPO), which, for the time being, is a SWIFT product comprising an irrevocable undertaking by an obligor bank (or banks) to pay the recipient based on an electronic exchange of data. Would you foresee eventually an ICC set of rules for the BPO?

Tan Kah Chye: I think so. That is where we are heading. Introducing a new product in the market place is not without its risks. If we do not introduce new open account products, I think trade finance will lose its relevance over time. By and large, the letter of credit business falls by about 10% every year, which also means that the bulk of trade is done on open account. Unless we provide a new payment concept in the open space, I believe we would lose our relevance in trade finance.

DCI:Does that mean that the BPO might replace the letter of credit and the UCP at some future date?

Tan Kah Chye: Not at all. Coins will disappear before letters of credit disappear. With all the technological advance in our banking space, do you think coins will disappear? This is because letters of credit, just like coins and like paper money, serve a specific need. In the decades ahead, I don't see the letter of credit going away. Its usage will become more and more refined, and I personally believe it will be used more and more by target groups of commodity traders or in trade flows that involve a large amount of money.

DCI: So, in your view, the electronic use of data is one of the waves of the future.

Tan Kah Chye: I think so, and I believe trade finance will embrace it. We have to help our clients to trade in a much more efficient manner, and the BPO is one of the ways we can do this.

DCI: Looking at the Commission's plans, it seems you are expanding far beyond a rulemaking role in trade finance to consider other issues, such as open account, as you just mentioned, supply train finance, terrorist financing, credit insurance and the like. Are you concerned that taking on so many other projects might dilute the rulemaking role the Commission has been known for?

Tan Kah Chye: No, I don't think so. The rule-making function, especially the well established rules on letters of credit, collections and guarantees, is here to stay. This provides us with a solid foundation to enable us to expand beyond what we are doing so well. I don't see a situation where what we are doing for the future will replace what we are doing now and have done in the past.

DCI: Finally, looking down the road, say, five years from now, what changes would you see in the Commission's work, in its set of priorities?

Tan Kah Chye: I strongly believe that five years from now, you will see the Banking Commission support more programs beyond our traditional strong role in the letters of credit, guarantees and collections. There are many institutions out there that would like to work with ICC. I see that the commission will expand its reach within the circle of trade finance beyond rule making into more policy work.

I also believe that ICC will become stronger for it. ICC as an institution has a great history; it's an organization that's widely appreciated by the trade community because of its work in the past and the work that we have done in the last 12 months. And it will be appreciated by the work we do in the future.

Tan Kah Chye's e-mail is kahchye.tan@barclays.com