Article

by Robert Marchal (with contributions from David Hennah, Alan Wong and Urs Kern)

Readers of DCInsight have been able to follow the development of SWIFT's Trade Services Utility (TSU) since SWIFT's Trade Services Advisory Group (TSAG) met in 2002 and proposed the TSU to support innovative bank services in the trade supply chain in any or all of the following areas: financing, information services, risk management, insourcing and working capital management1. The first release of the TSU in April 2007 supported bank solutions based on purchase order services. Earlier DCInsight articles on this subject noted that "the TSU is a bank-to-bank solution. It does not encroach on the corporate/bank relationship. The TSU acts a vehicle for banks to have data matched via the SWIFTNet messaging infrastructure, using common standards and abiding by a common Rulebook." In short, the TSU is a collaborative, centralized matching engine designed to help banks meet the open account supply chain challenge. Banks can build individually on the core functionality of the TSU to offer competitive services designed to complement existing product offerings to their corporate customers.

The second major release of the TSU became commercially available in March 2009. This article brings you up to date with events and progress since then.

New signings

First, we have seen a flurry of new sign ings by banks from all over the world during recent months. The global community of TSU banks now well exceeds 100. Among the banks extending the TSU community beyond this landmark number of users are Barclays Commercial Bank, YapiKredi Bankasi and Banco de Crédito del Peru.

More fundamentally, we have continued to see significant progress in new TSU registrations in the Asia-Pacific region in the last nine months. New names include Guangdong Development Bank, Bank of East Asia, China Construction Bank Hong Kong, Bank of China Hong Kong, Taishin Bank, Mega International Commercial Bank and Shin Kong Bank.

What do these banks have in common? The new registrations are coming primarily from the greater China region where the banks see a perfect fit in using the TSU as an open account processing platform for transacting with one another.

Software

One of the unique features of the TSU is that the new TSU member does not have to deploy specialist software, such as SWIFT's Relationship Management Application (RMA), to control the traffic they exchange with their counterparty banks in the TSU com mu nity. Upon regis tra tion, SWIFT pro vides the user bank with a sim pleto- install Webbased interface which enables extensive testing and train ing to take place with a limited invest ment before the bank makes any strategic decisions regard ing the even tual integration of TSU functionality into its back office applications and processes.

Intra-Asian and China trade

In the aftermath of the financial crisis, the continued increase in intra-Asian trade is also one of the factors that has led to increased registrations. Financing is, no doubt, an integral part of the supply chain offering, given the fact that most of the exporters in Asia are SMEs for which keeping the cash flow afloat is key to success. One attraction of the TSU's Release 2 is the use of a Bank Payment Obligation (BPO) to facilitate alternative forms of financing for the cash-hungry SME exporters in Asia- Pacific (see below for more details).

Moreover, Asian character matching based on UTF8 coding is a new enhancement that Chinese banks anticipate will be one of the key new features of the TSU in driving traffic development in the domestic market in China. The use of the BPO with Asian character matching can potentially replace local letters of credit currently issued outside of SWIFT. This enhancement is being tested by SWIFT and is scheduled for commercial availability in January 2010.

The three major economies in North Asia (China, Japan and South Korea) continue to be major contributors in building TSU success in the region with solid pipelines and live deals being transacted.

The three Regional User Groups (Europe, the Middle East and Africa (EMEA), the Americas and Asia-Pacific) have continued to meet on a regular basis, with the second annual Global User Conference also taking place during SIBOS in Hong Kong in September. The participants have shared experiences and discussed product offerings based on the TSU. These meetings are also opportunities to network and initiate partnerships.

While live volumes remain low, we have seen a surge of test traffic since Release 2, clearly showing that a number of banks are working hard on to integrate the TSU into their product portfolio.

The BPO

Another important component of the TSU service is its legal framework or Rule book. On top of general SWIFT applications concerning financial institution adherence to SWIFT rules, the TSU is also governed by a set of financial institution-to-financial institution rules. These rules have been jointly developed by a group of trade practitioners and lawyers and have now been extended to cover the rules applicable to the BPO.

The BPO is an irrevocable undertaking by an obligor bank (or banks) to pay the recipient bank according to the terms of the established TSU baseline. This means that the BPO comes into force on the successful matching of data in the TSU. Alternatively, the buyer's bank and obligor bank can accept a mismatch, i.e., discrepancies, on or prior to the expiry date of the transaction. Nineteen under lying rules are included in the TSU Service Description. These rules describe the duties, rights and responsibilities of the different parties.

For example, the BPO is separate from and independent of any underlying commercial transaction and always relates to a single TSU transaction (e.g., purchase order). Furthermore, multiple parties can send a BPO for the same transaction (e.g., the buyer bank and a third party obligor bank or banks). The TSU application does not in itself create a bank payment obligation. The TSU application notifies involved banks of the BPO's existence, reflecting the involved banks' agreement to participate in a TSU transaction. A financial institution will account for the BPO as required by its regulators. This latter subject is expected to be tackled by groups of TSU user banks at a national level.

In the period until and including 2009, SWIFT facilitated several ongoing streams of activity on the BPO. These included the publication of some generic product descriptions that banks may commonly choose to offer in a TSU environment. Among the products identified are propositions for pre-shipment and post-shipment finance, as well as reverse factoring. Reference has also been made to TSU Payment/Collec tion Services, in which payment may automatically be triggered by data matching in the TSU, as well as trade management services that enable banks to in-source business processes from buyers and sellers in a cost-effective way.

A comprehensive review of the rules governing inter-bank obligations has been completed, and work has also been done collectively on the development of standard template clauses suitable for inclusion in customer agreements covering TSU-enabled services. These clauses may be adopted optionally by TSU-user banks for incorporation in their standard documentation.

SWIFT presented the concept of the BPO to the ICC Banking Commission in Brussels in late November as a first step towards eventually asking ICC formally to endorse the BPO as an accepted market practice. A body of evidence will be brought forward in 2010 to demonstrate how banks are making practical use of this new instrument in a live commercial environment.

Robert Marchal is Business Analyst/Standards Specialist at SWIFT in Belgium.
His e-mail is Robert. Marchal@swift.com

1.DCInsight, Vol. 10 No. 4, October-December 2004; Vol. 11 No. 3, July-September 2005; Vol. 12 No. 3, July-September 2006; Vol. 14 No. 3, January-March 2008; Vol. 15 No. 2, April-June 2009.