Article

by André Casterman

Autumn 2012 was an extensive travelling time for some trade finance bankers, including ICC Banking Commission Chairman's Kah Chye Tan and some of his Vice-Chairs.

Between end October and mid- November 2012, the ICC and SWIFT teams were increasing awareness of the new Bank Payment Obligation (BPO) rules at two flagship events: Sibos in Osaka and the ICC Banking Commission meeting in Mexico City. These events illustrated how effectively banks, corporates, ICC and SWIFT can work together in support of the further development of the trade industry.

Open account trade represents 90% of global trade flows. An open account transaction means that the goods, along with all the necessary documents, are shipped and delivered before payment is due, usually within a timeframe of 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter, as the buyer could default on its payment obligation after shipment of the goods.

Goals

As announced in September 2011 at SWIFT's annual conference (Sibos), ICC and SWIFT have set themselves an ambitious goal to introduce an innovative way for trading counterparties to secure and finance their open account trade transactions via their banking partners. The new instrument, called "Bank Payment Obligation" (BPO), will enable importers and exporters to involve their preferred banking partners in their trade transactions and obtain just-in-time risk and financing services. Based on standardized messaging and advanced transaction matching operated by SWIFT, the new instrument will pick up the pace of the financial supply chain in support of ever-accelerating physical supply chains.

Mexico meeting

ICC recently gathered trade industry executives and policymakers during at its first-ever Banking Commission meeting in Latin America. The event, hosted by ICC Mexico, aimed to review the detailed specifications of the new BPO instrument which is to be used by buyers and sellers as a new payment term.

In Mexico, Kah Chye Tan, Chair of the Banking Commission and Global Head of Trade and Working Capital at Barclays, explained the drivers for the trade industry: "It is our ambition to help banks support the expected growth of trade by better engaging in open account transactions. The BPO enables ondemand risk mitigation as well as pre/ post-shipment finance and will extend banks' supply chain finance offerings."

Dan Taylor, Vice-Chair of the ICC Banking Commission and Managing Director at JP Morgan, who co-chairs the BPO Project at the Commission, confirmed the rationale for ICC and SWIFT to work together: "Combining the ICC rules and arbitration role with SWIFT's correspondent banking network and matching technologies offers the required legal and technology foundations for banks to secure and finance open account trade transactions in a standardized multi-bank environment".

During the Banking Commission meeting, Gary Collyer, Senior Technical Advisor, ICC Banking Commission, who chairs the BPO Legal Drafting Group, presented Draft 2 of the Uniform Rules for Bank Payment Obligation (URBPO) with David Meynell, Director, Trade Finance Product Management, Financial Institutions at Deutsche Bank, and Robert Marchal, Principal Standards Specialist at SWIFT. Collyer is enthusiastic about the progress of the group: "We have been drafting the UR BPO rules since July 2011 and are on track for presenting a draft for adoption at our next meeting in April 2013."

Yesica González Pérez, Secretary General, ICC Mexico, is gearing up efforts to drive BPO adoption: "We see the BPO as a major product innovation for the trade market and have set up a special project within ICC Mexico to help Mexican corporates and banks adopt the new instrument".

Sibos

At Sibos in Osaka, which took place late October, Yumiko Hoshino, Executive Officer in the Overseas Department at Ito-Yokado, the 7&I Holdings Group superstore operator, which is the first importer to use the BPO, explained how the new instrument would be an integral part of doing business in Asia: "Exporters want faster payment and less paper, so our suppliers who are using this love it," she said. Ito-Yokado has benefited from the BPO for over a year thanks to the leadership of Bank of Tokyo Mitsubishi UFJ.

Shigeki Kawabata, General Manager, Transaction Banking Division, Bank of Tokyo-Mitsubishi UFJ, who has been an advocate of the BPO from the outset, agreed: "Leadership will be a significant success factor to drive change and we are happy to be first on the Asian market with the BPO".

Ashutosh Kumar, Global Head, Corporate Cash and Trade at Standard Chartered Bank, confirmed the interest from the corporate market: "So far, interest in the BPO has been from large corporates, but it should also be a useful mechanism for SMEs to obtain supply chain funding more easily. SMEs are often good at what they do, but don't have strong balance sheets."

Challenges

The BPO demonstrates how bank-led innovation can be delivered efficiently at industry level when banks work with the right standardization bodies, i.e., ICC and SWIFT.

At SWIFT, a strategic priority is to innovate in our core markets such as correspondent banking. The BPO enables banks to enrich their correspondent banking practices in support of their competitive transaction banking services.

The next challenge for early adopter banks (see the list of 16 banks on page 11) is to engage with additional corporate users in order to deliver on the promises of this innovation to the corporate world. The ICC and SWIFT teams will therefore focus on growing adoption and acceptance of this new instrument at industry level. The April 2013 Banking Commission meeting in Lisbon will be a key milestone to establish the new URBPO rules on the market.

André Casterman is Head of Corporate and Supply Chain Markets at SWIFT, a member of the Executive Committee of the ICC Banking Commission and Co-Chair of ICC's BPO Project. His e-mail is andre.casterman@swift.com