DMCC Tradeflow. Making assets out of your inventory. A Dubai Government initiative in response to real market needs.

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1 DMCC Tradeflow. Making assets out of your inventory. A Dubai Government initiative in response to real market needs.

2 Message from DMCC EXECUTIVE CHAIRMAN Ever since DMCC was established in 2002 by His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Prime Minister and Vice President of the UAE and Ruler of Dubai, we have dedicated our time and efforts to delivering on his vision for Dubai. DMCC has consistently led the way for the development of Dubai as a major international commodities trading hub, and our ability to adapt to the changing world has allowed us to position ourselves for the future even in times of uncertainty. Innovation and the foresight to spot the winds of change are part of our proud Emirati heritage. From the early pearl and mercantile trade, to the dredging of the creek and development of the Jebel Ali seaport and Dubai International Airport, Dubai has proven to be at the forefront of innovation throughout its existence. DMCC has continued this tradition of innovation with our infrastructure, regulation and services delivering the solutions for real market needs in the Emirate. The Global Multi Commodities Receipt, launched in 2004, was DMCC s first trade finance platform and was created to help stimulate the trade of commodities in the region. As industry demands changed, we reached out to financiers, storage providers and commodity owners to find out how we could use the GMR platform to suit their evolving requirements. Based on their feedback, we worked on expanding this product range to include international receipts and a Sharia-compliant component. The result was the launch of DMCC Tradeflow in February Dubai is now firmly established as part of the commodity cycle, acting as a gateway between the producing countries in Africa and consuming nations in Europe and Asia and as such, trade finance remains as important as ever. DMCC Tradeflow is our solution to actively stimulate the commodity trade finance sector and maintain its long-term sustainability in ever-changing market conditions. We look forward to enabling your business to succeed. Ahmed Bin Sulayem Executive Chairman, DMCC

3 His Highness Sheikh Mohammed Bin Rashid Al Maktoum Vice President & Prime Minister of the UAE and Ruler of Dubai Late Sheikh Zayed Bin Sultan Al Nahyan Founder and First President of the UAE His Highness Sheikh Khalifa Bin Zayed Al Nahyan President of the UAE and Ruler of Abu Dhabi "Dubai s varied economic activities depend on a policy to decrease dependence on oil as the sole source of income. We promote the development of the trade sector, agricultural reform, national industry and national and international investment." His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President & Prime Minister of the UAE and Ruler of Dubai

4 About DUBAI & TRADE Dubai s strong trading heritage, ranging from its well-established port to its logistical infrastructure, stems back to the seventh century when the Umayyads introduced Islam to the area. The entrepreneurial spirit of Dubai was born, completely revitalising the city and opening up trade routes to modern-day India, Pakistan and Iran. In the early 1900s, trade in and out of Dubai increased rapidly under the leadership of Sheikh Maktoum Bin Hasher. His vision to launch the most business friendly port in the lower Gulf was quickly realised by slashing fees and abolishing duties and taxes, turning Dubai into a free port and the dominant player in the region. Decades later, Sheikh Rashid Bin Mohammed Bin Rashid Al Maktoum was instrumental in modernising Sheikh Maktoum Bin Hasher s vision and in the mid-1950s ordered a critical innovation which enabled vessels of all sizes to dock at the port, resulting in an explosion in trading volumes and in particular the gold export market. Dubai Creek in 1960 s The discovery of oil over 30 years ago gave birth to an entire new industry in the UAE. It also transformed the country into the modern metropolis it is now, with a high standard of living and an open economy. Located at the crossroads of producing and consuming countries, Dubai was also ideally situated to act as a gateway to the global commodities market. However, it was crucial that the Emirate had the correct infrastructure that would attract industry participants to operate from the UAE and use Dubai as a base from which to tap into other markets. In order to develop Dubai as a key trade hub, Dubai s leadership invested their oil wealth back into the local economy by developing its logistics infrastructure. As a result, today Dubai is known as a world-class logistics corridor, a key link in the global transport and distribution system, and a destination of choice for companies seeking to capitalise on growth opportunities in the region. Dubai in 1990 s

5 Connecting the world of business through the global GATEWAY OF TRADE By the turn of the 20th century Dubai had established itself as a successful sea port and harbour. In the 1950s the late Ruler of Dubai, His Highness Sheikh Rashid bin Saeed Al Maktoum, took the decision to dredge the Creek. The project resulted in an increased volume of cargo within Dubai, strengthening Dubai s position as a major trading and re-export hub. In 1966, following the discovery of oil, Sheikh Rashid began the extensive development of infrastructure. The world s largest man-made harbour was constructed in Jebel Ali and Dubai International Airport extended their runway to accommodate any type of aircraft. The airport now connects over 140 destinations and Dubai s central location attracts businesses from every corner of the globe. A leading business hub with a flexible business environment and several financial leverages, including no corporate tax and over 20 free trade zones, Dubai has truly established itself as a city at the heart of world trade. The Emirate has proved its ability to cater to all industry needs from media to healthcare, through to technology, real estate and banking.

6 Toronto Moscow New York Barcelona London Geneva Paris Frankfurt Dubai s modern airports and cargo facilities are connecting to over 140 destinations Cairo Riyadh Karachi Mumbai Beijing Considering its strategic geographical position between East and West, Dubai ports and airports are an indispensable tool for driving economic growth and diversification Sao Paulo Singapore Cape Town Sydney Time required from Dubai to different major business hubs are: 1. New York - 13 hrs 2. Sao Paulo - 14 hrs 3. Toronto - 13 hrs 4. Cape Town - 9 hrs 5. Sydney - 13 hrs 6. Singapore - 7 hrs 7. Mumbai - 3 hrs 8. Karachi - 2 hrs 9. Beijing - 8 hrs 10. Moscow - 5 hrs 11. Riyadh - 2 hrs 12. Cairo - 4 hrs 13. Barcelona - 7 hrs 14. Paris - 7 hrs 15. Geneva - 7 hrs 16. London - 7 hrs 17. Frankfurt - 6 hrs

7 About DMCC In 2002, His Highness Sheikh Mohammed Bin Rashid Al Maktoum issued a decree to create a commodities centre to stimulate trade flows through the Emirates by providing the physical, market and financial infrastructure required. Today, the Dubai Multi Commodities Centre (DMCC) is the region s leading commodities marketplace and has successfully attracted key participants throughout the entire commodities sector value chain by offering a fit-for-purpose regulatory framework, modern infrastructure, freehold property, innovative products and value-added services. DMCC is also the master developer and licensing authority for the Jumeirah Lakes Towers (JLT) Free Zone, one of the largest, fastest growing mixed-use developments in Dubai. In addition to commodities companies, businesses ranging from shipping to recruitment, IT to advertising and fashion have chosen to establish themselves in the JLT Free Zone. As a 200 hectare, mixed-use waterfront master development with a prime central location on Sheikh Zayed Road, JLT nurtures both trade and community living through its commercial, residential and retail property offering. JLT-based companies enjoy highly attractive benefits under the free zone status, including 50-year guaranteed 0% corporate and personal income tax, 100% business ownership, full ownership of business premises, and a secure, regulated environment. Mission We are the Government of Dubai Authority dedicated to establishing Dubai as the global gateway for commodity trade. We enable our members to succeed through continuous innovation and delivery. Vision We are the world s leading commodity focused eco-system and an indispensable partner for our member companies. How we get there: People Partner Place

8 Collateral Based Financing STRUCTURES FOR COMMODITIES Inventory that is sitting idle is often viewed as an unproductive resource that will cost money in storage and insurance. There are, however, ways to make inventory work and turn these idle resources into assets. The first step, in order to realise these assets, is to register the ownership with a document of title. Possessing a document of title legally represents the ownership of the goods that are described within the document. This can come in the form of a warrant, which is issued by the warehouse keeper stating that the goods held in the warehouse are of the specified quantity and will remain so while stored at their facility. This warrant is then listed on a central registry, which means the goods are accounted for and secured against any damage or losses incurred by the warehouse. The concept of warehouse receipts or warrants has been around a long time. In the US, warehouse receipts have been widely utilised in agricultural trade, particularly in the cotton industry. The warehouses storing the cotton would issue negotiable warehouse receipts showing the weight, storage date and tare of the goods. In the US, a warehouse receipt is a document of title supported by legislation. By contrast, in the UK, a warehouse receipt is a non-negotiable instrument not considered as a document of title. A document of title in their jurisdiction comes in the form of a warehouse warrant issued by warehouses nominated by entities such as the London Metal Exchange. Therefore, the level of security banks feel when lending against warehouse receipts very much depends on the law in the jurisdiction of the country. The ability to represent the legal title of your goods provides the commodities industry with several trade enabling tools. Firstly, the ability to transfer ownership of the assets to another party without the goods ever leaving the storage facility. The assets can also be used as underlying collateral to secure more favourable financing, as it will significantly reduce risks for the banks, resulting in greater liquidity in the market. DMCC Tradeflow is Dubai s solution for this market need.

9 About DMCC TRADEFLOW It is universally accepted that there is a desperate need for liquidity in the marketplace but with the ongoing difficulties in measuring risk, banks and financiers are hesitant when considering the release of capital. The lack of regional trade finance vehicles in the market has resulted in a slowdown in intra-regional trade relations, which is naturally a cause of concern as it reflects the inability of regional players to live up to their full potential. In 2004 DMCC successfully developed and managed the Dubai Commodities Receipt (DCR). The DCR addressed a gap in the regional commodity trade finance industry by allowing storage operators the ability to issue electronic warehouse receipts on behalf of commodity owners with stored goods. The commodity owners could then pledge the receipts in favour of financiers in return for trade finance. Although the concept was already widely used and accepted in many other parts of the world, the DCR was the first warehouse receipt system to be introduced in Dubai and facilitated approximately one billion dollars worth of transactions across commodities such as oil, precious metals, steel, cotton and many agricultural products. In February 2012, DMCC launched an enhanced version of the DCR system under the new brand name system under the new brand name DMCC Tradeflow. The new platform has been developed with extensive interaction from current members alongside advice from key regional financiers and commodity owners. DMCC Tradeflow brings state-of-the-art security and technology, with increased functionality for users.

10 1 At Undisputed proof of ownership: THE DMCC TRADEFLOW CENTRAL REGISTRY the core of the platform stands the electronic central registry of ownership for commodities. This registry uses negotiable title documents called DMCC Tradeflow Warrants to provide interested parties with the undisputed proof of ownership and security interests attached to UAE-based inventories. This allows for constructive possession of commodities to be registered in one place through electronic title documents for the first time in the region. Document of title: the DMCC Tradeflow Warrant DMCC Tradeflow Warrants are electronic documents of title issued by warehouse operators. The warrants provide evidence that the specified commodities of the stated quantity and quality are being stored at a DMCC approved location. The warehouse operator warrants or guarantees to hold the stored commodity by way of safe custody implying that although they are legally liable for any value lost through theft or damage, they have no legal ownership of them. As such, in case of liquidation, the warehouse operator s creditors will be unable to seek recourse to the commodities stored since the legal title remains with the holder of the warrant - as registered on the DMCC Tradeflow Central Registry. Ownership of DMCC Tradeflow warrants can be electronically transferred between members using the web-based, secure interface.

11 2 Stimulating commodities trade by increasing liquidity: DMCC TRADEFLOW COLLATERAL BASED COMMODITY TRADE FINANCE The use of collateral management in trade finance is increasingly seen as a tool that gives financiers a way to reduce and mitigate risk and offers much needed capital relief. The changed financial environment combined with Basel II and III requirements have resulted in tightened liquidity across the commodities supply chain. These structures provide global financiers reassurance that their borrowers will not dispose of financed inventories without their knowledge and approval. Registering security interest over stored commodities: DMCC Tradeflow Pledges DMCC s Tradeflow Pledge structure allows commodity owners and their financiers to register enforceable pledges as collateral in return for working capital financing. A pledge is a form of possessory security over goods whereby beneficial ownership is transferred from one party to another. On DMCC Tradeflow, this allows commodity owners to essentially mortgage their goods in favour of financiers to guarantee a loan. The advantage of a pledge for financiers is that it creates a security interest over the assets, allowing them to be used to secure the performance of an obligation, i.e. a trade finance loan. As the financier has beneficial ownership of the goods, holding this security interest gives the financier certain preferential rights in the disposition of secured assets in cases of dispute.

12 PLEDGE STRUCTURE DIAGRAM Legal enforceability of pledges in Dubai: DMCC Tradeflow Regulations All members of DMCC Tradeflow are required to accept and adhere to the rules and regulations issued by DMCC. These rules clearly explain the roles and responsibilities of each member in their interaction with the system and each other. They also clarify the legal procedures that would be followed in case of default, which ensures a transparent dispute resolution in order to reduce risks and potential uncertainty for all parties. As an integral part of each pledge transaction, DMCC Tradeflow generates standardised electronic contracts that are recognised under UAE law and electronically signed by the members/ users of the system. These standardised contracts significantly reduce the legal costs associated with having individual contracts drawn up for each and every stage of a transaction.

13 3 Providing regional solutions to the Islamic financing industry: DMCC TRADEFLOW SHARIA COMPLIANT COMMODITY MURABAHA The strong growth of the global Islamic finance industry over the past few years has created an equally strong need for appropriate Sharia compliant infrastructure. One area in which this is particularly crucial is asset-backed transactions, particularly the significant Islamic interbank liquidity market conducted through Murabaha mechanisms. STEPS TO SHARIA COMPLIANT COMMODITY MURABAHA ON DMCC TRADEFLOW Such mechanisms require significant amounts of assets in order to underlie transactions, as well as platforms capable of providing title transfer of assets in a quick, efficient and most importantly, Sharia-compliant way. DMCC s close relationships with major commodity suppliers and DMCC Tradeflow s role as the central registry providing clear title of ownership of commodities, make a natural fit for meeting the Islamic finance industry s requirements. DMCC Tradeflow provides the right solution to the Islamic financing community through the offering of fully electronic Treasury Murabaha transactions supported by UAE-based assets, which meet the most stringent criteria of Sharia compliance. Islamic banks, their clients and commodity suppliers will all be able to access the system to electronically conduct their relevant roles in connection with a full Treasury Murabaha transaction, such as selling and buying assets and legal acceptance of the relevant contracts. All participants in Treasury Murabaha transactions are governed by Islamic rules and regulations as drawn up by DMCC in accordance with the principles of Sharia and compatibility with UAE law. OBLIGOR BANK Borrowing Bank issues a Promise to Purchase to an Islamic Lending Bank to buy commodities. COMMODITY ASSET POOL FINANCING BANK FINANCING BANK The Financing Bank, relying on the Promise to Purchase issued by the Obligor Bank, buys the relevant commodities from the commodity suppliers who have listed their commodities on DMCC Tradeflow.

14 Unprecedented Transparency: Availability of UAE based assets The Treasury Murabaha mechanism hosted on DMCC Tradeflow is the only one of its kind supported by assets physically located in the UAE. Major asset owners contribute a wide range of assets including oil products, and base metals, which are available to support Treasury Murabaha transactions. As assets are located within a region where the majority of Treasury Murabaha transactions take place, Sharia scholars are easily able to inspect the goods used in transactions. This, in addition to the use of DMCC s Central Registry, combined with DMCC Tradeflow Warrants, will further enhance integrity and transparency of the assets used for Treasury Murabaha transactions on DMCC Tradeflow. FINANCING BANK Having acquired the ownership and possession of the relevant commodities, the Financing Bank exercises its right under the Promise to Purchase and enters into a Murabaha contract with the Obligor Bank with immediate delivery of the title and possession of the relevant commodities through DMCC Tradeflow. OBLIGOR BANK OBLIGOR BANK OPEN MARKET The Obligor Bank having acquired the ownership and possession of the relevant commodities from the Financing Bank, is able to monetise them by selling such relevant commodities in the open market using DMCC Tradeflow. DMCC s Warehouse Inspection and Ratings Programme ensures that all storage facilities holding assets to be used in Treasury Murabaha transactions are Halal-certified facilities. Full Sharia Compliance: Fatwas DMCC has worked closely with the world s leading Sharia advisory and consultancy firm, Dar Al Sharia Legal & Financial Consultancy LLC, to ensure that the Treasury Murabaha mechanism hosted on DMCC Tradeflow complies with Sharia principles. The Sharia structure and process of DMCC Tradeflow with regard to the Islamic transactions has received a fatwa from Dr. Hussain Hamed Hassan, certifying that it is fully in accordance with Sharia principles. Dr. Hussain Hamed Hassan, Managing Director of Dar Al Sharia Legal & Financial Consultancy LLC, is considered the pioneer of modern Islamic banking, having shaped the industry since He is a guiding force to AAOIFI and IFSB, the standard setting bodies in Islamic finance, in addition to heading several Sharia Boards in the region including Islamic Development Bank and Dubai Islamic Bank.

15 4 Storage Risk Mitigation and Identification: DMCC TRADEFLOW WAREHOUSE INSPECTION AND RATINGS PROGRAMME Financiers are often reluctant to engage professional warehouse inspection services to inspect storage facilities holding inventory that will be pledged as part of collateral based financing. Due to the perceived storage risks, the number of banks that provide finance against assets are limited. This has resulted in the need for a cost-effective way to identify and mitigate any risks associated with the storage provider. In response to this market need, DMCC initiated a formal Warehouse Inspection and Ratings Programme to provide this service. The programme has a rating system whereby warehouses are first certified for DMCC Tradeflow then are awarded one to five stars based upon a set of detailed criteria and obligations. Establishing clear standards against which to assess potential risk offers financiers much needed reassurance when financing the stored goods. Commodity owners seeking finance options have the opportunity to select higher rated warehouses to store their goods which could potentially increase the prospects of securing financing. Warehouses also benefit from the programme by continually improving their rating and attracting new business. The DMCC Tradeflow Warehouse Inspection and Ratings Programme is the first of its kind anywhere in the world.

16 5 Request Serving the Commodities Trade Community: DMCC TRADEFLOW S OTHER PRODUCTS for Quote (RFQ) As part of the DMCC Tradeflow offering, a unique Request for Quote function has been developed to help further stimulate commodity trade finance. Owners of goods that are stored and represented by a DMCC Tradeflow Warrant can send electronic notifications to member financiers detailing the available goods and request a quote for financing. The Request for Quote function is available to all owners and secure notifications can be sent to an unlimited number of financiers. Along with helping owners secure financing, the Request for Quote service helps financiers identify potential market needs and new clients. Loans for Gold DMCC Tradeflow is used by the retail banking industry to facilitate loans for gold products. Retail customers of banks pledge their gold and jewellery as collateral in return for short term loans. Once the loans have been repaid, the goods are returned to the original customer. DMCC Tradeflow is used to book the pledges between the two parties and the Warrants are issued by the member vaults responsible for storing the goods. DGCX Deliveries The Dubai Gold and Commodities Exchange (DGCX) was launched in 2005 as the region s first commodity derivatives exchange. Today, DGCX is the region s largest and leading derivatives exchange, named Best Global Commodities Exchange by Global Banking and Finance review. In 2012, DGCX selected the DMCC Tradeflow system as the sole provider to handle all of the physical delivery needs. The DMCC Tradeflow Central Registry allows clearing members and trading participants of DGCX to transfer the title of stored goods under Warrant as physical settlement of trades and contract close. Escrow Services Physical commodity traders looking to add an additional layer of security when transacting with a new counterparty have the ability to use the DMCC Tradeflow Escrow Service. DMCC, as registrar, acts as a trusted party and facilitator for title transfer of ownership between two parties that may not necessarily have a direct trading partnership with each other. The goods under the DMCC Tradeflow Warrant are able to be placed in escrow and only released once payment is confirmed. Registry Search When requested by commodity traders, DMCC, as the administrator of DMCC Tradeflow, will provide an official DMCC Tradeflow Central Registry Extract. This report will detail all warranted inventory owned by the trader. It can be used as proof to potential financiers that goods are correctly stored and under warrant, and no other security interest has been registered against the inventory.

17 Call 800 DMCC (3622) from within the UAE or tradeflow@dmcc.ae