Trade Services Utility (TSU) Bank Payment Obligation (BPO)

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1 Trade Services Utility () Bank Payment Obligation (BPO) Case Study First Forfaiting on /BPO in the world Vale International S.A. The Bank of Tokyo-Mitsubishi UFJ, Ltd. SWIFT

2 Vale s Challenges and Benefits Company Profile 2012 Revenues of USD 46.5 billion Main product Iron ore (68.2%) Approximately 100 clients worldwide (Iron Ore) Main market is China (34%) Challenges Competitive commodities market requires a secure and cheaper alternative to L/Cs L/Cs at sight for USD 18 billion with Chinese clients DSO (Days Sales Outstanding) is between 25 and 30 days Key Benefits Reduce the DSO by approx. 10 days (including internal processes efficiency gains) with a financial gain over USD 37 million/year Freeing up Working Capital USD 600 million Reduce costs for customers Reduce document delivery costs Reduce the risk of discrepancies Improve access to Trade Financing products to our customers Reduced environmental impact - reducing paper usage in extra copies of the shipping documents for the banks 2

3 BTMU s Challenges and Benefits BTMU s Strengths Largest global network of any Japanese financial group Strong credit rating Pioneer for the /BPO business in Japan and across Asia Winning new clients in new markets: BTMU can offer -based services as a new non-traditional trade settlement service New opportunity to provide trade & supply chain finance services Challenges Maintain the trade business Provide a new range of solutions to service the open account market Provide more process efficiency, but without losing the business information Key Benefits Open door to new business opportunities Provide quicker Account Receivable / Payable Provide easier and faster operations Meet the market requirement for banks to collaborate more on risk and client on-boarding No original documents handling, no paper checking. Automated solutions Better efficiency in operation. Easier and faster operation for banks Reduce costs of document handling Reduce costs for skilled human resources 3

4 Case Study : First FFT on /BPO in the world In July 2013, The Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) arranged a new /BPO settlement service with Vale International S.A. (Vale) BTMU is the first bank in the world to provide Forfaiting (FFT) on /BPO: upon seller s request, the bank purchases an export receivable (Open Account) with BPO at a discount with no recourse to the seller BTMU Singapore branch executed FFT on the same day of /BPO data matching with BTMU Bangkok branch through system, which was all completed on the same day Vale presented the dataset information Vale saved approx. 10 days and gained from increased safety, operational streamlining & cost reduction Normal L/C FFT FFT on /BPO 1 Sales contract Supplier (Exporter) 4 Export goods Buyer (Importer) 3 Notice of L/C opening 5 Export doc 7 Assignment of A/R (NR: Non-Recourse) 8 Discounted payment (Principal interest) 9 Settlement of fund on due date 2 L/C application LC Advising Bank (Exporter s BK) 6 Notice of acceptance 5 L/C Issuing Bank (Importer s BK) 3 L/C open 1 Purchase Order (P/O) Vale Int l (Exporter) Buyer (Importer) 4 Export goods & Dispatch shipping doc (Original) 2 P/O data 4 Shipping data 8 Assignment of A/R (NR) (After data matching) 9 Discounted payment (Principal interest) 10 Settlement of fund on due date 7 Notify matching result 2 P/O data BTMU SGP system 3 Input P/O data BTMU BKK 3 Check P/O data 5 Input shipping data 6 Notify matching result 4

5 Key Features of FFT on /BPO Subject Main function FFT Trigger Type of risk to mitigate Type of BPO Obligation Documents Rules Fees Remarks Description Importer s Bank guarantees the payment of the importer Exporter s Bank purchases export receivable (Open Account) with BPO at discount, non-recourse to the seller (exporter), upon seller s request Successful data matching on SWIFT system according to the baseline agreed between all the parties Buyer s credit risk and insufficient fund risk, payment delay risk Primary Obligation Originals are exchanged between importer and exporter ICC URBPO (Uniform Rules for Bank Payment Obligation) Similar as L/C FFT Wording of BPO is mentioned in P/O as the payment method for settlement safety 5

6 2nd Stage 1st Stage BTMU s Set-up for Live Usage 1 st Stage: BTMU makes presentation to Vale and Vale expresses interest 2 nd Stage: BTMU and Vale co-work to ask importers to introduce /BPO 1 Brazil, SGP Tokyo BKK Tokyo Importer Presentation to Vale 2 Internal Discussion 3 Soft Working Mandate 4 Discuss Appropriate Transaction for shifting /BPO 5 6 Instruction to make presentation to importer Presentation Discussion between Exporter and Importer supported by BTMU 8 7 Internal Discussion /BPO Contract 10 /BPO Contract 9 6

7 Contracts and URBPO Buyer Purchase order: BPO is one option of payment conditions Seller / Exporter Payment Service Agreement BPO Agreement Payment Service Agreement BPO Agreement Buyer s bank In Thailand Seller s bank in Singapore No additional bilateral agreement is required URBPO adopted by ICC Correspondent banking contract 7

8 BTMU s Global /BPO Network BTMU Locations Offering /BPO (As of July2013) Live Ready Testing Beijing Guangzhou Shanghai Tokyo Hong Kong Bangkok Kuala Lumpur Taipei Manila Jakarta Singapore Santiago Sao Paulo Buenos Aires Sydney 8

9 Why /BPO now? Increasing & diversifying trade with emerging countries Increasing trade risk & workload of trade operation Sophistication of trade control demands (Operational streamlining, Safety and early settlement, Cost reduction ) Importer Demands Reduce number of L/C transactions Accelerate A/R reconciliation Reduce settlement period to support suppliers working capital needs Use a trade portal with end-to-end service To improve visibility and traceability on trade control Exporter Demands Reduce number of L/C transactions Reduce costs related to L/C (e.f. discrepancy fees) Reduce document handling operations for D/A and for export bills for collection Use a trade portal with end-to-end service To improve visibility and traceability on trade control 9

10 Customers Benefit #1 #1 : Operational Streamlining Importers Benefit Easy procedure for BPO issuing Reduce operational burden of treating complicated L/C and trade documents Smooth reconciliation of payment & A/P (Account Payable) through prompt import data receipt Increase possibility of earlier taking import goods Increase chance of enhancing better relationship with exporter by diversifying settlement method Exporters Benefit Decrease shipping documents presented to banks in traditional documentary settlement Reduce operational burden of creating draft and shipping documents Reduce discrepancy workload The bank bears responsibility for any oversights Reduce workload and operation time for documents checking Mitigate risk of importer cancelling order or changing order 10

11 Customers Benefit #2 #2 : Safety and Early Settlement Importers Benefit Safer than open account payment Improve traceability (Importer could make payment after confirming import goods data) Decrease discrepancies arose from importers operation for early L/C issuing Early Settlement (Importer could issue BPO just after having P/O with exporter on settlement) Exporters Benefit Increase possibility of early fund collection Improve traceability (Exporter could ask importer clearly to execute payment after confirming data matching or acceptance of data mismatching by importer) Speedy settlement by decreasing discrepancies (Data matching point is limited on in compare with traditional documents checking) In case of BPO, the credit risk is transferred from importer to the obligor bank 11

12 Customers Benefit #3 #3 : Cost Reduction Importers Benefit Decrease inter-office cost through import operational streamlining Increase possibility to decrease banking charge (e.f. L/G, T/R) to receive import goods Importer could have chance to negotiate better terms and conditions through early settlement Decrease import financing cost by effective usage of import credit facility Exporters Benefit Decrease inter-office cost through export operational streamlining Reducing the DSO (Days Sales Outstanding) and freeing up working capital through early fund collection Chance to decrease various banking charge like discrepancy fee, L/C advising charge, postage etc Reduce finance cost by using BPO related trade financing 12

13 BTMU operational flows for the /BPO IMPORTER IMPORT BANK EXPORT BANK EXPORTER P/O Copy 2 1 Data Data Input on Input BPO issuance operation (utlize LC framework) BPO MATCHING 3 Data Data resubmission on Input P/O Copy (Contract Info) Matched Contract Data (Contract Info) BPO Advice Original documents to be sent directly from Exporter to Importer Shipment 4 Data Input for Bills Bought Ship Doc Copies Shipping Document Ship Doc Originals 7 Arrival Notice 6 Operation for Settlement of Import B/R (Shipping Info) Operation for B/R (Bills for receivable) Arrival 8 BPO balance deduct Operation MATCHING Payment/ settlement Match/ Accept (Shipping Info) 5 9 Operation for Bills Bought (withbpo) Operation for settlment of Bills Bought Receive Funds 13

14 Comparing the Flows Flow chart of A/S L/C Flow chart of Importer Import Bank Export Bank Exporter IMPORTER Importer's Bank Exporter's Bank EXPORTER Trade Contract Purchase Order Trade Contract Trade Contract Purchase Order Trade Contract Prepare LC LC Apply LC Appl Send MT70X SWIFT Receive MT70X LC ADV. LC ADVICE Ship Arrangement P/O Copy Notice Data Input (Contract Info) MATCHING Data Input (Contract Info) Notice P/O Copy Applicatio n Order for settlement Imp Doc Arrival Imp Doc Receive Imp Arrival Advice Document Delivery Doc Checking Settlement Operation Imp Doc Release Receive Import Doc Send MT40X & 20X Dispatch Export Doc ReceiveM T40X & 20X Doc Checking Receive Payment B/C Appl Credit BL&INV Credit for Bills for Collection Prepare Ship Doc Present Ship Doc Arrival Notice Automatic Payment (Import Settlement without L/C) (Shipping Info) Settlement Operation Matched Contract Data MATCHING Data Input (Shipping Info) Operation for Receiving the Payment B/C Notice Ship Doc Copy Shipment Shipping Document Present Copy Receive Payment Vale saved approx. 10 days and gained from increased safety, operational streamlining & cost reduction 14

15 Disclaimer The information herein is provided for information purposes only, and is not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. Neither this nor any other communication prepared by The Bank of Tokyo-Mitsubishi UFJ, Ltd. (collectively with its various offices and affiliates, "BTMU") is or should be construed as investment advice, a recommendation to enter into a particular transaction or pursue a particular strategy, or any statement as to the likelihood that a particular transaction or strategy will be effective in light of your business objectives or operations. Before entering into any particular transaction, you are advised to obtain such independent financial, legal, accounting and other advice as may be appropriate under the circumstances. In any event, any decision to enter into a transaction will be yours alone, not based on information prepared or provided by BTMU. BTMU hereby disclaims any responsibility to you concerning the characterization or identification of terms, conditions, and legal or accounting or other issues or risks that may arise in connection with any particular transaction or business strategy. Note that BTMU may have issued, and may in the future issue, other reports that are inconsistent with or that reach conclusions different from the information set forth herein. Such other reports, if any, reflect the different assumptions, views and/or analytical methods of the advisors who prepared them, and BTMU is under no obligation to ensure that such other reports are brought to your attention. The Bank retains copyright to this report and no part of this report may be reproduced or re distributed without the written permission of the Bank. The Bank expressly prohibits the distribution or re-distribution of this report to any parties, via the Internet or otherwise and the Bank, its head office, branches, subsidiaries or affiliates accepts no liability whatsoever to any third parties resulting from such distribution or re-distribution. 15

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