Payment Obligation IIBLP - 2012 Singapore Annual LC Survey Conference David Dobbing SWIFT Standards
Agenda Introduction How it works Uniform Rules for Payment Obligation Adoption and Case Studies 2
Introduction How it works Uniform Rules for Payment Obligation Adoption and Case Studies 3
What is SWIFT? SWIFT in numbers 4.43 billion messages per year 10,118 customers 210 countries and territories 2,000 employees Average daily traffic 17.56 million messages 44% Platform 6% 1% Trade 49% Last peak day 20.002 million messages 1 st June 2012
The current instruments Contract Contract Buyer Seller Buyer Documents Seller Documents Application Letter of Credit Documents Advice Documents Market Trend Open Account LC Issuing Issuance LC Advising Buyer s Seller s Payment risk / financing services based on paper document processing Payment services limited to payment processing. If any risk, Credit Insurance or Payment Guarantee is added 5
The opportunity for banks Contract Contract Buyer Documents Seller Buyer Documents Seller Data Payment Obligation Data Data -assisted open account Open Account Obligor Recipient Buyer s Seller s Payment Payment risk / financing services based on electronic trade data services limited to payment processing The BPO enables bank-assisted Open Account trade 6
The Payment Obligation (BPO) A BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after successful electronic matching of data according to an industry-wide set of rules. Therefore, a BPO offers: An assurance of payment Risk mitigation for all parties Possible use as collateral for finance An alternative instrument for trade settlement 7
Key features of the BPO Payment Assurance Receivables finance Payment Obligation Structured data and e-matching Payables finance Risk mitigation 8
Introduction How it works Uniform Rules for Payment Obligation Adoption and Case Studies 9
Buyer Establishment of a BPO in a TMA 1. Contract 5. Shipment & Documents Seller TSU 2. PO Submission 9. Payment BPO established due TMA 9. Payment 6. Data Submission 2. PO Confirmation 9. Payment Buyer s = Obligor TMA = Transaction Matching Application Seller s = Recipient
The baseline gathers the matching conditions using data extracted from trade documents Purchase order A BPO is an optional part of a TMA Baseline Baseline Matching conditions Commercial data set Transport data set Insurance data set Certificates data set Invoice Air Waybill (AWB), Bill of Lading (BOL), Insurance document Certificate document 11
The BPO transaction lifecycle Purchase order data Transport and Invoice data BPO establishment Data Set Matching Initial Baseline Submissions Baseline Match report BPO irrevocable & conditional to matching of specified data Dataset submission and reports Baseline amendments Mismatch acceptance or rejection Payment Obligation due (at sight or deferred) Inside scope of TMA Payment Payment due Payment Cash reporting Outside scope of TMA 12
Industry Standards for Traditional Trade UCP 600 URDG 758 ISP98 MT 798 Documents MT 7XX MT 798 Documents 1 2 3 Buyer Buyer s bank(s) Seller s bank(s) Seller SWIFT's MT 7xx are industry owned, technology neutral standards in support of ICC's rules for L/Cs, Standby L/Cs and Demand Guarantees FIN MT 7xx FIN MT 798 FileAct 13
Industry Standards for BPO Public Domain Payment Obligation 1 2 3 Buyer Seller Commercial Any channel / any format / any solution portal SWIFT's SCORE Paper Trade Txn Matching Scheme SWIFT's Trade Services Utility (TSU) Any inter-bank scheme based on ISO 20022 messages & rules Any channel / any format / any solution portal SWIFT's SCORE Paper 14
Introduction How it works Uniform Rules for Payment Obligation Adoption and Case Studies 15
ICC / SWIFT Cooperation Co-chairs ICC BPO Working Group: Dan Taylor, Executive Director J.P. Morgan André Casterman, Head of ing and Trade Solutions, SWIFT Objective Sub-groups Timeline Establish BPO as a technology neutral and industry owned instrument Legal Education Commercialisation Target publication Q1 2013 16
ICC UR BPO Rules Timeline DATE March 2012 End March 2012 May 2012 May 2012 May 2012 August 2012 September 2012 November 2012 December 2012 January 2013 March / April 2013 MILESTONE First review by ICC BPO Consulting Group Presentation to ICC ing Commission in Doha Second review by ICC BPO Consulting Group Drafting Group review comments from Consulting Group Send draft version to National Committees Review of comments from ICC National Committees Drafting Group to issue revised version Full presentation of ICC BPO Rules to ICC ing Commission Review of additional comments from ICC National Committees Drafting Group distribute proposed final version of ICCBPO Rules to National Committees Targeted approval at ICC ing Commission 17
Draft ICC Uniform Rules for Payment Obligations Article 1 Scope Article 2 Application Article 3 General Definitions Article 4 Message Definitions Article 5 Interpretations Article 6 Payment Obligations vs. Contracts Article 7 Data v. Goods, Services or Performance Article 8 Expiry Date and Submission Article 9 Role of an Involved Article 10 Undertaking of an Obligor Article 11 Amendments Article 12 Charges Article 13 Disclaimer on Effectiveness of Data Article 14 Force Majeure Article 15 Unavailability of the Transaction Matching Application Article 16 Applicable Law Article 17 Assignment of Proceeds ICC Uniform Rules for Payment Obligations 18
Introduction How it works Uniform Rules for Payment Obligation Adoption and Case Studies 19
38 banks adopting BPO (update as at 20 June 2012) Including 14 from the top 20 Trade banks 20
Live BP Chemicals case SCB offers BPO to replace confirmed L/Cs Company profile 2010 Revenues of USD 14 billion Revenue created for approx. 50% in Asia Trade account receivables of EUR 1.4 billion (consolidated receivables only) More than 600 clients worldwide Challenges About 50% of exposure on secured terms Competitive commodities market requires a secure and cheaper alternative to L/Cs High processing and confirming costs (0,8% of transaction value) LCs process limits commercial possibilities and weakens compliance under certain conditions Key benefits Get paid on time and avoid judicial proceedings Reduce complexity removal of paper trail Limit to relevant trade information only Reduce cost by removing vetting activities and presentation assistance Improve customer offer by allowing for flexible options Improve speed of handling discrepancies Reduce the risk of discrepancies Reduce need for confirmation cost by being able to tap larger pools. Free up banking lines. Easy to exercise tool for liquidity Easier access to banks to secure transactions Possibility to spread the risk with multiple obligors Avoid unnecessary paper flows Gains expected greater than $1m worldwide but most of the upside lies in more marginal income 21
Multi-bank export to China at Vale Proof-of-concept (ongoing) BPO Manufacturers TSU BPO Recipient s BPO Obligor branches 22
Thank you 23