What is Trade Finance?

• Benefits of trade finance to businesses and banks
• Introduction to the trade cycle
• Incoterms 2010
  • Summary of terms
  • The advantages/disadvantages to Importer/Exporter in the use of Incoterms 2010
  • Principal methods of settlement
• General Risk Considerations
  • Trade finance products vs open account
  • Financial Crime Compliance – AML, CFT, and Sanctions
  • Know Your Customer (KYC) and Customer Due Diligence (CDD)
  • Correspondent Bank risk
  • Counterparty risk
  • Credit risk

Case Study: Short exercise to check to understand of Incoterms application.

Key characteristics of Commercial Documents used in international trade

• Invoices (commercial, tax, customs, consular, Pro-forma invoice)
• Marine/Ocean Bills of Lading
  • Title, transfer
  • Control of goods (transferable B/L v. straight consigned)
  • Delivery considerations
• Other forms of transport document
  • Multimodal Transport Document
  • Air Transport Document
  • Road, Rail or Inland Waterway Transport Documents
  • Non-negotiable bills of lading
• Insurance Policy/Certificate
• Other certificates (Certificate of Origin, Inspection Certificate, Phytosanitary, etc)
• Bills of exchange

Exercise – using examples of commercial documents to help participants to understand their technical content, the significance and importance of particular documents.

Core Trade Products

• Import / Export Documentary Collections
• Letters of Credit
• Guarantees

Import / Export Documentary Collections

• Principal parties (buyer, seller, presenting bank, remitting/collecting bank)
• Benefits to importers and exporters of Documentary Collections
• Relationship between principal and banks
• Role of banks (incl. correspondent banks / agency arrangements)
• Legal and practical issues re the duties of the banks involved in handling collections
• Conditions for release of documents
• Areas of risk:
  • Usance collections
  • Partial payments
  • Avalisation (so rare would exclude)
  • Release of goods on trust

• Procedures for Protest of Bill of Exchange (B/E) and underlying risks
• Complexities of the ICC Uniform Rules for Collection (URC 522)

Case Studies

1. a)  to consider the needs of an exporter or importer and suitability of using Documentary Collection in a cross-border transaction and / or
2. b)  to check understanding of the collections procedure and the practical application of the URC 522

Documentary Letters of Credit

• Principal parties (buyer, seller, issuing bank, advising bank, confirming bank)
• Benefits to importers and exporters of Documentary Letters of Credit
• Relationship between buyer, seller and banks
• Advantages / disadvantages of letters of credit
• Risk factors re issuing letters of credit
• The autonomy of letter of credit operations (Independence Principle)
• Importance of the application form (legal issues)
• Instructions to issue/amend credits
• Workability of the credit
• Jurisdiction

Introduction to the International Chamber of Commerce UCP 600 Rules:

• Structure and obligations under letter of credit;
• Availability of credits, expiry date and place for presentation
• Availability by payment, deferred payment, acceptance, deferred payment standard for examination of documents; dealing with discrepant documents, waiver and notice of refusal;

Examination of documents

• Key elements of the main articles of UCP 600
• The standard for examination of documents: “no conflict” rule – article 14
• Processing non-compliant documents as Nominated/Confirming Bank
• Processing non-compliant documents as Issuing Bank
• Risks arising from non-adherence to UCP 600
• Legal cases and ICC Banking Commission opinions
• DOCDEX – dispute settlement mechanism of ICC for trade finance
• Analysing irregularities in documents

International Standard Banking Practice ISBP 745 (2013 Rev)

• What constitutes an “alteration” or “addition” to a document, when and how should these be authenticated?
• How should documents be signed, if this is not explicitly stated in the credit?
• How should one handle typing errors on documents regarding the name and address, different addresses of same company, etc.?

Advising, confirming, reimbursing credits

• Obligations and Risks associated with the Advising Bank, Nominated Bank, Confirming Bank
• The use of the Bill of Exchange in Letters of Credit
• Application of the Uniform Rules for Bank-to-Bank Reimbursement ICC 725
• Assignment of procceds

Case Studies

1. a)  to consider the needs of an exporter or importer and suitability of using a Letter of Credit in a cross-border transaction and / or
2. b)  to check understanding of the collections procedure and the practical application of the UCP600

Other forms of Letter or Credit

A review of the purpose, procedure and risks associated with:

• Irrevocable / revocable
• Usance credits
• Transferable Credits
• Back-to-Back Credits
• Red and Green Clause Credits
• Revolving / Reinstatement Credits
• Standby Credits
• Synthetic Credits

Guarantees

• Types of guarantees:
  • Tender/bid bonds
  • Advance payment guarantees
  • Performance bonds
  • Retention money guarantees
  • Warranty Guarantees (Maintenance guarantees)
  • Bail bonds
  • Payment guarantees
  • Indemnities/counter guarantees
• Risk Assessment (including risk weighting)
• Wording of Guarantees
• Demand under guarantees: issues
• Extend or Pay demands
• Expiry and Cancellation Uniform Rules for Demand Guarantees 758: main principles, URDG 758 guarantee sample wording, sample clauses

Case Study to review guarantees which caused a loss to the bank. Discuss the practical application of URDG 758 and potential for use in local banking practice and legal jurisdictions.

Financial Crime Compliance

• Consituent parts (money laundering, terrorist financing, sanctions breaches)
• Current examples
• An introduction to the nature of compliance risk in cross border transactions
• Why are international trade transactions increasingly a target for abuse?
• The consequences of non-compliance (for banks, corporates and individuals)
• Risk assessment from FCC perspective

Case Study: Participants work in groups to consider the needs of various SMEs and to identify the appropriate product solution.

• Summary of day’s learning
• Opportunity to refresh clarify key points, clarify
• Review main learning points.

The Current Market Place

• Recent evolution and current developments
• The challenge of emerging markets
• The challenge of China
• Brexit
• President Trump
• New products
• The traditional three bands of clients: Global and Large Corporate, MME’s, the rest!
• Understanding trade finance at a fundamental level.’
• Typical users of Trade Finance products and services

Financial Crime Compliance & Sanctions

• Understanding the risk based approach
• Impact on Trade Finance
• TI, CPI and its impact
• FATF
• DDD and the need to obtain a clear line of sight across the value chain
• Money laundering methodologies
• Ghost payments and variations
• Under/over invoicing and variations
• Documentary fraud
• PEPS
• Sanctions
• Risk mitigation, management and transfer

Case Study: Delegates will be asked to consider a real case to identify FCC risks and suggest how they may have been managed and mitigated

Traditional Risks – The Critical Issues

• Understanding, identifying and managing risk
• Credit risk, Market risk & Operational risk
• Sovereign, Political / Country risk
• Institutional risk / Bank risk
• Corporate and other critical risks
• Importer and Exporter’s risk
• Other risks in the transaction and how to mitigate them (transport risk, warehousing, force majeure, etc.)
• Risk mitigation, management and transfer

Case Study: An example using three different payment methods. Delegates will be asked to identify and explain what type of client would choose one in preference to the other two and why, to illustrate risks in reality.

Review of Key Products

• How does the customer analyse his risk?
• Which products does he use and why?
• Payment in Advance
• Open Account
• Collections – Outward & Inward / Clean & Documentary
• Letters of Credit (covered in more detail below)
• Risks and opportunities
• Control possibilities

Case Study: Showing how clients sometimes see the world of risk in a different way to bankers. 

Supply Chain Management & Finance

• The origins of SCM and what does it mean in practice
• Understanding the issues in SCM – “the tug of war” between supplier & buyer
• Bringing about a “balance” between parties for effective processing
• Understanding about movement of ‘information’ ,’goods’ and ‘cash’
• Supply Chain Finance Main SCF models: accounts payable – centric, accounts receivable, BPO
• Review the risk aspects of SCF

Case Study: Showing how Reverse Factoring works and how both Buyer Centric and Seller Centric models are being employed.

Letters of Credit (L/Cs)

• Traditional L/C’sThe four contract concept
• Confirmations
• Red Clause
• Green clause
• Revolving L/Cs
• Evergreen
• Transferable L/Cs
• Back to Back L/C structures

Case Study: Showing how different types of LC’s are used, why this is the case and what difference it makes to the risk profile.

Standby Letters of Credit

• History and origin
• The dominant trade finance product
• Uses
• Risk management
• Issue and assessment
• Pricing
• Understanding the applicability of ISP98 and UCP 600 for standbys
• Fraud and unfair calling

Case Study: Using a standby in practice

Export Finance issues

• Looking at the big picture
• Understanding the purpose of borrowing
• Country risk issues
• The reality of title and control
• Negotiation under letters of credit
• Discounting of deferred payment L/C, acceptance credits (with or without recourse)

Case Study: Delegates are asked to consider how to fund an export order using different types of contract arrangements.

Controlling Credit Exposure – Formulating a Limit

• Understanding and explaining the trade cycle
• The use of time lines
• Assessing and appreciating funding gaps

Case Study: Using time lines and facility plotting to spot double finance and identify the actual funding gaps and customer needs.

Structuring Finance for the Trader

• Analysing the trade flows
• Assessing facility size and structure
• Specific lending with identifiable maturity dates
• Appreciating and controlling sources of repayment

Case Study: An example of a medium size business using structured finance.

Effective Use of Collections for Short-Term Finance

• Using collections as financing opportunities
• Identifying and mitigating risks
• Maintaining control

Supporting the Trader

• Using the goods as collateral
• Assessing the value of goods
• The value of pledges and trust receipts
• The need for structured lending

Case Study: How to use goods as security for a trade deal.

Warehousing of Goods

• Warehouse location
• Management assessment
• Legal frameworks
• Obtaining and retaining title and control
• Risks and responsibilities of Collateral Managers
• Cost versus control

Case Study: Warehousing in practice using a real example.

International Demand and Contract Guarantees / Bonds

• Scope and Application – an introduction (suretyship v. demand guarantee)
• Indemnities versus guarantees
• Different types – Bid, Performance, Advance payment, Warranty and Retention bonds
• Rules governing guarantees and bonds
• Legal jurisdiction and expiry date issues
• Value of using URDG 758 – ICC Rules for demand guarantees
• Impact of non bank competitors – COFACE, Euler Hermes

Case Study: Using these in practice.

Receivables Financing

• Mechanics of Factoring and Invoice Discounting
• Forfaiting – an important adjunct to the TF mechanism
• Role of Credit Insurance
• Mechanics of Securitisation
• FCC risks

Case Study: A real example showing how this makes a huge difference to working capital.

The Commodity Sector and its Players

• History and origins of the commodity industry
• Understanding the nature of ’commodities’
• Analysing the players – growers / producers; traders and end-users
• Financing of commodities
• Looking beyond the balance sheet
• Available documentation – taking and retaining title
• Commodity futures, options and derivatives
• Hedging – a critical process in commodity finance
• Role and function of the exchanges
• Main risks in the commodity trade (market, fraudulent practices, legal issues, recent legal cases)

Case study: A large scale commodity deal and how it can be funded at an acceptable level of risk

Countertrade

• Overview – when to use
• Pitfalls and complications
• Possible structures and Time management

Syndications

• When to syndicate
• Lead or participant role
• The completion from capital markets – high yield bonds
• Selling down exposure
• Impact of quasi-governmental agencies
• Risk/reward analysis