Opus Presentation For Bny Mellon Beirut Operations Event 2010 Final

Trade Finance Operations

Beirut, Lebanon, March 2010

A Solutions View on Traditional Trade Products

Alexander R. Malaket, CITP, PresidentOPUS Advisory Services International Inc.

Summary

Trade finance is often “lost” in a bank, and trade operations is undervaluedin the trade finance value proposition

Innovations in trade finance, coupled with the profile gained sinceSeptember 2008, have highlighted the importance to global business

Traditional products still add value: Even more so, as part of a businesssolution!

A holistic view of the trade finance business, within banks, together with asolutions view of client needs, will set a constructive way forward

Trade Ops Staff: Look Beyond the Documents to the Business Solution!

“Short-term credit/trade finance has been associated

with the expansion of international trade in the past

century, and has in general been considered as a

routine operation, providing fluidity and security to

the movement of goods and services. Short-term

finance is the true life-line of international trade.”

Improving the Availability of Trade FinanceDuring Financial CrisesWTO Publications, 2003

The current crisis has generated unprecedented profile for Trade Finance

We could say this today, too…!

“We have excellent profile in the Bank: our division head reportsdirectly to the vice-chair, and often helps us make the case for tradefinance”

“…support from the Bank’s executive? Well, the Board will leave usalone as long as we are making money…”

“Our chairman recently briefed the CEO of a major global client onwhat we believe is a key trend in trade finance. That kind of senior-levelcommunication is invaluable..”

Yet, Trade Finance is often “Lost” in a Bank…

…and Trade Finance Operations even more so!

Mature business, established product offerings and shared practicesacross the globe. Some innovation

Credit-driven, with four main pillars: payments, financing, riskmitigation and information

Highly commoditized despite complexity and expertise

High fixed-cost business, increasing margin and profitabilitycompression

Value & profitability to banks – P&L – is very poorly understood

Increasing demands related to compliance, globally

Internally fragmented: Sales & Operations rarely in optimalalignment

Trade Finance as a Business

“I don’t care if you have a bunch of hamsters in the back-office processing thetransactions, as long as the client-facing system looks good and we bring in thebusiness”

Trade Operations: Undervalued Asset

- Senior Trade Executive, New York, circa 1998

“Whenever I ask a bit deeper question about the operational side of the issue,people are stuck…from the operational side, their know-how is very poor.Reporting & booking is very, very important. You might end up with a very badworking capital structure, or a worsening of return on invested capital. Thisis a point which blocks the deal, where we end up with no transaction at all.”

- AGM Finance, Istanbul, 2010

Low Medium High

Relationship

Expertise

New

Proven

Evolving

L/C

Collections

Open Account

OBSOLETE?

New relationship, low expertise in trade,represents highest risk, all else being equal

Low Medium High

Relationship

Expertise

New

Proven

Evolving

L/C

Collections

Open Account

OBSOLETE?

New relationship, low expertise in trade,represents highest risk, all else being equal

Trade Operations: Linking Product & Relationship

This model looked obsolete, but traditional products/features are back

…Provides some combination of:

Payment Facilitation

Financing

Risk Mitigation

Information

Every Trade Finance Product…

Including the emerging Supply Chain Finance & Working Capital Solutions

Importer(Buyer/Applicant)

Exporter(Seller/Beneficiary)

Advising Bank(Confirming Bank)

Issuing Bank

Sales Contract andDelivery of Goods

Verification & Transmission ofDocuments, Remittance of Funds

ImporterPayment,

Exchange forDocuments

ExporterDocuments,

Exchange forPayment

To Illustrate: Documentary Credits

Documentary Credits are typically used between trading partners wishing toensure mutual security in a transaction

They may also be required as the basis for financing; Banks will oftendiscount or advance funds due under a Letter of Credit. The need to useL/C’s may arise out of financial arrangements independent of thebuyer/seller relationship (to access FX, for example)

Banks have extensive and well-established roles and obligations to ensurethat the terms and conditions of these instruments are met

The Issuing Bank structures and issues the Letter of Credit on behalf of theApplicant, but the Credit, once issued, represents a "promise to pay" by theIssuing Bank

Documentary Credits

The Advising Bank receives, authenticates and verifies the L/C, then“Advises" it to the exporter

Documentary Credits may include a separate payment undertaking by aConfirming Bank, which may be sought by the exporter

Discrepancies in the Shipping Documents against the L/C terms can causethe transaction to fail, or they may be waived to permit conclusion of thetransaction. 60-70% of documents tendered by exporters under L/C's havesome type of discrepancy

Governed by the Uniform Customs and Practice for Documentary Credits(UCP 600), International Chamber of Commerce, Paris, and periodicrevisions thereto

Documentary Credits




Issuing Bank



ImporterPayment,


ExporterDocuments,

Exchange forPayment




Issuing Bank



ImporterPayment,


ExporterDocuments,

Exchange forPayment

MasterL/C

MasterL/C

Back-to

BackL/C

Back-to

BackL/C


BecomesImporter/Applicant

Master = Collateral

Documentary Credits: Back-to-Back

…which also offer some uniquely useful & flexible features

Trade financiers – including Operations Specialists – need to look beyondthe flow of documents and the processing of transactions

This is a business solution for trade clients

Once such a view is adopted, it is much easier to take an integratedapproach to trade finance – where sales/relationship specialists ANDoperations specialists work together

Look to the future: if you process documents, you shuffle paper. If youprovide a client solution, you create value

Trade Products & Operations: A Solution View

The L/C as a Risk Mitigation Solution




Issuing Bank

Political/CountryRisk

Commercial Risk

Bank Risk




Issuing Bank

Political/CountryRisk

Commercial Risk

Bank Risk

The L/C as a Risk Mitigation Solution





Issuing Bank

Country 1


Issuing Bank

Country 2


Payment type/timing

Confirmed L/C

L/C

Confirmed L/C

Payment Terms

Confirmed L/C

Incoterm

ECA Cover

Guarantee/IFI Programs

ECA Cover Importer(Buyer/Applicant)




Issuing Bank

Country 1


Issuing Bank

Country 2


Payment type/timing

Confirmed L/C

L/C

Confirmed L/C

Payment Terms

Confirmed L/C

Incoterm

ECA Cover

Guarantee/IFI Programs

ECA Cover

The L/C as a Financing Solution

Negotiations Contracting L/C Issuance DocumentPreparation

Shipment Settlement

TF as a competitiveadvantage

Payment Terms Bank Re-Finance

Invoice Financing/Factoring

Pre-shipmentFinance Buyer Credit

ECA Cover

ECA CoverUCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties

Negotiations Contracting L/C Issuance DocumentPreparation

Shipment Settlement

TF as a competitiveadvantage

Payment Terms Bank Re-Finance

Invoice Financing/Factoring

Pre-shipmentFinance Buyer Credit

ECA Cover

ECA CoverUCP

Importer/Buyer Exporter/Seller

Financing shifts the timing of Financial Flows & Risks between parties

Warehouse receipt financing: Pre-shipment collateralized loan, using goods storedin independent warehouse

Trust Receipt Financing: Financing of the importer after the release of the Bill ofLading and the goods, on the basis of a trusted relationship and the expectation ofrepayment after sale

Financing based on a Banker’s Acceptance: tenor, discount rate – can finance thebeneficiary/exporter, or either Bank

Financing of foreign receivables – transactionally or on a ‘pooled’ basis: advance apercentage of the receivables, with full recourse

Factoring: purchase of invoices on a non-recourse basis; factors must conducteffective credit assessments, therefore often become very involved in the Exporter’scredit analysis and bookkeeping

Aval: The act of having a third party (usually a bank) guarantee the obligations of abuyer to a seller per the terms of a contract such as a promissory note or purchaseagreement.

The L/C as a Financing Solution

‘We take a ten-year view of our trade banking relationships, assess thedirection of the Bank and the compatibility of our value systems…’

‘Open Account is increasingly important to us, but the products andservices available simply do not meet our needs….

‘We are in a highly competitive and volatile commodity business. If I have to operate 24/7to meet the needs of my clients across the globe, my trade bank has to keep up’

‘We are not interested in technology for its own sake. If the tool adds value, wewill look at it, however, our processes in L/C transactions are optimized to thepoint where we prefer to use letters of credit than to shift to Open Account, orsome other option’

The Client View: Solution, not Product!

The last speaker claims to process 20,000 transactions/year with 2 FTEs

Traffic Dept.,P.O. Processing

Finance, Treasury

FunctionsSupporting

InternationalTrade

Trade Bank Client Organization

Sales and/orStructured Trade

Trade ServicesOperations

OBJECTIVES

Client Supply Chain

Integrated Trade Finance Model

Channels for client information,Internal communications and staffing

Service delivery based on client objectivesAnd business solutions

Holistic approach with broad accessto Client Organization

Business Objectives/Solutions

Channels

Traffic Dept.,P.O. Processing

Finance, Treasury

FunctionsSupporting

InternationalTrade

Trade Bank Client Organization

Sales and/orStructured Trade

Trade ServicesOperations

OBJECTIVES

Client Supply Chain

Integrated Trade Finance Model

Channels for client information,Internal communications and staffing

Service delivery based on client objectivesAnd business solutions

Holistic approach with broad accessto Client Organization

Business Objectives/Solutions

Channels

The Solution View Links to TF Ops

OPUS Advisory, 2004

Trade operations capabilities are expensive to maintain

IT implementations can cost up to US $30 Million

Technology solutions from TradeCard to TSU are still working to“virtualize” some or all of the trade transaction flow

Staff shortages have been an issue, though the crisis & resultingexit of banks from trade finance has mitigated this issue

Staff development is critical: timelines vary from 5-7 YEARS to 6MONTHS (Consider the CDCS Program)

Productivity among trade banks can vary by 700%

Compliance is a complex and increasingly critical issue in tradefinance

Operations & the Client/Solution Connection

Response to these issues determines success in client solutioning

- Senior European Trade Banker, 2006

Foreign Regs

Th

eB

oard

er



Issuing BankImporter

(Buyer/Applicant)

Bank Regulations KYC OFACCommercial Regs BIS Environmental Regs

Insourcing Bank

Foreign Regs

Th

eB

oard

er




(Buyer/Applicant)


Insourcing Bank

Th

eB

oard

er




(Buyer/Applicant)


Insourcing Bank

Client Solutions & Compliance

Limited understanding of tradeamong auditors & compliance specialists

Lack of clarity about the nature oftransactions & their associated risk

Limited communication & MISspecific compliance issues

“The only way we can be fully compliant today, is to turn off the lights, close the door and go home”

Bottom Line?

P & L: Is the BusinessProfitable?

RM’s & Sales: Does TradeHave the Necessary Profile?

Trade Operations:Is the Model Effective &

Leveraged?

Client Value:Do Clients See aBusiness Solution?

P & L: Is the BusinessProfitable?

RM’s & Sales: Does TradeHave the Necessary Profile?

Trade Operations:Is the Model Effective &

Leveraged?

Client Value:Do Clients See aBusiness Solution?

Trade Operations is an important piece of the puzzle: Leverage an Undervalued Asset!

Thank You.