Coastline newsletter / 2012 edition

ISSUE 45 Sep2012

The Bank Payment Obligation – now a reality (Part 1)

Where we are today

By Gary Collyer

After what seems to have been an almost endless process of discussion, debate, education, and even more discussion and education, 2012 has seen the completion of the first fully automated end-to-end trade transaction involving the issuance of a Bank Payment Obligation, or "BPO" for short, as the basis for the underlying payment security. This transaction was completed with the use of the SWIFT Trade Services Utility (TSU) BPO Rules.

In 2013, there will be ICC rules for use with the BPO, and these will be known as the URBPO (Uniform Rules for Bank Payment Obligations). At the time of drafting this newsletter no ICC publication number had been allocated to the rules.

On 1 June 2012, ICC national committees received Draft 1 of the URBPO for review and comment. This first draft was the result of extensive work of the URBPO Drafting and Consulting Groups, and followed the signing of a Memorandum of Understanding between ICC and SWIFT at Sibos in September 2011; the aim of which was the creation and implementation of international rules for the BPO.
Following a review of comments made by ICC national committees to that first draft, a second draft has been released on 18 September. Comments to Draft 2 are to be submitted prior to the ICC Banking Commission meeting that will be held on 13-14 November in Mexico City. At that meeting, a 2½ hour session has been allotted to discuss the content of the URBPO so that any outstanding or lingering issues may be discussed and answers provided.

The meeting in Mexico City will also be an opportunity for those individuals and organisations who have not previously been aware of the content of the URBPO, or the workings of the BPO, to hear directly from members of the Drafting Group as to the scope of the rules, and the role of any bank involved in a BPO.

Globally, banks continue to indicate strong interest in the BPO with a view to facilitating the increasing risk mitigation and financing needs of their corporate clients. A total of 40 banks have confirmed their current or future adoption of the presently available SWIFT Trade Services Utility (TSU) BPO rules. It is anticipated that these banks will also adopt the URBPO when implemented by ICC in 2013. It should be noted that this list has more than doubled since ICC and SWIFT signed their Memorandum of Understanding and is made up of the following banks (as of 27 September):

Americas: Banco do Brasil, Banco Itaú, Bank of America Markets, BMO Capital, BNY Mellon, Citi, JP Morgan

EMEA: Bank Al Etihad, Barclays, BNP Paribas, Byblos Bank, Commercial Bank of Dubai, Commerzbank, Deutsche Bank, Fimbank, First National Bank of S. Africa, HSBC, ING, La Caixa, National Bank of Greece, Qatar National Bank, SEB, Societe Generale, Standard Bank of South Africa, The Royal Bank of Scotland, UBS, Unicredit

Asia/Pacific: ANZ, Bangkok Bank, Bank of China, Bank of Communications, BTMU, China Citic Bank, China Minsheng Bank, Hua Nan Bank, Kasikornbank, Korea Exchange Bank, Siam Commercial Bank, Standard Chartered Bank, SMBC

It has also been widely reported that the number of corporates interested in BPO supported transactions is growing, with the most advanced banks indicating approximately 40 corporate customers already engaged, mainly in Asia/Pacific but also in the EMEA region. In each instance, buyers and sellers appear to appreciate the major efficiency improvements that a BPO subject to ICC rules and the supporting electronic data flows will generate.


The first fully automated end-to-end BPO trade transaction

In May 2012, BP Chemicals and Octal went live using a BPO offering made available by Standard Chartered Bank. The major benefits that were identified by BP Chemicals included reduced complexity through the removal of paper documentation used in the determination of compliance and thereby a reduction in costs inherent in paper presentations; improvement in the speed of handling discrepancies in data coupled with the reduced risk of discrepancies; getting paid on time; and the possibility to spread the credit risk with multiple Obligor Banks. As David Vermylen, Global Credit Manager, Petrochemicals at BP commented at the time, "The BPO offers exporters a number of efficiency benefits through reduced document handling and lower confirming costs, and by conducting business with less paper compared to traditional letters of credit."

The Brazilian mining and minerals company Vale has also identified a number of key financial benefits it hopes to obtain through BPO adoption. These include a potential reduction in DSO of approximately 10 days with a financial gain of over USD37 million per year; the freeing up of working capital totalling USD600 million; reduction in costs in respect of document delivery and reduction in their customer’s own costs; reduction in discrepancies and the reduced environmental impact – reduction in use of paper documents for trade transactions.


What is a BPO in brief terms?

For those that may be new to this product, a BPO is an alternative instrument for trade settlement. It is designed to complement all existing trade finance solutions, NOT to replace them. There are some who often refer to the BPO as an electronic letter of credit or LC Lite whereas the reality is that it should be seen in its own right as a means of settlement.

The URBPO Draft 2 define a Bank Payment Obligation as an irrevocable and independent undertaking of an Obligor Bank to pay or to incur a deferred payment obligation and pay at maturity a specified amount to a Recipient Bank after successful electronic matching of data in accordance with the conditions specified in an Established Baseline.

In this context, an Obligor Bank may be the bank of the buyer, but need not be. A Recipient Bank will always be the bank of the seller.

Similar to a letter of credit subject to UCP 600, or a collection subject to URC 522, or a guarantee subject to URDG 758, the actual settlement of a BPO is made outside the scope of the URBPO.

The BPO serves to effectively bridge the gap between open account and letter of credit transactions and permits a bank to offer multiple services around the BPO in much the same way as banks do today with the MT700. For example, whether a bank is the number one trade finance bank in the world or number one thousand, they have at their disposal the same message type and structure for the issuance of a documentary credit. It is the financing services and reporting that each bank provides around that message that helps to differentiate them from any other bank.

For most open account transactions, the only role for a bank will be to make a payment to the account of a seller, upon the request of its client. The BPO opens the door for banks to provide financing and other services linked to open account transactions, and even those currently conducted as documentary collections.

As can be seen below, a BPO combines the security of a letter of credit with the simplicity of open account transactions.

Source: SWIFT


The ability of a bank to participate in a BPO is conditioned on two main pre-requisites:

(a) a single (common) Transaction Matching Application; and
(b) the mandatory use of standard ISO 20022 TSMT messages.

The URBPO Draft 2 define a Transaction Matching Application (TMA) as any centralised data matching and workflow application, use of which is required under an Established Baseline, providing for the processing and automatic comparison of TSMT messages received from Involved Banks and the subsequent issuance of all related TSMT messages to Involved Banks.

TSMT messages are Trade Service Management messages subject to ISO 200022 standards and as defined by the International Organization for Standardization (ISO). Only ISO 20022 TSMT messages may be used in a BPO otherwise the transaction is outside the scope of the URBPO.

The following slide, which forms part of the BPO overview presentation that accompanied URBPO Draft 2, articulates the process flow from inception to payment in fairly simplistic terms:



The URBPO Draft 2 define a Baseline as data, in respect of an underlying trade transaction, submitted to a Transaction Matching Application by a Buyer’s Bank and a Recipient Bank corresponding to data received by each bank respectively, from a buyer or seller of goods, services or performance to create an Established Baseline. A BPO is an optional component of a Baseline and is made up of the elements shown in the extract below.


Source: SWIFT

Users of a BPO benefit from assurance of payment and risk mitigation but through a much faster, paperless and fully automated process. The result is a less complex and more cost-effective settlement tool that accelerates the payment cycle.


Competitive and collaborative aspects of a BPO

In any trade transaction there will need to be collaboration between buyer and seller in the selection of the BPO as the agreed payment terms and the proposed Obligor and Recipient Banks.

In a BPO transaction there is what can be described as the Collaborative and Competitive space in which the Obligor and Recipient Bank will operate.

There is collaboration between these banks in terms of the establishment of a BPO subject to the electronic matching of specified data elements through a single (common) Transaction Matching Application. These data elements are described in the Baselines submitted by the Buyer’s Bank and Recipient Bank. In this collaborative space, and as mentioned above, the adoption of URBPO and ISO 20022 TSMT messaging standards is mandatory.

There is also competition between these banks in terms of the level of service they can offer to the corporate in respect of risk mitigation, financing, payment assurance, process efficiency, price etc. In this competitive space, there are no rules or mandatory standards. Banks and corporates are free to negotiate their own terms by way of bilateral forms of agreement.


Scope of the URBPO

The URBPO exist exclusively in the bank-to-bank or 'collaborative' space. The rules do not cover the interaction between a bank and their corporate client which is seen to be in the competitive space as discussed above.

In this newsletter reference has been made on several occasions to Obligor Bank and Established Baseline. For clarity, the following are the definitions provided in URBPO Draft 2:

"Obligor Bank" means a bank that issues an irrevocable and independent undertaking to pay or to incur a deferred payment obligation and pay at maturity the amount due to a Recipient Bank in accordance with the payment terms specified in the Established Baseline. An Obligor Bank may be a Buyer's Bank.

"Established Baseline" means a Baseline from the point in time when a Transaction Matching Application sends a Baseline Match Report to each Involved Bank containing Zero Mismatches and with the status 'established'. An Established Baseline may contain more than one BPO.



Part 2 of this newsletter will follow next month, the focus of which will be the more frequently asked questions asked by the banking and corporate sector together with more information on the messaging flows and high level content of the URBPO.

 

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