Published: June 01, 2012
Managing financial risk has always been a core responsibility of the treasury function, but during a prolonged period of economic uncertainty and changing trade patterns, treasurers have also had a growing role in managing trade risks. The years up until 2008-9 witnessed a relative increase in open account transactions due to greater convenience and lower costs. However, the global financial crisis illustrated the importance of trade finance to increase predictability of cash flow, release working capital from the supply chain, and perhaps most importantly, to manage supply chain risk.
Trade finance instruments have traditionally been used to add security to trade transactions with suppliers and customers in less familiar markets – for instance, a European buyer using a Letter of Credit in a transaction with a supplier in Asia. Such transactions were often small, but carried with them some degree of uncertainty. Now, however, in a prolonged period of fragility for the Eurozone, treasurers and CFOs are recognising the benefits that trade finance brings to every region, for both domestic and cross-border transactions. The absence of an appropriate trade finance infrastructure could be perceived as a barrier that, by damaging the flow of trade, hinders the trade and export potential of an economy and region.
The large, multinational corporations that comprise J.P. Morgan’s client base continue to perform strongly (with the exception of some consumer goods companies) and increase their cash balances. Notwithstanding that, treasurers and CFOs are far from complacent about the need to manage risk proactively. Supply chains are often finely balanced, and the loss of key suppliers could have a rapid impact on the company’s ability to deliver on its obligations. Similarly, customers cancelling orders or being unable to pay could result in excess inventory or a loss of cash flow.
Buyers and sellers alike are therefore challenged to manage their supply chain risk without compromising efficiency or relationships. For example, even though a company may have been selling to a customer for many years, their risk profile could have changed substantially (perhaps given current market conditions), so transactions may need additional collateral, such as a Letter of Credit or Guarantee. In industries with a high exposure to commodity prices, this issue is exacerbated further, as when commodity prices rise, larger transactions use up credit limits more quickly. Consequently, we are seeing companies such as those in the oil, gas, and energy sectors requiring further credit support on transactions using trade finance instruments.
For buyers, managing supplier risk effectively is key to a robust supply chain. Companies are therefore strongly motivated to support key suppliers that may find it more difficult to source market liquidity, without adding substantially to their own risk.[[[PAGE]]]
Supply chain financing (SCF) is proving an increasingly popular and successful means of enabling buyers to provide their suppliers with access to reliable financing on pre-agreed terms. Most large multinationals have now at least considered implementing an SCF programme, although they may have different motivations: some will focus on working capital by extending days payable outstanding (DPO), while others will focus more on mitigating supplier risk and increasing supply chain resilience. The one thing that is certain is that the security and surety of the supply chain is of paramount importance to all who are involved with it and control it.
Having successfully provided SCF programmes for 18 years, J.P. Morgan is proving a highly attractive choice as companies recognise the credibility of our programmes and the proven success of our implementation model. For example, we help companies to build a compelling business case that will attract the senior management support that is crucial to gaining acceptance and sponsorship by the different stakeholders across their business. In addition, we have a dedicated onboarding team to help segment the supplier base in order to identify key suppliers that would benefit most from the programme, and build up the required level of supplier adoption. We focus on helping suppliers to understand the programme and the advantages it offers, and become familiar with the developing technology. Supported in this way, they are able to better understand the benefits these programmes can bring, and can make informed decisions about how to participate.
SCF programmes are typically initiated from Europe and / or North America, but as corporations headquartered in countries such as China and India continue to expand, we also expect to see SCF programmes gain traction in these regions. We hope that corporates everywhere look to banks like ours to assist with their activities and are attracted to our partnership approach, pragmatic attitude, innovative technology and targeted onboarding strategy.
Technology is a key element of achieving a robust and effective risk management framework. We recognise that our customers need a combination of efficient transaction management capabilities, including streamlined integration with internal systems, and sophisticated dashboard and reporting tools to provide visibility, accessibility and trade analysis. These concepts provide the foundation for our Trade Channel platform. Trade Channel supports trade activity conducted through both Open Account and documentary credits, and by providing the user with full control over transactions, enables more effective management of counterparty and sovereign risk.
An innovative component of the Trade Channel platform is our new proprietary User Dashboard, with analysis tools, that provide near real-time monitoring of all activities with J.P. Morgan, including up-to-date transaction status, market exposures, hedge positions, key metrics and performance indicators to support decision-making and comprehensive analytics.
Having achieved visibility and control over transactional and exposure information, treasurers and finance managers can then be more confident in devising and delivering on strategies that will increase the resilience of the supply chain and mitigate risks in the trade process. One example of how we at
J.P. Morgan are enabling our customers to achieve this is our TSU-BPO solution. This leverages SWIFT’s Trade Services Utility (TSU) for our corporate customers, enabling them to conduct transactions under open account whilst mitigating risk in a similar way to documentary credits by using Bank Payment Obligations (BPO).
TSU is a SWIFT-based service that enables banks to exchange and validate trade-related information using industry-standard messaging and formats. A Bank Payment Obligation (BPO) is a bank-to-bank payment obligation instrument that is associated with a TSU transaction. It is an irrevocable obligation on the part of the buyer’s bank to pay a specified amount to the seller’s bank based on the successful matching of agreed datasets within the TSU.
Consequently, the BPO acts in a similar way to a Letter of Credit, which is also payable based on compliant documentation. Buyers and sellers benefit from the automation and convenience of open account whilst mitigating potential risk and liquidity issues and ensuring that document discrepancies can be identified and remedied quickly to avoid payment delay.
The use of this innovative solution brings manifold advantages to both buyers and sellers. For buyers (importers) there may be the opportunity to increase credit limits or obtain more favourable terms from sellers (exporters) with an irrevocable payment obligation in place. Since the process is handled by the bank, sellers do not need to invest in additional technology or resources, and costs are lower than for a Letter of Credit transaction. Documentation is handled more quickly, with discrepancies identified and resolved promptly, accelerating the exchange of cash and goods.[[[PAGE]]]
Sellers (exporters) no longer have credit risk to the buyer, since this is replaced by an irrevocable payment obligation by the buyer’s bank. This in turn allows them to increase credit limits to their buyers, and therefore their volume of trade. Like a Letter of Credit, BPOs can be confirmed, adding greater assurance against credit and country risk. Costs are lower than a Letter of Credit, and receivables can be moved off-balance sheet using techniques such as post-acceptance discounting.
For J.P. Morgan, BPO is just one element of the trade continuum, and we provide a full portfolio of solutions – short- and medium-term financing, using both open account and trade finance solutions as well as longer-term trade financing, working with export credit agencies to facilitate long-term investment. We focus on helping companies to balance efficiency and risk mitigation across all solutions and timeframes, and to understand what opportunities are available to manage risk and realise cash flow.
As part of our customer commitment and collaborative approach, we want to support clients in managing their cash and risk across the regions in which they do business. Consequently, we want to facilitate trade activities and make it easier to do business. Deepening our solutions and services is a top priority and we are listening to our clients; our Global Trade solutions are driven by where these clients are going and we want to be wherever they need us.
Along with our unrivalled correspondent network, our presence is very strong in the US and Europe, and we now have eight branches in China, with a growing footprint in India and other parts of Asia in which our customers are seeking to expand.
In the Middle East and Africa, we provide solutions and on-the-ground support in United Arab Emirates, Saudi Arabia, South Africa and Nigeria; similarly, in Latin America, we have a strong value proposition in Brazil, Mexico and Argentina, with an ongoing expansion strategy to meet the cash and risk management needs of our customers.
Corporates everywhere look to banks like ours to assist with their global trade activities. Trade can often be the reason a client approaches us for the first time; we want to help clients grow, solve problems and implement solutions flawlessly.
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