Engaging Risk on Open Account: The Trade Services Utility
Paper-based documentation chains still prevail in the majority of documentary trade business – namely inter-corporate trade deals requiring some form of guaranteed payment. Although financial settlement terms have been standardized over the years, the underlying documentation chain remains in multiple datasets and from differing data sources. For this reason, errors can occur that prevent goods or funds being released to allow the timely completion of a transaction. Although it seems counter-intuitive, the very documentation intended to reduce risk can therefore become a source of ‘documentation risk’.
A narrowly defined dataset – especially one that reduces the amount of data exchanged – would therefore greatly facilitate supply chain integration, while also allowing banks to support risk mitigation for transactions settled via open account, or on ‘semi-open account’ basis. This would need to address highly diverse and specialized commercial requirements, which have hindered past attempts to develop internationally accepted standards of trade documentation. A universal standard and a common infrastructure for closer, undisputed matching of trade data is still a priority. But given the difficulty of establishing these across different markets and industries, any solution must take a simplified, minimalistic approach – covering the majority of trade deals and leaving aside complicated and highly specialized variations.
This is the goal of the Trade Services Utility (TSU) currently under development by SWIFT and to be tested together with a number of pilot banks. The TSU provides a common standard for a simplified trade data set and a messaging service for matching this data for banks. This will bring a high degree of efficiency to the exchange of trade data, both between corporates and banks as well as between banks. There is a parallel with the achievements that web-enablement by individual banks has already provided to ‘traditional’ documentary credits, such as LCs and their underlying datasets. However, in contrast to individual bank solutions, TSU offers a multi-bank, multi-country data standard and matching service.
Cost reduction and risk mitigation are achieved both at the corporate and at the bank level via highly automated data-matching between related source data. This in turn opens the way for new ranges of financial services. But to avoid falling prey to project-creep, or interfering with competitive areas of banks, TSU is limited to the minimum level of common functionality needed and restricted to the data exchange between banks. Indeed, the aim is not to impose a rigid infrastructure on all trade participants along the complete trade chain – it is simply to support the exchange and matching of corporate supply chain information between banks, thus enabling them to add to the various financing and settlement tools at their discretion. This should free up the physical supply chain by reducing its dependence on the paper-based documentary elements of the financial supply chain.
Today 80 per cent of world trade is based on open account, with related data-matching done predominantly at corporate level. From a corporate perspective, TSU is highly complementary to streamlining corporate data processing, service outsourcing and hubbing operations. But the broader demands of creating technical interfaces to support such integration are complex and time-consuming. From a banks perspective, there is the prospect of servicing corporates on their data-matching needs even in open account transactions. This enlarges the field of financing and risk mitigation possibilities, while reducing the related processing cost to both the corporate and the bank.
Trade financiers could consider there to be a risk of biting further into the market for traditional paper-based documentary credits. But there is also the chance to regain lost territory on trade risk services via customer-friendly e-solutions, and combining these with tailor-made structured financing and risk solutions. This would require integration of TSU services into the overall trade product concepts of a bank, and includes costly adjustments to related technical internal and external tools.
From a regulatory perspective, the prospect of using the TSU matching engine for more structured transactions such as Lite LCs or Lite collections, as we would hope to, may introduce the need for a review of the UCP 500 and eUCP 500 interbank standards set by the International Chamber of Commerce in Paris.
Achieving tangible cost reduction and efficiency gains for corporate clients and banks are the number one criteria. This extends to the enhancement of other trade services that rely on similar tools, or on trade data exchange in correspondent banking. However, this goal will require TSU to be embraced by main trade counterparties relatively quickly – an aim supported by the fact that the TSU will be introduced into the market by SWIFT, bringing with it global reach and a proven track-record in establishing bank-wide industry standards. Furthermore, implementation should be supported by major global trade bank members of SWIFT, such as those represented in Trade Services Advisory Group (TSAG) and related committees. While TSU takes its first steps into the market with the simplified open-account approach, it is also intended for further targets such as the introduction of data matching for “Lite LCs” and “Lite Collections”, as well as enabling related settlement standards. This would bring even more business through the TSU process – in turn significantly reducing bank operating costs. The ultimate success factor may therefore actually be to change significantly the way in which most traditional LC business is settled. That is not to negate the long-term demand for traditional, paper-based L/C solutions. But, if all works out well, much of this business could in the long term migrate towards a TSU process.