- The code is designed to drive trust and transparency between trading organizations and their lenders. It also promotes sustainable credit flows.
Best practices for commodity financing
On Monday (November 30, 2020), a set of best practices for commodity financing was rolled out and is the first such code for Singapore’s businesses. This comes after Singapore’s reputation as a trusted hub for commodity financing has taken a hit of late.
The code was introduced by the Association of Banks in Singapore (ABS), with the help of the Monetary Authority of Singapore (MAS), the Accounting and Corporate Regulatory Authority (ACRA), and Enterprise Singapore (ESG).
The ABS Code of Best Practices for Commodity Financing shows major principles governing prudent commodity trade financing practices.
In a press statement, ABS said: “It provides a benchmark for banks’ lending standards in the sector to make Singapore more resilient, relevant and competitive as a global commodity trading hub.”
Two primary themes underpinning the code are:
- At a macro level: banks must understand traders’ corporate governance, business and transactions, and risk management practices via due diligence and policy requirements.
- At a transactional level: banks must obtain sufficient transparency and control over financed transactions, receivables, and goods.
About 28 banks together developed a code after consulting with trading organizations. These leaders include Societe Generale (SocGen), DBS Bank, BNP Paribas, OCBC Bank, ABN Amro, United Overseas Bank, Citi, and Bank of China. These represent most commodity financing banks in Singapore.
To elevate industry standards for commodity financing, the Business Times first stated in July 2020 that banks with operations in the city-state had set up a working group to propose new guidelines in a bid.
As per ABS, “The code is designed to provide broad guidance to banks, which are expected to ensure that the appropriate policies, procedures, and controls are in place to observe the principles in the best practices in a risk-proportionate manner.”
Samuel Tsien, Group CEO at OCBC Bank, commented: “The code ensures a more robust and disciplined financing approach to support the growth of Singapore’s thriving commodity trading sector, which comprises a broad range of participants ranging from boutique firms to leading international commodity groups.”
Ho Hern Shin, Assistant Managing Director of Banking and Insurance, Monetary Authority of Singapore, expects strong participation by other firms in implementing the best practices that will encourage greater transparency and trust between trading firms and their lenders. Moreover, it will promote sustainable credit flows.
Satvinder Singh, Assistant Chief Executive Officer at International Enterprise Singapore, commented: “The code also sets out a common set of risk management considerations for participants at the center of global trade. This will guide creditors and provide them comfort when financing global trading companies.” Further, he added, “A diverse range of commodity trading companies provided feedback for the development of the code.”
Mr. Andy Sim, Assistant Chief Executive of the ACRA and In charge of Legal Services and Prosecution, commented: “The code as a step in the right direction to boost corporate transparency and the trust between banks and traders.” Further, he added, “This will help to promote accountability and uphold the integrity of the commodity trading sector.”
The commodity-trade finance business has been plagued by scandals such as the high-profile collapse of oil trading giant Hin Leong and structural problems such as regulatory pressures on profits and falling prices.
Few European banks were noted to be pulling back from the segment in Singapore. Among those said to be scaling down or shutting down their trade finance operations in Singapore are BNP Paribas, SocGen, and ABN Amro.
Singapore is trying its best to get greater transparency to the segment with other initiatives. One of them is Trade Trust, an interoperability framework that connects platforms to exchange digital trade documentation and an upcoming proof of concept for a digital trade finance registry.