Trade Risk Mitigation. Michelle Hui Managing Director Head of Trade and Supply Chain Finance - APAC BNY Mellon

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1 Trade Risk Mitigation Michelle Hui Managing Director Head of Trade and Supply Chain Finance - APAC BNY Mellon

2 BNY Mellon Global Footprint BNY Mellon s global presence comprises a large network of branches, representative offices and subsidiary locations. BNY Mellon s Asia footprint is among the largest of any global services provider. Montreal Utica New York HQ Pittsburgh Bahamas Grand Cayman Mexico City Rio de Janeiro Sao Paulo Buenos Aires Santiago Moscow London Dublin Brussels Frankfurt Paris Madrid Milan Istanbul Beirut Cairo Dubai Abu Dhabi Johannesburg Branches, Subsidiaries, Representative Offices Amsterdam Breda Copenhagen Cor Dusseldorf Edinburgh Geneva Luxembourg Manchester Zurich Mumbai Pune Beijing Seoul Tokyo Shanghai Taipei Hong Kong Manila Bangkok Kuala Lumpur Singapore Jakarta Sydney Melbourne Source: BNY Mellon 2

3 Recent Market Trends International trade slowdown economy, decline in oil/commodity prices Market spreads decline China, India Basel III increasing capital adequacy & liquidity requirements Regulatory scrutiny compliance, KYC, AML, sanctions It s not which deal you do; it s which deal you don t do. 3

4 Use The Right Financing Solution Classic Trade Solutions Imports Letters of credit (LC) Documentary collections Exports Letters of credit (LC) Documentary collections Standby letters of credit (SBLC) Bank Guarantees Specialized Trade Solutions Structured Trade Solutions Capital equipment financing for >1year Financing of export-related accounts receivable and inventory Export Credit Agency (ECA) backed financing e.g., US EXIM Risk participation, club structure Private credit insurance and political risk insurance Multi-lateral agencies e.g., ADB, World Bk Supply chain finance Receivable and payable financing 4

5 Letters of Credit BUYER s Bank Letter of Credit Advising Bank Advice Letter Letter of Credit Application Documents BUYER Goods SELLER A Letter of Credit replaces risk of BUYER with risk of Issuing Bank It assures the SELLER that he will be paid provided that documents presented comply with its terms and conditions A Confirmed Letter of Credit is the undertaking of two Banks; the Issuing Bank and the Confirming Bank. Both are equally liable to pay the beneficiary 5

6 Letters of Credit Sight LC Payment effected when documents presented are in compliance with the terms and conditions of the credit May have multiple shipments and hence multiple payment points Usance LC Tenor of the LC e.g., 90 days from Bill of Lading date or at sight Seller s Credit Terms are extended by Seller; Exporter/LC beneficiary discounts LCs and proceeds are net of discounting spread (borne by exporter/lc beneficiary) Buyer s Credit * Terms are requested by the Buyer/Importer. Thus the Exporter/LC beneficiary are paid Principal by negotiating bank at sight of compliant documents; Interest spread payable by importer/lc applicant * Also known as Usance Payable At Sight LC All LCs are governed by UCP600 (or the prevailing version) 6

7 LC Process Flow (2) Issue LC via MT700 (5b) Documents (7b) At maturity, effect settlement (P) (1) Request to issue LC Issuing Bank (6) Payment of sight LC (7b) At maturity, effect settlement (P) (5c) Documents 1) Request to issue LC 2) Issue LC via MT700 3a) Direct advise 3b) LC confirmed by BNYM 4) Shipped goods 5a-c) Presentation of documents 6) Payment at sight for sight LC Usance LC 7a ) Beneficiary discounts LC; discount proceeds (P interest) paid 7b) At maturity, effect settlement (P) (3b) LC confirmed by BNYM (3a) Direct advise 7a ) Beneficiary discounts LC; discount proceeds (P interest) paid (6) Payment At Sight (without discounting interest deducted) (5a) Presentation of documents (4) Shipped Goods Importer / LC Applicant Exporter / LC Beneficiary 7

8 Trade Loan 1) Master Agreement Signed 2a) Trade Loan 3b) At Maturity, effects settlement Indonesian Bank 3a) Repays at Maturity 2b) Financing (export or import) Indonesian Bank s Customer 8

9 Trade Risk Participation Mitigation tool when lines of credit extended to correspondent bank s customers are fully utilized Portfolio management diversify risks across different countries Ability to provide more financing and keep customers happy When selling, offer reciprocity fees to partner banks When buying, earn revenue on otherwise unused limits Flexible, unfunded or funded, cross border Effected pursuant to a Master Risk Participation Agreement ( MRPA ) BAFT template globally recognized 9 9

10 Trade Risk Participation Bank Risk 1) MRPA Signed 4) Risk Participation Offer 5) Funded Participation 7) Releases Participation, Settles Funds Indonesian Bank Participant 3a) Negotiate & discount LC BNY Mellon Customer Issuing Bank 10

11 Trade Risk Participation Corporate Risk 1) MRPA Signed 4) Risk Participation Offer 5) Funded Participation 7) Releases Participation, Settles Funds Indonesian Bank BNY Mellon as Participant 3a) Invoice sale 3b) Funds invoice purchase 2) Sales contract Indonesian Supplier Buyer in the US 11

12 Export Finance Multilateral Development Banks Provide financial assistance to developing countries in order to promote economic and social development Fund large infrastructure and other development projects, provide loans tied to policy reforms by the government Established trade programs for emerging countries such as Bangladesh, Pakistan and Vietnam Export Credit Agencies Government agency set up to promote a country s exports Provide advantages to local exporters so that they can extend competitive credit terms to the overseas importer The borrower is typically the importer or the importer s bank Commonly used for medium- or long-term financing (2-10 years) 12

13 IFC Guarantee Program 10) Cancel Guarantee 9) Notify LC settled 7) Issue Credit Guarantee 4) Send Guarantee Request 1) Credit Guarantee Agreement Signed 3a) Advise, confirm, negotiate LC 5) Seek issuing bank s consent by SWIFT 6) Give consent by SWIFT BNY Mellon Customer Issuing Bank 13

14 Questions? 14

15 BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally including The Bank of New York Mellon. The Bank of New York Mellon, is a banking corporation organized and existing pursuant to the laws of the State of New York (member FDIC) and its subsidiaries and affiliates have various branches and representative offices in the Asia-Pacific Region which are subject to regulation by the relevant local regulator in that jurisdiction. Not all products and services are offered at all locations. This presentation does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy or make an offer where otherwise unlawful. Information and opinions presented have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to their accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this presentation The Bank of New York Mellon Corporation. All rights reserved.