A set of best practices for commodity financing was rolled out yesterday, the first such code for the industry in Singapore. It comes after the country's reputation as a trusted hub for this lending segment took a hit lately.
The code was launched by the Association of Banks in Singapore (ABS), with the support of the Monetary Authority of Singapore (MAS), Enterprise Singapore (ESG) and the Accounting and Corporate Regulatory Authority (Acra).
The ABS Code of Best Practices for Commodity Financing lays out key principles governing prudent commodity trade-financing practices. 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, ABS said in a statement.
One of the two key themes underpinning the code is that, at a macro level, banks should understand traders' corporate governance, risk-management practices, business and transactions through due diligence and policy requirements. The other is that, at a transactional level, banks should obtain sufficient transparency and control over financed transactions, goods and receivables.
The code was developed by an industry working group of 28 banks, in consultation with trading companies. These lenders - including DBS Bank, OCBC Bank, United Overseas Bank, Bank of China, Citi, ABN Amro, BNP Paribas and Societe Generale (SocGen) - represent the majority of commodity-financing banks in Singapore.
The Business Times (BT) had reported in July that banks with operations in Singapore had set up a working group to propose new guidelines in a bid to raise industry standards for commodity financing.
ABS noted yesterday that the code is designed to provide broad guidance to banks, which are expected to ensure the appropriate policies, procedures and controls are in place to observe the principles in the best practices in a risk-proportionate manner.
Mr Samuel Tsien, ABS chairman and OCBC group chief executive, said 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, from boutique firms to leading international commodity groups.
MAS assistant managing director for banking and insurance Ho Hern Shin expects strong participation by the industry in implementing the best practices.
This will encourage greater transparency and trust between trading firms and their lenders, as well as promote sustainable credit flows, she said.
The code also sets out a common set of risk-management considerations for participants at the centre of global trade. This will guide creditors and "provide them comfort" when financing global trading companies, noted Mr Satvinder Singh, ESG's assistant CEO. He added that a diverse range of commodity-trading companies provided feedback for the development of the code.
Mr Andy Sim, Acra assistant CEO, legal services and compliance, sees the code as "a step in the right direction" to boost corporate transparency and the trust between banks and traders. "This will help to promote accountability and uphold the integrity of the commodity trading sector."
The commodity-trade finance business has been rocked by scandals, including the high-profile collapse of oil trading giant Hin Leong, as well as structural issues such as falling prices and regulatory pressures on profits.
Some European banks have pulled back from the segment in Singapore.
BT also reported in October that Singapore is trying to bring greater transparency to the segment, with other initiatives such as TradeTrust, an interoperability framework that connects platforms to exchange digital trade documentation, as well as an upcoming proof-of-concept for a digital trade-finance registry.
THE BUSINESS TIMES
Correction note: An earlier version of this article wrongly named BNP Paribas as one of the banks shutting or scaling down their trade-finance operations in Singapore. BNP Paribas is in fact not exiting or scaling down these operations in Singapore, although it has closed its Swiss commodities firm and frozen new deals in Europe, Middle East and Africa. We are sorry for the error.