As part of our series of articles dedicated to the selected audience of commodity trading firms, Malik Dahmoune, founder of Finelia, explains the challenges of automated monitoring of trade finance operations and the prospects for modernising the business opened up by the digital revolution. To explore the topic further after reading this interview, download our new study by completing the form at the bottom of the page.
– What are the challenges of digitalization for trading companies?
– Trading activity necessitates a consolidated vision of all of the transactions processed at each moment in time and in different parts of the world. The strategy is to closely follow the company’s risk exposure, to calculate the profitability of each transaction – independently of the type of instrument that is financing it – and to manage the credit lines.
As it stands these processes are rarely automated and, when they are, it is usually only partially. The majority of traders still track their Trade Finance transactions in an Excel spreadsheet that must be completed manually, with the natural risk of errors.
Documentary credit (Letter of Credit) is a transaction that changes over time, with a pace of events that is unsuitable for purely matrix-type recording. There are in fact platforms for monitoring Trade Finance instruments, but they are not wholly adequate. They are too regional, and they are struggling to find their public. They only target single-sector companies and only cover a fraction of the needs of large rading companies that are active in various sectors. Finally, the basic features of marketplaces do not facilitate either the centralization or effective management of documentary credit (LC), documentary collection, guarantees and receivables.
– Will the sector bypass the digital revolution?
– No. Modernization of trading activity seems possible due to technological progress in the form of the increased dematerialization of documents, monitoring of goods and compliance aspects. Blockchain can link all of the participants involved in a transaction in a context in which documents will be totally dematerialized.
This technology will enable, using smart contacts, processing times, costs and related risks to be reduced. At the supply chain level, the Internet of Things will facilitate the monitoring and traceability of goods, enabling better control. But all this will take some time. Governance and legal frameworks are two critical issues to address.
Currently, each type of entity involved in a transaction (such as importers, exporters, banks, maritime companies, port authorities, insurance companies, governments) is still seeking to impose its own platform and/or system as the new standard to adopt.
– What can trading companies do in this situation?
– Each trading company must get ready without delay and be able to exchange structured files with their partners, especially banks, to collect and centralize information. This will represent a significant step toward the unification of the data management process, which is essential for managing liquidity, forecasting cash flows and managing risk (such as counterparty risk, foreign exchange risk and cash-at-risk).
The ability to efficiently communicate with all of one’s banks will make daily tasks such as requests to open documentary credit (Letter of Credit), accounting for inventory releases (as part of pledge transactions), or even issuing guarantees, much easier.
Currently, the move to the automation of processing documentary credits and bank guarantees is being carried out by the SWIFT international financial messaging system. SWIFT messages relating to Trade Finance are of the type 7XX. An MT 700 message, for example, contains the terms and conditions of a documentary credit.
Based on the German DTA format, SWIFT has taken the initiative to extend the use of its messaging format to enable companies to communicate directly with their banks. This is carried out through specific FileAct requests or via structured FIN messages that are transported in so-called MT 798 envelopes.
– What is the preferred channel for these exchanges of messages?
– The transport of messages is carried out natively via the SWIFTNet channel. However, a company and its bank may use another channel such as Ebics, Host to Host or SFTP. Exchanges between a bank and a company are in the form of a batch of MT 798 messages, each type of which represents a precise event, such as a request to open or an discrepancies advice notification. A batch is composed of a first index message, followed by a detailed message and possibly an extension message. There are 48 types of message in all.
MT 798 is gaining popularity among banks, including within regional banks, which have for the main part initiated development projects, or have at least launched feasibility studies. At present, nearly 50 banking groups are operational with MT 798, according to SWIFT, the majority of which are European banks.
A trader can therefore communicate with all of its banks via a single channel. To do this, a company must adapt its IT tool, at its choice, to the new protocol, or use software that processes all SWIFT MT 798 messages. The publisher Finelia proposes a multi-bank solution for Trade Finance processing and monitoring, with the possibility of exchanging MT 798 messages with banks via SWIFTNet or Ebics. By interfacing with a customer’s information system, this new tool facilitates the automated opening of a Letter of Credit, a guarantee or a documentary remittance.
When it comes to exporting, the documents required for documentary credit are automatically published. The execution department can thus send instructions (directions for document preparation) from the fields displayed in the MT 700 message, effectively eliminating any risk of data input error, one of the main causes of discrepancies reported by banks. These same documents can also be scanned and sent to the bank via FileAct. Some banks now accept pre-verification of documents in electronic format, which constitutes major progress toward Trade Finance digitalization.
Emmanuel Lechere / Mihai Andreoiu
Commodity trading firms face a large number of risks that could jeopardize a patiently fostered business
Given the multitude of industry specific challenges at present for commodity trading firms, Redbridge’s consulting team believes in sharing its thoughts on a wide range of topics of interest through a publication designed especially for this select audience.
In this publication
- Trading firms and banks: who’s afraid of whom?
- What’s driving the risk appetite of your (potential) financing banks?
- Why borrowing bases are valuable opportunities to consider
- The alternative represented by trade finance funds
- How to achieve a consolidated vision of all the trades processed at each moment in time
And also, a conversation with
- Louis Dreyfus Commodities