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Singapore’s banks have finalised a code of best practice for the provision of trade finance to the commodities sector, after a string of fraud scandals left lenders with significant financial losses.

The Association of Banks in Singapore (ABS) says the long-awaited code provides a “benchmark for banks’ lending standards in the sector to help enhance the resilience, relevance and competitiveness of Singapore as a global commodity trading hub”.

The code has been developed with the support of 28 banks, as well as Enterprise Singapore, an innovation-focused government agency.

Though it is not intended to take the place of legislation or regulatory guidance, the code also has the backing of the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority.

It has not yet been made public, but the final version – seen by GTR – says that the monetary authority “may refer to the code in its supervisory oversight of the lenders’ business and risk management activities”.

Ho Hern Shin, MAS assistant managing director, says the initiative “will encourage greater transparency and trust between trading firms and their lenders, and promote sustainable credit flows to support Singapore’s growth as a global commodities trading hub”.

“We look forward to strong participation by the industry in implementing the code,” she adds.

One of the code’s central features is transparency around commodity finance arrangements. It recommends that banks impose measures on traders ensuring they provide sufficient visibility over trade transactions, the underlying goods being traded and any receivables due.

Lenders should also insist that traders provide information on “the end-to-end process and trade cycle” when seeking finance for a transaction, while traders should agree not to obtain any other financing relating to the same goods without prior written consent from the bank.

In cases where letters of indemnity (LOIs) are used – a relatively common practice in commodities trading – the code suggests banks also demand a copy of the title or transport documents being relied upon.

For Baldev Bhinder, managing director of Singapore-based commodities law firm Blackstone & Gold, LOIs and receivables security “have been correctly identified as areas that require careful attention in monitoring or verification”.

Though many recent fraud cases have centred on invoices being used to obtain double or multiple financing from banks, in some instances receivables were also exploited in the same way.

Other recommendations in the code cover corporate governance, risk management, due diligence and industry cooperation.

The code says banks should check whether traders’ policies are appropriate given their size and structure, that payment to directors or managers should be based on a “sound risk culture”, and that avenues should be available to whistleblowers.

Though the initiative is separate from the recent development of a blockchain-based trade finance registry – a project led by DBS Bank and Standard Chartered, built on dltledgers’ platform – the code recommends that lenders “participate in industry collaboration initiatives that aim to further strengthen the commodity trading sector”.

“Future initiatives could include leveraging on technology to authenticate underlying trade transactions financed by lenders and to enhance lenders’ assessment of the credit worthiness of corporate entities,” it says.

 

Trade finance de-risking

The project follows a slew of fraud cases during 2020. In March, the collapse of Agritrade International led to allegations of fraud including double financing, leaving banks scrambling to recover funds.

The following month, the demise of trading giant Hin Leong left banks with an initial combined exposure of US$3.5bn, with evidence later emerging of widespread multiple financing, fake transactions and document forgery.

Similar accusations have since been levelled at several other traders, resulting in bank nervousness around providing financing to the sector.

Though financial support appears to be holding up at the larger end of the market, smaller traders are reporting difficulties despite having no ties to those fraud cases.

Jean-François Lambert, founding partner of consultancy firm Lambert Commodities, says the code is “undeniably going in the right direction and will compel local traders to improve their governance, processes and communication with their bankers”.

“In the shorter term however, this is going to stiffen lenders’ behaviour and it will be interesting to monitor the practical effect of such guidance on Singapore trading activities,” he tells GTR.

According to Lambert, it is likely that MAS audits of banks’ operations could include a demand for evidence that the code is being taken into account. That could prompt banks to tighten lending policies further and “foster a flight to quality towards better-rated traders”.

“The question is how many will not make the cut as banks step up their demands, inspired by the code?” he adds.

But for dltledgers, the code could provide a way for smaller trading houses to prove to banks that their activity is legitimate and their processes can be trusted.

“Banks are not rejecting financing applications from small traders because they are small, but purely because they are deemed too high risk versus the potential reward,” says chief marketing officer James Green.

“If, as a result of this code, those traders are better equipped to demonstrate their professionalism, build a track record of paying promptly and provide banks with a real-time view into their trades, they will be doing everything they can to help the banks reduce their risk.

“This can only improve their chances of getting finance.”

Blackstone & Gold’s Bhinder agrees that verifying a trader’s internal structures and processes will come at a cost to banks, which could in turn impact the cost of funds, but says that is “not necessarily a bad thing for the market” given the events of recent months.

“The real issue is how realistic will implementation of these practices be given the velocity of trade, and long-term adherence given that it is not legally binding,” he says.