global banking & trade solutions trade finance essentials liao anglais.pdf · broker funds flow...

Trade Finance Essentials

Global Banking & Trade Solutions

Bin Liao

Vice President

Global Trade & Banking

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NORTH AMERICA

Calgary*

Chicago (US HQ)*

Los Angeles

Montreal*

New York*

San Francisco

Toronto (HQ)*

Vancouver*

Mexico City*

Milwaukee*

Atlanta

Boston

Dallas

Denver

Houston

1,537 bank branches and

4,350 ABMs in North

America

EUROPE

London*

Lugano

Munich

Zurich

Dublin

SOUTH AMERICA

Rio de Janeiro*

ASIA

Beijing*

Guangzhou*

Hong Kong*

Shanghai*

Singapore*

Taipei*

Mumbai*

AUSTRALIA

Melbourne

North American-based with international on the ground presence.

We have partnership with1,200+ banks in 160+ countries around the world

UAE

Abu Dhabi*

Key Differentiator: Our extensive network provides us an advantage to gain current local information on the markets.

Countries where

we have on the

ground BMO

coverage.

*GB and/or GT

Representation

Shaded area on the map

represents where we have

relationships with

correspondent

banks/external parties and/or

where we have commercial

credit exposure.

Our Global Footprint BMO Global Banking and Global Trade are focused on growing our representation world wide.

BMO Financial Group in Asia

Leveraging the BMO Brand in the fast-growing Asia market

BMO Asia • Beijing:

• BMOFG Asia Head Office • BMO ChinaCo Beijing Branch

• BMO Nesbitt Burns • Partner in COFCO Trust

• Shanghai:

• BMO ChinaCo Shanghai Branch • Investment in Fullgoal

• Guangzhou:

• BMO ChinaCo Guangzhou Branch

• Hong Kong: • BMO Hong Kong Branch

• Lloyd George Management

• Taiwan: BMO Rep Office

• Singapore: BMO Singapore Branch (pending regulator approval)

• India: BMO Advisers Ltd

Very complex, involving a large number of participants.

Local

Government

Bank

Domestic Carrier

Bank

Freight

Forwarder

Exporter

Domestic Carrier

Importer

Customs

International

Carrier

Broker

Funds Flow

Actual Goods

Current Global Trading Environment

Open Account

Open Account (Insurance Enhanced)

Advance Payment

Import & Export Letters of Credit

Standby Letters of Credit and Guarantees

Documentary Collections

Basic Types of Trade Finance Products

EXPORTER

Highest Risk

Lowest Risk

IMPORTER

Lowest Risk

Highest Risk

Open Account: Used when there is a high trust level on the part of the exporter that the importer will pay at the agreed future time. To provided added protection to the exporter, insurance can be purchased for selected buyers and/or countries. Documentary Collections: Used when there is a need to minimize the risk for both the exporter and importer by ensuring that goods are shipped according to the contract. Documentary Credits: Used when there is a need to minimize the risk for both the exporter and importer by ensuring that goods are shipped according to the contract and payment is received against the goods. • Confirmed: BMO assumes payment risk. • Unconfirmed: Risk of foreign bank retained. Advance Payment: Used when the exporter demands payment in full from the importer prior to the shipment of goods. E.g. New relationship.

When Each Trade Finance Product is Used

Open Account: The exporter sends the documents covering the goods directly to the importer who then takes possession and title of the goods before paying for them.

Highest Risk – Exporter; Lowest Risk – Importer;

Open Account – Insurance Enhanced

Open Account

EXPORTER

IMPORTER

Goods

Reimbursement

EXPORTER

IMPORTER

Goods

Reimbursement

Insurance Co./EDC

Open Account

Advance Payment: Payment is made to the exporter by the importer in full prior to the shipment of goods.

Highest Risk – Importer; Lowest Risk – Exporter;

EXPORTER

IMPORTER

2) Goods Shipped

1) Reimbursement (prior to shipment)

Advance Payment

Documentary Collections: Following the shipment of goods, documents (e.g. Bill of Exchange, etc.) are forwarded by the exporter to the importer’s bank with instructions to deliver the documents to the importer after collecting payment (or on a promise to pay on a specified date).

Exporter Taking on Payment Risk

EXPORTER

REMITTING BANK

COLLECTING BANK

1) Sales Contract

2) Goods

3) Documents

4) Documents

5) Documents

IMPORTER

6b) Payment

6a) Payment 6c) Payment

Documentary Collections

A written undertaking of a bank to make payment to a beneficiary up to a prescribed amount upon

presentation of specified documents within a specified time

A legally binding instrument

Governed by Uniform Customs & Practice for Documentary Credits published by ICC Paris (UCP600)

What is a Letter of Credit?

Benefits

For The Seller / Exporter For The Buyer / Importer

mitigate payment risk a bank’s

undertaking to pay instead of the buyers

eliminate risk of order

cancellation by buyer

opens doors to new markets

help differentiate your company from the competition by offering

longer payment terms

facilitates financing

convenience of receiving

payments at your own bank or your bank of choice

does not tie up cash

ensure payments are not made

until seller fulfils terms and conditions outlined in the LC

convenience of receiving goods

at destination of choice by the specified date

able to negotiate more

favourable trade terms with the Exporter when payment by

Letter of Credit is offred

Why use a Letter of Credit?

Import

FOREIGN EXPORTER

CDN IMPORTER BMO

Client/Prospect

ADVISING/ CONFIRMING

BANK

ISSUING BANK (BMO)

1) Sales Contract

2) L/C application

4) Advice/ Confirm L/C

3) L/C Issued

5) Goods

6a) Docs & L/C

6b) Docs & L/C

6c) Docs Reviewed

7b) $$

7c) $$ 7a) $$

Import & Export Letters of Credit: Minimizes the risks for both the exporter and the importer. A bank undertakes to pay the exporter, provided that the documents presented which evidence that the terms and conditions of the contract have been complied with.

Risk Shared Equally between the Importer and Exporter

Import & Export Letters of Credit

CDN EXPORTER BMO

Client/Prospect

FOREIGN IMPORTER

ADVISING/ CONFIRMING BANK

(BMO)

ISSUING BANK

1) Sales Contract

2) L/C application

4) Advice/ Confirm L/C

3) L/C Issued

5) Goods

6a) Docs & L/C

6b) Docs & L/C

6c) Docs Reviewed

7b) $$

7c) $$ 7a) $$

Export

Import & Export Letters of Credit (cont’d)

Three basic features of letters of credit: 1) Sight L/C vs. Term L/C

Sight L/C: The exporter is paid immediately upon presentation of specified documents. Term L/C: The exporter is paid at a future date as established in the sales contract. Many

corporates look to finance these term L/Cs and BMO can provide this financing. I.e. Sight plus 90 days.

2) Irrevocable

Cannot be cancelled Cannot be amended Beneficiary consent required to cancel/amend

3) Confirmed L/C vs. Unconfirmed L/C

Confirmed: A L/C which has been guaranteed by another bank where the exporter is uncomfortable with the credit risk of the issuing bank primarily due to the country or credit risk issues of the bank. I.e. L/C’s from emerging markets are typically confirmed.

Unconfirmed: This type of L/C carries the obligation of the issuing bank to honour all drawings, provided that the terms and conditions of the letter of credit have been complied with.


Why a Confirmed L/C?

Buyer’s country has a reputation for economic and/or political instability

Buyer’s country has complicated FX restrictions

Exporter not comfortable with L/C Issuing Bank and would like BMO to take over payment obligation from the L/C Issuing Bank


Advantages of a Confirmed L/C for the Exporter

Eliminates/mitigates credit risk and political risk when the L/C is confirmed

by BMO

L/C is irrevocable, therefore, it protects against pre-shipment risk

Permits immediate payment in Canada

L/C facilitates financing from BMO to foreign bank which can add to the attractiveness of your trade


Typical Documents Required Under A Documentary Letter of Credit

Drafts (Bills of Exchange)

Commercial Invoice

Transport Documents, (e.g. Ocean Bills of Lading, Air Waybills)

Inspection Certificate

Certificate of Origin

Packing List


Common Discrepancies

L/C expired

Late shipment

Late presentation

Inconsistency among documents

Typographical errors

Corrections not authenticated


Risks with discrepant documents

Loss of L/C protection

Risk of Non-payment

Demurrage/storage charges

May not be able to find a new buyer

Strain business relationship

Cost you time and money


How to avoid discrepant documents

Review terms and conditions of the credit on receipt to ensure they agree

with your sales contract and seek amendment before shipment

Ensure you can comply with buyer’s expectation on performance

Ensure documents required are within your control

Prepare documents based on L/C terms and not on contract terms


Points to Remember:

The rule of strict compliance

You are not exempted from presenting a document that you cannot

produce

Banks deal with documents only and not with goods

No payment obligation of the bank will arise unless the documents are in strict compliance

Any agreement to changes between buyer and seller has no effect unless the L/C is amended


Standby Letters of Credit and Guarantees: A written undertaking given by BMO to the party with whom our client has entered into a contract, to pay a specified amount of money in the event that our client does not meet specific financial or performance obligations.

Beneficiary

BMO Client

BMO

Standby Letter of Credit

Standby Letters of Credit & Guarantees

Two types of Standby Letters of Credit and Guarantees: 1) Financial Issued to cover customer transactions that are:

An obligation settled by a cash payment only Given on behalf of the client in support of a financial obligation to another party

2) Non-Financial Issued to cover customer transactions that are:

An obligation settled by performance of work done instead of payment of cash Support for completion of non-financial or commercial contracts

Standby Letters of Credit & Guarantees (cont’d)

Who We Are: Trade advisors.

What We Do: Provide advisory services, engineer and execute financial instruments.

Target Market: BMO clients conducting international trading activities.

Trade Finance Operations Value Proposition

1) Trade Products

Subject matter experts on international trade products, including import, export and standby letters of credit and collections.

“Best in Class” Internet-based Trade Venue processing.

Competitive pricing.

2) Country Risk Advice Through Global Banking and Trade Solution Support

Country risk advisors assisting clients in understanding payment & country risks, the global market and trading environment.

Capability to leverage an extensive network of strategic Global partners. Primary support provided through our partnership with the IFI team and our offices around the world.

Expertise in conducting business in emerging markets.

Trade Finance Operations Value Proposition (cont’d)

3) Structuring and Risk Mitigation Expertise

Expert trade finance structuring capabilities, helping clients mitigate non-domestic trading risk.

Extensive expertise in structuring standbys and/or guarantees supporting complex global transactions.

Effective support from our partners (EDC and private insurers).

4) Financing

Working capital support through payment undertakings and discount financing.

5) Execution Support Excellence

Personalized service from a team of dedicated Trade Finance and Financial Institution professionals.

Trade Finance Operations Value Proposition (cont’d)

Questions?

Questions and Answers

As part of BMO Capital Markets and being a Trade and Country Risk Advisor, I am committed to provide risk

mitigation, structuring, financing and execution support to BMO clients and targeted prospects focused on

international markets. I enjoy more than 21 years of banking experience; of which 15 years have been with various

international operations at major Canadian financial institutions.

Bin Liao Vice President, Trade Finance BMO Capital Markets Tel.: (514) 282–5921 Fax: (514) 282–5930 Email: [email protected]

Banking Experience

Commercial and syndicated financing, structured trade with

export credit agencies and correspondent banks, foreign risk

assessment, supply chain financing, factoring, and trading

company financing.

Industry Expertise

Exposure in the following industries:

Infrastrucuture, aeospace, agro-food, retail, transportation,

financial institutions, equipment manufacturing, forestry and

trading company.

International Network

Well established relationship with international banking

correspondents and export credit agencies. China banking

specialist.