Commodity-finance industry in Singapore gets code of best practices

A SET of best practices for commodity financing was rolled out on Monday, the first such code for the industry in Singapore. This comes after the city-state's reputation as a trusted hub for this lending segment has taken a hit of late.

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, said ABS in a press statement.

One of the two key themes underpinning the code is, 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, at a transactional level, banks should obtain sufficient transparency and control over financed transactions, goods and receivables.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The code was developed by an industry working group of 28 banks, in consultation with trading firms. These lenders - including DBS, OCBC, UOB, Bank of China, HSBC, Citi, ABN Amro, BNP Paribas and Societe Generale (SocGen) - represent the majority of commodity financing banks in Singapore.

The Business Times (BT) first reported in July that banks with operations in the city-state had set up a working group to propose new guidelines in a bid to raise industry standards for commodity financing.

ABS on Monday noted that the code is designed to provide broad guidance to banks, which are expected to ensure that the appropriate policies, procedures and controls are in place to observe the principles in the best practices in a risk-proportionate manner.

Samuel Tsien, ABS chairman and OCBC group chief executive officer (CEO), 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 ranging from boutique firms to leading international commodity groups.

Ho Hern Shin, MAS's assistant managing director for banking and insurance, expects strong participation by the industry in implementing the best practices, which she said will encourage greater transparency and trust between trading firms and their lenders as well as promote sustainable credit flows.

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 Satvinder Singh, ESG's assistant CEO. He added that a diverse range of commodity trading companies provided feedback for the development of the code.

Andy Sim, Acra's 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," Mr Sim said.

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 had thus been pulling back from the segment in Singapore. (see amendment note)

BT also reported last month 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.

Amendment 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.