Singapore sets out commodity trade finance guidelines

Singapore-based banks have published a code of conduct governing commodity trade financing, as the regional trading hub tries to rebuild its reputation following the collapse of several oil trading companies earlier this year.

The Code of Best Practices for Commodity Financing, published by the Association of Banks in Singapore (ABS) with backing from the government, is designed to "articulate key principles governing prudent commodity trade financing practices".

The initiative, which was first announced in July, comes after Singapore-based trading firms Hin Leong, Zenrock Commodities and Hontop were forced to seek court protection earlier this year, leaving banks exposed to losses of up to $4bn.

All three companies were revealed in court filings to have used a single letter of credit to finance multiple cargoes, or to have secured financing for cargoes that did not exist, prompting some banks to reassess their lending to the sector.

The new code "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," financial regulator the Monetary Authority of Singapore's (MAS) assistant managing director Ho Hern Shin said.

The non-binding code was put together in consultation with unnamed commodity trading firms. The ABS identified two key themes underpinning the code: to increase banks' understanding of trading firms' corporate governance, risk management practices, business and transactions at a macro level; and to give banks sufficient transparency and control over financed transactions, goods and receivables at the transactional level.

The guidelines themselves are non-proscriptive, instead identifying examples of corporate governance, risk management and due diligence practices that banks can apply when dealing with trading firms.

These include ensuring that directors of trading companies have an adequate understanding of their firm's operations; checking that procedures are in place to mitigate risk, including hedging, which are appropriate for the trading company's operations; and ensuring that banks have information on trading firms' financial statements and details of related party transactions.

In what appears the most direct attempt to address the alleged fraudulent practices at Hin Leong, Zenrock and Hontop, the guidelines suggest that trading firms should agree not to obtain other financing relating to the transaction or goods that are financed by banks. Trading firms should also declare "that the transaction subject to finance is a trade transaction involving a genuine sale of goods" and provide information "on the end-to-end process and trade cycle", it said.

The 28 banks that formed the working group behind the code of conduct account for the vast majority of commodity finance lenders in Singapore. There may be further collaboration initiatives between banks to identify and reduce risks, the ABS said.

The code was backed by the MAS, government business agency Enterprise Singapore and the country's Accounting and Corporate Regulatory Authority. It is one of two main initiatives put in place to prevent any repetition of this year's trading scandals. The other, a blockchain-based trade finance database planned by a group of Asian and European banks, is at the proof of concept stage, its backers said in October.

By Kevin Foster