On April 17th, the ICC Banking Commission approved the URBPO contractual rules, which will be brought into effect from July 1st 2013.This recent announcement is likely to create ripples in the financial services industry. In this blog I will review what BPO means, what are the uniform rules (the UR in URBPO) mandated by ICC, and what would be the implications of these rules on international trade.
The current state of International Trade
According to a recent WTO press release, world trade growth in 2012 fell to 2% from 5.2% in 2011 and is likely to remain at a sluggish 3.3% in 2013 due to the ongoing economic crisis and slow growth in developed economies. Slow growth in international trade has a direct impact on the balance of payments for economies and profitability of corporates, thereby exacerbating the economic slowdown. On the other hand, an HSBC trade forecast predicts that:
To enable a favorable international trade growth outlook and to build confidence among international traders, financial messaging service provider SWIFT and the banking commission of ICC have jointly introduced an innovative bank assisted trade instrument—BPO, a potential game-changing innovation shaping supply chain finance and international trade in coming years.
What is BPO?
BPO, as defined by financial messaging service provider SWIFT and the banking commission of ICC is an irrevocable undertaking given by one bank to another bank that payment will be made on a specified date after successful electronic matching of data, generated by SWIFT’s Trade Services Utility (TSU) or any equivalent Transaction Matching Application, based on Uniform Rules for BPO issued by ICC. Essentially, BPO is an alternate payment instrument to settle international trade with automated processing and reduced risk (assurance of payment to the seller). It offers:
How does BPO differ from traditional trade finance instruments?
How will Banks benefit from BPO?
For a BPO transaction, the bank will be involved in all stages of an open account transaction, starting from the initial baseline submission and it will reduce the overall operational cost associated with the trade transaction. Banks can also offer value-added services like financing, cash forecasting, liquidity and working capital management to their corporate clients based on underlying trade transactions and reporting. Large banks can also offer white label processing tools for the banks that would not like to build their own BPO processing tool.
How will Corporates benefit from BPO?
What will be the capital and accounting treatment of BPO?
Based on the initial reference of ICC Banking Commission, the BPO has the characteristics and behavior of contingent liability and at the time of issuance; this would be an off-balance sheet item for the obligor bank and characterized as unfunded (The execution of a BPO is contingent upon agreed transaction terms between the obligor and recipient Bank). The BPO, once utilized, will be removed or liquidated from the books and balances of the obligor and the recipient bank upon the execution of a BPO for a payment “at sight”. It will be on-balance sheet item if the deferred payment undertaking changes into definitive undertaking at the time of dataset match by the transaction matching application.
What could be the potential shortfalls of this system?
I hope this description clears some of the doubts regarding BPO and its implications. I would be glad to answer any further queries you have and to learn from your comments.
Tushar Chitra is the Senior Director for Product Marketing at Oracle Financial Services. He can be reached at Tushar.chitra AT oracle.com.