Commodities & the Economy: Is 2024 the Year the Industry Pops? by Trade Finance Global

ISSUE 20

TRADEFINANCEGLOBAL.COM

THANKS TO Harriet Palmer Sarah Nutkins Sylwia Nowak Ben Parker Aaron Bailey Christopher Coppock Daniel Barbosa Jingcheng Song Paul Sebastien Mourad Nait-Atmane Khalil Al Harthy Sven de Zoeten Phil Levy Ozlem Ozuner Tom Zscach Silja Calac

KHALIL AL HARTHY CEO Credit Oman

TFG EDITORIAL TEAM Deepesh Patel Brian Canup Carter Hoffman Tammy Ali Duygu Karakuzu Kirtana Mahendran

LAYOUT DESIGN Nigel Teoh

PHOTOGRAPHS AND ILLUSTRATIONS Freepik Company S.L. Canva

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OZLEM OZUNER

Head of Operations & Finance Allianz Trade

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© Trade Finance Talks is owned and produced by TFG Publishing Ltd (t/a Trade Finance Global). Copyright © 2023. All Rights Reserved. No part of this publication may be reproduced in whole or part without permission from the publisher. The views expressed in Trade Finance Talks are those of the respective contributors and are not necessarily shared by Trade Finance Global. Although Trade Finance Talks has made every effort to ensure the accuracy of this publication, neither it nor any contributor can accept any legal responsibility whatsoever for the consequences that may arise from any opinions or advice given. This publication is not a substitute for any professional advice.

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TOM ZSCHACH

Chief Innovation Officer Swift

Contents

CONTENTS 1 1.1

Foreword

From coffee beans to credit lines: The ties of commodity and trade in 2024

Featured

2.1

EMOM for 2024: the incremental gains for credit insurance, trade and supply chain finance

2.2

2024 predictions: What’s in stock for tech for trade, treasury and payments in the year ahead?

2.3

3 tips to navigate ESG issues across global supply chains

2.4

Choosing the right Incoterm: Ex Works (EXW) vs. FCA

2.5

Maritime mayhem: Implications of the Red Sea shipping crisis

2.6

Less than 100 days until the EMIR Refit: What are the changes and how can firms take action?

Commodities in 2024: A year for growth or setbacks?

3.1

Capturing opportunity: 2024 commodity trade outlook

3.2

Biofuels as a bridge: A tangible solution to lowering emissions

3.3

Resource-rich but short on supply: A look at the lithium industry’s midstream dilemma

3.4

‘Green’ commodity markets: Robust environmental claims vs risk of greenwashing

3.5

Navigating commodity trade finance: A comprehensive guide for borrowers

3.6

Oman's economic diversification: A closer look at non-oil exports and trade partnerships in 2022"

3.7

Commodity & Finance a match made in heaven or not?

The evolution of the payments industry

4.1

Six payments predictions that will influence 2024

4.2

Allianz Trade: How BNPL is revolutionising B2B e-commerce

4.3

Year ahead: Swift CIO on balancing uneven payments regulation and advancing CBDC

4.4

Unwrapping the EU Late Payments Regulation

4.5

The new language of payments: BAFT releases whitepaper on navigating the ISO 20022 transition

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FOREWORD

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Foreword

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1.1

From coffee beans to credit lines: The ties of commodity and trade in 2024 DEEPESH PATEL

Editorial Director Trade Finance Global (TFG)

The global commodities market stands at a crossroads, marked by heightened volatility and transformative shifts.

BRIAN CANUP

Assistant Editor Trade Finance Global (TFG)

Commodity trading and finance surround all of us at every moment of the day. From the coffee beans used in our morning coffee to the precious metals used in the smartphones that power our newsfeeds to the food used to cook dinner at night. All of these activities are impacted by the physical trading and financing of the commodities that are instrumental to our everyday lives.

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However, commodities are intricately tied to external influences throughout the world. The very news that we read on our smartphones is the reason why the bag of coffee beans might have gone up by 10%, or why a new pair of shoes has increased beyond your budget. Much like the world over the past 12 months, the commodity market has consistently experienced ups and downs.

Foreword

Rice Commodity Prices 28 27 26 25 24.090 23 22 21 20

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Sugar Commodity Prices 19 18.170

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2024

The global commodities market stands at a crossroads, marked by heightened volatility and transformative shifts. The repercussions of geopolitical instability, fluctuating trade policies, and the persistent threat of climate change cast long shadows over the trading landscape. Yet, within this volatility lies the very real presence of opportunities. Collaboration across all global industries, innovations in trade finance, advancements in sustainable practices, and the digital overhaul of traditional trading mechanisms all give reason for optimism as we head deeper into 2024.

Not just commodities: What is going on with the trade industry in 2024? Entering January, TFG wanted to catch up with global industry leaders to get an insight into the international trade temperature. We reached out to 20 experts and asked them their views on 2024. Just like the commodity market in 2023 and the start of 2024, the predominant theme was uncertainty. The majority of experts that we spoke to expressed concern about the changing regulatory landscape and believed that the infamous $2.5 trillion trade finance gap will increase over the next 12 months.

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But the outlooks weren’t all negative. There was a general consensus that corporate defaults would fall in 2024, and there was palpable optimism that trade technology would help businesses address KYC issues and help streamline cross-border transactions. Of course, sustainability is on the minds of everyone, but most experts seemed confident that the industry has started to plan, or implement, ESG strategies.

Resilience in the Face of Adversity A key takeaway from 2023 and the early weeks of 2024 is resiliency. Both existing examples of resiliency and the knowledge that we need to make our industry more resilient. This idea is not just about surviving; it's about thriving. Leveraging adversity to create innovation, enhance efficiency, and strengthen global networks.

COVID-19 halted the flow of goods globally, the Ever Given blocked the Suez Canal, and now, the Red Sea military action is creating major disruptions. While these events can be viewed as stains on the global supply chain, they can also foster future innovation and collaboration.

Speeding up the transition These challenges have already led to discussions, and use cases, on transitioning to a more sustainable and resilient future in multiple areas. Countries are beginning to diversify their production capabilities and export profiles away from oil by using both incentives and legal initiatives. The new strategies are encouraging the private sector to create and build green products and partnerships.

An obvious example of the necessity of building resilience is the issues with Supply Chains over the past three years.

Behind all of these initiatives is the growing industry of payments. Commodities, sustainable projects and increasing global markets require a functioning payment industry, which needs constant innovation and development.

Global trade has been significantly impacted by the three major events (with many smaller obstructions) since 2020.

Companies are experimenting more and more with embedded payments and Buy Now, Pay Later (BNPL), hoping to ease the process for the end users.

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Foreword

B2B payments are also emerging as an important area for collaboration. While the transition to a more digital system is an important step, without an interoperable system, the process will remain littered with roadblocks. This is why the ISO 20022 transition is a vital component to ensure the industry is on the same page. Trade Finance Global has been at the forefront of discussing these topics with global leaders across all industries. That’s why we can see the many links between commodity trading, credit tightening, shipping mayhem and payment regulations and why our coffee beans might be an extra £1. Hopefully after this magazine, you can make these connections as well. As always, TFG wants to thank all of our sponsors and writers for their support in making this publication possible.

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Featured

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2.1

EMOM for 2024: the incremental gains for credit insurance, trade and supply chain finance DEEPESH PATEL

Editorial Director Trade Finance Global (TFG)

As we begin the new year, it’s a fitting time to look forward to, or at least ponder what lies in stock for trade, treasury and payments.

CARTER HOFFMAN

Research Associate Trade Finance Global (TFG) 40% of Britons want to exercise more in 2024, according to Forbes. For many, this means going to the gym, which has almost as many acronyms as trade and supply chain finance.

Year-ahead predictions are increasingly difficult. The uncertain macroeconomic conditions of late often have a snowball effect on seemingly unlinked phenomena.

Many workout acronyms are centred around incremental, steady progress, as well as TFG’s predicted theme for 2024.

As we begin the new year, it’s a fitting time to look forward to, or at least ponder what lies in stock for trade, treasury and payments.

As with these gym exercises— we predict the next 12 months to be a year of growth—slow, steady, incremental.

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With this in mind, Trade Finance Global (TFG), reached out to a handful of brave (and strong) experts in international trade, trade finance, supply chain

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finance, and trade credit insurance with one simple ask: to predict the 12 months ahead. We asked them what trends to look out for and what challenges we might anticipate in the year ahead, and received a range of responses to that end. 2023 could be summarised as an alphabet soup of acronyms and terms that most people hadn’t heard of 5 years before; Gen AI, digital islands, COP, and ETDA. 2024 looks similar according to many experts TFG spoke to, but we needed to understand the complexities and uncertainties that define these areas, gathering insights to shape a clearer picture of what to expect in 2024. The result is a compilation of predictions and perspectives

from those who know these industries best, offering a glimpse into the potential ends and developments that could help us prepare, shape and future-proof trade, supply chain and credit insurance, at least for the next 12 months.

Uncertainty will underpin the macroeconomic landscape (again) Like 2023, the global environment for trade is expected to continue to be challenging in the year ahead. We expect another workout cycle of macroeconomic and geopolitical uncertainty, which many have termed ‘the new normal’. Trade volumes tend to correlate with trade, receivables and supply chain (payables) finance, with the exception

of changing interest rates and market confidence. With many experts predicting a continued economic slowdown in 2024, with some possibility of a global recession, the outlook for trade finance is uncertain. It will depend on an array of factors, such as central bank monetary policy, China’s continued economic slowdown, energy prices, and geopolitics (notably if Trump gets elected in the United States). Rebecca Harding, Managing Director, Rebeccanomics, said, “Commodity trade finance is caught in the slipstream of events in the Middle East and the Russia – Ukraine conflict. It is likely to be volatile through the year although profitable if oil prices stay high.”

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What do you foresee as the top challenges for meeting business demands in 2024 Regulatory landscapes/compliance Technology investment Competing financial institutions Economic climate Lack of common standards Meeting sustainability and ESG needs Adapting to digital currencies Other (please specify)

Uncertain macroeconomic conditions such as these, however, tend to amplify credit and liquidity pressures, often causing firms to take protective action. For businesses, particularly credit-reliant micro-, small-, and medium-sized businesses (99% of the global workforce), the effects can be disastrous. Once lending appetite goes down, so too does cross-border exports, real economy job creation, and wealth creation. Johanna Wissing, Board Member, Head of ESG at ITFA, said: “Lenders around the globe are looking to cut costs, which would usually trigger layoffs, however, there is a severe lack of talent in trade finance, not just at banks, but across insurers, brokers, traders, asset managers, and fintechs.” Significant job cuts and reduced risk appetite within this sector could have

compounding consequences. Access to working capital would be constrained. Consequently, companies are expected to face higher costs and tighter credit conditions, making access to trade finance more challenging. Richard Wulff, Executive Director, ICISA, said, “Elections (not least those in the US) will have consequences on trade and business. I expect a continuation of rising insolvency numbers because of this and because of continued aftereffect of Covid. The rising trend of interest rates is halted, but I am not confident that we will see any meaningful decreases in rates. This does not help the business community.” To add more uncertainty, 2024 expects at least 64 elections around the world, and the USA’s presidential election holds the most uncertainty; the election’s outcome may have

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a significant impact on free trade and geopolitical tensions worldwide.

Supply chain finance expects lackluster growth Some exercises are fairly easy to progress in. The number of miles you can run or cycle in a set period of time, weighted leg exercises (think squats, burpees, sprints). Others, often dumbbell-related, are harder to progress in; chest press, shoulder press, and bicep curls. 2024 is synonymous with the latter, sluggish growth across the board for trade and supply chain finance. There is little disagreement that the trade finance gap will have grown in 2023 (the report is expected to be published in mid-2024), although some believe it will grow significantly, while others predict it will grow only slightly.

Featured

Standards and frameworks will take centre stage

How do you anticipate the trade finance gap will change

Environment, social, governance (ESG) and digitalisation will also remain critical priorities for trade finance in the year ahead.

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However, the emphasis in both areas will be on developing and promulgating robust standards and legal reform to allow for open and sustained progress for years to come.

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No single initiative or technology can solve the industry’s challenges in isolation, as highlighted in the International Chambers of Commerce Wave 2 framework, released during COP28 in UAE. The main priority in 2024 must, therefore, be maintaining slow, steady, and sustained progress.

Flat market conditions will lead to tightened liquidity and increased derisking (by way of cutting correspondent banking relationships), putting pressure on the availability and price of trade finance products. These conditions will cause non-traditional financiers to have a much more prominent role as the industry continues uprooting norms and simplifying products. Sean Edwards, Chairman of the ITFA, said: “I expect supply chain finance (SCF) to get structurally cleverer and to start moving into, or at least exploring, newer areas such as purchase order and inventory financing.”

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desire for liquidity. However, this view is not universal. Rudolf Putz, Head of the Trade Facilitation Programme (TFP) at the European Bank for Reconstruction and Development (EBRD), said, “I expect that in 2024, the growth of receivables and supply chain finance will slow down due to lower economic growth and more cautious lending and risk cover provided by banks, factoring companies, and insurance underwriters.”

Sean Edwards said: “Digitisation, despite or maybe because of recent failures, will continue to gain pace but only slowly. It is here to stay, but I don’t expect an “AI Revolution”, just as I didn’t expect a blockchain revolution.” Technology-agnostic solutions that can adapt to rapidly changing digital conditions will be more vital than ever.

There is a general expectation that open account trade – including payables and supply chain finance – will continue to grow the most in the year ahead owing, to a tight economy, amplifying the

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Corporate failures and defaults in 2024 (vs 2023) Slightly increase 30.8%

Slightly decrease 69.2%

Increased demand will drive growth in trade credit insurance There is a general consensus among experts in the trade credit insurance (TCI) landscape that corporate failures and defaults will slightly increase in 2024 compared to 2023. Many believe this will lead to more normalised claim ratios – similar to those seen before the pandemic – and may result in insurers reducing credit limit acceptance ratios. The market is also poised to become more fragmented, with market share increasingly shifting away from the “big three” and towards more niche credit insurers. Chris Hall, Head of FI Sales, Financial Solutions at WTW, said: “TCI will remain a growth market with carriers continuing to offer aggressive commercial terms and increased risk

appetite to meet expected continued increase in global demand.” This demand will likely be driven by new trade agreements and a reshuffling of the global economic order, increasing supply chain complexity and elevating the importance of counterparty risk. Azzizza Larsen, Alexia BoutinSomnolet, Petra Bockmayer, Vince McCue at Marsh said, “Increasing overdues and claim events will lead to further normalisation in claim ratios to 2018-2019 levels and result in reducing credit limit acceptance ratios by insurers.” However, insurers also anticipate higher loss ratios, which could lead to increased premium rates. Insurers will continue investing in credit information and credit risk assessment tools, which will help expand market

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penetration as corporates and financial institutions increasingly rely on the industry for qualitative insights on obligors’ default probability. Wulff added, “I firmly expect that trade credit insurance companies will keep capacity at a level that will satisfy the market, but will become pickier when it comes to risk quality. The capitalization and professionalism of the industry gives me the confidence that the market will continue to function well to the benefit of our clients and the economy as a whole.” Finally, financial institutions’ anticipated derisking of accounts receivable portfolios is likely to trigger an increased demand for trade credit insurance. It is clear that a landscape of complexity and opportunity awaits. Adding in a bit of growth, the themes of 2023 will resonate with 2024.

The winners: tradetech and insurtech aimed at monitoring and reporting on fraud and risk, making the credit process faster and cheaper, non-bank financial institutions and funds, private credit, SCF. The losers: large lending banks focusing on the documentary trade business, particularly those exposed to the US market, those solely banking on short term wins from AI, digital islands (and those stuck on them). The year ahead will demand resilience and adaptability, as companies face tighter credit conditions and a competitive environment. Key focus areas like robust ESG frameworks, digitalisation, and technology-agnostic solutions will be crucial in navigating these uncertainties. As trade, supply chain and credit insurance continue to adapt to global changes, its role in supporting and shaping the future remains as vital as ever for the real economy.

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2.2

2024 predictions: What’s in stock for tech for trade, treasury and payments in the year ahead? DEEPESH PATEL

Editorial Director Trade Finance Global (TFG)

At Trade Finance Global (TFG), we have gathered insights from industry experts to forecast the developments and challenges these sectors will face in the coming year. Following on from our first predictions article, the incremental gains for credit insurance, trade and supply chain finance, TFG surveyed 9 more industry experts looking at what we might expect for technology for trade, treasury and payments in 2024.

CARTER HOFFMAN

Research Associate Trade Finance Global (TFG)

As we ring in the new year, the trade, treasury, and payments is indeed poised for another year of significant evolution. At Trade Finance Global (TFG), we have gathered insights from industry experts to forecast the developments and challenges these sectors will face in the coming year. Their collective wisdom sheds light on the overarching trends and expected transformations across several key areas. Perhaps some of these predictions can help to navigate the changes and opportunities that 2024 is likely to bring.

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What will be the most important solutions that new and emerging technologies will address in 2024 for trade, treasury , and payments? KYC/KYB Digital Indentities Reducing human error and operational cost Enhancing cybersecurity Streamlining cross-border transactions Other (please specify)

Solving complex issues will be key to fintech survival In 2024, experts anticipate significant advancements and shifts in the fintech landscape across trade, treasury, and payments, focusing on streamlining cross-border transactions. This will be achieved by expanding instant payment systems by major infrastructures like Visa, Mastercard, SWIFT, and new technologies such as Ripple. Enno-Burghard Weitzel, SVP Strategy, Digitization & Business Development, Surecomp, said, “We expect 2024 will see an increased use of APIs as standards are put in place and technology providers expand their portfolios.”

financial solutions while also helping to combat trade-based fraud and support supply chain resilience. While opportunities abound in the fintech space, they will not be shared equally by all firms, with fierce competition expected to drive several out of business as the industry continues to consolidate. Andre Casterman, Founder, Casterman Advisory, said, “Those fintechs that succeed in solving the most complex issues will survive and become key partners to financial institutions in trade, in payments and in ESG. Many other fintechs won’t deliver sufficient value and will therefore continue to lose money and disappear over time.”

Other technologies, like artificial intelligence and machine learning, will automate complex processes, improve risk assessments, and enable the creation of personalised

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2024 is poised to be a year where fintech significantly evolves to meet the complex demands of cross-border trade, with a strong emphasis on efficiency, compliance, security, and the integration of emerging technologies like AI.

An infrastructure revolution for payments If some of the speculation is to come true in the year ahead, 2024 may be remembered as the year of payment’s infrastructure revolution. 2023 marked the beginning of the multi-year transition to ISO 20022, a structured and global data standard for financial information, that is expected to gain momentum this year. Barry Rodrigues, EVP, Payments, Finastra, said, “Banks are required to transition to the new messaging standard before November 2025, but many will implement the necessary changes ahead of time for a competitive advantage.” These changes will complement others across the payments infrastructure base, such as a growing embrace of cloud technology, that will lay the groundwork for a revised and digitally driven approach to payments. Darren Parslow, Global Head, Visa Commercial Solutions, said, “We expect formerly closed-loop and proprietary technologies will become more open source, generic solutions will become increasingly tailored and once-siloed networks will become even more interoperable.”

Transaction banks will continue to explore new growth avenues, such as request-to-pay solutions for SMEs and digital procurement platforms, which are expected to drive continued demand for supply chain finance and open account instruments. On a national level, considerable digital change may also be in the works, but it is tough to say when its full impact will be felt. Stan Cole, Advisor, Unite Global AS, said, “We will see a relentless push forward by governments and central banks towards introducing retail CBDC in the payments mix.”

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Avanee Gokhale, Global Lead Trade Strategy, SWIFT, added, “Central bank digital currencies (CBDCs) are on the horizon with significant impacts on the payments ecosystem… but these remain some years away for full impact.” Overall, the payments sector in 2024 will be shaped by continuous technological innovation and a push towards real-time, transparent, and cheaper payment solutions, amidst a backdrop of geopolitical tensions and market fragmentation.

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Which of the following are likely to be the greatest interest to your treasury over the next 12 to 24 months? Centralisation & standardisation Real-time reporting Real-time liquidity Real-time payments and collections FX management APIs Technology and fintechs ESG integration Other (please specify)

Technology will aid decision-making in treasury With the integration of advanced technologies and a shift towards real-time liquidity management at the forefront of the industry, treasury is in store for a transformational 2024. With the onset of rich data sets, there will be a deeper integration across companies, enabling automation and eliminating inefficiencies. This degree of data availability, when augmented with modern technologies, will allow treasury departments to swiftly make decisions and adapt to changing market conditions.

Moreover, digitising treasury functions will make a broader range of instruments available for optimising working capital intra-day. Treasuries will have greater access to tools and resources that allow for more precise and efficient management of resources. Thameur added, “In 2024, the CFO role will evolve into more of a ‘Chief Liquidity Officer’, having accurate and immediate visibility on where the

company’s current and future liquidity needs stand and being able to action different liquidity scenarios at a fingertip.” The progression towards digital integration and informed decision-making will be of great benefit to organisations, allowing them to stay ahead of the curve and respond effectively to the challenges of a rapidly evolving business landscape.

Moez Thameur, VP Product Working Capital, Kyriba, said: “APIs and Artificial intelligence will be the CFO’s co-pilot in making the right decisions, at the right time, with the right information.”

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ESG is here to stay The role that sustainability and ESG play in business strategies and operations will become more critical in 2024, yet the journey towards effective implementation and standardisation will remain challenging. Enno-Burghard Weitzel said: “2024 will only see wide adoption of ESG reporting across the industry if regulators make ESG transparency mandatory based on an agreed-upon framework or standard.” Johanna Wissing, Board Member, ITFA, added, “There is an urgent need to harmonise reporting standards and develop common audit requirements. This will take time. It was a multiyear process to implement similar standards for financial accounting, so efforts will need to continue past 2024.” The push for greater focus on ESG will come not only from regulators but also from activist investors who are looking for greater transparency and disclosure from companies. Such investors increasingly seek assurance that the companies they invest in manage their ESG risks and avoid greenwashing.

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In terms of sustainability and ESG, where is your business at? Early planning Policy development Initial implementation Advanced implementation Fully integrated into business Not currently pursuing ESG initiatives

A significant aspect of the conversation around ESG in 2024 will involve the role of emerging markets in the context of trade finance, highlighting the need to understand and integrate ESG considerations in diverse economic and geopolitical landscapes. One of the key challenges identified for ESG implementation is the potential widening of the SME trade finance gap. As funding smaller businesses becomes more complex, there is a risk that ESG could be perceived as too difficult to implement effectively.

for tracking and managing sustainable supply chains. The intersection of technology and sustainability is expected to drive innovation and offer new tools for companies to meet their ESG objectives. Rebecca Harding, Managing Director, Rebeccanomics, said, “ESG isn’t going to go away, but there will need to be a concerted cross-industry effort in 2024 to keep the momentum going behind this issue.” —– These predictions and insights from industry experts attempt to see through the fog of the

future and provide a sense of what the next year might bring. Should they prove to be true, then 2024 will be a year of significant evolution driven by technological advancements and a deepening commitment to ESG principles. As we navigate these changes, the insights shared by our experts may prove to be invaluable in guiding strategies and decision-making processes, ensuring readiness for the dynamic landscape of 2024 and beyond.

Such a challenge underscores the need for cooperative efforts across industries to maintain momentum and ensure an inclusive transition towards sustainable trade. This will open opportunities for technology companies in the ESG space, particularly when it comes to developing solutions

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2.3

3 tips to navigate ESG issues across global supply chains HARRIET PALMER

ESG Strategy Manager ESG360

As the polycrisis of nature, climate and social justice unfolds, the notion of ‘business as usual’ is being disrupted. Whilst Scope 1 and 2 GHG emissions are largely under the control of an organisation, Scope 3 are considered the ‘hidden’ emissions, intricately woven into a company’s supply chain.

SARAH NUTKINS

ESG Strategy Associate ESG360

Understanding the challenge As the polycrisis of nature, climate and social justice unfolds, the notion of ‘business as usual’ is being disrupted. Whilst Scope 1 and 2 GHG emissions are largely under the control of an organisation, Scope 3 are considered the ‘hidden’ emissions, intricately woven into a company’s supply chain. Amounting to approximately 80% of an organisation’s total emissions, the enigmatic Scope3 emissions, including

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those from waste, transportation, and distribution, are a major piece of the emissions puzzle. As the tangible impacts of climate change become more prevalent, international businesses are increasingly recognising the need to manage and curtail Scope 3 emissions. This has been exacerbated by new legislation emerging on an international level, and the recommendations of the Intergovernmental Panel on Climate Change (IPCC) that businesses must cut GHG

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emissions by 45% by 2030 and meet net-zero by 2050 (as enshrined in UK law in 2019). Frameworks such as the EU’s Corporate Sustainability Reporting Directive (CSRD) call on businesses to disclose climate and sustainability risks and opportunities in unprecedented detail, requiring significant resources to comply.

Where to begin? The challenges posed by Scope 3 emissions are multifaceted, demanding a holistic approach, in which supplier collaboration is key. Three essential steps for businesses across sectors to manage the challenge presented by Scope 3 include: 1

Establish robust governance structures by forming a net-zero working group within your organisation. This ensures that emissions data collection and reporting processes are streamlined and reliable, paving the way to self-sufficiency. It also means that accountability is shared and the key stakeholders from across the business can collaborate for improved outcomes.

Upskill your team to ensure a strong understanding of the interplay between the E, S and G of ESG. These issues are complex and historically haven’t been part of many roles’ day to day, so bringing employees along on the journey is critical for engagement and success.

Seek guidance from professionals with expertise in GHG emissions and climate science to ensure that best practice is adopted. Leveraging technological solutions is a powerful vehicle to facilitate your net zero journey.

Case study: Engaging tier 1-3 suppliers across an international supply chain The widespread reliance on Scope 3 emissions estimations is becoming the norm, yet can massively distort a company’s ESG portfolio by relying heavily on averages and ‘guesstimates’.

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Raw Material Suppliers

Component Supplier 1

Raw Material Suppliers

Component Supplier 2

Raw Material Suppliers

Component Supplier 3

Scope 1 & 2 Scope 3 Cat 4,5,9 Upstream & Downstream transportation & Waste

Key Component Supplier

Sourcing Company Primary Manufacturer & Distributor

Distribution Retailer

End Consumer

Scope 1 & 2 Scope 3 Cat 4,5,9 Upstream & Downstream transportation & Waste

Scope 1 & 2 Scope 3 Cat 4 Upstream transportation and distribution

Scope 3 - Cat 9 Downstream transportation and distribution

Scope 3 Cat 11. Use of sold products & Cat 12. End of life treatment of products

Figure 1 : ESG360°‘s value chain map, highlighting the key emissions data required from each tier of the value chain.

One approach to combat this, as ESG360° are currently piloting with a client, lies in collecting energy consumption data directly from your tier 1, 2 and 3 suppliers (as opposed to emissions data). This builds greater governance structures, promotes supplier collaboration and ensures more reliable data is collected, as suppliers can provide accurate energy consumption data as opposed to estimated emissions totals. The energy data can then be used to calculate emissions resulting in a robust process, less prone to error and better able to stand up to audit.

This in turn provides businesses with a clear view of their full value chain emissions and allows them to create a comprehensive emissions reduction strategy.

A final note: Going beyond the E of ESG While the spotlight on carbon emissions data collection and decarbonisation is a huge milestone, the intricacies of ESG extend far beyond GHG emissions. Significant risks such as human rights violations and biodiversity loss in the supply chain warrants equal attention

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and ambition to manage and should be integral to a business’s ESG strategy. Simply put, by addressing E, S and G issues in silos and without adopting a systems view, businesses will fail to implement the changes necessary to ensure they can remain resilient in the face of future uncertainties. To remain competitive and thrive in this new business reality, Scope 3 should be a key focus, in tandem with other social and governance risks and opportunities that ultimately impact enterprise value.

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2.4

Choosing the right Incoterm: Ex Works (EXW) vs. FCA SYLWIA NOWAK

Independent Consultant

There are advantages and disadvantages of various Incoterms, we’ll focus on the EXW (ExWorks) Incoterm, what its misuse can lead to, what are the risks and propose a different Incoterm that could be more suitable in various scenarios. Having been exposed to a wide range of shipping documents and Incoterms over the past decade, I have reflected on some of the best practices and crucial elements that should consistently be followed for trouble-free import and export processes. Although we are moving towards the digitalisation of customs and paperless trade, the transfer of essential shipping information remains a necessity. This can be achieved through various means such as electronic data interchange (EDI), advance shipment notifications (ASN), emailing PDFs, or attaching physical copies of documents to parcels, among other methods. Sometimes certain discrepancies can be noticed when dealing with various shipping documents and one of the most common mistakes is applying the incorrect Incoterm.

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Currently, it is mandatory to state Incoterms in the UK's import declarations. This requirement stems from the transition from the old UK requirement stems from the

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transition from the old UK customs system, CHIEF, to the new Customs Declaration Service (CDS), along with the introduction of new demands. The newest version of Incoterms was released in 2020 and these are governed and revised every 10 years by the International Chamber of Commerce. Although not mandatory to be stated in the shipping paperwork, once they are agreed upon and used - the Incoterms become legally binding. Numerous trade and customs-related institutions, organisations, and private companies offer training in Incoterms. Understanding these terms helps clarify the rules and obligations between sellers and buyers. It also instils confidence in situations such as resolving

insurance claims if any issues arise with the goods during transport. While many companies adhere to commercial practices and may not always exercise or seek their rights under a specific Incoterms rule,

often depending on customer relationships, it's important to note that Incoterms also determine the allocation of risks and costs. Therefore, it is crucial for businesses to at least understand the Incoterms that are relevant to their operations and when trading goods. There are advantages and disadvantages of various Incoterms, we’ll focus on the EXW (Ex-Works) Incoterm, what its misuse can lead to, what are the risks and propose a different Incoterm that could be more suitable in various scenarios.

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What is Ex Works (EXW)? According to ICC’s Incoterms ® 2020, EXW places maximum responsibility, risks and costs on the buyer which is visualised in the ICC’s practical wallchart (that can be downloaded for free here)

Under EXW, at the named place, the exporter of record makes the goods available for collection. In many companies, this is quite impractical (causing EXW to often be misused). Typically, a vehicle arrives at the exporter's (named) premises and the goods are loaded by the exporter's forklift driver. However, under EXW (Ex Works) terms, this shouldn't occur. Instead, the buyer's transport company should arrange for a vehicle equipped with a tail lift or a Moffett, which tends to be more expensive. Upon arrival, the driver of this vehicle is responsible for loading the goods. Numerous companies consider it impractical, and misunderstandings often arise about the obligations of each party, particularly when loading heavy goods. This involves not only arranging special equipment but also conducting risk assessments and method statements properly. Effective communication and preparation among all parties involved, including the seller, transport company, health and safety personnel, buyer, and others, are essential.

Under EXW, sellers/exporters are not obliged to raise an export declaration and apply for any export licenses (if goods are subject to export controls). From the importer’s (buyer) perspective, this would also be very troublesome, as it is the seller who has the most knowledge about the product it sells/exports. The buyer might not be aware of the technical specifications and may not have access to any technical drawings, which are necessary for: a.

Accurately classifying goods under the Harmonized Tariff Schedule (HTS) and

Applying for an export license

However, what often happens, in order to accommodate for the customer (buyer), the exporter arranges transport and/or an export declaration, which is not in accordance with rules under this Incoterm.

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Legal obligations and proof of export under EXW and FCA One of the most crucial aspects to consider is the legal obligation pertaining to the proof of export evidence. Under EXW, it’s the buyer’s (importer’s) responsibility to arrange for an export declaration, however, the buyer may not provide a copy of it, as it is not obliged to do so. This poses a problem for the seller (exporter), as the exporter is then unable to prove to the authorities the goods left the country (were exported). The seller may lack complete knowledge about the goods' final destination if they are diverted elsewhere, as the seller is not responsible for arranging the transport.

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Typically, the exporter’s commercial invoice would be zero VAT rated. Strictly speaking, in order to legally apply zero VAT to the invoice, there should be evidence of goods being exported. In the case of a lack of proof of export, authorities have every right to demand the VAT to be paid back by the seller (exporter).

Under FCA these activities are the responsibility of the seller, therefore my recommendation would be to use FCA instead of EXW (e.g. FCA Company XYZ, Bristol, UK, Incoterms 2020) and ensure the FCA Incoterms are stated clearly on the shipping documents or correctly transferred by electronic means.

What is the best Incoterm for an export declaration?

Although EXW Incoterm was slightly revised in 2020 version (as opposed to 2010 version) to tackle the issue of sea transportation and Bill of Lading’s transfer (and article A6/B6 explains this change in more detail), ICC’s Publication No. 723E explains that businesses should make careful considerations, before using EXW for domestic sales.

The safest Incoterm to adopt when the exporter is responsible for arranging the export declaration and is loading the goods upon the vehicle's arrival is FCA (Free Carrier).

For the above reasons, I strongly urge traders to think about the EXW implications and consider using FCA Incoterm instead.

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2.5

Maritime mayhem: Implications of the Red Sea shipping crisis BRIAN CANUP

Assistant Editor Trade Finance Global (TFG)

To date, 12 shipping companies, in addition to numerous corporates, have suspended activities in the Red Sea, instead choosing to reroute their journeys around the Cape of Good Hope in South Africa.

The global supply chain and shipping industry have endured a lot in recent years. And 2024 is off to a rough start. COVID-19 wreaked havoc on every level of international trade and shipping. Manufacturers were unable to receive essential supplies to create products, and even if they did, they often lacked sufficient workforce to create their goods. Rising shipping costs and heavy reliance on “just in time” inventory systems plagued global trade.

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The ongoing trade war between the United States and China continues to hamper international trade, and the Russia-Ukraine war created substantial issues with commodity trading and shipping in the Black Sea. In 2021, the “Ever Given” cargo ship became stuck in the Suez Canal for six days, causing delays that cost over $10 billion in trade a day. And now, the global shipping industry is severely impacted by the spillover effects of the Israel-Palestine war.

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Suffice to say, it has been a rough 3-4 years for the international and shipping industries.

What is happening in the Red Sea? In response to Israel’s invasion of the Gaza Strip, and the United States continued economic and military support for Israel, the Iranian-backed and Yemenbased Houthi militants have conducted numerous attacks on civilian cargo ships. According to Al Jazeera, “The Houthis aren’t going to stop what they’re doing, until the Israeli offensive in Gaza concludes,” Gregory Brew, an analyst at the Eurasia Group, told Al Jazeera, “and even then they are likely to continue for some time after.” The Houthi militants first conducted an attack on 19 November 2023 and have since launched 27 attacks, ranging from suicide drones to anti-ship cruise missiles. In response to the Houthi attacks on cargo ships, the US and UK launched a joint military mission, targeting Houthi militants in Yemen. The initial outbreak of the Israel-Palestine war and the subsequent impact reaching the Red Sea has led to major changes in the international shipping industry, as the Red Sea and Suez Canal account for nearly 30% of all cargo ship traffic. To date, 12 shipping companies, in addition to numerous corporates, have suspended activities in the Red Sea, instead

choosing to reroute their journeys around the Cape of Good Hope in South Africa. Vincent Clerc, Maersk’s chief executive told the Financial Times that their ships will avoid the Red Sea for the foreseeable future. He added, “In the short run, it could cause significant disruptions at the end of January, February and into March.”

Beyond geopolitics: How will this impact global trade? We are already seeing the immediate implications of the Houthi attacks and the joint USUK military action on the night of 11 January. Clarksons Research shows that the number of cargo ships in the Red Sea has decreased by 90% compared to rates in 2023.

John Miller, chief economic analyst for Geneva-based Trade Data Monitor said, “China-Europe seaborne is the world’s most important trading relationship, and that’s what’s imperilled by threats in the Red Sea.” This naturally will drive up the costs of global shipping significantly in the short run, and preliminary data shows that this is already taking effect. The journey around the Cape of Good Hope will roughly add 10 days, 13,000 km and $1 million in costs per journey, but companies like AP MøllerMaersk and Hapag-Lloyd have deemed it necessary. Increased fuel usage and days will create significant environmental ramifications, alongside the clear economic impact.

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Anne-Sophie Fribourg, Vice President of Global Ocean Freight at Zencargo said, “In the short term, we’re seeing a significant 25% reduction in capacity. Rerouting vessels via the Cape of Good Hope has increased transit times by 10-20 days, depending on the size of the vessels. At Zencargo we’re observing rate increases ranging from 90% to 300% compared to just a month ago, a significant surge. All of this disruption is going to lead to more delays and more congestions in ports whilst the crisis is ongoing.” Speaking on the environmental impact of the new routes, Adam Hearne, CEO and Co-founder of CarbonChain said, “CarbonChain’s analysis of a common shipping route, Shanghai to Rotterdam, shows that an average (median) bulk carrier could see an emissions increase of around 30% by rerouting via the Cape of Good Hope, compared to the Suez Canal route.

Source: Bloomberg

The rise in costs has already hit specific commodities as well, according to the BBC, Brent Crude oil prices have hit $80 per barrel.

“With shipping responsible for 2-3% of global emissions, this escalation poses yet another challenge to the industry’s decarbonization targets, which it’s already off track to meet (per the IEA). It doesn’t just affect ship operators, but businesses trading goods via these routes, who are facing rising fuel costs as well as pressure to tackle their supply chain emissions.” Prior to the first Houthi attack, in October 2023, container prices sat at $1,004 (ShanghaiRotterdam) and $1,344 (Shanghai-Genoa). In January 2024, they are $3,577 and $4,178.

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Oil companies Shell and BP have announced that all shipments through the Red Sea are paused until further notice.

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Prime Minister Rishi Sunak voiced his concern over the “major disruption to a vital trade route and [higher] commodity prices”. Not only will commodity prices and general costs of shipping increase, but insurance premiums will almost certainly rise, which will both be absorbed by the companies and passed along to the end customers. In the rarer cases where some companies choose to continue operations in the Red Sea, insurers will either refuse coverage or significantly increase premiums. But when the more likely situation arises, that companies will need insurance to cover the trip around the Cape of Good Hope, costs will likely increase as well. The longer journey increases the vessel’s exposure to mechanical issues, weather conditions and piracy, which is more common along the Eastern and Western waters of Africa than in the Red Sea. Robert Besseling, Founder and CEO of Pangea-Risk said, “The detour around Africa, involving longer routes through the Horn of Africa and the South Atlantic, leads to increased fuel consumption and extended transit times, contributing to inflation and higher emissions. These increased shipping costs are expected to gradually impact the global economy, exacerbating an already delicate recovery.

While US-led airstrikes might temporarily impact the Houthis’ capabilities by reducing its weapons and materiel stockpiles, they would not fundamentally degrade their power. Any decrease in weapons supply is likely to be brief, as Iran, the primary supporter, is expected to replenish these resources. In the end of January or beginning of Feburary, it is anticipated that Houthi attacks on vessels will persist, albeit potentially at a reduced rate and intensity, as the group reorganises and formulates its forthcoming strategies.”

Further escalation? We have to wait and see On Monday, 15 January, a United States cargo ship, the Gibraltar Eagle, was struck with an anti-ship missile. Initial reports show that no one was injured and there is limited damage to the goods. On Tuesday, 16 January, Volvo announced a pause in production in their Belgian factory, as they are unable to receive a shipment of gearboxes due to Red Sea turbulence. Michelin, a global tire company, has already experienced two production pauses, as they were unable to access the necessary raw materials. We are still waiting to see the long-term impact of the Red Sea crisis, and if there will be further escalations in the United States and United Kingdom’s retaliatory strikes.

The longer that these problems persist, the more severe the shipping impacts will be. Some of the supply chain issues have already been felt by major global companies. On 12 January, Tesla announced a manufacturing pause due to the Red Sea attacks. According to the electric vehicle company, this could lead to 5,000-7,000 cars not being built. On Tuesday, Volvo announced a pause in production in their Belgian factory, as they are unable to receive a shipment of gearboxes due to Red Sea turbulence. Michelin, a global tire company, has already experienced two production pauses, as they were unable to access the necessary raw materials. The ramifications are quickly piling up. If the problems are sustained, Tesla’s pause in production will not be an isolated event, and trade finance providers might start adjusting their strategies accordingly. Ultimately, the continued attacks by the Houthi militants and response by Western militaries will certainly have an impact on global shipping and trade, the only question is to what extent. If the Red Sea tensions lead to a larger regional conflict, then these concerns mentioned today will only intensify.

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2.6

Less than 100 days until the EMIR Refit: How to prepare your company BEN PARKER

CEO and Founder eflow Global

The most proactive organisations already have projects underway to ensure that their regulatory processes are in place and tested ahead of the deadlines. But why is the new regulation so significant? The European Market Infrastructure Regulation (EMIR) was introduced by the European Securities and Markets Authority (ESMA) in 2012 to enhance transparency and reduce risk in derivative markets. But at the end of 2022, the ESMA announced EMIR was getting a new look: the EMIR Refit. The EMIR Refit, aka EMIR 3.0 in the industry, is bringing widescale changes to transaction reporting, data sharing and report formatting processes both in the EU and the UK. This will increase the complexity of reporting derivatives to trade repositories (TRs) and entail a range of operational and technical challenges. It’s imperative that businesses act now, with less than 100 days until the EU deadline (end of April) and the UK deadline (end of September) also looming. Although there is significant awareness amongst businesses that the EMIR Refit deadline is fast approaching, we’re finding that the approach taken by

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impacted firms to get their houses in order is inconsistent at best. The reporting changes that need to be made under EMIR Refit are significant and won't simply be rolled out with a few weeks of internal discussion and planning. The most proactive organisations already have projects underway to ensure that their regulatory processes are in place and tested ahead of the deadlines. But why is the new regulation so significant?

A sea of change Increased volume of data fields required The volume of data fields is increasing significantly. The total number of fields that firms will need to report on is rising from 129 to 203, including 89 brand-new fields – just 59 have been left unaltered. Firms therefore have significant operational and reporting changes to implement in order to remain compliant.

Amongst the additions is a new ‘Event Type’ field, which aims to amplify transparency around the lifecycle of a trade and will work in tandem with the existing ‘Action Type’ field. While this will give regulators much greater insight into derivative transactions, it also creates a whole variety of event and action type combinations for firms to use when reporting, adding to an already complicated process.

A new look format for reports: ISO 20022 The way in which data needs to be reported is also changing. One of the main changes under the new regulation is the introduction of reporting that follows the ISO 20022 XML format. ISO 20022 is an international reporting standard that creates a more structured way of sending data to TRs and, as the Bank of England describes, “has the potential to create a single common language for most payments globally.” The idea is that this common language will harmonise derivative reporting globally and also make it easier for firms to detect market abuse. To adhere to this new standard, firms will need to use the fully standardised ISO 20022 XML format after the April/September deadlines. They will be required to ensure their reports meet these requirements, which will directly – and significantly – impact the generation of Unique Transaction Identifiers,

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alongside having to integrate the newly introduced Unique Product Identifiers.

Because of this, they need to take action now or risk regulatory penalties.

This in itself will cause obstacles for firms, given that reporting processes will need to be updated to ensure that data is captured and reported on accurately. This is especially true for those firms who currently use CSV and Excel formats.

How can firms take action?

But what if firms aren’t ready to implement these changes by the deadline? There has been no sense of a 'grace period' being offered by regulators. Firms have known about EMIR Refit and the associated deadlines for around 18 months, so there seems little likelihood of them being able to plead for a 'bedding in' period.

It is no longer sufficient for firms to simply have a compliance system in place. Rather, there is increased scrutiny being placed on how effectively these systems can monitor the accuracy of what is being reported. With the EMIR Refit coming into play, financial firms need to have the right tools in place if they want to gain a competitive advantage. As regulators expect more sophisticated record-keeping, one-dimensional compliance systems are unlikely to offer a long-term solution. As a result, more specialised, integrated solutions that span trading activity can allow businesses

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to move away from the strategy of simply meeting their minimum regulatory requirements and, instead, start to pursue greater efficiency and regulatory robustness through integrated digital tooling. When it comes to the EMIR Refit, the six-month date difference in deadlines between the EU and the UK adds further complications for entities who operate in both jurisdictions. As such, it is advisable to look at compliance solutions that adhere to the new reporting requirements across regions and can help firms manage their obligations in line with the relevant deadlines. It’s also important to note that while firms have no choice but to comply with new regulations, it’s unrealistic to think that adapting existing regulatory processes is going to be a labour of love.

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If you don’t have the internal resources to support a smooth and efficient transition in time to meet the deadlines, working with an external consultant or technology provider who can guide you through what needs to be done and help with the ‘heavy lifting’ could be a wise investment.

Fail to prepare… For financial institutions, it’s not simply a matter of keeping up with the changes associated with EMIR Refit, but getting ahead of them. To navigate the shifts in the amount and format of data that needs to be reported, firms should consider integrated compliance tools that are ‘REFIT ready’ and go beyond meeting minimal requirements. Historically, the handout of hefty fines by regulatory bodies has often prompted firms to implement the most readily deployable compliance systems available, rather than taking the time to seek the most suitable solutions. However, the EMIR Refit is a regulatory shift of such significance that it requires a specialised and robust approach. Where possible, this should involve a robust compliance strategy that has process automation and operational efficiency at its core. It can be easy to ignore deadlines. But failing to prepare for the EMIR Refit could leave firms facing far more regulatory problems than they bargained for.

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Commodities in 2024: A year for growth or setbacks?

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3.1

Capturing opportunity: 2024 commodity trade outlook AARON BAILEY

Senior Vice President, Global Commodity Trading Solutions (CTS) Leader - Credit Specialties Marsh

What is the outlook for commodity trading in 2024? Marsh’s Aaron Bailey and Christopher Coppock provide their views

CHRISTOPHER CAPPOCK

Outlook summary 1

In the context of a record number of elections and macroeconomic challenges, 2024 will see volatility in the commodity market driven by a complex web of market forces, government and intergovernmental policy, unforeseen geopolitical developments, and climate impacts.

These events are expected to present various credit, political, economic, supply chain, and climate-related risks, testing the ability of many traders and financial institutions to capture available opportunities.

Strategic use of insurance risk capital sourced from a combination of credit and political risk, and surety bond, guarantee, and parametric markets can help create tangible value for stakeholders and enable trade, investment, and lending across the commodity value chain.

Vice President, Political Risk Analysis Marsh

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Factors shaping volatility in 2024 Geopolitics in 2024 will likely continue to drive commodity volatility. As noted in the 2024 Global Risks Report, three of the top ten risks in the coming years in terms of severity are geopolitical — social polarisation, lack of economic opportunity, and involuntary migration.

Commodities in 2024: A year for growth or setbacks?

Fundamentals will continue to drive crude prices 100.00 95.00

OPEC+ meeting Forecast macroeconomic environment improves

US$ per barrel

90.00 85.00 80.00 75.00

Hamas attacks Israel

70.00 2023-01-03

2023-04-03

2023-07-03

Source: U.S. Energy Information Administration

Many of the developments from 2023 will likely persist, including the Russia-Ukraine war, escalated tension in the Middle East, and further disruption to trade routes such as the Suez Canal.

For energy markets in particular, the renewed focus on geopolitical events and the associated impacts, while understandable given the increased frequency of conflict in recent years, should not

distract from the reality that structural forces will likely remain the most significant driver of price direction over the mid and long-term. Oil prices moved relatively little after the October 7 Hamas attack on Israel and the delayed November policy meeting of OPEC+ compared to how prices tend to respond to demand indicators and macroeconomic uncertainty. It would take a seismic geopolitical event, or an escalation of existing events noted above, to have a similar and lasting price impact. Government trade policies and climate events will likely be significant drivers of volatility in other commodity asset markets, particularly critical minerals and soft commodities.

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Two policy trends could potentially disrupt trade flows and influence the market for these commodities. 1

The first trend is policies restricting the export of goods, such as India’s recent non-basmati rice export ban, which saw global rice prices increase by 16%, or the variety of raw metal export bans implemented in recent years. Two considerations will likely influence government decisions on similar policies in 2024. For soft commodities, governments may assess that climate disruptions could create a negative electoral result or affect political stability in their country. In contrast, for minerals, policymakers may weigh the potential to earn additional revenue by requiring incountry processing, regardless of the potential disruption to global trade.

The second policy trend involves those that affect the import of goods, especially soft commodities. For instance, as of December 2024, the new EU Deforestation Regulation will penalise importers of specific products associated with deforestation activity. The policy is already impacting supply chains for soft commodities as traders look to de-risk their operations ahead of its implementation.

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Commodities in 2024: A year for growth or setbacks?

Restrictive trade and investment levels stemming from a continuation of geopolitical volatility and subsequent country risk deterioration may also be complicated by the results of Basel IV discussions on asset classes and the benefits of risk mitigants.

300 250 200 150

In addition, while there is a strong demand for minerals in emerging and frontier markets, the heightened threat of discriminatory government action may limit capital deployment in new mining projects. Sources of potential losses to lenders and asset owners, such as the seizure of assets, currency transfer restrictions, or cancellation of concessions, may be mitigated through political risk insurance (PRI), which can support the flow of capital into new projects.

100 50

20 22

20 18

20 14

0 20 10

Trade interventions per year

Fundamentals will continue to drive crude prices

Source: Global Trade Alert

To an extent, the effects of government policies on commodity prices can be predicted in advance. Yet it is challenging to know which stakeholders across the commodity value chain will comply, which will seek alternative export markets, which will withdraw from the relevant market, and what the overall impact on prices will be.

Implications of volatility Given the expectation of volatility across commodity markets in 2024 driven by market forces, geopolitics, and climate change, commodity traders and financial institutions may face distinct challenges in mitigating risk while capturing the full scope of available opportunities. One challenge to consider is the impact of prolonged price volatility on internal counterparty credit limits.

For instance, in Europe, in the two weeks following Russia’s invasion of Ukraine, oil, coal, and gas prices increased by around 40%, 130%, and 180% respectively. This led to a market-wide liquidity strain, particularly for energy traders, who faced substantial margin calls and required additional financing to support trading. At the same time, future trade levels were at risk of being limited due to credit concentrations driven by price risk. Many traders and financial institutions looked to the private credit insurance and surety bond markets for payment and performance risk solutions to support the management of credit concentrations, diversify their forms of collateral issuance, and support additional trade across both physical and financial markets.

The impact of climate-driven events on financial risk is another important consideration. Climate-related disruption across supply chains and weather-related changes to crop yields and growing seasons will likely continue to represent a financial risk to many producers, traders, and financiers. The expanded adoption of global parametric insurance solutions is one potential route to provide protection against loss of revenue, increased costs, and physical damage resulting from adverse weather events. In 2024 and beyond, the private insurance market will continue to play a key role in helping financial institutions and commodity traders mitigate investment and trading risk.

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3.2

Biofuels as a bridge: A tangible solution to lowering emissions DANIEL BARBOSA

Finance Director and Executive Board Member Fex Agro

In order to reach the goals intended, a feasible plan must be designed. For that to happen, common sense must once again come to the table. There are three points to consider about the road to net zero.

The road to zero emissions is a challenging one. Ideology can be a blessing and a curse. Ideology is a blessing in the sense that it pushes us to high standards and goals. But these high standards and goals can be almost impossible to achieve in the desired timeframe. In order to reach the goals intended, a feasible plan must be designed.

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For that to happen, common sense must once again come to the table. There are three points to consider about the road to net zero. 1

We need to be honest and accept the fact that there is not a one-size-fits-all solution to the matter. There are a few possible approaches that can be effectively implemented.

Commodities in 2024: A year for growth or setbacks?

One other aspect to be taken into account is the fact that countries are in different stages of economic development. Many developed countries have benefited from the use of fossil fuels in building their wealth. The use of fossil fuels has been instrumental in the generation of wealth since the Industrial Revolution. Developing countries rightly feel shortchanged with the fact that the rules are changing exactly in their turn to join the party.

There is already a significant amount of infrastructure in place. These are sunk costs, as this infrastructure requires little investment to become operational and that should be considered in the analysis.

We could bring more points to the discussion, but these three are sufficient.

Case study: Electric vehicles Let us analyse the case of EVs. In the last decade, they gained attention as the only viable option for future automobiles. As EV emissions are low, EV manufacturers have been very successful in exploiting these commercial benefit. But to assess the emissions footprint correctly, we also have to take into account how the electricity that powers the EV was produced – if it was produced in a coal power plant, the reportedly low emissions will not be accurate.

Additionally, the production and lifespan of a car batteries can significantly impact emissions. Inputs used to make EV batteries are limited and difficult to source. When the battery comes to the end of its life, it will have to be properly disposed of or recycled. Unfortunately, due to costs and accessibility of recycling plants, that is not always the case. The case EV is a practical example of how challenging a seemingly good solution can be.

Since the Brazilian energy matrix is predominantly dependent on hydro-powered electricity generation, the most favourable results were observed with electric cars powered by electricity sourced from this Brazilian energy matrix. With these numbers in hand, we can consider a second best alternative.

The next best option

Recently, Stellantis and Bosch published the results comparative test where four different energy sources were compared for total CO2 emissions. The comparison included the pollutants emitted during energy production, not only the emissions of the car while in use. The results for the test for a 240,49 km drive were: 100% gasoline (E27): 60,64 kg CO2eq 100% electric (BEV) supplied by the European energy matrix: 30,41 kg CO2eq 100% ethanol (E100): 25,79 kg CO2eq 100% electric (BEV) supplied by the Brazilian energy matrix: 21,45 kg CO2eq

One that is not so obvious – the hybrid car powered by ethanol and electricity. There are at least two practical advantages to this approach: a hybrid car needs a much smaller battery and as ethanol is highly efficient in terms of emissions – 70% to 80% of CO2 emissions are absorbed by the sugarcane during the plant development. We are not claiming that this is the definitive solution, as we should always strive to achieve more. But, our idea here is to present an alternative solution that could be used as a bridge between the world’s current energy matrix and the desired target of zero emissions – turning an unreachable goal into a tangible target.

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3.3

Resource-rich but short on supply: A look at the lithium industry’s midstream dilemma JINGCHENG SONG

TFG Accelerate Scholarship Participant

48 46

Moving forward, it will prove vital to control lithium price bubbles, encourage midstream enterprise development, and reduce frictional loss. Only then can we mitigate against the lithium industry’s growing midstream dilemma.

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Commodities in 2024: A year for growth or setbacks?

Price of Lithium Carbonate (99.5% LiC03 min, battery grade), CNT/ T percentage of increase since 2020 Lithium Carbonate (CNY/T)

+1200% +1100% +1000% 949.50

+900% +800% +700% +600% +500% +400% +300% +200% +100% 0%

2020

Apr

Jul

Oct

2021

Apr

Jul

Oct

2022

Apr

Jul

Oct

2023

Source: Lithium carbonate prices data, Trading-Economics

Imbalanced lithium market As the largest consumer of lithium, China has experienced a surge in battery-grade lithium carbonate prices since 2020. By the end of 2021, the price substantially increased by nearly 500%. The price continued to grow rapidly till the end of 2022. The incredible growth rate is attributed to an extreme imbalance between global demand and supply. Based on the current situation, the demand from electric vehicle (EV) producers is expected to increase for at least ten years. Meanwhile, the diminishing stocks of global lithium producers have yet to recover from the COVID-19 lockdowns.

The increasing stress on the lithium supply chain has raised panic about a potential supply crunch.

Rich natural lithium resources do not mean sufficient supply Unlike oil, the natural reserve of lithium natural reserve is rich. According to a US Geological Survey, there are an estimated 14 million tonnes of lithium on earth, approximately 100 times the worldwide production volume in 2022.This means there is no acute problem with the shortage of lithium resources. The industry’s concern is how quickly and efficiently these raw resources can be exploited and developed into the required materials.

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Mine production of lithium worldwide from 2010 to 2022 (in metric tons of lithium content)

Production in metric tons of lithium content

130,000

107,000 95,000 86,000 69,000

28,100

2010

34,100

35,000

34,000

31,700

31,500

2011

2012

2013

2014

2015

38,000

2016

2017

2018

Source: US Geological Survey, ©Statista2023

From discovery to financing to production There is a lengthy delay between finding a lithium deposit and producing usable lithium since mineral resources cannot simply jump from discovery to production. Generally, the process follows three main stages: Discovery Stage: The discovery and investigation of lithium mines and experts will determine the feasibility of exploitation. (This is the most time-consuming stage.) Orphan Stage: The discovered mineral deposit sits untapped while mining firms seek investors and capital inflow to start construction and operations.

82,500

Production Stage: With capital raised and investors on board, mining companies can begin operations. To illustrate the time frame in question, Australia Hard Rock Mines, the largest global lithium supplier, takes an average of 6 to 8 years to complete the entire process. Currently, most global mine producers are still in the first stage, with production not expected to occur until well into 2024. Rich natural lithium resources provide the illusion that sufficient lithium stock exists in the market and encourage confidence in lithium-related industries’ future expectations. Meanwhile, the promise of EVs further stimulates the pursuit and demand for lithium.

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2019

2020

2021

2022

Commodities in 2024: A year for growth or setbacks?

These factors push the price of lithium even higher before many of the minerals had even been exploited – with whispers that a financial lithium bubble may be on the horizon.

Economic impact of rising lithium prices The lithium supply chain mainly consists of mining companies upstream that sell the mineral to EV and laptop manufacturers downstream through intermediary lithium development companies. These development companies transform the raw lithium into materials (such as batteries) that are useful for the downstream manufacturers. Their production period is relatively short compared with

mining companies, but they are beginning to face profitability challenges in light of the rising lithium prices. This is because the contracts between midstream and downstream companies usually last for several months while the price of raw lithium bought from upstream organisations is floating. Rising lithium prices, therefore, mean that the costs these intermediaries face increase while their sales remain locked in at lower prices. On top of this, their negotiating power is generally far weaker than that of their larger downstream counterparts, leading to increasingly squeezed gross profit over time. Lower gross profit will cause fewer investors and cash inflow for such companies and many newly-founded companies in the lithium midstream have faced financial difficulties over the past few years. For many mature intermediary firms, however, it is not price so much as unstable supply that is the primary concern. To secure their raw material supply, many midstream companies attempt to vertically integrate by purchasing stakes in mining companies rather than remaining as mere customers. However, these actions attribute significant additional frictional costs in the market. In the case of Canada’s Millennial Lithium Corp Acquisitions, the deal was broken twice, the buyer changed 3 times, the process was extended for more than

6 months, and more than $30 million in termination fees were paid. This proved to be a timeconsuming and costly process that added no tangible value to the global lithium industry. With start-ups struggling to survive in the midstream industry and mature firms paying a considerable amount of frictional costs in lithium reserve competition, barriers to the midstream market are rapidly increasing, and the relationship between the upstream and midstream industries is becoming more fragile.

Midstream industries: The fragile mainstay of the lithium supply chain A robust relationship between upstream and midstream industries is the key to preventing a catastrophic lithium supply crunch. In an imbalanced lithium market, companies that are just starting up will struggle to survive, and mature companies will struggle to use their capital effectively. Overblown expectations, increasing midstream market barriers, and considerable frictional costs are the key factors that will aggravate the chain’s vulnerability. Moving forward, it will prove vital to control lithium price bubbles, encourage midstream enterprise development, and reduce frictional loss. Only then can we mitigate against the lithium industry’s growing midstream dilemma.

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3.4

‘Green’ commodity markets: Robust environmental claims vs risk of greenwashing PAUL SEBASTIEN

Co-founder and managing director Carbon Offset Certification

There is no question that stricter ‘green’ regulations are here to stay. To avoid criticism and backlash, companies should rely on robust and credible communication at the core of their sustainability-based initiatives. It is not just about what they claim. In October 2023, Apple announced all its products will be ‘100% carbon-neutral by 2030’. This objective, in line with the company’s commitment, emerged following the establishment of partnerships with suppliers for ‘green aluminium’. Recognising the momentum to act, companies are progressively formulating Paris Agreement-aligned Net Zero strategies and deploying ‘green’ strategies. Commodity and logistics companies are among the most carbon intensive industry. Steel: 10% of global GHG Concrete and cement: 8% Shipping: 3% etc. This led to growing scrutiny from the public and financiers. Increasingly, sustainability is becoming a pivotal criterion in financing decision, as

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evidenced by initiatives such as Société Générale’s ‘green trade finance’ strategy and the joint sustainable supply chains financing programme by Citi and the European Bank for Reconstruction and Development (EBRD).

Commodities in 2024: A year for growth or setbacks?

Companies: End Mitigation Targets Covering the world’s largest 2,000 company annual revenue. Percentages by number NET ZERO TARGETS

NO TARGET

OTHER MITIGATION TARGETS

26%

1,069

79%

288

USA

49%

582

CHINA

28%

10%

265

88%

RoW

46%

WORLD

47%

652

1,986 0%

20%

34% 37% 40%

60%

80%

100%

*Rest of the World (RoW) **The global total is 1,986 because some companies have been acquired or moved to private ownership. Source: Net Zero Tracker

In an effort to highlight sustainability efforts, global mining company BHP and Japan’s JX Metals developed the Green Enabling Partnership to reduce GHG emissions in the

copper supply chain. Kazuhiro Hori, director and deputy chief executive officer of JX Metals said,”We respond to our stakeholders’ needs by enhancing our ESG efforts in

upstream sectors.” These marketing strategies, focused on environmental sustainability, are designed to meet both financiers’ expectations and clients’ demands. They also enable businesses to generate extra profit by adding a margin on top of the ‘greenium’ (green premium) – the additional cost incurred to reduce and offset the carbon footprint of products.

Green marketing? Approach carefully In the shipping industry 82% of customers are willing to pay a premium for zero-carbon shipping, and more generally 70% of customers are willing to spend at least 5% more for ‘green’ solutions, which is far above the actual cost to offset most of products’ life-cycle carbon footprint.

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The cost to compensate cradle-to-grave commodities life-cycle range on average between 0.5% and 2% of their market value (e.g. copper: 0.5%, steel: 1.6%) and the cost to mitigate final products’ or services life cycle or services’ carbon footprint is less than 1% of the total price charged to clients, creating space for untouched revenue. For example, a T-shirt sold at $20 has on average a 7kgCO2e footprint that can be offset for $0.05 leading to greenium of 0.25% on the sales price. Regardless of the drivers, we can express enthusiasm for the growth of green commodities markets.

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However, authentic green marketing efforts must be approached with caution, as any communication related to the environment is a sensitive issue. This is particularly relevant today, as regulators are beginning to address this unregulated landscape. Hazy or misleading communication can jeopardise not only corporate reputation, but also lead to financial penalties. Companies should be strategic and precise when marketing their “green” products or services to the market.

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Enough greenwashing: the start of strict regulations Stricter regulations, such as the European Union Green Claims Directive, are set to regulate green marketing further by banning misleading environmental claims such as ‘eco-friendly’, ‘green’, or ‘carbon neutral’ that are considered greenwashing (when carbon footprint is offset). Penalties for noncompliance with the Green Claims Directive could include administrative fines of up to 4% of the annual turnover of the company. For example, a French company who manufactures and sells coffee products has recently

Commodities in 2024: A year for growth or setbacks?

“The message needs to be clear, we are not banning carbon offsets, they are allowed. The only thing is that the consumers must be fully informed. If you’re stating that the product you are selling is carbon neutral, and it’s carbon offset, additional information is needed to specify its carbon offset.” Virginijus Sinkevičius, EU Environment Commissioner

“We are clearing the chaos of environmental claims.”

Biljana Borzan, Member of the European Parliament

come under scrutiny for claiming that their products had “Zero CO2 impact” through their offsetting initiatives. Under the new EU rules, this type of claim becomes unlawful. The same applies to “carbon neutral flights” or “carbon neutral fuels” for example. There is no question that stricter ‘green’ regulations are here to stay. To avoid criticism and backlash, companies should rely on robust and credible communication at the core of their sustainability-based initiatives. It is not just about what they claim. It is also about what they can prove and are now allowed to communicate. Environmental claims shall be transparent, verified by a third party, and subject to regular reviews as provided by Carbon Offset Certification a Swiss-based and first global independent certification label for carbon offset products or services developed in partnership with Bureau Veritas.

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3.5

Navigating commodity trade finance: A comprehensive guide for borrowers MOURAD NAIT-ATMANE CEO Tilelli Consulting Ltd

Navigating commodity trade finance requires borrowers to overcome obstacles, understand their financing needs, and grasp the intricacies of different financing mechanisms. Clarity and strategic approaches are essential in securing the right financial support for business endeavours.

In today's economic landscape, there exists a substantial gap of approximately $2.5 trillion in trade finance, limiting businesses' ability to flourish and capitalise on lucrative opportunities. The ramifications of inadequate support are significant, highlighting the importance of addressing the challenges faced by borrowers in accessing trade finance. Several factors contribute to the impediments restricting borrowers' access to trade finance.

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Chief among these challenges is the lack of technical capacity among businesses to formulate and present compelling business plans and bankable proposals. The manner in which businesses approach banks is crucial, requiring careful consideration of various elements to enhance their chances of securing financing. High-interest rates further compound the obstacles faced by borrowers. Banks, as riskaverse entities, demand higher returns for higher-risk ventures.

Commodities in 2024: A year for growth or setbacks?

Understanding the inherent risks within business operations and implementing effective mitigation strategies is pivotal in negotiating favourable interest rates. This underscores the significance of risk management in facilitating affordable financial arrangements.

Understanding commodities: Commodities, ranging from raw materials to agricultural products, can be classified into three main categories: 1

Agricultural (''Agri'') Commodities: Encompassing crops and animals from farms or plantations, including staples like grains and livestock, as well as nonfood agri commodities like cotton and tobacco.

Metals and Minerals Commodities: Covering mineral resources, industrial and base metals such as steel, copper, and aluminium, along with precious metals like gold and silver.

Energy Commodities: Encompassing crude oil, heating oil, natural gas, and gasoline.

Each category comes with its unique set of challenges and opportunities. Businesses seeking financial support must equip themselves with a comprehensive understanding of financial institutions, available products

and services, credit policies, and procedures. Additionally, borrowers must meticulously assess and articulate their financing needs to navigate the landscape of trade finance successfully. Determining the appropriate amount of financing is a critical facet of effective financial management. Underestimating or overestimating financial needs can have significant repercussions. Underestimation may restrict resources, expose

the business to risks, or result in missed profitable opportunities. Conversely, overestimating can lead to unnecessary debt, potential penalties for early repayment, and increased costs. Striking the right balance is essential for sustainable financial health. Before approaching financiers, businesses must carefully evaluate their actual financing needs.

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Commodity trade finance mechanisms: It's imperative for any Borrower to understand distinct financing terms to be able to understand the different options they have. 1

Commodity Finance: The overarching term for financing activities throughout the commodity value chain, spanning production, processing, and trade. Commodity Trade Finance: A subset focusing on financing the underlying exchange of commodities from supplier to buyer, intricately tied to the asset conversion cycle. Structured Trade Finance: Another subset employing specific financing techniques to minimise risks, particularly in situations where the tenor exceeds the typical asset conversion cycle.

Decoding commodity trade finance mechanisms:

structured through contingent instruments, with letters of credit being the most common. The choice of structures hinges on factors such as the borrower's governance, financial position, and the type of commodities in play. The general classifications include: 1

Borrowing Bases: Allows borrowers to raise finance against an aggregated pool of working capital assets, with periodic valuation setting maximum limits.

Working Capital: Obtained based on historical performance assessments, relying on audited financial statements.

Structured Trade Finance: Utilised for situations where financing tenor exceeds the standard asset conversion cycle, involving techniques like prepayments, tolling, and structured inventory products.

Commodity trade finance essentially acts as the bridge between the procurement and sale of commodities. It's essential to note that this process doesn't always involve direct funding but can be

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Transactional Trade Finance: Involves a trader entering agreements with suppliers and buyers, seeking financing from their bank for purchases and sales.

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We can split the types of finance in three phases as follows: Pre-shipment: Pre-shipment finance includes any finance that a business can access before delivering the goods to the Buyer. Post-shipment: Post-shipment finance includes any finance that a business can access postdelivery of the goods to the Buyer. Receivables: Receivables financings refer to all financing methods used by businesses when the goods have been delivered and invoiced to the Buyer with deferred payment terms. Navigating commodity trade finance requires borrowers to overcome obstacles, understand their financing needs, and grasp the intricacies of different financing mechanisms. Clarity and strategic approaches are essential in securing the right financial support for business endeavours. By addressing these challenges and adopting informed strategies, businesses can unlock the vast potential of commodity trade finance, bridging the global trade finance gap and fostering sustainable growth.

Commodities in 2024: A year for growth or setbacks?

Case Study Company Name

Trade Co

Business activity

Commodity Trading

Product traded

Bitumen

Business model

Distribution in local market

Financing needs

Pre-Shipment; Post-Shipment; Receivables

Supplier

Refinery

Purchase terms & Conditions

FOB on prepayment basis. Pricing: Formula

Sale terms & Conditions

EX-tank: Cash&Carry and open account. Pricing: Fix price multi-currency

Risks in the supply chain

Non-Performance; Operational (logistics); Price & Credit Risk

7. Final Invoice: Trade Co can request financing for the diff with PI if price is higher

Trade Co

12. Payment: Assignement of proceeds to Financier

2. Provisional Invoice

5. Delivery FOB: BL to be issued to order of the Financier

Non-Performance insurance with loss payee the Financier

11. Release 6. Shipment

BL on the name of the Financier Insurance certificate on the name of the Financier

HC on the name of the Financier Financier to be loss payee on inventory insurance

Assignement of proceeds to Financier on hedge: FX; Price

4. Prepayment by the financier from an account held on the name of the Trade Co

Financier

12. Payment: To the Financier to an account held on the name of the Trade Co

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3.6

Oman’s economic diversification: A closer look at non-oil exports and trade partnerships in 2022 KHALIL AL HARTHY CEO Credit Oman

The government has implemented various initiatives to promote and support non-oil exports, encouraging the growth of sectors such as petrochemicals, minerals, and the seafood industry.

Oman has made concerted efforts to diversify its economy to reduce its reliance on oil and gas revenues. The non-oil export sector has become a key focus, reflecting the country’s commitment to sustainable economic development. In 2022, Oman’s non-oil export sector is expected to encompass a range of industries, including manufacturing, agriculture, and services. The government has implemented various initiativesto promote and support non-oil exports,

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encouraging the growth of sectors such as petrochemicals, minerals, and the seafood industry. Additionally, Oman has sought to strengthen international trade partnerships and explore new markets to boost the export of non-oil goods and services. This strategic shift aims to enhance economic resilience, create employment opportunities, and foster longterm economic stability for the Sultanate.

Commodities in 2024: A year for growth or setbacks?

Trade Structure 30,000.00

million OMR

25,000.00 20,000.00 15,000.00 10,000.00 5,000.00 0.00 2018

2019

Exports

Oman consistently achieves a net export status when oil and gas exports are included in the trade balance calculation. Over the past five years, the country has maintained an average trade surplus of around 5.5 billion OMR. The trade composition of Oman from 2018 to 2022 is depicted in Figure 1 above.

2020

2021

Non-oil Exports

2022

Imports

Non-oil exports From 2018 to 2022, there was an upward trend in non-oil exports in Oman (See Figure 2), with a CAGR of 15%. This positive development is particularly noteworthy considering Oman’s dependence on oil, especially

in the face of economic challenges like COVID-19 and the Russian invasion of Ukraine. In 2022, the value of non-oil exports reached 7.5 billion OMR with an annual growth of 44.2% compared to 2021 and it is expected to show a positive growth rate in 2023.

Figure 2: Oman’s Non-oil Export, 2018-2022.

Non-oil Exports

Non-oil Export Value RO mn

8,000.00 7,000.00 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 0.00

2018

2019

2020

2021

2022

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Sector changes Products of Chemicals & Allied Industries’, ‘Mineral Products’, and ‘Base Metals & Articles of Base Metals’ represented approximately 69.9% of total nonhydrocarbon exports, growing in value by 54.6% in 2022. Exports in ‘Plastic, Rubber, & Articles Thereof’ grew by 26.9%. ‘Live Animals and Live Animal Products’ exports increased by 24.5%. ‘Vegetable Products’ exports rose by 5.2%. ‘Textiles & Articles Thereof’ experienced a decline of 49.5%. ‘Foodstuffs, Beverages, Tobacco & Related Products’ decreased by 6.4%

At the same time, exports to India and the USA grew by 77.1% and 31.4%, respectively. Non-oil exports to Qatar grew by 35.2% representing 4.6% of total nonoil exports.

sectors, such as ‘products of chemicals & allied industries’ and ‘live animals and animal products,’ which decreased by 38.8% and 4.2%, respectively, during the same period.

Re-exports

In contrast, ‘foodstuffs, beverages, tobacco & related products,’ ‘base metals & articles of base metals,’ and ‘mineral products’ witnessed increases of 11.9%, 13.2%, and 65.5%, respectively. These shifts resulted in a more distributed composition of re-exports.

Re-exports in 2022 showcased a divergence from the trends seen in both oil and non-oil exports in Oman. These re-exports maintained a comparable level to the previous year in absolute terms, revealing a varied landscape of changes among major reexport items throughout the year. The largest category within reexports, encompassing ‘Vehicles, aircraft, vessels & associated transport equipment,’ experienced a notable decline of 29.6% in 2022. Furthermore, there were contractions observed in other

Destination wise UAE, USA, Saudi Arabia, and India continued to be the top importers of Omani non-oil exports, jointly accounting for 43.9% of the total non-oil exports from Oman to the world. UAE is on top of the list in terms of value exported, reaching a value of 1.20 billion OMR in 2022 compared to 1.23 billion OMR in 2021, a 2% decline in the growth. Saudi Arabia became the largest destination in terms of growth, as it witnessed an impressive growth of 51.4%, increasing their share in non-oil exports from 9.8% in 2021 to 11.4% in 2022.

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The UAE remained the top destination for re-exports despite witnessing an 11.1% decrease, followed by Iran after registering a substantial growth of 34.7% during the year. Re-exports to Qatar declined by 63.0%, reducing the country’s share in re-exports from 9.7% to 3.6%, taking it to the sixth top destination position in 2022 amidst the lifting of the trade blockade imposed on Qatar by some GCC countries.

Commodities in 2024: A year for growth or setbacks?

Benefits of Credit Oman’s credit insurance covers to Omani Exporters and Omani Banks 1

Avoidance or identifying probable losses:

Credit Oman does a critical credit risk analysis on the buyers, their sector, and the potential political risk in the importing country and provides its perception of the risk to help avoid losses. Further, it has a database of buyers that have a track record of adverse financial indicators, payment default or payment delays which helps in forewarning the exporters who approach for credit insurance covers on such buyers. This access to this database and guidance helps in avoiding potential loss by dealing with such buyers.

Transfers risk to insurer’s balance sheet:

The exporter at the time of availing the credit insurance protection from Credit Oman transfer the risk of nonpayment of the buyer due to insolvency or protracted default from its balance sheet to the balance sheet of Credit Oman to the extent of the cover provided, say 80%. This translates into a stronger balance sheet and ratios and profitability for the exporter. 3

Lower bad debt provision:

The provision for doubtful debts, which is also referred to as the provision for bad debts or the provision for losses on accounts receivable, is an estimation of the amount of doubtful debt that will need to be written off during a given period. Put simply, it is a provision – or allowance – for debts that are doubtful.

Specific allowance refers to specific receivables that you know are facing financial problems, and so may be unable to pay off the debt. General allowance refers to a general percentage of debts that may need to be written off based on business experience as per past records. Provision for doubtful debts should be included in the exporter’s balance sheet to give a comprehensive overview of the financial state of the business to provide an accurate picture of the amount of working capital that is available to it. As these potential losses are covered by Credit Oman, the provisioning requirements gets reduced to the extent of the risk retained with the exporter and thereby not largely affecting the working capital.

There are two types of bad debts – specific allowance and general allowance.

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Better access to finance:

The credit risks in the trade receivables have been transferred to Credit Oman which helps in improving the credit rating of the exporter. The benefits under the Policy can be assigned by the exporter in favor of their bankers. This enables exporters to have a better negotiated credit facility from their bankers. 5

Balance sheet enhancement:

Through Invoice discounting and factoring, the debtor assets can be freed up thus improving the current ratio and the overall balance sheet. 6

Replacement to secured transactions:

Credit Insurance acts as a replacement for opening Letters of Credit in transactions. Similarly, this can save issuance of bank guarantees also and thus save the cost, adminstrative efforts, and improve margins. 7

Enables exporters to extend credit terms:

The exporters can extend the credit terms to the buyers as the risks have been transferred to Credit Oman which enables the exporter to have a competitive edge in the market over its competitors.

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Commodities in 2024: A year for growth or setbacks?

Fortify credit management processes:

The exporters are expected to have internal credit managements procedures to assess the buyers before finalising orders / contracts. The credit insurance support and experience enable companies to improve / fortify the credit management processes, over a period. 9

Access to credit risk expertise and analysis:

Credit Oman expertise helps in fixing the credit limit (the limit of exposure) on the buyers. Moreover, in case of nonpayment, it helps the exporter in its management of collection and recovery processes for recovering the receivables.

Promotes sales growth and diversify markets with sustained controls:

The strengthened upgraded credit management processes supported by credit insurance allow the exporter to safely extend payment terms to its customers and enhance the credit limits in existing and new or developing markets.

Directs and supports sales to higher margin markets:

Credit Oman’s protection can support increase sales in selected focused markets where there are better opportunities and to markets where the margins are higher. 12

Supports mergers and acquisitions:

Credit Oman’s protection helps in insulating the Trade Receivables in the portfolios of acquired or merged entities.

Prevents exporter accounts turning into Non-Performing Asset (NPA)

The non-payment of Trade Receivables impacts the quality of the asset with the bank. The Bank immediately requests the exporter to pay up the advance granted against the bills of such defaulted buyer and the exporter may not be able to pay this amount immediately. Credit Oman’s cover given to the exporter against the buyer in question and the assignment of the benefits to the bank helps in keeping the account “Standard” and thereby the account does not turn NPA, and the exporter is able to continue doing business normally.

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3.7

Commodity & Finance: A match made in heaven or not? SVEN DE ZOETEN Managing Director & Co-Founder TCFPartners

I would define commodities as goods that are widely useable and easily tradable with an identifiable value which is equal to all buyers. The use of a commodity is identical anywhere and by anyone and therefore, the implicit value is identical for any user. For this article, I also used something very modern to get an additional view of commodity finance, which is something very old. Took that as one of life’s little enjoyments writing this article in 2024. The term ”commodity” is a commonly used expression but it is always good to try and come to an acceptable definition. First, we asked our new modern friend ChatGTP, who gave the most commonly accepted (correct) answer in mere seconds.

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Different definitions: ChatGPT vs the human view According to ChatGTP, the definition of a commodity is, “A commodity refers to goods that are uniform in quality and characteristics, interchangeable and widely traded in the market. Commodities are often traded on exchanges, and their prices are determined by supply and demand dynamics in the market.

Commodities in 2024: A year for growth or setbacks?

I would define commodities as goods that are widely useable and easily tradable with an identifiable value which is equal to all buyers. The use of a commodity is identical anywhere and by anyone and therefore, the implicit value is identical for any user. For the definition of commodity finance, ChatGTP says, “Commodity finance is often provided by banks, financial institutions, and specialised commodity trading companies. The goal is to support the efficient and smooth functioning of the commodity

Commodity finance: How does it actually work

markets by addressing theunique financial requirements and risks associated with the production and trade of commodities. Commodity finance, which involves the financing of physical goods, has been a part of trade and commerce for centuries.” My definition of commodity finance in its original form is financing self-liquidating trade transactions. Whereby a borrower reaches out to a lender with a trade transaction to buy goods from a supplier which are sold to a buyer.

The borrower's own money, together with the loan from the lender, adds up to enough cash to cover the supplier's bill for the goods. Once the goods get to the buyer, they just pay for what they've received. These proceeds are firstly attributed to repay the loan of the lender including the cost of the loan. Any extra cash left over is for the borrower to cover other expenses and keep as their trading profit.

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The tenor of the loan is shortterm and follows the normal cash conversion cycle of the underlying trade transactions. You can create several variations on this basic model, always ensuring that the selfrepaying feature of any setup is maintained. As an example, you can aggregate all single transactions of a borrower into a pool of goods and subsequent receivables, and this structure would be called a borrowing base facility. With the basic principle, you should be able to come to the best structure for any counterparty by closely following their pattern of trade and/or processing. In very simple terms as a lender, you know your counterparty (borrower), you know the supplier(s) and the off-taker(s) of your counterparty and you know the specific characteristics of the underlying goods as well as the (market) value. You know the tenor of the transaction, which matches the tenor of your financing, and you are the first to get repaid (including your cost) by receipt of the proceeds of the sale of the goods. This intricate knowledge should make for swift and easy risk analysis and execution.

Risk calculations in commodity finance But not everyone has the same access to risk tools. Banks have a unique opportunity to calculate the risk weighting of the assets of an exposure. From a credit risk perspective, the high-level formula is: Probability of Default (PD) x Loss Given Default (LGD) x Exposure = Exposure at Default (EaD). The PD (in %) is the likelihood a borrower will default in a given time frame. LGD (in %) is the proportion of the exposure that will be lost in case of a default. In other words, the bank has the administrative tools in hand to have exposure to a counterparty with a high PD (non-investment grade counterparty rating) and a low LGD (risk mitigation by taking security) coming to an equal EaD as if you have an exposure to a counterparty with a low PD (investment grade counterparty rating) and high LGD (unsecured). Commodity finance, when done properly, has excellent capabilities of lowering LGD, which creates an advantage for banks versus any other potential private lender. This is the “short and easy” story and there is much more detail available in the Basel documents. However, it fundamentally boils down to the points made above.

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Commodities in 2024: A year for growth or setbacks?

According to the Asia Development Bank in its brief No. 256 of September 2023, the trade finance gap (trade finance not financed by banks) increased to $2.5 trillion in 2022 (10% of global merchandise trade). A quick initial conclusion would be that banks are not, or not adequately or sufficiently, using the administrative tools they have. Not all trade finance is commodity finance, but a substantial part of this gap is related to commodity finance. Estimates show that there is an earnings potential of $50-200 billion to be picked up by banks if they set up a framework for the proper recognition of collateral that commodity finance intrinsically has to offer.

Commodities and finance: A fit, but not yet Commodities were the first to appear, but as soon as finance emerged, they quickly and naturally connected. Judging from the ADB brief it might not currently be a match made in heaven for all, but this could change again in the future. Commodities and finance have brought us to where we are today and they are needed to bring us to where we want to go tomorrow. Commodity finance is in the industries’ DNA and certainly so at TCF Partners. We know the requirements and the risks and are ready to support the commodity finance market to function as smoothly and efficiently as possible.

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The evolution of the payments industry

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4.1

Six payments predictions that will influence 2024 PHIL LEVY

CEO Exact Payments

Overall, it’s going to be an exciting year for payments. The boost from economic improvements and new tech advancement will help fintechs and the payments industry evolve and grow — positioning those leveraging these new tools for success.

The last couple of years have been rough for the economy as a whole and payments in particular. But recovery started building in 2023 and is expected to continue into 2024 — helped by a healthy dose of new technology.

Prediction 1: Economic recovery will drive even more payments growth Although the payments industry experienced its first contraction in 2020 due to the economic slowdown caused by COVID-19, it bounced back quickly. McKinsey expects it to return to

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its historic 6-7% growth or even better over the coming years. Other corroborating evidence includes a strong underlying economy and 2023’s Black Friday hitting record numbers. This steady return to increased economic activity drives increased payment activity, which translates to growth for embedded payments in 2024. These factors, combined with even greater pressure on SaaS platforms to produce more revenue, will urge more players to enter the world of payment monetisation, embedding payment functionality directly into their software.

The evolution of the payments industry

By capturing a portion of the payment processing fee generated by credit card transactions, SaaS businesses will enjoy a more predictable and diversified revenue stream.

Prediction 2: Generative AI will help payments following a few false starts Generative AI is here to stay, but few have understood how to successfully harness tools like ChatGPT, Claude, and Gemini. In particular, it is becoming clear that the technology has real challenges due to ‘hallucinations’ — or factually inaccurate results. To mitigate the effects of AI’s lack of logic and reasoning capabilities, some companies are using custom data sets and limited fields of operation with success. However, we do expect this technology to help automate transactions — for example,

communication around transaction statuses like exceptions, which typically require manual intervention. Generative AI is great at rapidly and automatically building short pieces of communication around a strictly limited subject matter. Another area where the technology will continue to help is fraud detection. Many fraud detection systems already use ML and AI as a part of their processes, so it won’t be surprising to see these systems extend their capabilities. The final area that might be the most significant for payment tech is the automation of compliance and documentation. A great deal of documentation and tracking is needed for proper compliance, regulatory documentation, and forms. Generative AI can make creating and routing this documentation faster, easier, and more automatic.

Prediction 3: The fintech-friendly bank will continue to grow in popularity Even though the past year saw some of the most spectacular bank failures of recent decades, it also saw the launch of many brand-new banks. Some aim to be more consumer-friendly in various ways, but others focus on more tech-friendly and, specifically, fintech-friendly features. Examples of these banks are Lead and Bunq, both of which aim to offer banking-as-aservice solutions that assist fintechs in moving funds and data more efficiently. Additionally, these banks enable payments and new fintech opportunities like embedded finance. Legacy banks, including some of the oldest and most traditional, are making inroads into fintech to keep their capabilities relevant. In most

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cases, this means acquisitions. An example is the JP Morgan Chase acquisition of WePay. Although this technically took place in 2018, it is only in the last year that WePay has launched a true integration. The big banks show no sign of stopping their push for consolidation, so we expect to see fintechs merge with others or drop by the wayside due to acquisitions.

Prediction 4: Network tokenisation will make payments more secure and increase sales It’s not a well-known technology, but 2024 could be the year network tokenisation gains broader support.

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Tokenisation replaces primary account numbers and other sensitive card details with an algorithmically generated token issued by any one payment provider. The benefit is that tokenizing this data renders it useless if stolen. Additionally, tokenisation provides a more frictionless payment experience. Network tokenisation differs because it uses a standard algorithm created by the card networks to generate tokens. Since the card networks authenticate network token payments, fraud is reduced, and businesses enjoy higher approval rates and increased sales.

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While critics of network tokenisation exist, the need for more and better data to authenticate transactions is more persistent than ever. This need will drive adoption, and eventually, network tokenisation will become the standard for the future.

Prediction 5: Real-time payments will benefit buyers, sellers, banks, and fintechs It’s safe to say that almost everyone wants real-time payments. Analysts see immense growth in real-time payments, and why not? The benefits to everyone involved in a transaction are evident.

The evolution of the payments industry

For the seller, the benefit is immediate access to funds. For the payer, the advantage is an immediately settled transaction, resulting in greater cash flow accuracy. Other participants in the transaction, like banks or fintech providers, get to offer a feature and service that is inherently attractive and helps them gain a competitive edge. Obviously, it will take time for standards to be fully set and adopted to allow everyone to offer real-time payments, but they are expected to become more common by the end of 2024.

Prediction 6: B2B will embrace embedded finance Just as the past five years have seen online payments take off and jumpstart new revenue streams for SaaS platforms, the next few years will see the nascent embedded finance industry advance. Many fintechs are already gearing up support for B2B embedded finance. As with payments, more players will enter the market, forcing standards and approaches to coalesce into the best solutions. We will increasingly see companies incorporating other areas of finance into their payment flows, including loans,

insurance, and other financial products. Indeed, this evolution is already happening with companies like Tranch, which provides loans for SaaS businesses, and Ordway, which integrates payment functionality within their subscription billing and accounting platform. Overall, it’s going to be an exciting year for payments. The boost from economic improvements and new tech advancement will help fintechs and the payments industry evolve and grow — positioning those leveraging these new tools for success.

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4.2

Allianz Trade: How BNPL is revolutionising B2B e-commerce OZLEM OZUNER

Head of Operations & Finance Allianz Trade

It’s early days for BNPL in B2B, but we expect the technology to quickly scale up and for the market to grow rapidly in coming years as procurement moves online. UK e-commerce success Over the last two decades, e-commerce has transformed the consumer retail space. The UK is now the third largest e-commerce market in the world behind the US and China, with revenues projected to hit £225 billion by 2025. Around a quarter of all UK retail sales are now online, up from just under 10% a decade ago, according to ONS data. A similar trend is now playing out in the business-to-business (B2B) space. COVID-19 has accelerated big changes in business practices, with companies exploring new digital sales channels, and relying less and less on in-person sales. For the first time, B2B sellers are now more likely to offer e-commerce channels than in-person selling, while more than two-thirds of B2B companies now offer e-commerce capabilities, according to McKinsey.

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The evolution of the payments industry

Buy Now Pay Later boom It’s not just the UK’s ecommerce market that’s heating up. Buy-now-pay-later (BNPL) offerings in the consumer space, like Klarna and PayPal, have also experienced rapid growth. BNPL payment options, which offer instant short-term credit at point of sale, are now a familiar part of the consumer e-commerce experience. More than a quarter (27%) of UK adults used BNPL at least once during the last six months of 2022, up from 17% in the previous 12 months, according to the Financial Conduct Authority. Having proved a huge success for online personal shopping, BNPL is now making waves in the B2B market. Many of the

world’s most famous tech investors believe BNPL is a significant opportunity for B2B. For example, among the investors in the Norwegian fintech company Two, is Sequoia Capital, the Silicon Valley-based firm notable for its early-stage investments in several high-profile technology companies, including WhatsApp, Google, Airbnb, and various other successful tech ventures. There are now about 10 fastgrowing European BNPLs for B2B providers, with at least one valued at £500 million.

Almost anyone can visit your webstore, requiring an instant decision on whether to extend credit. With B2B e-commerce growing exponentially, so the does demand for paymentterm solutions.

E-commerce without the risk

By removing existing barriers, BNPL is set to unlock the huge growth potential in B2B ecommerce. While the traditional offline model sees merchants extend payment terms to trusted customers, using trade credit insurance to mitigate non-payment risk, the online world is more transactional.

When used in conjunction with invoice financing and trade credit insurance, BNPL enables a business to offer customers flexible payment terms, without the risk of non-payment or additional costs. It can help a business grow its online customer base while at the same time mitigating their credit risk. Offering trade buyers competitive payment terms as part of a fast and seamless ecommerce experience can boost online sales revenues,

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attracting buyers to webstores and increasing conversion rates. When a business buys products online, which could be anything from office furniture to building materials, they might be given credit terms of 30 to 90 days at the checkout. This offer can be made without requiring the traditional manual procedures of credit checks or customer onboarding, even for their first purchase. BNPL also offers a low-risk and low-cost way to increase international sales and exports. Increasingly, BNPL providers will be able to support international transactions and foreign currencies, enabling firms to get instant online credit terms when dealing directly with overseas suppliers.

How it works BNPL solutions are easily integrated into a company’s online store. Sitting alongside traditional payment options at checkout, the BNPL solution is connected directly to the merchant’s own webstore using an application programming interface (API) or via online plugin platforms. Customers just click on the BNPL icon to receive an instant decision on payment terms. This seamless online experience is made possible by a new breed of fintech companies that manage the digital process and provide instant invoice financing. This means the merchant gets paid within

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24 hours, minus a fee, and payment is collected from the buyer when it becomes due. Working in the background, the seller and/or a trade credit insurer carries out real-time checks on the buyer and makes an instant credit decision, ready and waiting for the customer at checkout. When used in conjunction with invoice financing and trade credit insurance, BNPL can preserve a sellers’ cash flow and protect the balance sheet against bad debts. They get paid upfront, while the insurer takes the risk of non-payment, as well as responsibility for recovering the debt. The solution is also a competitive alternative to traditional payment options, and at a significantly lower cost than the 2%-4% transaction fee charged by credit card providers.

Disrupting B2B purchasing For B2B e-commerce to really take off, BNPL solutions require robust technology and data to mitigate credit risk at a global scale. To further this, Allianz Trade has partnered with Santander CIB and Two to launch a global one-stop B2B BNPL solution that enables businesses to offer instant deferred payments at checkout. The solution matches Two’s innovative technology with Santander’s invoice financing capabilities and Allianz Trade’s trade credit insurance.

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The evolution of the payments industry

During an online B2B purchase, Allianz Trade assesses credit requests instantly through its API thanks to its large and deep database, which contains commercial, financial and strategic information about more than 83 million businesses worldwide. This enables Santander CIB to make financing decisions on the spot. Everything happens in a fraction of a second, without the end user even realising it.

B2B e-commerce future The partnership with Santander and Two is just one example of how Allianz Trade is helping UK companies and the BNPL market bring a fast, convenient and seamless consumer-like e-commerce experience to B2B e-commerce. Such solutions take credit insurance to the next level, automating individual credit risk assessments, and potentially bringing more transactions within the scope of trade credit insurance. It’s early days for BNPL in B2B, but we expect the technology to quickly scale up and for the market to grow rapidly in coming years as procurement moves online. With the global e-commerce market expected to reach almost $5 trillion by 2028, the UK is in a strong position to capture the opportunities of B2B e-commerce and BNPL. As BNPL becomes widely available, it will upend centuries-old business practices and transform B2B purchasing into an Amazon-like experience.

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4.3

Year ahead: Swift CIO on balancing uneven payments regulation and advancing CBDC TOM ZSCHACH

Chief Innovation Officer Swift

DEEPESH PATEL

Editorial Director Trade Finance Global (TFG)

Cross-border payments have historically operated on fragmented standards, burdened by local practices and their variations 2024 is set to bring about significant changes in finance and banking. Driven by a convergence of cutting-edge technologies, the industry-wide transition to ISO 20022, the rise of digital currencies, and innovative AI-powered solutions, the year holds promise for considerable advancements and enhanced alignment between fintech and traditional financial institutions. The potential impact of these advancements is substantial, promising more efficient, innovative, and cost-effective solutions in banking, investment, and insurance. However, to ensure a secure and efficient transformation, it is imperative to address the challenges that accompany these changes. The emerging trends not only signal a transformative journey in banking and financial services but also underscore the importance of striking

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a balance between innovation and responsibility. In anticipation of the BAFT International Trade and Payments Conference from 27-29 February 2024, in Washington, DC, TFG’s Deepesh Patel sat down with Tom Zschach, Chief Innovation Officer at Swift.

The evolution of the payments industry

Balancing innovation and regulation As cross-border payments are increasingly moving to the digital space, the G20 has made enhancing cross-border payments a priority under its Cross-Border Payments Roadmap that it began to work on with the Financial Stability Board (FSB) and other entities in 2020. The G20’s commitment to enhancing cross-border payments by 2027 includes four strategic targets: 1

Limiting costs

Improving speed

Boosting access

Increasing transparency.

Leading the way in this transformative journey, Swift has made remarkable progress toward meeting these targets.

Currently, 89% of transactions processed on the Swift network reach recipient banks within an hour, surpassing the speed targets set by the Financial Stability Board (FSB) to achieve one-hour processing for 75% of international payments by 2027. Zschach highlighted Swift’s dedication to these goals, saying, “Swift has taken these targets very seriously, and we’re making good progress on some of those targets already.”

This momentum shows Swift’s commitment to expedite delivery and enhance banking services, challenging common perceptions about the necessity of payments to travel through chains of intermediary banks before reaching their final destination. Despite the progress towards achieving the Roadmap targets, some challenges and gaps between the Roadmap’s targets and the current state are still persistent. For instance, Zschach pointed out the complexities of screening for sanctions and financial crimes, underlining the impact of repeated checks that vary by jurisdiction, creating friction in cross-border payment transactions. Additionally, he emphasised the often-overlooked compliance costs, saying, ‘’What doesn’t get talked about probably enough is the compliance cost, it’s both expensive and labour-intensive.’’ According to LexisNexis Risk Solutions’ ‘True Cost of Financial Crime Compliance Study for 2023’, global financial institutions invest over $200 billion annually in combating financial crime.

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Acknowledging these challenges, Zschach reiterated Swift’s proactive role in collaborating with the community to craft efficient solutions. He expressed, “At Swift, we are actively working with our community to tackle these compliance challenges and develop solutions that not only meet requirements but also address financial crime more efficiently.” The G20’s Roadmap shows the critical role of international payments in global economic growth, emphasising the need for industry-wide collaboration to achieve tangible improvements. The ongoing efforts within the financial industry align with the shared goal of enhancing the speed, cost, transparency, choice, and access of crossborder payments—a collective pursuit ignited by the G20 in 2020 and set to accelerate during 2024.

ISO 20022: A new language for cross-border payments Cross-border payments have historically operated on fragmented standards, burdened by local practices and their variations. These often variable and inconsistent messaging standards have restricted effective communication among Financial Market Infrastructures (FMIs), Financial Institutions (FIs), machines, and ecosystems, lacking a common language. After years of intense preparation, the global financial community began

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the migration to the ISO 20022 standard for cross-border payments and reporting (CBPR+) on March 20, 2023, establishing a new language for the global payments industry. Zschach emphasised, “The migration to ISO 20022 improves data richness, enhances customer experiences and automates processes like invoice reconciliation.” The introduction of structured data is a gamechanger, promising smarter and faster financial operations. Financial institutions can therefore leverage this newlyfound language for improved analytics, compliance, and innovative opportunities for enhanced customer experiences that can ultimately change the dynamics of cross-border payments. Complementing this move, Swift proactively develops

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solutions to facilitate the adoption of the ISO 20022 standard. With a vast community of over 11,500 financial institutions, the global financial messaging network has introduced the Payment Pre-validation tool. Articulating its significance, Zschach noted, “We’ve recently launched a payment prevalidation solution that allows our financial institutions to reduce the risk of rejected payments or missing data before the payment is instructed.” Driven by advanced APIs, the tool empowers financial institutions to validate the accuracy of data input into payment instructions, before being moved from one country to another, ultimately reducing errors in the transaction process.

The evolution of the payments industry

enhancing the overall security and efficiency of cross-border payments for its community.

2023, with 3 central banks betatesting its innovative solution for interlinking CBDCs.

Swift’s role in the rise of CBDCs

Zschach highlighted this commitment, stating, “We developed an experimental interlinking solution that connects new CBDC networks with the existing payment rails.” Moreover, Swift has also initiated a second phase of sandbox testing, exploring more complex use cases such as trigger payments related to trade finance and securities settlement.

Central bank digital currencies (CBDCs) are increasingly gaining momentum. According to The Atlantic Council CBDC tracker, 130 countries, representing 98% of global GDP, are now exploring CBDCs.

Moreover, as the world continues to make rapid progress in Artificial Intelligence (AI), it is increasingly evident that machine learning can contribute to achieving the G20 targets on cross-border payments. Hence, Swift is actively developing AI-powered solutions that ensure transactions are instant, frictionless and safeguarded from financial crime. As Zschach noted, “Swift has started its journey with AI and machine learning, developing technologies to detect anomalies and abnormalities inpayment flows across the network.” This includes identifying errors in data, operational issues, and even signs of potential fraud. The integration of AI and machine learning aligns with Swift’s commitment to staying ahead of challenges and

Nineteen G20 countries are well-advanced in CBDC development, with nine currently in the pilot phase. Despite this progress, many central banks are predominantly concentrating on domestic applications, potentially resulting in a fragmented landscape if not adequately addressed.

Looking ahead, Zschach expressed optimism about Swift’s pivotal role, affirming, “We’ve been able to validate with our community that we’ll be able to provide solutions that connect existing payment rails to new digital networks.”

To counter this fragmentation, Swift has prioritised focus within its innovation agenda on interoperability for digital currencies and tokenised assets to enable them to scale if and when they are deployed into the financial ecosystem. Its work on CBDCs began in October 2022 and, in the first phase of its experiments and sandbox testing conducted with 18 central and commercial banks, almost 5,000 transactions were simulated between two different blockchain networks and withand with existing fiat-based payment systems. Building upon the groundwork laid in 2022, Swift has entered a new phase of its work on CBDC interoperability throughout

The active collaboration of over 30 financial institutions, comprising market infrastructures, commercial banks, and central banks, in these experiments indicates strong industry support for Swift’s forward-thinking approach. The iterative process of testing, refining, and collaborating with the community ensures that Swift can address real-world challenges and enable a global financial system where CBDCs coexist with traditional payment rails. To find out more about the topics covered here see the sessions on the Payments Track, please see the website for BAFT’s International Trade and Payments Conference here.

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4.4

Unwrapping the EU Late Payments Regulation SILJA CALAC

Boardperson, Head of Insurance ITFA

The new proposal takes a decisive standpoint, striving to establish a uniform 30-day payment term applicable for all commercial transactions, including B2B, large companies and SMEs while protecting businesses from the adverse effects of payment delays in commercial transactions.

DEEPESH PATEL

Editorial Director Trade Finance Global (TFG) Businesses and public authorities across the EU may be facing tougher laws on late payments, with the European Commission proposing a new regulation enforcing maximum 30-day terms. The proposal, part of a comprehensive set of policies designed to underpin the resilience of SMEs across the EU, is set to revise and replace the 2011 Late Payment Directive with a more stringent EU Regulation.

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The implications of this proposal have spurred discussions and raised several concerns within the supply chain community. At the ITFA Christmas event in London, TFG’s Deepesh Patel sat down with Silja Calac, a Board Member at the International Trade and Forfaiting Association (ITFA), to discuss the key novelties of the Late Payment Regulation proposal compared to the existing Late Payment Directive,

The evolution of the payments industry

The 2011 Late Payment Directive: The need for change On 12 September 2023, the European Commission unveiled a proposal for a new EU Regulation aimed at tackling the issue of late payments in commercial transactions in Europe. A fundamental feature of the European Commission’s proposal is to replace the current 2011 Late Payment Directive with a Regulation applicable to all EU Member States once enforced. Currently, the existing directive stipulates a payment term of 30 days for B2B transactions. However, this can be extended to 60 days or more “if not grossly unfair to the creditor”.

redress systems. With a pronounced emphasis on protecting SMEs, the regulation seeks to establish a clear, standardised payment term applicable to all European businesses. As Calac said, “The current Directive in place leaves much room for interpretation. The European Commission wants to establish a very clear and strict payment rule for all businesses.” Pending approval by the European Parliament and the EU Council of Ministers, the proposed legislation entails automatic penalties for late payments, accruing interest at 8% above the European Central Bank (ECB) base rates.

Notably, these laws encompass every commercial or business organisation and are specifically designed to expedite payments for the EU’s SMEs. Other provisions include the removal of the right for contracting parties to extend payment terms, a restriction on the creditor’s ability to waive late payment interest, and an obligation on debtors to pay late payment interest on overdue invoices. This comprehensive overhaul reflects the European Commission’s commitment to creating a more efficient and equitable payment landscape, particularly benefiting SMEs.

In practice, the absence of a maximum payment term and the ambiguity in the definition of “grossly unfair” has led to a situation in which payment terms of 120 days or more are not uncommon. The new proposal takes a decisive standpoint, striving to establish a uniform 30-day payment term applicable for all commercial transactions, including B2B, large companies and SMEs while protecting businesses from the adverse effects of payment delays in commercial transactions. It is not yet clear how far this will apply to public authorities though. The proposed regulation sets forth a comprehensive set of objectives, aiming to combat late payments, rectify imbalances in contractual bargaining power, facilitate timely payments, and fortify

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Diving into everyday business challenges: ITFA’s perspective While the proposal presents at first glance some commendable measures, such as reducing maximum payment terms for SMEs and reinforcing the enforcement by compulsory interest payments, closer examination reveals that the wider impact of the proposed Regulation requires careful consideration. Despite the regulation’s intention to support SMEs, ITFA advocates against a rigid, onesize-fits-all model. For instance, Calac referenced a potential challenge for buying SMEs, which often operate on tight margins, in complying with the mandated payment term. Strict timelines, while aimed at promoting financial discipline, may inadvertently burden SMEs as buyers/debtors, constraining their ability to manage cash flow effectively and allocate resources efficiently. She said, “This will backfire when SMEs act as the buyer. For them, they will need to seek additional funding resulting in higher financing costs, particularly since it will not be based on the rating of their better-rated buyer.” Moreover, limiting businesses’ ability to freely negotiate extended payment terms tailored to their unique circumstances is highly likely to disproportionately affect industries with complex supply chains and lengthy capital cycles, particularly impacting SMEs.

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The evolution of the payments industry

Such a stringent approach overlooks the diverse nature of industries, distinct business models, and variable financial capabilities of SMEs. Consequently, it unintentionally infringes upon the right to freedom of contract, restraining negotiations that might better serve the parties involved. As Calac emphasised, “This is not ideal in a free economy. The German Association of Lawyers (Deutscher Richterbund has already expressed its concern as this regulation would be against liberal economic principles and the freedom of contracting. It is also what ITFA fears can be the detriment of SMEs.” Besides, the proposed 30-day limit of payment terms could be detrimental to the competitiveness of EU suppliers and buyers engaged in transactions outside the EU. International settings commonly involve longer payment terms, and constraining these terms could result in a competitive disadvantage for EU-based companies.

Although the freedom of contract would be maintained in B2B transactions outside the EU, EU-based companies operating internationally might be compelled to require shorter payment terms, diminishing their attractiveness compared to their non-EU counterparts. The Commission’s proposal for the Late Payment Regulation recognises an opportunity to enhance competitiveness through improved payment discipline which can undoubtedly provide valuable support to SMEs. However, the present proposal brings along unintended consequences that could jeopardise the very businesses it seeks to protect. Therefore, a nuanced approach is essential, one that achieves a delicate balance, safeguarding SMEs while acknowledging and addressing the specific complexities of different situations rather than applying a one-size-fits-all solution.

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4.5

The new language of payments: BAFT releases whitepaper on navigating the ISO 20022 transition CARTER HOFFMAN

Research Associate Trade Finance Global (TFG)

As the financial industry embarks on the complex journey of transitioning to ISO 20022, the insights and experiences shared by BAFT members and published in this whitepaper provide invaluable guidance. Many challenges have emerged and lessons have been learned since Swift implemented ISO 20022 payment standards in March last year, with some banks having already implemented the new standard and others just getting started. The Bankers Association for Finance and Trade (BAFT), a global industry association for international transaction banking, has released a whitepaper, “ISO 20022 Migration: Lessons Learned”, highlighting some of the critical lessons its members have learned while implementing this ‘new language of payments’. The paper is intended not as an advocacy for the standard nor a best practices guide but rather as a ‘what to look out for’ reference for banks that are beginning to implement the new standard within their organisation.

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The paper emphasises five main areas of lessons learned: High-level governance Data strategy and adoption Business phasing strategy Testing and validation strategy ISO 20022 postimplementation and evolution

High-level governance Firms implementing ISO 20022 must ensure they have certain high-level aspects, particularly strong governance, effective communication, and a degree of technological readiness. Technologically, such a migration will require thoroughend-to-end architectural reviews to identify and address any flagrant gaps

The evolution of the payments industry

so as to avoid costly delays during the implementation. Dedicated technical standards teams have proven helpful in translating standards into technical requirements and ensuring seamless upgrades. Given the nature of implementing an industry-wide standard, external engagement with other banks and industry bodies is crucial for gaining insights and ensuring the viability of the migration. This holistic approach to organisation planning, communication, and technology readiness, underpinned by external collaboration, has proven vital in successfully implementing ISO 20022 among BAFT members.

Data strategy and adoption Key to the data strategy and adoption process is understanding the new structured data format, which is a significant shift from previous MT standards under ISO 15022, with the new format bringing additional data elements that enhance business analytics and payment screening. During the planning phase of the transition, banks have found it helpful to categorise these new data capabilities into those that benefit clients, like improved transaction details, and those that aid internal functions, such as enhanced analytics and processing efficiency.

Considering the higher granularity level required by ISO 20022, breaking data requirements into detailed models has proven effective during the design and execution phase, which often means updating legacy systems and client databases. For those beginning down the implementation path, knowing that the coexistence of old and new data formats during migration will add complexity and require banks to manage data repopulation and increase storage needs will be helpful. Throughout the adoption and migration process, banks should maintain an adaptable and system-agnostic data model that can continue to feed all messaging systems independently of the specific messaging standard needed.

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Business phasing strategy

Testing and validation strategy

The transition to ISO 20022 is a complex, multi-year endeavour that is expected to extend beyond 2025, therefore requiring a carefully structured business phasing strategy that encompasses a strategic approach to the introduction of new message types and standards.

When it comes to testing and validation, a successful strategy hinges on effective collaboration and communication with stakeholders to ensure alignment with the plan, scope, and ultimate execution of end-to-end testing scenarios.

Banks have different options for processing rich data under ISO 20022, such as replacing their core payment systems entirely or maintaining legacy systems with an ISO wrapper. These approaches highlight the varied strategies institutions can adopt based on their current systems and the effort required for each.

Employing methods like Orthogonal Array Testing (OATS) and automating test cases allows for thorough coverage of various

A key component of the business phasing strategy involves maintaining continuous awareness and engagement at the senior executive level. This ensures a balanced investment in both the ISO requirements and other ongoing payment changes. Notably, the alignment of industry standards and responding to mandatory requirements from clearinghouses will drive the priority of adoption. This comprehensive strategy underscores the need for an active, involved approach, recognising the intricate challenges and opportunities presented by the transition.

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configurations and payment scenarios, facilitating a more efficient and accurate validation process. A critical aspect of this strategy is the emphasis on accuracy and resilience. By building resilience through continuous validation of newly introduced ISO functionalities and addressing potential “false fails” in validation, banks can maintain the integrity of existing payment functionalities while transitioning to new message formats.

The evolution of the payments industry

Moreover, client testing and real-life scenario simulations, including the participation of back-office teams and testing with diverse bank types, have proven to be effective in identifying and resolving practical issues early in the process. Several banks that have successfully completed the transition have found dress rehearsals and penny tests to be highly effective. These rehearsals, carefully planned to represent a wide array of real production cases, ensure smooth go-live transitions.

By simulating real transactions, financial institutions can preemptively identify and address potential issues, thereby mitigating the risk of disruptions during the actual transition. This will enhance the reliability of the ISO 20022 adoption process and ensure a smoother transition for all parties involved.

Post-implementation and evolution The migration process, currently in the first of three planned phases, requires banks to adapt to MX messages across various categories by November 2025. This transition is crucial for banks to keep pace with global payment standards and to tackle any issues during the ongoing coexistence phase. However, the adoption of MX messages in the cross-border space has been slower than anticipated, indicating the need for more concerted efforts in the migration process. A pivotal aspect of this transition is the shift from translation-based solutions to native ISO 20022 solutions. This shift is essential for banks to simplify internal complexities and achieve interoperability across the payments landscape.

Phase 3 of the migration, which will focus on adopting structured data, underscores the need for banks to engage closely with corporate clients. These clients play a critical role as originators of enhanced data and are liable to face their own set of challenges, including extensive and costly system upgrades. — As the financial industry embarks on the complex journey of transitioning to ISO 20022, the insights and experiences shared by BAFT members and published in this whitepaper provide invaluable guidance. From high-level governance to the intricacies of data strategy, business phasing, and testing methodologies, this transition presents both challenges and opportunities for institutions worldwide. To gain a comprehensive understanding of these critical lessons and strategies for a successful ISO 20022 migration, download and explore the full whitepaper here. For a more interactive experience and deeper insights, BAFT will be holding a panel session where this whitepaper will be explored in greater detail at the BAFT International Trade and Payments Conference from 27-29 February. To see more information on the event, visit the website here.

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Partner Events

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Partner Events DATE DATE

CONFERENCE

PROVIDER

LOCATION

6 - 29 Feb 2024

Virtual Proficiency Series on Economic Sanctions

Virtual

19 - 22 Feb 2024

ICISA Surety Week

Virtual

23 - 24 Feb 2024

Mines and Money Miami

Miami

27 - 29 Feb 2024

2024 International Trade and Payments Conference

27 Feb 2024

TradeTech Forum 2024

6 Mar 2024

7th Annual Canadian Forum on Global Economic Sanctions

Toronto

7 Mar 2024

Women in Trade, Treasury and Payments 2024 (In-person event)

London

8 Mar 2024

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9 - 10 Apr 2024

8th Annual Forum on FinTech & Emerging Payment Systems

New York

15 - 16 Apr 2024

Innovate Finance Global Summit (IFGS) 2024

London

17 - 18 Apr 2024

C4DTI Digital Trade Conference & Awards

London & Virtual

23 - 24 Apr 2024

Commodity Trading Week Europe

London

5 - 8 May 2024

2024 BAFT Global Annual Meeting

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22- 23 May 2024

TXF Amsterdam 2024

29 - 31 May 2024

The 2024 Payments Canada Summit

Toronto

30 - 31 May 2024

European Forum on Global Economic Sanctions

Berlin

9 - 13 June 2024

56th Annual Meeting

Seoul

7 - 10 Oct 2024

ICISA Trade Credit Insurance Week

Virtual

Amsterdam

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