BPO session featuring DB, JPM, Bank of China and Bank of Tokyo Mitsubishi

The Bank Payment Obligation Update on the BPO project

Dan Taylor and André Casterman

Co-chairs of ICC Bank Payment Obligation Project Wednesday October 26th 2011

Beijing, China

Objectives of this session

• To update the Commission on the BPO project

• To demonstrate how the new BPO rules complement the existing ICC rules

• To demonstrate how banks are taking advantage of a new instrument in response to corporate needs

• To show BPO in action from a technology perspective

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Speakers today

• Dan Taylor, Vice-Chair, ICC Banking Commission • André Casterman, Head of Trade and Supply Chain, SWIFT • David Hennah, Senior Product Manager, SWIFT • David Meynell, Director, FI Product Management, Deutsche Bank

• Hiroyuki Watanabe, Hong Kong Trade Business Office, Trade

Business Division, The Bank of Tokyo-Mitsubishi UFJ, Ltd • Xiong Yuanmeng, Global Trade Services Department, Bank of

China • Michael Quinn, Managing Director, J.P. Morgan

• Olivier Berthier, Global Solutions Director, Misys

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Agenda

• SWIFT / ICC Cooperation on BPO – Dan Taylor, ICC Banking Commission and André Casterman, SWIFT

• BPO features and benefits – David Hennah, Senior Product Manager, SWIFT

• BPO rules and ISO 20022 standards – David Meynell, Director, FI Product Management, Deutsche Bank

• BPO-based supply chain finance services – Hiroyuki Watanabe, Hong Kong Trade Business Office, Trade

Business Division, The Bank of Tokyo-Mitsubishi UFJ, Ltd – Xiong Yuanmeng, Global Trade Services Department, Bank of China – Michael Quinn, Managing Director, J.P. Morgan

• Technology solutions combining LC and BPO – Olivier Berthier, Global Solutions Director, Misys

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Cooperation Agreement

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Both the ICC and SWIFT believe that by working together and leveraging their respective positions

across the trade finance community, the BPO will have an important role to play in supporting the

development of international trade in the 21st century in addressing cost pressures in the face of increased

automation and changes in the regulatory environment.

Industry standards … are those developed by international standardisation bodies

Industry standards are technology-neutral and industry-owned

• Trade Finance instruments (UCP, URDG, …) • Supply Chain Finance instrument (BPO)

• MT standards for LCs and Guarantees • ISO 20022 registration authority • ISO 9362 BIC registration authority, … • ISO 20022 Financial Industry standards • ISO 9362 Business Identifier Code (BIC), …

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BPO combines the best of both worlds

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Seller Buyer

LC Advising Bank

LC Issuing Bank

Docum

ents

Contract

Documents

Doc

umen

ts

Advi

ce

Application

Issuance

Payment

Letter of Credit

Bank services based on paper document processing

Seller Buyer

Seller’s Bank

Buyer’s Bank

Contract

Payment

Open Account

Documents

Bank services limited to payment processing

Array of risk, financing and processing services to address both cash management and trade finance needs

Seller Buyer

BPO Recipient

Bank BPO

Obligor Bank

Contract

Documents

Payment

Bank Payment

Obligation

Bank services based on electronic trade data exchange

Data

Dat

a

Dat

a

Corporates

Banks

Composition of ICC BPO Group

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ICC BPO Working Group (1/2)

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To establish the BPO as

a technology neutral

industry-wide instrument

Objectives

Legal Education

Commercialisation

Activities

Target publication date:

Q1 2013

Timeline

ICC BPO Working Group (2/2)

Why • To complement the existing

instruments (UCP, URDG, ISBP)

• To take advantage of increased digitilization of trade data (PO, transport, invoice, certificates)

• To help banks address risk, financing and processing needs of their corporate customers that UCP and URDG cannot address, targeting mainly open account transactions.

How • New rules, independent of existing

ones (UCP, e-UCP, …) • No impact on LC and Demand

Guarantee rules and business which allows for faster establishment of rules

• Use of public domain and technology-independent standards: ISO 20022 linking trade with payments and cash management processes

• Technology decisions remain in competitive space.

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To establish the BPO as a new industry-wide and technology neutral instrument owned by the ICC

Timetable and tentative deadlines

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• Ongoing from July 2011 – Draft ICC Rules • October 2011 – Provide in-depth session on the use of a bank

payment obligation, ISO 20022 message standards and bank presentations to the Banking Commission meeting in Beijing

• December 2011 – Create a Consulting group to provide input and review draft text of rules

• Spring 2012 Banking Commission Meeting – present outline of the drafting process and progress made to date

• Fall 2012 – Present proposed draft of the rules and review with the contents with the members of the Banking Commission

• Spring 2013 – Depending on the status of the rules at this point the rules could be presented to the Commission for approval.

Agenda







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What is a Bank Payment Obligation (BPO)?

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A BPO is an irrevocable undertaking given by a bank to another bank that payment will be made on a specified date after a successful electronic matching of data according to a defined set of rules. Therefore, a BPO offers:

- An assurance of payment - Risk mitigation for all parties - Possible use as collateral for finance

The key to offering finance and payment services is the ability for a bank to give an obligation to another bank which can be turned into an

undertaking to the seller/exporter.

BPO features & benefits End-to-end structured ISO 20022 messaging

Matching Platform

(e.g. TSU)

ISO 20022 or proprietary

Buyer’s bank(s)

Seller's bank

1 2 3

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Seller Buyer

ISO 20022 or proprietary

ISO 20022

Electronic matching based on

ICC BPO rulebook

Paper, FileAct, web or direct line Electronic matching based on ISO 20022 messaging and ICC BPO rules

Channel

Open standardised exchange and matching of structured data

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From Purchase to Pay

From Production to Distribution From Order to Cash

Accounts payable

REVENUE MANAGEMENT

SUPPLY CHAIN MANAGEMENT

EXPENDITURE MANAGEMENT

Receiving & Evaluating

Discrepancy management

Invoice processing

Payment issuance

Cash management

Ordering & contracting

Selecting & negotiating

Budgeting & forecasting

Production scheduling

Production

Warehousing

Distribution

Product development

Forecasting

Order processing

Raw materials planning

Order fulfilment

Billing

Cash collection

Cash management

Sales management

Contract management

Sales order processing

Credit check

DSO

DPO

DIO

BPO features & benefits Managing the cash conversion cycle

Optimising working capital/minimising operational risk & cost

Documents

Payment

BPO features & benefits Supply Chain Management & Financing Trigger Points

Purchase Order Agreed

BUYER SELLER

Purchase Order Finance

Due date

Documents approved

Documents presented

Documents issued

Goods warehoused

Document & data management, matching & reconciliation processes including discrepancy management and dispute resolution

Approved Payables Finance

Extended Payables Finance

Post Shipment Finance

Receivables Purchase

Warehouse Finance

Data Matching Application

Source: adapted from BAFT-IFSA Open Account Product Definitions

Trade Services Utility

BPO

BPO BPO BPO BPO BPO

Buyer supports purchase order finance for the supplier

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I want my business- critical supplier to increase its financial resilience and will confirm the purchase

order

I want to access cost-effective financing to

cover my working capital expenditure

I will offer purchase order finance to my customer based on

the BPO

Case 1: Buyer mitigates the supplier default risk

I will guarantee the payment (BPO) to the seller’s bank upon the

confirmed purchase order 3 4

1 2

Financing services

Seller Buyer

BPO

TSU BPO Obligor

Bank BPO Recipient

Bank

Supplier gets post-shipment finance

Case 2: Supplier mitigates liquidity risk

I want my business- critical supplier to

increase its financial resilience and will

confirm the transport or commercial data

I want to be paid as early as possible

after the shipment to the buyer

I will guarantee the payment (BPO) to the seller’s bank

based on the submission of compliant transport or

commercial data

I will offer post-shipment finance to my customer

based on the BPO issued by the buyer’s bank

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1

2

3 4

Financing services

Seller Buyer

BPO

TSU BPO Obligor

Bank BPO Recipient

Bank

Multi-bank BPO Trade Asset Distribution Model e.g. ‘club’ structure’?

Importer

Beneficiary bank

Lead BPO obligor bank

Exporter

Risk participation

Obligor bank Obligor bank Obligor bank Obligor bank

e.g. Importer informs the ‘club’ of investor banks of their pro

rata share in the BPO

Importer informs lead obligor bank of investor bank shares

Agenda







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BPO rules and ISO 20022 standards 26 October 2011

David Meynell

Rules & Standards Joint initiative ICC / SWIFT to develop ICC Rules

• ICC noted that there was an increased demand for implementation of ICC rules governing trade finance – Survey 2011

Modify existing BPO rules to be independent of TSU

• Neutrality

Inter-bank Transaction Matching Application implementing ISO 20022 TSMT Matching Rules Banks involved in common transactions must be connected to the same Transaction Matching Application Phase 1: Focus on B2B Phase 2: Incorporate Corporate interaction: buyer and obligor bank; seller and recipient bank Compile all possible text sources for review and consolidation

David Meynell

Primary Sources UCP eUCP TSU Guidelines & Service Description

• Several re-usable definitions

BPO Rulebook • Guidance on existing roles and responsibilities

ISO 20022 • International Organisation for Standardisation provides the financial industry with a common platform for the development of messages and allows users to define message sets according to an internationally agreed approach using agreed business standards – refer ISO website

Other ICC Rules • As applicable

Market Practice • To the extent that it exists

David Meynell

UCP 600 - examples

Application Definitions Interpretations Obligation (Credit) v. sales and contracts Data (Documents) v. goods, services or performance Undertaking Amendments Disclaimers Force Majeure

David Meynell

eUCP Version 1.1 - examples

Scope Definitions Format Notice of refusal (mismatch)

David Meynell

Tentative deadlines for BPO Working Group

Ongoing from July 2011 – Draft ICC Rules October 2011 – Provide in-depth session on the use of a bank payment obligation, ISO 20022 message standards and bank presentations to the Banking Commission meeting in Beijing December 2011 – Create a Consulting group to provide input and review draft text of rules Spring 2012 Banking Commission Meeting – present outline of the drafting process and progress made to date Fall 2012 – Present proposed draft of the rules and review with the contents with the members of the Banking Commission Spring 2013 – Depending on the status of the rules at this point the rules could be presented to the Commission for approval.

ICC BPO Group meeting - 24 October 2011 - Beijing 26

Agenda







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Export Bank ExporterImporter Import Bank

SWIFT

LCADV.

SendMT70X

Imp DocArrival

　LC Apply

ShipArrangement

PresentShip Doc

Order forsettlement

Credit forBills forCollection

SettlementOperation

ReceivePayment

DocumentDelivery

Credit

LCAppl

BL&INV

B/CAppl

PurchaseOrderTrade Contract

　LC ADVICE

Prepare LCApplication

PrepareShip Doc

ReceiveImportDoc

ImpDoc

Release

SendMT40X& 20X

Imp ArrivalAdvice

ImpDoc

Receive

DocChecking

DocChecking

ReceiveMT70X

ReceiveMT40X& 20X

Trade Contract

DispatchExportDoc

EXPORTER

Notice Notice

Notice NoticeArrival

IMPORTER Importer's Bank Exporter's Bank

ShippingDocument

ＴＳＵ

P/OCopy

MATCHING

Matching Result(Contract Info)

MatchedContract Data

MATCHING

DataInput

DataInput

DataInput

TSUAppli-cation

P/OCopy

TSUAppli-cation 　TSU

Applicatio

TSUApplication

　Shipment

Ship DocCopy

B/CAppli-cation

Matching Result(Contract Info)

Matching Result(Shipping Info)

Matching Result(Shipping Info)

Present Copy

Automatic Payment(Import Settlement without L/C)

MatchingResult

MatchingResult

　MatchingResult

ReceivePayment

　MatchingResult

PurchaseOrderTrade Contract Trade Contract

Operation forReceiving the

Payment

SettlementOperation

Flow chart of L/C Flow chart of TSU

1. Trade transaction using TSU

No. of Date 1 2 3 4 5 6 7 8 9 10 11Day of Week Monday Tuesday Wednesday Thursday Friday S S Monday Tuesday Wednesday Thursday

Exporte r

EXP Bank

IMP Bank

Impor t er

(Fi i l D t )

Application

Draft

Application

Draft　Courier

A/N

A/N

B/LInvoice

P/L

B/LInvoice

P/L

CoverLetter Draft

US$

US$

　Dispatch

US$

US$

　　　DOCs

Delivery &Presentationto Bank

　　　DOCs

B/LInvoice

P/L

B/LInvoice

P/L

B/LInvoice

P/L

2. Reduction of Settlement term

No. of Date 1 2 3 4 5 6 7 8 9 10 11Day of Week Monday Tuesday Wednesday Thursday Friday S S Monday Tuesday Wednesday Thursday

Expor t er

EXP Bank

IMP Bank

Impor t er

B/L　DataInvoiceData


TSU Data


B/LCopyInvoice

Copy

TSU dataInput

US$

US$

US$

US$

<Documentary Trade Flow>

<TSU Trade Flow>

3. Step to BPO

STEP 1 TSU Payment Service (without BPO)

Inter-office Completed

STEP 2 TSU Payment Service (without BPO)

Inter bank Completed

STEP 3 TSU Payment Service (with BPO)

Inter bank & Inter-office To be

started

BTMU completed step 1 & 2

We are now challenging step 3 !

4. L/C vs BPO

Documentary L/C TSU BPO Gap / Similarity

Function Bank guarantees the payment of importer.

Bank guarantees the payment of importer.

GAP Similar

Payment Trigger

Presentation of the documents according to L/C

Data matching between Baseline and Dataset data on TSU system.

GAP Similar

Obligation Primary Obligation Primary Obligation GAP Similar

Documents

Original documents to be handled

Only the TSU data to be handled, and no original docs are requested

GAP Similar

Rules UCP by ICC Rule book by SWIFT GAP Similar

5. Japanese Corporate interested in BPO

BPO

=Export（8 Corporates)Operat ional =Import（6 Corporates)Ef f ic iency

JPY100billion JPY500billion JPY1trillion JPY5trillion

Corp FPr int ing

Corp GSt eel

Trading

Corp HTrading

Company

7 & IRet ailer

Corp AChemical

Corp DMachines

Corp ESt eel TradingCorp C

Trading Company

Potential marketwhich BPO is not

necessary

PotentialMarket whichrequires BPO

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Requirement

Turn Over

Corp BElect r ic Par t s

Corp JAut o Par t s

Corp LRet ailer

Corp ITrading

Company

Corp KAut omobile

Corp MFurnit ure

BOC, we know the world of trade

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BOC TSU BPO SERVICE


• Oct 2006, member of Trade Services Advisory Group

• Jun 2007, membership of TSU

• Oct 2007, Shanghai Branch completed China’s first TSU business

• Apr 2009, signed the first TSU Bank-to-Bank Agreement globally

• Sep 2009, BOCHK joined TSU

• Mar 2010, draft the first Bank-Corporate TSU BPO service agreement

• Apr 2010, Shanghai Branch completed the world’s first TSU BPO Business

• Jul 2010, Shenzhen Branch and Shanghai Branch finished the first TSU BPO

post-shipment financing business globally

• Oct 2011, Shanghai Branch Conducted China’s first buyer BPO service with

Hua Nan bank

Milestone


Expertise and Network of TSU

QINGDAO JINAN NANJING

HONG KONG

HANGZHOU SHAOXIN

G

NANTONG WUXI CHANGZHO

U

GUANGZHOU FOSHAN HUIZHOU

Sao Paulo

Brazil

TSU service points in 8 branches among 15 cities Member of drafting committee of TSU Ruling Book Member of ICC Banking Commission BPO Legal Task Force


Cooperation with other banks

carried out the world’s first PO financing against BPO

conducted TSU business over 40 deals

BOC Our Banking Partners

conducted China’s first TSU business

Shanghai Branch

Shandong Branch

Jiangsu Branch

Shanghai Branch

Conducted China’s first buyer BPO service


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Oct. 2011, BOC Shanghai branch

conducted China’s first buyer

BPO services with Hua Nan

bank in Taiwan.

Case sharing


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Company S Group Y in Taiwan 1. T/T

2. L/C

buyer

Backgrounds

seller


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Original

TT

T/T

TSU BPO

Business Mode


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Group Y

TSU

Company S 1. Contract

2. Purchase Order

submitted

5. BPO

Service Process

2. Purchase Order

submitted


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2. Documents submitted

6. Payment

6.Payment

1. Shipment

TSU

6. Payment

Service Process

Group Y Company S


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Pairing cooperation intention

Probing prospect customers

Digging more TSU BPO business

Cooperation prospects on BPO


Thank You !

JPMorgan and the TSU Experience

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26 October 2011 Michael F. Quinn Managing Director JPMorgan Global Trade

This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose. Any distribution, copy, reprints and/or forward to others is strictly prohibited without expressed written consent. The statements in this presentation are confidential and proprietary to J.P. Morgan and are not intended to be legally binding. Neither J.P. Morgan nor any of its directors, officers, employees or agents shall incur any responsibility or liability to you or any other party with respect to the contents of this presentation or any matters referred to in, or discussed as a result of this document. J.P. Morgan makes no representations as to the legal, regulatory, tax or accounting implications of the matters referred to in this presentation.

IRS Circular 230 Disclosure: JPMorgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with JPMorgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.

Additional information is available upon request. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Securities Ltd. and J.P. Morgan Limited are authorised and regulated in the UK by the Financial Services Authority. J.P. Morgan is the marketing name for JPMorgan Chase & Co. and its subsidiaries and affiliates worldwide. J.P. Morgan Cazenove is a marketing name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.

J.P. Morgan Securities LLC. is a member of NYSE, FINRA and SIPC.

©2011 JPMorgan Chase & Co. All rights reserved.

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JPMorgan and the TSU Experience History

JP Morgan was one of the initial five investors in the Trade Services Utility Advocate of an open account solution at the Trade Services Advisory Group Invested $’s and people in its development and launch

2007 JP Morgan initiated the first TSU transactions in support of Dillards Inc. Importer who passed a high volume of LC and OA transactions through JPM Already had host to host PO transmission for LC and OA generation Transactions between Dillards and Hong Kong based supplier

Though “successful” not completely satisfying Few banks active in the TSU Limited benefit on the supplier side

2008 Launched TSU Champion Bank Program Arrangement with SWIFT facilitated recruitment of FI participants 18 partner banks joined; no transactional activity

2008 Launched TSU Connect White labeled web based capability available to FIs Provides linkages among all parties to the transaction End to end from PO initiation to document preparation Release 2.0 in 2009 with BPO functionality G

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JPMorgan and the TSU Experience Challenges to Adaption

Lack of compelling business case for Open Account transactions Many banks were unaware of the migration to OA Few offered any OA services other than payments

Emerging Market bank acceptance weak with a few notable exceptions Customers not capable of electronic interface Internal automation not a priority

Within JPM “competing” with proprietary solutions Multiple applications with similar functionality “Why bother?”

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JPMorgan and the TSU Experience Current State

Customers are increasingly seeking ways to reduce paper and increase productivity Firm wide initiatives to take paper out of everything they do Recognition that the purchase and sales processes have much opportunity

In cross border transactions recognition that delays are inherent to the process Reliance upon data that is contained in documents Lack of visibility to completion of the financial cycle Acknowledgement that confirming key data elements triggers conclusion of

commercial transaction; should do the same for the financial as well

Addition of Bank Payment Obligation enhances the business case Customers seeking one business process for both OA and LC transactions See data interchange critical as supply chains extend globally Prefer the ability to selectively request risk mitigation

6 Customers in the pipeline in various stages of the sales cycle Primarily exporters Common theme of improving DSO and productivity Full suite of “end to end” offerings

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JPMorgan and the TSU Experience Learnings

Need to create awareness of the capabilities Internal and External Other constituents (Legal community; Technology companies, Logistics

companies)

Need a commitment to change Fundamental change to the customer’s business process Affects the underlying commercial agreement for buyer and seller “Champion” in the customer’s office

Not “plug and play” Requires conversations between buyer and suppliers Changes in agreements, documentation, third party providers roles

Be not afraid! Everything that is needed already exists in the customer’s business processes TSU rule book and infrastructure provide means to do it TODAY There are banks and technology providers who can help you do it

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Agenda







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experience, solutions, results

A technology perspective on BPO and ISO 20022 messaging

Olivier Berthier Global Solutions Director, Transaction Banking [email protected]

mailto:[email protected]�

52 experience, solutions, results

The letter of credit analogy


Payment

Payment

More evolution than revolution

Letter of Credit • Bank services based on paper document processing…

Importer

LC Isssuing Bank

Exporter

LC Advising Bank

Contract

Goods and Services

Application Documents

Issuance

Advice Documents

Documents

Payment

but already using a fair bit of electronic data exchange!

Channels Channels

Back-office Systems

Back-office Systems



Bank Payment Obligation • Bank services based on electronic data exchange… from a buyer’s bank perspective

Baseline (+ BPO)

Commercial Data Set

Buyer

Buyer’s Bank

Payment

Payment

Invoice against PO

Invoice Acceptance

Collection

Programme Establishment

Twin Baseline

Seller’s Bank

Seller

Intent To Pay

Channels

Back-office Systems



Bank Payment Obligation • Bank services based on electronic data exchange… from a seller’s bank perspective

Initial Baseline Submission

Payment

Collection

Programme Establishment

Established Baseline

Commercial Data Set

Seller’s Bank

Seller

Payment Invoice Acceptance

Invoice Data

Buyer’s Bank

Buyer

Intent To Pay

Channels

Back-office Systems


The benefits of richer structured data sets


Catching up with cash management

ISO 20022 for Trade & Supply Chain Finance Bank-to-bank: baseline establishment, data set submission, baseline amendment, intent to pay, status change and extension, etc. (tsmt.0xx)

Corporate-to-bank: new set of guidelines published in 2011

ISO 20022 for Cash Management (since 2006) Credit Transfer (pain.001, pacs.008, pacs.009, etc.)

Direct Debit (pain.008, pacs.003, etc.)

Account Statement (camt.05x)


Technology perspective on BPO and ISO 20022

Standards! Guarantee of interoperability between participants (parties and systems), larger pool of skilled resources, de-risking investment in proprietary technology.

Proven and Familiar Existing IT expertise, ability to leverage components already in use for Cash Management, familiarity with well-known flows similar to traditional trade.

“Fixing the LC” Enabling greater granularity on transaction details, opening up opportunity for deeper data exploitation and related trigger points, extension to the corporate-to-bank space.

BPO &

experience, solutions, results

NEXT

60

Conclusion and Q&A

Economy & Finance

BPO session featuring DB, JPM, Bank of China and Bank of Tokyo Mitsubishi