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The ABC of Digitisation

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The ABC of Digitisation 1

By David Hennah, Head of Trade and Supply Chain Finance, Finastra

David Hennah, Head of Trade and Supply Chain Finance, Finastra

David Hennah, Head of Trade and Supply Chain Finance, Finastra

In recent years the trade agenda has seemingly been dominated by endless debates on compliance and regulation. There can be little doubt, however, that the 2010s will ultimately go down in history as the decade of digitisation. The digital universe has finally descended upon us, bringing with it brontobytes of big data and billions of distributed devices. But what does it mean to banks and what does it mean for the business of trade finance?

In light of the cosmic developments in new technology, many banks have come to recognise the competitive constraints of existing infrastructure and are ready to respond to the compelling case for business transformation. Many leading institutions have legacy applications that are both monolithic and siloed, resulting in unacceptably low levels of interoperability. Such technologies are not only expensive to enhance and maintain but are also inevitably approaching end of life.

Whilst it is acknowledged that trade is a particularly difficult business to digitise due to the number of participants and documents across the supply chain, the opportunity to translate documents to data and to transform business processing from analogue to digital is huge. With digitisation comes the ability to extend connectivity across the trade ecosystem. This is of vital importance in the face of ever more complex corporate value chains and the fragmented technology landscape that persists across trade, supply chain finance and trade lending.

Banks today need to deploy market leading technologies on a modern architecture so as to adapt to digital disruption and respond effectively to changing customer needs with increased agility.

Some key areas banks will need to focus on include:

Paperless trade

For generations the business of trade finance has been dominated by paper-based processing, from bills of lading to warehouse warrants; from bills of exchange to promissory notes. Today, there is a widespread recognition of the business benefits and cost efficiencies associated not only with digitised document preparation but eventually the removal of paper processing altogether.

Removing the paper pain points will significantly reduce the most common risks of delays and discrepancies as well as supporting the increased availability of structured data for business intelligence purposes. Empirical evidence has suggested that banks can save more than two hours per transaction by not handling paper, with further savings achieved through automated compliance checks.

The transition to electronic trade documents further supports the continuing move to open account and the increasing demand for supply chain finance (SCF).  By its very nature, SCF must be digitised to make the business viable at any scale and underpin the common desire among corporates to optimise working capital by accelerating the cash conversion cycle.

Open architecture

To firmly place themselves at the centre of the trade ecosystem supporting corporate clients, banks must put in place an open ‘plug and play’ architecture that supports collaboration with technology platforms, system integrators, government agencies and other third partyservice providers.By adopting an open architecture, banks will obtain access to a new channel through which they can engage with the digital world. API-based open banking creates huge flexibility in the ways in which customers can interact with their financial services providers. This is a transformational change enabling more efficient integration and better use of infrastructure.

Business intelligence and predictive analytics

In the digital world, data is the new collateral. Banks need to leverage big data in order to better understand operational, market, industry and customer risks,opening up new opportunities for growth and enabling more efficient use of regulatory capital.

As banking in general becomes more and more commoditised, the mining of big data represents a huge opportunity for banks to stand out from the competition. Big data may be seen as a pot of gold and every transaction that lies within is a golden nugget of information that can be dissected and analysed in order to enhance almost every aspect of service levels.

The evolving art of predictive analytics will enable banks ultimately to better manage their relationships, revenues and risks.The bank will also be able to improve customer self-help through greater access to data whereby corporates can interface to their own ERP systems and run predictive data analytics across their working capital needs.

Artificial intelligence, machine learning and natural language processing

These days, the use of standard optical character recognition (OCR) to read text from trade documents has become commonplace.

As we move forward with the adoption of next generation technologies such as artificial intelligenceand cognitive computing,so too will opportunities to enhance both the efficiency and productivity of performing operationally intensive tasks, such as document processing and compliance checking.

The adoption of machine learning and natural language processing techniques enables the automation of a complex web of cognitive processes associated with due diligence. Its application will eventually benefit multiple aspects of international trade, including the more efficient management of supply chains, contracts and regulatory compliance, ultimately opening up new opportunities for easier access to finance.

Smart contracts and smart objects

No article on the subject of digitisation would be complete without some reference to the potential impact of Distributed Ledger Technology (DLT), more popularly known as ‘blockchain’. While the full business benefits of blockchain are yet to be validated, blockchain theory has attracted widespread interest, resulting in a tidal wave of laboratory-based proof of concept use cases. The ability to industrialise such solutions and bring them to market might remain constrained for some time by the continuing absence of a common set of rules and standards.

Arguably the most compelling use cases associated with blockchain are those that promote the use of smart contracts to generate instructions for downstream processes, such as payments or the transfer of collateral, provided the reference conditions have been met.

Smart contracts contain pre-written logic that can be stored or replicated on a distributed ledger platform and executed by a network of computers connected to the blockchain. Smart contracts reduce operational risk by the automation of workflow. They can be used to help with e.g. automatic uploads of purchase orders for financing and the translation of data for document preparation or paperless trade. They can also potentially be extended into artificial intelligence.

Beyond smart contracts, there is much interest now in the evolution of track and trace devices that enable us to monitor the location and condition of smart objects in transit, hence reducing the operational risks commonly associated with the transportation of goods.The ability to extend this technology further still – e.g. back into the supply chain – in order to guarantee the provenance of goods at source in support of sustainable trade, has further captured the imagination of thought leaders.

Rules and standards

It is true that, as an industry, we still lack a degree of certainty around common rules and standards. The absence of clear definitions is a barrier to interoperability and a constraint on connectivity. Collaboration is key to overcoming the obstacles.

Most recently, the International Chamber of Commerce (ICC) Banking Commission announced the creation of a working group on digitisation. Among its aims will be the evaluation of ICC rules such as the eUCP to ensure that these are both practical and e-compliant, enabling banks to accept data in place of documents.

A+B+C = D

Smart trade demands smart trade finance.

As we approach the next decade of digitisation, intelligent trade will not only rely on a combination of smart contracts and smart objects, artificial intelligence and business intelligence but also significantly draw upon the combined powers of:

  • API-based open architecture;
  • Big data; and
  • Cognitive computing

This A+B+C approach will ultimately come to represent the true fabric of (d) – the Digital Trade Bank of the 21st century.

Trading

Barclays announces new trade finance platform for corporate clients

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Barclays announces new trade finance platform for corporate clients 2

Barclays Corporate Banking has today announced that it is working with CGI to implement the CGI Trade360 platform. This new platform will provide an industry leading end-to-end global trade finance solution for Barclays clients in the UK and around the world.

With the CGI Trade360 platform, Barclays will provide clients with greater connectivity and visibility into their supply chains, allowing them to optimise working capital efficiency, funding and risk mitigation. By utilising cloud based functionality for corporate banking clients, Barclays will also be able to offer a leading client user experience through easy access and real-time integration to essential information, combined with the latest trade solutions as the industry-wide shift to digitisation continues to accelerate.

This move underpins Barclays commitment to supporting the trade and working capital needs of their clients and reinforces a commitment to innovation that has been central to the bank for more than 300 years.

James Binns, Global Head of Trade & Working Capital at Barclays, said: “We are delighted to announce our move to the CGI Trade360 platform and to have started the implementation process. We have a longstanding partnership with CGI, and the CGI Trade360 platform will mean we can continue delivering the best possible trade solutions and service to our clients for many years to come.”

Neil Sadler, Senior Vice President, UK Financial Services, at CGI, said: “Having worked closely with Barclays for the last 30 years, we knew we were in an excellent position to enhance their systems. Not only do we have a history with them and understand how they work, but part of the CGI Trade360 solution includes a proof of concept phase, which is essentially seven weeks of meetings and workshops with employees across the globe to guarantee the product’s efficiency and answer all queries. We’re delighted that Barclays chose to continue working with us and look forward to supporting them over the coming years.”

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What’s the current deal with commodities trading?

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What’s the current deal with commodities trading? 3

By Sylvain Thieullent, CEO of Horizon Software

The London Metal Exchange (LME) trading ring has been the noisy home of metals traders buying and selling for over a hundred years. It’s the world’s oldest and largest metals market and is home to the last open outcry trading floor. Recently however, the age-old trading ring, though has been closed during the pandemic and, just a few weeks ago, the LME announced that it will remain so for another six months and that it is taking steps to improve its electronic trading. This news fits in with a growing narrative in commodities about a shift to electronic trading that has been bubbling away under the surface.

Something certainly is stirring in commodities. The crisis has affected different raw materials differently: a weakening dollar and rising inflation risks bode well for some commodities with precious metals being very attractive, as seen by gold reaching all-time highs. Oil on the other hand has had a tough year and experienced record lows from the Saudi-Russia pricing war. It has been a turbulent year, and now prices look set to soar. While a recent analyst report from Goldman Sachs predicts a bullish market in commodities for the year ahead, with the firm forecasting that it’s commodities index will surge 28%, led by energy (43%) and precious metals (18%).

Increasingly, therefore, it seems that 2020 is turning out to be a watershed moment for commodities, and it’s likely that the years ahead will bring about significant transformation. And whilst this evolution might have been forced in part by coronavirus, these changes have been building up for some time. Commodities are one of the last assets to embrace electronic trading; FX was the first to take the plunge in the 90s, and since then equities and bonds have integrated technology into their infrastructure, which has steadily become more advanced.

The slow uptake in commodities can be explained by several truths: the volumes are smaller and there is less liquidity, and the instruments are generally less exotic, essentially meaning it has not been essential for them to develop such technology – at least not until now. This means that, for the most part, the technology in commodities trading is a bit outdated. But that is changing. Commodities trading is on the cusp of taking steps towards the levels of sophistication in trading as we see in other asset classes, with automated and algo trading becoming ever prominent.

Yet, as commodities trading institutions are upgrading their systems, they will be beginning to discover the extent of the job at hand. It’s no easy task to upgrade how an entire trading community operates so there’s lots to be done across these massive organisations. It requires a massive technology overhaul, and exchanges and trading firms alike must be cautious in the way they proceed, carefully establishing a holistic, step-by-step implementation strategy, preferably with an agile, V-model approach.

The workflow needs to be upgraded at every stage to ensure a smooth end-to-end trading experience. So, in replacement of the infamous ring, these players will be looking to transform key elements of their trading infrastructure, including re-engineering of matching engines and improving communications with clearing houses.

However, these changes extend beyond technology. For commodities players to make a success of the transformation in their community, exchanges need to have highly skilled technology and change the very culture of trading. All of which is currently being done against a backdrop of lockdown, which makes things much more difficult and can slow down implementation.

What is clear is that coronavirus has definitely acted as a catalyst for a reformation in commodities. It is a foreshadowing of what lies ahead for commodities trading infrastructure because, a few years down the line, commodities trading could well be very different to how it is now, and the trading ring consigned to history.

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Afreximbank’s African Commodity Index declines moderately in Q3-2020

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Afreximbank’s African Commodity Index declines moderately in Q3-2020 4

African Export-Import Bank (Afreximbank) has released the Afreximbank African Commodity Index (AACI) for Q3-2020. The AACI is a trade-weighted index designed to track the price performance of 13 different commodities of interest to Africa and the Bank on a quarterly basis. In its Q3-2020 reading, the composite index fell marginally by 1% quarter-on-quarter (q/q), mainly on account of a pull-back in the energy sub-index. In comparison, the agricultural commodities sub-index rose to become the top performer in the quarter, outstripping gains in base and precious metals.

The recurrence of adverse commodity terms of trade shocks has been the bane of African economies, and in tracking the movements in commodity prices the AACI highlights areas requiring pre-emptive measures by the Bank, its key stakeholders and policymakers in its member countries, as well as global institutions interested in the African market, to effectively mitigate risks associated with commodity price volatility.

An overview of the AACI for Q3-2020 indicates that on a quarterly basis

  • The energy sub-index fell by 8% due largely to a sharp drop in oil prices as Chinese demand waned and Saudi Arabia cut its pricing;
  • The agricultural commodities sub-index rose 13% due in part to suboptimal weather conditions in major producing countries. But within that index
    • Sugar prices gained on expectations of firm import demand from China and fears that Thailand’s crop could shrink in 2021 following a drought;
    • Cocoa futures enjoyed a pre-election premium in Ghana and Côte d’Ivoire, despite the looming risk of bumper harvests in the 2020/21 season and the decline in the price of cocoa butter;
    • Cotton rose to its highest level since February 2020 due to the threat of storm Sally on the US cotton harvest, coupled with poor field conditions in the US;
    • Coffee rose 10% as La Nina weather conditions in Vietnam, the world’s largest producer of Robusta coffee, raised the possibility of a shortage in exports.
  • Base metals sub-index rose 9% due to several factors including ongoing supply concerns for copper in Chile and Peru and strong demand in China, especially as the State Grid boosted spending to improve the power network;
  • Precious metals sub-index, the best performer year-to-date, rose 7% in the quarter as the demand for haven bullion continued in the face of persistent economic challenges triggered by COVID-19 and heightening geopolitical tensions. In addition, Gold enjoyed record inflows into gold-backed exchange traded funds (ETFs) which offset major weaknesses in jewellery demand.

Regarding the outlook for commodity prices, the AACI highlights the generally conservative market sentiment with consensus forecasts predicting prices to stay within a tight range in the near term with the exception of Crude oil, Coffee, Crude Palm Oil, Cobalt and Sugar.

Dr Hippolyte Fofack, Chief Economist at Afreximbank, said:

“Commodity prices in Q3-2020 have largely been impacted by COVID-19. The pandemic has exposed global demand shifts that have seen the oil industry incur backlogs and agricultural commodity prices dwindle in the first half of the year. The outlook for 2021 is positive however conservative the markets still are. We hope to see an increase in global demand within Q1 and Q2 – 2021 buoyed by the relaxation of most COVID-19 disruptions and restrictions.’’

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