Singapore introduces commodity trade finance guidelines

The Code of Best Practices for Commodity Financing, published by the Association of Banks in Singapore (ABS) with backing from the government, is designed to ‘articulate key principles governing prudent commodity trade financing practices’. The initiative, which was first announced in July 2020, comes after Singapore-based trading firms Hin Leong, Zenrock Commodities, and Hontop were forced to seek court protection earlier in 2020, leaving banks exposed to losses of up to USD 4 billion, according to argusmedia.com.

All three companies were revealed in court filings to have used a single letter of credit to finance multiple cargoes, or to have secured financing for cargoes that did not exist, prompting some banks to reassess their lending to the sector. The non-binding code was put together in consultation with unnamed commodity trading firms. The ABS identified two key themes underpinning the code: to increase banks' understanding of trading firms' corporate governance, risk management practices, business, and transactions at a macro level; and to give banks sufficient transparency and control over financed transactions, goods, and receivables at the transactional level.

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