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ICC unveils universal terms for supply chain finance

Global financial body says standardised definitions will boost clarity around core transaction techniques

A set of universal terms for improving communications in the field of supply chain finance (SCF) has been unveiled by some of the most prominent bodies in the world of finance.

The release of the terms marks the end of a two-year project in which the groups have been busily working out how the SCF industry should name and classify its various techniques, to ensure they are not confused with aspects of trade finance.

Published on 9 March, the 100-page Standard Definitions for Techniques of Supply Chain Finance was drafted by a special working group led by the International Chamber of Commerce (ICC), with support from the Bankers Association for Finance and Trade (BAFT), the Euro Banking Association, Factors Chain International and the International Trade and Forfaiting Association.

While long and highly detailed, the document is essentially based around nine, core disciplines in three, main categories that have been agreed as the primary methods at the heart of the fast-growing SCF industry:

Category 1 – receivables purchase SCF

  • Receivables discounting;
  • Forfaiting;
  • Factoring; and
  • Payables finance.

Category 2 – loan or advance-based SCF

  • Loan or advance against receivables;
  • Distributor finance;
  • Loan or advance against inventory; and
  • Pre-shipment finance.

Category 3 – enabling framework

  • Bank Payment Obligation (BPO).

Explaining the need for those standard terms, the document says: “The current inconsistency in definitions, nomenclature and general language around the financing of trade linked to open-account terms, and to the support of global supply chains, is proving to be challenging for buyers, sellers, finance providers, service providers and other stakeholders.

“This issue has immediate implications for the accounting and regulatory treatment of SCF structures, and by extension, impacts market uptake and the engagement of traditional, as well as emerging, providers of SCF solutions.”

It adds: “The inconsistent – even contradictory – language currently in use is complicating advocacy efforts and diluting the effectiveness of communication aimed at fairly articulating the value proposition around SCF, at a time when it is increasingly important to domestic commercial activity [and] global trade.”

According to former ICC Banking Commission chair Kah Chye Tan – head of the steering group that devised the terms – standardised SCF terminology “will ensure a much clearer communication in this rather complex ecosystem of providers, clients, accounting and legal professionals, regulatory authorities and others involved in international supply chains”.

BAFT president and CEO Tod Burwell said: “Supply chain finance has grown and evolved in recent years in response to shifts in corporate supply chains and the ever-growing demand for trade finance. This publication should aid the market, regulators and other stakeholders in gaining clarity and consistency on the various terms and techniques used.”

The paper has been envisaged as a “living document” that will change over time, reflecting SCF’s development as it continues to attract new stakeholders. While the terms are not yet legally binding, the document says that “the use of standard market definitions should assist in the establishment of legal precedents”.

For full descriptions of the agreed terms and further details, download the full ICC document.

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