Reed Smith In-depth

On 30 November 2020, the Association of Banks in Singapore (ABS), with the support of the Monetary Authority of Singapore (MAS), Enterprise Singapore (ESG) and the Accounting and Corporate Regulatory Authority (ACRA), and in consultation with commodity traders, published the Code of Best Practices – Commodity Financing (the Code).

The Code was developed following several high-profile fraud cases this year involving Singapore-based commodity trading companies and is intended to articulate key principles governing prudent commodity trade financing practices that financial institutions regulated by MAS should be guided by.

This client alert examines what the Code may mean for you.

Authors: Omar Al-Ali Kohe Hasan Hagen Rooke Philip Orme Jennifer Ince Mie Miura

What is the Code?

The Code aims to articulate key principles governing prudent commodity trade financing practices, underpinned by two key themes, namely:

  • at a macro level, Lenders’ understanding of the corporate governance, risk management practices, business and transactions of a trader that obtains commodity financing from a Lender (a Trader) through due diligence and policy requirements; and
  • at a transactional level, Lenders obtaining sufficient transparency and control over the financed transactions, goods and receivables.

The Code achieves this by setting out five general principles to guide commodity finance lenders when carrying out credit risk assessments and structuring transactions to ensure appropriate risk mitigation. In summary, these are:

  • Corporate Governance: Lenders should ascertain that each Trader has appropriate corporate governance policies and practices based on its size, complexity and structure.
  • Risk Management: Lenders should ascertain that each Trader’s risk management policies and practices are commensurate with its business strategy, turnover, complexity of operations and risk appetite.
  • Business Due Diligence: Lenders should conduct proper and adequate business due diligence to obtain comprehensive information on each Trader’s operations, business and relevant aspects relating to commodity trade financing for credit risk assessment and mitigation purposes.
  • Transparency and Control:  Lenders should adopt and/or impose measures to ensure sufficient transparency and control over (1) transactions and the underlying goods that are subject to finance and (2) receivables associated with the sale of such underlying goods.
  • Industry Collaboration: Where relevant, Lenders should participate in industry initiatives that aim to further strengthen the commodity trading sector in Singapore.

The general principles set out in the main body of the Code are supplemented by specific, non-exhaustive, non-prescriptive examples of good practice contained in Appendices to the Code that Lenders are encouraged to adopt as applicable and appropriate, taking into account the risk, scale and complexity of the profile of a Trader and the financing activities undertaken.