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Trade Finance and Services Comptroller’s Handbook A-TFS Safety and Soundness Capital Asset Sensitivity to Other Adequacy Quality Management Earnings Liquidity Market Risk Activities (E) (L) (C) RESCINDED(A) (M) (S) (O) Trade Finance and Services Version 1.0, April 2015 This document and any attachments are replaced by version 1.1 of the booklet of the same title publishedOffice October of the 2018. Comptroller of the Currency Washington, DC 20219 Version 1.0 Contents Introduction ..............................................................................................................................1 Overview ....................................................................................................................... 1 Trade Finance................................................................................................................ 3 Letters of Credit ...................................................................................................... 3 Guarantees............................................................................................................... 6 Acceptances ............................................................................................................ 6 Open Account Financing ........................................................................................ 7 Export Credit Programs .......................................................................................... 8 Other Specialized Trade Financing ......................................................................... 9 Financial Supply Chain ......................................................................................... 13 Trade Services ............................................................................................................. 13 Prepayment ........................................................................................................... 14 OpenRESCINDED Account Trade ............................................................................................. 14 Advising ................................................................................................................ 14 Trade Collections .................................................................................................. 14 Bank-to-Bank Reimbursement Services ............................................................... 15 Insourcing and Outsourcing Trade Processing ..................................................... 16 Hedging Services .................................................................................................. 16 Risks Associated With Trade Finance and Services ................................................... 17 Operational Risk ................................................................................................... 17 Compliance Risk ................................................................................................... 19 Credit Risk ............................................................................................................ 20 Liquidity Risk ....................................................................................................... 21 Price Risk .............................................................................................................. 22 Interest Rate Risk .................................................................................................. 23 Strategic Risk ........................................................................................................ 23 Reputation Risk ..................................................................................................... 23 Risk Management ....................................................................................................... 23 Risk Controls ........................................................................................................ 25 Examination Procedures .......................................................................................................27 Scope ........................................................................................................................... 27 Quantity of Risk .......................................................................................................... 29 Quality of Risk Management ...................................................................................... 40 Conclusions ................................................................................................................. 47 Internal Control Questionnaire ................................................................................... 49 Verification Procedures .............................................................................................. 60 Version 1.0 Contents Appendixes..............................................................................................................................67 Appendix A: Commercial Documentary Letter of Credit .......................................... 67 Appendix B: Banker’s Acceptances ........................................................................... 71 Appendix C: Issuance of Commercial Letter of Credit and Banker’s Acceptance .... 76 Appendix D: Guarantees ............................................................................................. 80 Appendix E: Relevant Legislation .............................................................................. 81 Appendix F: U.S. Government and Multilateral Agencies That Guarantee or Insure Export Financing ................................................................................................... 86 Appendix G: Accounting Practices ............................................................................. 87 Appendix H: Sample Request Letter .......................................................................... 89 Appendix I: Glossary .................................................................................................. 92 Appendix J: Abbreviations ......................................................................................... 97 References ...............................................................................................................................98RESCINDED Comptroller’s Handbook ii Trade Finance and Services Version 1.0 Introduction > Overview Introduction The Office of the Comptroller of the Currency’s (OCC) Comptroller’s Handbook booklet, “Trade Finance and Services,” is prepared for use by OCC examiners in connection with their examination and supervision of national banks and federal savings associations (collectively, banks). Each bank is different and may present specific issues. Accordingly, examiners should apply the information in this booklet in a manner consistent with each bank’s individual circumstances. When it is necessary to distinguish between them, national banks and federal savings associations (FSA) are referred to separately. This booklet addresses international trade finance and services activities. These activities1 include letters of credit, guarantees, acceptances, open account financing,2 other specialized trade financing, financial supply chain solutions, prepayment, advising, trade collections, bank-to-bank reimbursement services, insourcing/outsourcing trade processing, and hedging services. Overview RESCINDED International trade, in terms of export value in nominal terms, has increased exponentially over the last three decades. Lower trade barriers, supported by multilateral trade negotiations and regional trade agreements, have helped fuel this growth. Also facilitating the growth in international trade are a broader range of invoicing currency3 and advances in technology. The growth also is affecting U.S. exports and imports, which have been rising. At the same time, markets have become more efficient, competition has increased, and company profit margins have been under pressure. In response, businesses conducting international trade have been seeking more cost-effective trade finance solutions, such as open account financing, more effective use of the financial supply chain, and the outsourcing of back- office trade processing services. These changes have created business opportunities, as well new risks, for U.S. banks. Globalization has changed the relationship between international buyers (importers) and sellers (exporters) of goods and services. Many emerging markets have become more open, and purchasing from these markets is more common. In these highly competitive markets where suppliers often offer similar goods and prices, buyers’ negotiating power increases. The traditional terms of payment (for example, commercial documentary letters of credit) have, to some extent, been replaced by terms more favorable to buyers. Some regular buyers 1 The activities listed in this booklet are not a comprehensive list. These are the primary activities that examiners may encounter during their examination. 2 In an open account transaction, the buyer and seller agree on payment on a specified date without a negotiable instrument, such as a draft or acceptance, evidencing the obligation. In most cases, the shipping documents are sent directly to the buyer rather than through a bank. 3 While the U.S. dollar retains its dominant role in financing international trade, the euro has emerged as a major currency for trade invoicing. In recent years, the creation of an offshore market for the renminbi has prompted an appetite in the market for local currency financing
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