Risk Management of Trade Finance

Course Overview:

There are two key aspects of risk management in trade finance; the first involves the transfer of risk between the trade parties – the so called trade “tug of war”, the second is managing risk from a prudential and regulatory viewpoint.

This course considers both types of risk management, considers the key issues, how to identify them and how to implement an effective risk management system.

This course focuses principally on risks and risk control although some elements of trade finance products will be refreshed.

Learning Objective:

• To equip delegates with a practical understanding of the risks and controls inherent within International Trade
• To provide delegates with an understanding of the importance of risk management of trade regulations and requirements in a business context
• To assist firms in developing risk management frameworks suitable for the International Trade industry

Who Should Attend:

The course is appropriate for delegates with some experience in trade finance.

Methodologies:

Classroom lectures and interactive practical workshop sessions.

Course Content:

An Introduction to Risk Management within Trade Finance

• What are the current key risks within the trade finance industry?
• How are these different within a conventional banking environment?
• The key risks existing within trade finance.

Case Study: Develop an initial analysis of the key risks existing within Trade Finance

Financial Techniques Applied by Trade Finance Banks

• Key Risks affecting the global community
• The risk and control of trade finance
• The differences in risk, control and financing of the major trade finance types:
  • Open account
  • Clean collections
  • Documentary collections
  • Documentary letters of credit (LC)
  • Confirmed letters of credit
  • Other LC types
  • Payment in advance
• Impact of default
• The risk and control of letters of credit and guarantees in trade finance.

Case Study: What are the key risks arising from the application of trade finance practices? How should these be controlled in practice?

Basel and Trade Finance

• The framework for Basel – does this provide additional challenges to the trade finance bank
• Credit risk
  • EAD
  • LGD
  • PD
• Market risk
• Operational risk
  • Basic indicator approach
  • Standardised approach
  • Advanced measurement approach
• Liquidity risk
• Strategic risk
• Reputational risk

Case Study: What are the key issues faced by banks involved in international trade in implementing the Basel Accord? How can these be overcome?

Risk Management Techniques within a Trade Finance environment

• Risk Registers and Risk Identification
• Control and risk self assessment;
• Key risk, performance indicators and risk appetite;
• Loss databases

Case Study: What are the key risks within Trade Finance and the indicators that should be applied?

Risk Transference Within International Trade

• What are the trading risks
• The “tug of war”
• Trade instruments and risk transfer
• Responsibilities of the parties
• The risk pyramid
• Advising clients
• Risk versus reward

Case Study: How does a client avoid risk in trade finance but remain competitive?

Regulatory/Trade body concerns

• UCC
• URC
• UCP
• ICC
• Trade conventions
• Other guiding principles

Case Study: What are the key risks within these regulations and how they should be applied?

Group and Named Lending

• What is a group?
• What is named lending?
• How should named lending be monitored?
• What is control?
• Cross border considerations

Risk Management and Capital Adequacy

• Introduction to the ICC regulations and impact on Capital Adequacy:
  • Basis and Limitations of the Standard’s Measurement Methodology
  • Scope of Application..
  • Specificities of Islamic Financial Instruments
  • Structure of the CAS
• Principals for Minimum Capital Adequacy Requirements
  • Credit Risk
  • Market Risk
  • Operational Risk
  • Profit Sharing Investment Accounts
• Minimum Capital Requirements For Trade Financing Assets
• Collections
• Guarantees
• Letters of credit
• Performance bonds
• Standby LC’s

Risk within Trade finance funding

• Overdrafts
• Loans
• Buyer credit
• Supplier credit
• Acceptances
• Aval
• Guarantees
• Red & Green clause advances
• Advance payments
• Open account
• Bank assisted open account

Case Study: What are the key risks within the above and how should they be controlled

Stress Testing & Scenario Modeling

• What is sensitivity analysis?
• What is stress testing?
• What is scenario modelling?
• What are the requirements from the Accord?
• What are the new Basel rules and how should they be applied?
• How will these vary with Basel I?

Case Study: What are the stress tests and scenario models which are most suitable for trade finance operations?