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Commodities trade finance goes electronic after centuries of paper

* Electronic transactions cut deal completion times to hours

* Electronic systems will also enhance transparency

* Change is slow due to complexity of deals

By Jonathan Saul

LONDON, June 1 (Reuters) - Commodity traders and banks are breaking with centuries of paper trails to embrace electronic trade finance, helping to speed up deals and increase transparency.

Completion times for transactions involving the transport of dry bulk commodities such as grain or iron ore can take several weeks, or even months, as they traditionally involve multiple documents.

A trade finance deal - the technical and payment procedures needed for the international sale or purchase of goods - for a single commodities cargo by sea can require around 36 original documents and 240 copies from as many as 27 parties.

Years after most industries went electronic, banks and traders have in recent months started using electronic solutions for bulk commodities that can complete a deal in hours.

"The industry is remarkably outdated in terms of the speed to which it adapts to technologies," said Matt Shellabear, who leads trade operations at agricultural giant Cargill.

"For instance, if a trade changes in the current paper world, it's an administrative nightmare. But in a digital world, it's a few clicks of a mouse."

Commodities traders and banks face tougher regulatory scrutiny across financial markets, and an electronic system would likely make trade finance transactions more transparent.

Global transaction services organisation SWIFT is driving development of an automated bank payment obligation (BPO), which is similar to a letter of credit. SWIFT said 20 banking groups, predominantly in Asia and Europe, were live on their BPO processing platform.

"The majority of those clients are moving away from the letter of credit because they suffered too much from the slow paper-based processes which cannot be accelerated because of the manual processing," Andre Casterman, head of corporate and supply chain markets at SWIFT, said.

"We should be reaching close to 1,000 purchase orders this year through the BPO. Last year we had 600. It is still early days."

SWIFT said it was also working with a leading provider of e-solutions, Malta-headquartered firm essDOCS.


In April essDOCS completed the first BPO transaction with its own software for an iron ore shipment from Australia to China involving multiple parties including Australia and New Zealand Banking Group and Cargill.

"I would expect that we will get to a tipping point on digital trade finance in the next 12 to 24 months," essDOCS Chief Executive Alexander Goulandris said.

Malaysia's CIMB Group Holdings Bhd pioneered the first live BPO cross-border transactions with counterparts in China.

"The move towards digitisation is irreversible. We see more banks and corporates moving into this space," said CIMB's group head of transaction banking Thomas Tan Kok Kiong.

Commodity trader Trafigura's logistics and warehouse unit Impala Terminals said it was planning to adopt electronic documents across its business.

"Due to the fragmented nature of international trade any transaction may not be seamless," Impala Terminals Chief Executive Nicolas Konialidis said. "However, essDOCS offers us the possibility to revert back to traditional paper form if required."

But the pace of change remains slow given the complexity of trade deals, the multiple parties involved such as shipping companies, insurers and inspection authorities and the task of shifting all to electronic systems.

"Corporate awareness is still very low," SWIFT's Casterman said. "The legal aspects require product managers to go through their risk committees to get approval to roll out those new services."

Hari Janakiraman, head of global core trade products at ANZ, said electronic trade finance was set for steady growth, but was "unlikely to be a game changer in the short term".

"Nevertheless, it will be an increasingly vital capability for any serious corporate trader in future." (Editing by Veronica Brown and Susan Thomas)