Since a draft was included in the presentation at issue in ICC Opinion TA.948, it prompts important questions about examination not only under UCP but also under bills of exchange law.
Four years after the Association of Banks in Singapore (ABS) roll out of a “Code of Best Practices – Commodity Financing” intended to serve as an industry benchmark for bank lending standards in this sector, the Monetary Authority of Singapore (MAS) conducted inspections on select banks to assess their commodity financing (CF) business practices and on 4 March 2025 released an Information Paper, “Governance and Risk Management of Commodity Financing”, presenting its observations and supervisory expectations following the inspections.
Among banks it reviewed, MAS determined they “had generally established frameworks to provide oversight of CF activity and processes to monitor the risks undertaken. However, there is room for banks to improve the effectiveness of implementation of these risk management measures.”
Although the Paper did not identify the banks reviewed nor how many banks were inspected, sources have informed DCW that seven banks attended a closed meeting where they were briefed on the results of the Paper. When the Code of Best Practices was released by ABS in 2020, it was noted that an industry working group comprised of specialists from 28 banks representing the vast majority of commodity finance lenders in Singapore assisted in formulating the key principles contained in the Code.
The inspections focused on three spheres: governance and management oversight; customer-level controls and monitoring; and transactional-level controls and monitoring. Various facets under each of these three themes were identified for which MAS outlined its supervisory expectations, reported key observations from its inspections, and distinguished consequential areas for improvement with examples of good practices it encountered.
Governance
Of note in the area of Organisational Set-Up and System Support, MAS articulated expectations that functions performing “the credit and transactional risk control and monitoring processes should be adequately resourced, sufficiently independent and have clear mandates that are reflected in their reporting structure.” In its reviews, MAS observed different reporting structures. “Some banks ensured the independence of their control functions from business unit by having them reporting into second line of defence (such as credit risk management function) or first line operations. A few banks had, however, structured their credit control and monitoring units to report either directly or ultimately into the business head (i.e. front office), posing potential conflict of interests that may undermine the effectiveness of checks on compliance with lending terms and conditions.” For this latter set of banks, MAS advised that “additional measures should be put in place to manage the risks arising from the lack of independence in the reporting line of the control functions.”
Customer-Level Controls
While MAS found that banks’ implementation of Code principles at this level elevated their credit risk management and due diligence standards for their commodity trading customers overall, one area of concern is fraud risk assessment. According to MAS: “Most banks did not adequately adopt a structured approach to holistically assess the fraud risk of its customers such as incorporating fraud risk assessment as part of regular credit due diligence.” MAS did commend one bank for its good practice in taking a structured approach to assess fraud risk, with differentiated processes for its different risk-tiered portfolios. Business units are required to perform transactional reviews with the support of reports that highlight customer profile and activity, review customer relationships against established risk indicators, and also explicitly comment on customers’ fraud risk and risk mitigants which are then reviewed by credit risk approvers as part of a second line credit risk appetite assessment.
Transactional-Level Controls
At this level, MAS evaluated banks’ middle office functions, compliance checks, price checks & monitoring processes, controls over warehouse/storage financing, vessel movement checks, post-transaction reviews, and their implementation of code principles.
While satisfied that most banks reviewed had established middle office policies and procedures on transactional controls in areas such as pre-transaction checks, ongoing transaction monitoring and system reconciliations, MAS noted that these policies and procedures were not always updated and subject to regular reviews.
In the area of compliance checks with transactional terms and conditions, MAS found the banks reviewed generally required the risk management function to be involved in the approval of any material deviations from trade terms and conditions that brought about increased credit risk, but some banks lacked a centralised platform to store approvals obtained for transactional exceptions, instead keeping them in emails or disparate workflows of various systems.
Price checks & monitoring processes garnered consideration attention. MAS pointed out that banks should not only have adequate processes in place to perform price reasonableness checks on customers’ transactions, but ensure that their information needs on pricing are adequately met. In some instances where subscriptions to the relevant market price are not available, banks may obtain prices from customers and sometimes customer-provided pricing data was accepted without any checks as to its authenticity.
Indicative of its belief that controls to manage credit risk from commodity price fluctuations could be bolstered, MAS cited one bank’s approach to managing the credit risk arising from issuance of import LCs with price escalation clauses. As described by MAS: “The bank monitored price movements of a few key benchmark prices. [Mark-to-market] computations for each customer would only be conducted if pre-determined thresholds for price movements in these benchmark prices were triggered. However, there were no regular reviews to assess if the selected benchmark prices remained representative of its CF portfolio, and that the thresholds continued to be reflective of market conditions.” MAS noted that this approach could result in undetected credit risks if there are price movements of commodities in the bank’s portfolio that deviate from the selected benchmark prices.
As for warehouse/storage financing, MAS cited concerns that some banks do not have adequate due diligence practices in place for onboarding and reviewing warehouse/storage operators and facilities.
MAS expects banks to perform vessel movement checks to verify the genuineness of shipments and guard against credit and fraud risks, besides sanctions and money laundering risks. To their credit, most banks MAS reviewed subscribe to third party platforms providing information on the course of the shipment. MAS did add that banks can improve checks to ensure that the end-to-end voyage of a shipment is in line with expected trajectory, where such checks are warranted.
Post-transaction review is another area where banks can upgrade their processes. Among the banks it reviewed, MAS determined they generally do not have adequate mechanisms to track trade exceptions and anomalies on a consolidated basis. Strengthening their processes in this area will add support to robust customer due diligence and fraud risk assessment.
While MAS found that banks reviewed generally had established adequate guidance for transactional transparency and controls over the underlying receivables and goods, some banks’ guidance on implementation of Code principles is not sufficiently adhered to in practice at the transactional level.
The complete 33-page Information Paper, “Governance and Risk Management of Commodity Financing”, is available on the MAS website.
