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Trade finance alternative.

Summary: There is more to trade finance than what the banks offer. Global Multi Commodities Receipts are one example. fME explains what they are and how they can be used

Those who argue that trade must be increased between GCC countries will not be very happy to hear that it is still, despite attempts from various governments and organisations, quite lacklustre.

GCC and MENA countries on the whole still appear to be sending most of their goods abroad, to the overall detriment of local and regional growth.

HSBC's forecast for intra-MENA trade is at 13.43 per cent by 2025, barely two percentage points above what prevails today. A major reason for this has been a lack of regional trade finance vehicles in the market.

For instance, Dubai Multi Commodities Centre (DMCC) has historically filled this gap with its Global Multi Commodities Receipt (GMR).

Key Stakeholders

e* Banks & financiers

e* Commodity traders and asset owners

e* Warehouse, vault and storage operators

Owner deposits commodity with warehouse operator and requests a Tradeflow Warrant -> Warehouse operator Tradeflow Warrant -> Owner publishers details of the Inventory on the Tradeshow platform for financier(s) to accept -> Financier accepts to finance the published inventory and gives quotation for financing -> Owner accepts the quotation and pledges the inventory in favour of the financier -> DMCC Tradeflow register reflects the pledge in favour of financier

The GMR, says the DMCC, is a "unique electronic warehouse and vault receipt system" whereby physical inventories stored in warehouses or vaults in the UAE can be converted into negotiable warrants, enabling inventory financing at competitive rates by financiers. Over the past six years the GMR platform has facilitated over 2,000 transactions worth approximately $1 billion.

The process is roughly thus:

e* The commodity owner stores assets in a warehouse

e* The warehouse issues a Tradeflow Warrant - this warrant is essentially a receipt that confirms the storage and ownership.

e* The commodity owner can pledge the Tradeflow Warrant in favour of financiers in return for trade finance. There also exists the ability to transfer the title of the assets.

e* By accepting the pledge or transfer title, the financier now has beneficial ownership of the underlying assets. This is the key for the financiers.

e* Once the commodity owner has repaid the finance as agreed the financier returns the Tradeflow Warrant to the commodity owner

. e* Should a commodity owner not keep to the trade finance agreement, the financier, as the beneficial owner, can request that the assets are liquidated in order to recover the outstanding amount.

Those who might be interested need to know that all members pay the same annual membership fee of AED 5000 and that tradeflow is capable of handling any size of trade regardless of quantity or value.

Should a commodity owner not keep to the trade finance agreement, the financier, as the beneficial owner, can request that the assets are liquidated in order to recover the outstanding amount

Need to know

Prohibited commodities? Tradeflow accommodates the trading of the full list of commodity goods and assets that are approved, set up and maintained by Dubai Customs.

Is there a redemption period? The redemption period is entirely down to the agreement between the financier and owner. Tradeflow and DMCC play no part in contract particulars between the members and there is no fixed redemption period imposed

by tradeflow.

Fees? There is a fee payable by the financiers each time they accept a pledge from a commodity owner. This fee is a small percentage of the value of the stored commodities being financed.

Do you need to be a member of the DMCC to access it? Although you do not need to be a DMCC-registered company, you do have to be a member of Tradeflow and the commodities must be stored in the UAE. For that reason, Tradeflow can be utilised by global businesses that use the UAE for storage purposes.

2012 CPI Financial. All rights reserved.

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Date:Mar 15, 2012
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