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Why CDCS matters to global trade finance

22 January, 2020Ouida Taaffe

2020 marks the 21st anniversary of the Certificate for Documentary Credit Specialists (CDCS). Our experts in trade finance – Mike Backhouse, Alex Gray and David Morrish – explain why the qualification is so important.
Shipping containers on a shipping boat

Properly drafted documentary letters of credit should ensure that:

  • importers get the documentation they want and in good time
  • exporters who present complying documents are guaranteed payment for the goods they ship.

Importer and exporter may be in different time zones, use different legal codes and speak different languages. They may never have met. But they can still be confident about the terms of their trade if they rely on the expertise of a trade bank.

It is an old idea but still a very important one.

Financial security

Because of the high risk to a bank’s bottom line – and to its reputation if things go wrong in trade finance – issuing and paying letters of credit demands detailed technical understanding.

Both banks and their customers want to make sure the terms are correct and watertight.

“The Certificate for Documentary Credit Specialists (CDCS) is specifically designed to ensure the expertise of individuals doing the job – for people physically handling new applications and documents in their day-to-day work,” says David Morrish. “That makes it unique.”

Letters of credit do provide the security they promise. Default rates for import letters of credit from 2008 to 2018 averaged 0.37%, and 0.05% for export letters of credit, according to the International Chamber of Commerce (ICC).

Global trade in 2018 was valued at US$18.5tn and trade finance backed US$48bn. As those numbers suggest, trade documentation errors matter.

“At a minimum, if exporters don’t get the documents right there will be a downside in terms of delayed cash flow,” says Mike Backhouse.

“Or the importer could use a mistake in the documents presented to ask for a discount. If things really go wrong, potential losses are very high as the value of many trade deals can run into millions of dollars.”

When a bank has CDCS trained staff, customers can turn to an expert to get the right answers. That provides a lot of comfort and assists the relationship dynamic between the bank and its customers.

Global security

Fully trained trade finance staff are also vital for compliance. This goes far beyond making sure that the bank doesn’t lose money due to discrepant documentation.

“Checking letters of credit is the first line of defence in tackling problems like money laundering and the financing of terrorism,” says Mike.

“The document checker will notice anomalies like under-invoicing or over-invoicing that could indicate money laundering. They have a lot of responsibility.”

Mike argues that the importance of the work done by holders of the CDCS cannot be overstated.

“Thousands of people hold the CDCS and they help maintain the trade flows that we all rely on,” he says.

CDCS and the world of trade finance

SWIFT is a secure messaging platform used by banks and large corporates.

Unsurprisingly, there is a correlation between the volume of SWIFT messages related to letters of credit and the number of CDCS holders in individual countries.

This suggests that the more a company uses letters of credit, the more important it is for it to have CDCS-qualified staff.

Checking letters of credit does require an eye for detail and it can sound like a mundane job. But don’t judge this book by its cover.

Holders of a CDCS are employable around the world – at both banks and large corporates. And trade finance is an often fascinating window onto the workings of the global economy.

Alex Gray is our new Head of Trade and Transaction Banking at The London Institute of Banking & Finance. He joined us this month.

“When I worked in Hong Kong,” he says, “I could see letters of credit issued in March and April for the toys that would be hits at Christmas. You get to see the logistics of global trade.”

Global understanding

Because the CDCS is the accepted benchmark, its holders have potential access to the same job around the world.

The CDCS is based on the Uniform Customs and Practice (UCP) 600 rules for Documentary Credits, issued by the ICC.

Including the UCP 600 in contracts is voluntary, but banks deviate from the standards at their peril. “In the Far East, the CDCS is effectively a de facto licence to practice,” says David.

Tech and expertise

All the experts at The London Institute of Banking & Finance expect technology to radically alter the way trade finance works – but not in the short term.

“The fact is in some countries original documents have to be supplied. For a purely technological solution to be feasible, governments and customs regulations all need to be aligned. It will take quite a long while,” says Mike.

Technology will not mean the end of human expertise in letters of credit.

“AI can already do some document checking,” says Alex.

“And the physical checking of documents will disappear over time, but you still need a person to oversee the technology. That will make the CDCS qualification even more relevant because you will have to have someone who understands the documentation. A computer does not.”

“At the end of the day,” says Mike, “the use and operational management of documentary credits is standard transactional banking business for banks.

“However, its value in the development of international trade – and the benefits that brings to the globally economy – is often underestimated.”

About our experts

Mike Backhouse is our Relationship Director for International Trade Finance Qualifications.

Alex Gray is our new Head of Trade and Transaction Banking at The London Institute of Banking & Finance. He joined us this month.

David Morrish is retiring as Relationship Director for International Trade Finance Qualifications this month after a long career in trade finance.

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