News and Blogs Working for a better understanding of trade risk

Jun Xu was asked by LIBF to write two chapters of the textbook for the new CITR qualification. In that she tried to ensure that the information would be useful both to trade finance specialists who need to understand more about risk management tools and methods, and to risk departments who may have no knowledge of trade finance.

“There are many people working in the risk departments of banks who don’t have a profound knowledge of trade finance products,” says Jun Xu. “Sometimes they treat trade finance as having the same risk as a working capital loan. Getting them to really understand how low risk trade finance is would be very beneficial,” she says.

But CITR is not just for banks. Their customers, too, have interest in understanding trade risk. “I also talked to exporters and importers,” says Jun Xu. “They are very keen to know more about risk. The book can also help them get a good overview of the risks in trade and of the relevant trade finance products.”

One of the main advantages of the CITR, Jun Xu says, is that it covers all trade finance products as part of risk management in one book. “It’s very comprehensive risk management guidance,” she says.

Jun Xu knows the value of a good textbook from personal experience. “I took CDCS [the Certificate for Documentary Credit Specialists] in 2002. When I was preparing for the exam, I really enjoyed reading the textbook and having it as a reference source. Even after I had passed, I kept the book on my desk because it was written by experts from many countries.”

For those just starting out in trade, Jun Xu says, the first major risks to consider are operational because they haven’t yet mastered all the rules. “There are a great many ICC publications and rules and opinions they need to come to terms with,” she says. “LIBF’s courses help them be aware of these.”

Seasoned professionals, whether they are managing trade finance products, or developing new ones, need to be able to consider the credit risk of their customers, performance risk, geopolitical issues and compliance requirements in order to do their job well, Jun Xu says. “Managing trade finance products is particularly demanding,” she says. “You need to know the ICC rules, to be familiar with domestic and international regulations, and also the internal risk management policies of your institution.”

Jun Xu says that risk awareness is a particularly pressing issue for those working in Chinese banks. “In recent years, Chinese regulators have tightened the rules for financial institutions so there is a lot of pressure to comply with regulations. There have been fines, and people excluded from working in financial services. Some have even gone to jail for violating laws such as committing letter of credit crime.” This is despite the fact that trade finance remains one of the lowest risk areas at banks.

Technology is changing many industries. What will it mean for trade finance?

“We have been promoting digitalisation,” say Jun Xu, “But I don’t see a day when machines will be able to do everything in trade. Very simple transactions, they could easily carry out. However, for more complex products, such as a letter of credit, putting it together requires the professional judgement that comes with experience. It will take a long time for the technology to get there – if it ever can.”

Just as importantly, technology does not exist in a vacuum. Jun Xu points out that without very proficient people in trade finance the industry will not be able to establish the foundations of digitalisation.

“Some banks say that they’re having difficulty in pushing the digitalisation of trade finance forward. It’s not because they don’t have the technology. The issue is that the technology can do nothing unless we are able to tell it what to do.”

“I studied English at university,” says Jun Xu. “I thought I would become an academic or go into publishing. Before I worked in a trade bank, I didn’t even realise there was such a thing. However, I’ve always had a lot of curiosity.”

Jun Xu found that a trade bank was the perfect place to have an inquiring mind and a keen interest in continuous learning. “Working in trade finance is like starting out again in university life. You have to keep learning – from customers, fellow bankers, regulators, lawyers…There are so many risks that deals might face.”

Having an appetite for working hard at exams also helps. Jun Xu sat her first trade finance exam, the Certificate for Documentary Credit Specialists (CDCS) after just a few weeks of study while she was working for JPMorgan Chase Bank. “I was almost the youngest, and the bank wasn’t confident about letting me sit it as the time for preparing for the exam was so short, but I was the only one to pass. I regretted being just one mark short of a distinction.” Following that, her manager asked her to provide training for others about to sit the exam the following year. Almost all of them passed.  

“My parents wanted me to be an academic,” says Jun Xu. “In the bank, I have achieved their dreams and mine working as a trainer internally and externally and lecturing at universities to students of business management.”