Recently, Singapore Branch has successfully granted a CER trade facility limit to a Singapore listed commodity trading conglomerate; as of end-April 2011, the said loan facility was fully drawn down, and signifying our formal entry into the highly specialised field of CER trade financing.
The renowned Kyoto Protocol enacted on 16 Feb 2005 paved the way for the introduction of Clean Development Mechanism (hereafter referred to as "CDM"), which stipulates developed countries during phase 1 of CDM from year 2008-2012 period has to meet the committed carbon reduction targets within the stipulated timeframe, and these have to be eventually borne and implemented by corporate customers, whilst developing countries are exempted entirely. Owing to the huge disparities in carbon reduction costs that exist between developed countries and developing countries, trading of CDM quotas under the Kyoto Protoco framework has been rapid over the past years.
In carbon credit trading, the greenhouse gas emission trading quota, refers to the buying of additional emission rights from an unrelated party to offset one's obligation so as to reduce carbon emission. Through the CDM carbon credit trading mechanism, developed nations are allowed to purchase CER freely from developing nations to fulfill their original carbon reduction targets. Conversely, developing nations obtain much needed revenues and technology through the selling of CER.
In recent years as each country becomes increasingly concern over environmental protection issues, China is fast becoming a net CER exporter under the CDM mechanism, although Chinese banks are rarely involved in carbon credit trading related financing at this juncture. The above captioned transaction was originated with the sale of CER by a large Chinese steel producer conglomerate to a Singapore commodity trading conglomerate, both are our ABC Head Office controlled customers. On September 2010, under our ABC Head Office's Corporate Banking Division arrangements, Singapore Branch and the said trading conglomerate started preliminary negotiation and due diligence related activities. As CER is an intangible "commodity" with unique characteristic, its methods of transfer and acceptance between buyer and seller are vastly different and more complex than the trading of conventional physical commodities, hence the financing of credit risk varies proportionately throughout the entire trading process.
Developing green energy and low carbon economy will be China's key development pillars going forward. With the successful conclusion of this CER financing transaction, ABC group effectively helped our steel producing customer monetised its ongoing carbon reduction program and earned extra revenue in foreign currency, mitigating exchange rate risk, thus making this a good example of successful cross-border collaboration between branches and providing impetus for further financial product development.