Electronic trading documents may be coming soon

The commodities industry has been undergoing significant digitalisation, particularly after Covid-19 prompted industry-wide remote working, and is increasingly prepared for a long-anticipated switch to electronic trading documents. However, legislation has been one of the major barriers to the widespread adoption of these electronic documents.

This may soon change, as governments are now bringing in legislation to allow electronic documents the same legal status as their paper-based equivalents. Singapore has already granted this legal standing, and the UK Law Commission have published a consultation paper on the same subject, which is open until 30 July.

Under current UK law, which is often used as the basis of trade agreements, transferring possession of a document can transfer the obligations which the document embodies. For example, handing over a bill of lading can be sufficient to give the new holder a right to the goods described in the bill. These rules are based on the idea that the trade documents can be physically held or “possessed”.

However, possession is currently only associated with tangible assets, meaning that the law does not recognise the possibility of possessing electronic documents. The UK Law Commission consultation paper therefore proposes legal recognition of specific trade documents by allowing them to be possessed and therefore the equivalent of a paper document.

Electronic documents will need to meet 3 criteria:

• The trade document is one listed in the draft legislation. These include bills of lading; bills of exchange; promissory notes; ship’s delivery orders; warehouse receipts; marine insurance policies; cargo insurance certificates; and warehouse receipts.
• The electronic document is capable of exclusive control. It must be on a system that ensures only one person or group has control of the document at any one time.
• The document must be divested on transfer. Once it is transferred, the original owner cannot control the document.

The potential impact

The main aim of this proposal is to prevent legislation from impeding innovation by ensuring that trade documents in an electronic form have the same legal effect as the printed version. There is already strong consensus from industry that this needs to happen for a number of reasons.

Efficiency savings and environmental impact are one argument in favour of electronic documents; there are currently 28.5 billion (often multi-page) paper documents generated for shipping each year, and the International Chamber of Commerce has estimated that digitalising these documents could free up £224 billion in efficiency savings.

As well as efficiency improvements, a move to electronic documents, if done well, can reduce the risk of human error. For example, good commodity management systems can already greatly reduce the manual steps needed to create these documents and can use automated workflows to improve their transfer too.

These workflows can, for example, ensure documents are only sent to the correct counterparty and only sent once all the correct approvals are granted. They can also automatically populate system data with information from received documents.

Security and compliance can also be improved as electronic systems provide an irrefutable record of the document transfers taking place. These records provide a clear audit trail for each organisation’s own use, and some initiatives such as digital ledger/blockchain proofs of concept are taking this digital transparency further by creating an immutable record of transactions that all parties can view but none can retroactively edit.

Security, transparency and efficiency are just some of the benefits

Mitigating risk

As well as the efficiency benefits of electronic documents, they can reduce operational risk through automation and some fraud risks through increased transparency. However, they can also introduce new risks, which should be mitigated. Possibly the most widespread risk is that jurisdictions are still moving towards digitalisation and progressing at different speeds. Particularly in the short term, there will be legal and compliance risks as organisations need to continue using paper documents for some regions.

Security risks will remain but in a different form; instead of securing physical locations, systems will need to be secured and monitored. And fraud risks also remain in a new form. Some types of fraud can become much easier to detect due to increased transparency, traceability and faster digital processes that more accurately reflect real-world positions, but organisations will need to remain alert to the possibility of new types of fraud.

For example, they may need to be careful to ensure that the documents they receive are from a legitimate counterparty, either from managing email addresses carefully or using a secure shared platform. The potential for human error in opening malicious software disguised as a document or email attachment remains, but digitalising processes alongside documents makes it easier to confirm that any received documents were expected, and cybersecurity training can help to mitigate other cyber risks.

An opportunity for the industry

Digitalisation has been driving efficiency and helping profitability in the commodities industry for a long time. With this potential change in legislation, the next step on this journey is closer now than ever. Electronic documents can change risk profiles, but this involves reducing many of the risks associated with commodity trading and confers a range of other benefits too.

Richard Williamson, Founder & CEO at Gen10 said:

“As a technology company that helps manage such important trade documents as contracts, LCs, BLs, bills of exchange, other trade finance and marine cargo insurance policies, this is a very important opportunity to leap forward digitally, opening the door to much greater expedience, efficiency and, done correctly, reduced risk of fraud, theft and error.”

 

To find out more about the consultation and provide a response, visit the UK Law Commission.