From Supply Chain Management Encyclopedia
Russian: Финансовый свитч
The financial switch can be treated as a sophisticated type of the Product Switch. The same triangle or tripartite configuration is supported by a switch trader and/or clearing broker. The said actors are necessary to be involved due to the main contradiction between the nature of a compensating product that is at the disposal of the importer and could be offered to the exporter (A) by the importer under the first barter contract (A-B) and real exporter’s needs. The latter, as usual, needs to receive a hard currency. Therefore, a switch trader and/or clearing broker create a supporting mechanism to arrange a hard currency payment for the said exporter. The interests of the said additional actors could be satisfied by reselling/speculating the importer’s compensating product on one of product markets in expecting a good margin after subtracting all necessary transaction costs as well as compensating through the bid-ask spread of a local-hard currency pair.
Financial Switch (Simplified Flow Chart)
In case of the financial switch (participants: Company А = USA; Company В = Chili; Company С = Ukraine) the switch is developed as following:
- 1) Company В (Chili) needs to renovate its mining equipment to use on its copper mines. Traditionally, such mining equipment is bought in USA from the Company А. There is an obstacle for this transaction: Company А insists to receive payment in dollars, but the Company В has not a dollar amount necessary this time.
- 2) Company В has found the Company С supplying Ukrainian copper plants with the copper ore concentrate. However, this product has a relatively low liquidity to be an effective product for a compensating transaction.
- 3) There are two possible actions of the Company С:
- 1 – Company С directly sells this product on its domestic market for grivna (Ukrainian national currency) and, then, converts the grivna revenue in the hard currency (dollar) with a disagio, to accelerate the deal with a clearing broker.
- 2 - Company С releases the product to a switch trader on consignment basis with a discount depending on the time of consignment and receives in exchange the hard currency (dollar).
- 4) Company С pays the contract delivering the said mining equipment from company А to company В.
- ↑ Черенков В.И. Внешнеэкономическая деятельность предприятия: основные операции (серия «Высшее образование»). Ростов-на-Дону «ФЕНИКС», 2007 - с. 97-102. (с авторским изменением дизайна)
- ↑ A switch trader, in case of switch trading, is the third party to whom the importer (under the first barter contract: A-B) transfers its obligations to pay to the exporter (A) in exchange to delivery from the said importer received with a discount. Then, the switch trader resells this product for a hard currency and the latter is used to fulfill the payment obligation to the original exporter (A) under the first barter contract: A-B. According terms and conditions of such agreements the discount in favor of the switch trader depends on the importer’s need degree for a hard currency and corresponding market conjuncture [Countertrade -https://www.boundless.com/business/international-business/types-of-international-business/countertrade/].
- ↑ As usual [Clearing Broker - http://www.investopedia.com/terms/c/clearingbroker.asp], the clearing broker is understood as a member of an exchange that acts as a liaison between an investor and a clearing corporation. A clearing broker helps to ensure that the trade is settled appropriately and the transaction is successful. Clearing brokers are also responsible for maintaining the paper work associated with the clearing and executing of a transaction. In the context of countertrading, the clearing broker (organization) plays almost the same roles. Especially, in case of switch transactions, the clearing broker could be an intermediary who converts a local (soft) currency using a currency exchange. The same function could take place on product markets – a liaison between the third party in switch trading and a commodity exchange. A clearing broker is employed by a company that has holds the right to trade directly on the various commodity exchanges on behalf of customers [Economics and Marketing: Choosing a Commodity Broker - http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis1015].