From Supply Chain Management Encyclopedia
This form of countertrading, similar to barter and clearing arrangements, has a third party involvement as a main feature. This fact means transferring (they may say, switching) the most important obligations of trade transaction to the said third party. Such three-party, or “triangle”, configuration of transaction, where obligations are transferred to the third party, is known as a switch trading or, simply, “switch”. Generally, switch trading is a form of clearing agreement, where importer’s debt (as a result of unilateral fulfillment of barter transaction by the exporter) is transferred/sold to the third party known as a switch trader. In accordance with common practices, this transferred to a switch trader debt (accounted in a clearing currency) is to be discounted. In the simplest form of clearing trading (product switch, the role of switch trader could be played by a third company who agrees to take an appropriate barter delivery. As a result, this third company receives a compensating delivery of acceptable products that are in disposal of the debtor party of the first barter transaction (importer in the frame of first transaction). In the case when the debtor party has not appropriate compensating products switch trader, has to be sure in a possibility to realize one of the following options:
- using the clearing currency that is received according terms and conditions of the said tripartite transaction for its own purchases; or
- selling the clearing currency (or local national currency received on domestic market) with a discount to a clearing broker, to receive, as usual, a hard currency.
There are following options of clearing trading:
- Product Switch - delivering a high liquid compensating product to company C (in response to delivery in the frame of the first contract А→В) made by importing company В that has not a hard currency to pay provided that the company C will pay to exporting company A for the delivery in the frams of the first contract А→В in favor of importing company В;
- Financial Switch – when the importing company В has not a high liquid product, they construct a sophisticated configuration with a switch trader/clearing broker included. As a result, the importing company В also delivers its product to company С. However, in this case, the importing company С can not to sell quickly a low liquid product, but sells this product (discounted) to a switch broker. Then, this local (soft) currency is converted (through a clearing broker) to a hard currency and is used to pay the delivery of the exporting company А in the frame of the first contract (А→В). Each party by the financial switch has its own benefit:
- 1) Importing company В receives necessary products while the lack of a hard currency;
- 2) Importing company С receives products with the such discount that is sufficient for:
- а) compensating services provided by s switch trader and/or clearing broker (in the form of disagio),
- б) settlement for the products delivered by the first barter contract (А→В), and
- в) receiving its own получения собственной приемлемой прибыли.
- ↑ Clearing Currency - It is estimated currency units that exist only in an ideal (countable) form as the accounting records of banking transactions on mutual supply of goods and services by participating countries of payment agreement. Example is SDR (Special Drawing Rights) - International counting currency, issuance of which carried a legal decision by the International Monetary Fund (IMF). SDR does not have its own value and real security, they are used for clearing international payments through the entries in special accounts, and as the unit of the IMF. - http://www.forexisig.com/beginers/education/currency.aspx
- ↑ The discount necessary to dispose of the goods taken in counter-trade. The disagio reflects the marketability of the goods, securities, and currencies. 2-3% - Moles, T., Terry, N. Handbook of International Financial Terms – Oxford University Press, 1997