Identifying the scope for Letter of Credit (49D)

The Trade Finance Management process generally covers the creation of financial transactions and executes payments for fees and cash collateral for bank guarantee issuing. For further processing, the roll over and termination of transactions is possible.

SAP has introduced new products to cover the trade finance in SAP S/4HANA Treasury.

• Letter of Credit
• Bank Guarantee
• Standby Letter of Credit

SAP Trade Finance Powered by SAP Treasury and Risk Management offers a complete E2E solution to integrate trade finance process into treasury to oversee high volume transaction and mitigate the risk related to it.

The SAP Trade Finance solution supports you with the function functions:

• Integration of the most important global trade payment methods, Letter of Credit, Bank Guarantee in Treasury as a product category
• Master data management for Trade Finance
• Manage related cash flow position
• Manage related credit line and margin
• Automated and integrated within trade financing activities
• Manage the related counterparty risk
• Extend the Role of treasurer for trade finance

The front office area contains functions for entering trade finance transactions. It also enables you to also call up information on transactions or make changes at a later date. Collective processing functions are available to help you manage your transactions efficiently.

The following product types and transaction types are now available in the trade finance transactions: 86A

Once you have entered financial transactions in the Front Office area, you settle them in the Back Office area. The Back Office area also contains functions for checking and changing the transactions. Transaction postprocessing primarily involves:

• Adding any missing transaction data that is needed to process the transaction further
• Preparing for posting and payment (for example, by checking the accounts used)

The collective processing functions are also available in the back office.

Once you have entered the transactions in the Front Office area and checked them and added any missing details in the Back Office area, you then need to process them for accounting purposes. The Accounting area includes functions for transferring data to Financial Accounting, such as posting reports or position management postings. It also includes functions for parallel valuation.

Check the interactive graphic to learn about the initial data that is required for all trade finance processes.

To map transactions in the system efficiently, you first have to enter the initial data.

• Company Code

  When you enter the company code, you determine which division within your group is acting as the contracting party for the transaction.

• Product Type

  The product type indicates which specialization of the product category is involved in the current transaction.

  Product types are predefined by SAP.

• Transaction Type

  Transaction types define which specialization of the transaction category - issuing or receiving letters of credit or bank guarantees - is involved in the current transaction.

  Transaction types are predefined by SAP.

• Partner

  You specify a third party as a partner in the system that issues the letters of credit or bank guarantees at your request or notifies you about a letter of credit or bank guarantee issued with you as the beneficiary.

  The partner charges a certain amount of fees for a letter of credit or bank guarantee in the issuing or receiving process. An additional fee is also charged based on the total amount of the letter of credit or bank guarantee and including certain conditions, such as the payment rate.

• Transaction

  If you have specified external number assignment, you enter the key that uniquely identifies a financial transaction within a company code in the Transaction field in the External Number Assignment area.

  Otherwise, the system assigns a number automatically.

Trade finance transactions are used for special financial transactions provided by banks and financial institutions that facilitate trade transactions. The Trade Finance area is a subcomponent of the Transaction Manager and is closely integrated with other components. It offers the following business values:

Financial Instrument

• Represented as new financial instruments in Treasury and Risk Management for Letter of Credit, Bank Guarantee and Standby Letter of Credit
• Support financial instrument management for both applicant and beneficiary

Contract Management

• Capture master data for the financial instrument contract
• Comprehensive and flexible Document Management for Letter of Credit
• Financial instrument contract based facility can be consumed or released automatically
• Support the combined usage of facility and cash collateral for applicant
• Integrate with Credit Risk Analyzer to optimize risk control

Lifecycle Management

• Status Management with different steps: Contract - Settlement - Rollover- Termination
• Customer-specific workflow can be configured
• Full support of Presentation and Payment process for Letter of Credit
• Full support of loan generation out of the Letter of Credit directly

Integration

• Integration with Accounting Management
• Integration with Cash Management
• Provide comprehensive BAPIs for Transaction Management

Communication

• Integrated in the Correspondence Framework
• MT798 - SWIFT message with respective sub messages

The letter of credit (L/C) is an instrument which has a long tradition in foreign commerce in which it fosters trust between parties who usually do not personally know each other. It provides a means to safeguard the execution of a commercial agreement and the correct ownership transfer for the underlying goods.

The letter of credit itself is a document issued by a bank guaranteeing that a beneficiary will receive payment provided that certain documents have been presented to the bank as required.

The letter of credit (L/C) is an instrument which has a long tradition in foreign commerce in which it fosters trust between parties who usually do not personally know each other. It provides a means to safeguard the execution of a commercial agreement and the correct ownership transfer for the underlying goods.

The letter of credit itself is a document issued by a bank guaranteeing that a beneficiary will receive payment provided that certain documents have been presented to the bank as required.

Letter of credit transactions include transaction types for issuing and receiving letters of credit. In addition to functions for creating and changing letters of credit, the SAP system also supports functions for rollover, reversal, termination, order expiration, order execution, and presentation of documents.

The process of issuing and presenting a letter of credit looks mostly like the above and can be explained as follows:

1. The buyer and seller agree on a purchase. A purchase order, to be paid by a letter of credit is created.
2. The buyer applies for a letter of credit with their bank (issuing bank).
3. The issuing bank is forwarding this letter of credit request to the advising bank of the seller.
4. The advising bank in turn informs the seller of the letter of credit.
5. The seller is shipping the goods to the buyer and documents this action.
6. These signed documents are being presented to the advising bank to inform them about the correct dispatchment of the goods to the buyer.
7. The advising bank is accepting the documents and is forwarding the information to the issuing bank of the buyer.
8. The issuing bank receives the documents and hands them to the buyer with a request to pay the negotiated amount.
9. The buyer accepts the documents (and thereby the correct dispatch of the goods) and order their bank to pay the money to the seller (at maturity).
10. The issuing bank is transferring the requests funds at maturity to the advising bank of the seller.
11. The advising bank is notifying the seller about the incoming funds.

If you request a commercial bank to issue a Letter of Credit for your company 's oversea trade, normally the commercial bank will require your company to either provide cash collateral or consume your company's credit line facility in the bank.

Letter of credit transactions include transaction types for issuing and receiving letters of credit. The banks (or business partners) charge additional fees based on the principal amount of a letter of credit in the issuing and receiving process and based on certain conditions. The fee calculation process takes place during all stages of the letter of credit lifecycle. The fee calculation is based on four condition types for different amounts.

In addition to creating and changing letters of credit, the system also supports functions for rollover, reversal, termination, order expiration, order execution, and presentation of documents.

The S/4HANA Cloud system is very flexible and all of these types of business transactions are fully supported.

Being part of the Transaction Manager, the Trade Finance Area supports Letter of Credit transactions provided by banks and other financial institutions.

The end-to-end trade finance process for the letter of credit can be split into the above shown components:

• Different Financial Instruments for Letter of Credit and bank
• Detailed Master Data for Letter of Credit and Bank Guarantee
• Document Management for the Financial instrument
• Facility and Cash Collateral Management for Trade Finance
• Credit Risk Analyzer for Trade Finance
• Detailed Life Cycle Management for Trade finance
• Integration to the different Treasury and SAP S/4HANA Module

Those components are described in more detail for the Letter of Credit process below.

Use the tile Create Letter of Credit from the SAP Fiori launchpad. Enter the company code, product type, transaction type, and partner to start the processing.

To facilitate the Letter of Credit in the SAP S/4HANA Cloud system, the product type 85A and transaction types 100 for L/C issue and 200 for L/C receive are used.

Specifies the bank that issues the letter of credit or advises the beneficiary of the letter of credit. Detailed information of Letter of Credit can be captured, with clear information classification.

You decide whether the activity is an order or a contract. You can create a letter of credit transaction directly as a contract. A transaction becomes legally binding with the activity category Contract.

The Document Management for the Financial instrument is further enhanced by the different templates for creation and presentation of Letter of Credit transactions. You also benefit from a convenient attachment management and status management.

Specifies the terms and conditions related to payment for the letter of credit.

Based on your business needs, you can decide whether to maintain this section. To maintain the documents for a letter of credit, you can add document types. Alternatively, you can select a document template.

For each document type, the following activities are allowed:

• Specify whether it is creation-related or presentation-related
• Specify the number of the originals and copies required
• Upload attachments for presentations
• Select a status (Waiting for Check, Rejected, or Accepted)

The commercial bank will require your company to either provide cash collateral or consume your company's credit line facility in the bank if you request to issue a Letter of Credit. This cash collateral can be managed based on each trade finance deal. The processing of a facility can be automatically triggered. Further it is possible to use a facility and a cash collateral at the same time.

The Credit Risk Analyzer can be activated based on product types of Trade Finance, with customizable limit rules and limit types.

The utilization and release of limits can be triggered automatically.

Lifecycle Management for Letter of Credit is fully supported. Parallel Letter of Credit status and presentation/payment status even though with some restrictions.

A traceable history is implemented to keep track of all changes and audit requirements.

Presentation

Specifies the terms and conditions related to presentations against the letter of credit.

In transactions where letter of credit is used for payment of goods or services, the seller needs to present certain documents to a bank to get payment after the goods or service has been delivered. The buyer may accept or reject a presentation after checking whether the presented documents meet the conditions of the letter of credit.

• Support multiple presentations and payments
• Complete status management can cover the whole lifecycle from presentation to acceptance and payment
• Timely remaining credit amount update
• Flexibility to allow for discrepancies
• Payment amount vs presentation amount
• Charges/fees can be reflected for each presentation
• Convenient connection for presentation based financing deal
• Independent authorization control from letter of credit

Loan Management out of Letter of Credit

• Support to generate loan directly based on each presentation/acceptance of the Letter of Credit
• Support to link each presentation with an existing loan
• Support to link each trade finance deal with one or multiple loans

Integration with Cash Management through Position Management of TRM

• Support multiple valuation areas according to different accounting regulations
• Independent positions for L/C deal and each presentation
• Foreign currency valuation for gain or loss
• Accrual/deferral for charges/fees
• Monitor flows, positions, posting and payment centrally
• Enable update of Cash Management before posting

Integration with Accounting Management

• Flexible posting rule
• Independent posting for each flow
• Support contingent liability posting
• Enhanced posting rule for letter of credit to support special G/L indicator

Communication

The Trade Finance solution is integrated in the Correspondence Framework. This enables the following features:

• Pre-set correspondence format
• Flexible control for detailed correspondence processes
• Automatically generate correspondence files, including MT798 swift messages
• Automatic settlement after counterparty's confirmation
• Monitor the whole correspondence process

In Treasury and Risk Management, financial data is analyzed based on the financial objects created automatically for each object you want to analyze. Additional information that is required for risk analysis is also entered into the financial object.

Financial objects are created for the following:

• Money market transactions
• Foreign exchange transactions
• Over-the-counter (OTC) derivatives
• Security transactions
• Security class positions in securities accounts
• Trade finance transactions
• Exposure positions

Bank accounts

The structure of financial objects mainly consists of three parts:

General part: General data (such as the product type) for the financial object

• Company Code
• Transaction
• Product Type
• Source System

Analysis: Data that is relevant for Market Risk Analysis

• Transaction Start
• Transaction End
• Contract Type
• Security Class ID
• Securities Account

Default Risk Limit: Data about the Default Risk and Limit System

• Credit Risk (CR) Active
• Limit Product Group
• Monitoring Unit
• Default Risk Rule

If you are creating a new financial transaction, you can set the values for the Counterparty Risk - for example, here with a Fixed-Term Deposit on the tab Default Risk Limit.

Set the indicator Counterparty Risk Active (CP Risk Active), so that an attributable amount is calculated for the transaction.

Enter the following limit characteristics:

• Limit Product Group (the limit product group you enter here overwrites the default limit product group)
• Monitoring Unit (freely definable reporting characteristic)
• Rating (the rating you enter here overwrites the rating for the business partner, but this is not the case for the integrated external business partner).

Enter the following evaluation parameters:

• Default Risk Rule (the default risk rule you enter here overrides the one set in Customizing)
• Recovery Rate

In the next end-of-day processing run, the system calculates an attributable amount for the transaction to which you assigned this financial object.

The financial objects are created automatically by the system when you create financial transactions, exposure positions, and bank accounts. The field values are derived according to predefined derivation rules and customer-defined substitution rules. When you create a financial transaction, you can change the derived financial object data manually. Financial objects are created immediately following the creation of financial data. 

Financial objects are created for the following reasons:

• Treasury and Risk Management
• Cash Management

When you create financial transactions, the system offers dialog entry screens in which you can change the financial object data manually. If you do not enter the data manually, they are derived automatically by the system. For exposure positions and bank accounts, the financial objects are always derived automatically by the system. When you save the transaction, the system checks the information in the various parts of the financial object.

During the derivation process, the predefined derivation rules are executed first. The predefined derivation rules do not overwrite any field values. Therefore, a field value that is entered manually, for example, is not overwritten by the predefined rules. In the second step, the substitution rules are executed. When the system executes the substitution rules for the market risk data, the system first executes the rules for the specific business contexts and then the rules for the general context. The substitution rules can overwrite the fields that have already been filled manually - either by predefined derivation rules or by an earlier executed substitution rule - if the Overwrite indicator was set in the definition of the substitution rule. Note this when you define your substitution rules.

With the Financial Objects Substitution Rules - Default Risk Data app, you can display, change, and create substitution rules for some fields of the financial objects that are relevant for default risk limit management. The rules are executed during the automatic derivation process of financial objects, whereby you can replace the field values that have already been filled, for example, from the predefined derivation rules.

Using the Financial Objects Substitution Rules - Default Risk Data, your business configurations expert can define substitution rules for the values of the following fields of the financial object data that are relevant for default risk limit management:

• Business Partner as Limit Characteristic
• Default Risk Rule
• Transaction End Date for CL Counterparty/Issuer Risk
• Transaction Start Date for Counterparty/Issuer Risk
• Limit Product Group
• Counterparty/Issuer Risk Active indicator

The fields available for defining preconditions are different for each business context. This enables you to substitute values of the target fields dependent on attributes specific to the business context.

You can define substitution rules to fill the following fields:

• CR Active
• Business Partner as Limit Characteristic
• Limit Product Group
• Default Risk Rule
• Start Date
• End Date

If you changed or created new substitution rules, business user can start the Update Financial Objects app to update the data of all existing financial objects.

The Financial Objects Substitution Rules - Market Risk Data app facilitates the display, change, and creation of substitution rules for some fields of the financial objects that are relevant for market risk analysis. The rules are executed during the automatic derivation process of financial objects, whereby you can replace the field values that have already been filled, for example, from the predefined derivation rules.

You manage substitution rules by business context. A context represents the circumstances in which the substitutions are defined and applied. It determines the fields that are available in the rule definition. There are several applicable business contexts defined by SAP. It is important to note that those can not be changed. Examples of these are as follows:

• Bank Accounts: Market Risk Data
• Derivatives: Market Risk Data
• Exposure Positions: Market Risk Data
• General: Market Risk Data

When the system executes the substitution rules for the market risk data, the system first executes the rules for the specific business contexts and then the rules for the General: Market Risk Data context.

The fields available for defining preconditions are different for each business context. This enables you to substitute values of the target fields dependent on attributes specific to the business context.

The same fields are also available as source fields for the substitution.

Note

You are responsible for ensuring that the data used in the substitution rule is used in accordance with the applicable legal or business requirements. The results, which substitution rules were applied, and the values of the target fields are visible in the apps for users with treasury business roles and must therefore not contain any sensitive data.

With this app, you can update the data of your existing financial objects. The report starts the derivation process of financial object data for the selected financial objects and updates the values, if needed.

You use this report in the following cases:

• If your business configuration expert created new substitution rules for specific fields of the financial object using the Financial Objects Substitution Rules - Market Risk Data and Financial Objects Substitution Rules - Default Risk Data configuration apps
• If your business configuration expert changed the settings in the Assign Product Categories and Default Risk Rules and Assign Product Categories and Limit Product Groups configuration steps
• If an error occurred during the automatic integration process of financial objects and the data could not be derived

You execute the report for a specific financial object type, whereby you can also restrict the number of financial objects according to financial object type-specific selection criteria.

You can execute the report as a test run or as an update run.

Account assignment references are assigned to each treasury position.

You use the account assignment reference to determine the G/L account in which the position is managed.

You make the assignments of the G/L accounts dependent on the account assignment reference for the relevant account symbols (position and interest revenue) for posting the positions, dividend payments, interest payments, accruals and deferrals, incoming payments, and repayments in the general ledger.

For example, you can define different account determination settings for an update type, depending on the valuation area. You could, for example, assign posting specifications to an update type in valuation area 002 that differ from the posting specifications for the same update type in valuation area 003. Alternatively, you could use the same posting specifications, but assign different G/L accounts to a account symbol for each valuation area.

In order to derive the correct account assignment reference, the following requirements are set in the system:

• You have defined the chart of accounts and all the required accounts in Financial Accounting.
• You have defined all account assignment references in the step Define Account Assignment References.
• In the Define Account Symbols configuration step, you have defined abstract account symbols.
• You have defined your update types.
• The system posts flows in the parallel valuation areas only if an update type is set as relevant for posting in the Indicate Update Types as Relevant to Posting configuration step, and if posting specifications have been defined, for the corresponding update types in this configuration step.

The determination process of account assignment references starts when an over-the-counter (OTC) transaction or security purchase is created.​

During the determination process of account assignment references, the system runs through the following sequence:

1. The system searches for a suitable substitution rule. If it finds a suitable substitution rule, it uses it to determine the account assignment reference.
2. If the system can not find a suitable substitution rule, it searches for a suitable determination rule. If it finds a suitable determination rule, it uses it to determine the account assignment reference.
3. If the system can not find a suitable determination rule either, it derives the account assignment reference using predefined rules in the content.

The single items and dependent Fiori apps will be analyzed in more detail below.

The Account Assignment Reference - OTC Transactions (Substitution Rules) app helps you to display, change, and create substitution rules to determine the account assignment references of OTC transactions. Account assignment references are assigned to each treasury position. ​You use the account assignment reference to determine the G/L account in which a treasury position is managed.

The substitution rules are executed during the automatic process for determining account assignment references when an OTC transaction is created.​

Rules for the determination of account assignment references can be defined by you and are predefined in the content:

• You can define rules in the Account Assignment References - OTC Transactions (Substitution Rules) and Account Assignment References - Securities (Substitution Rules) configuration apps
• If you have the Define Determination Rules - Account Assignment References in use, the settings are still relevant for the determination process of account assignment references.
• The predefined content also contains derivation rules that are also still relevant for the determination of account assignment references.

During the determination of account assignment references, the system runs through the previously described sequence.

The table exemplifies the different fields for available defining preconditions by business context. This enables you to substitute values of target fields dependent on attributes specific to the business context. The target field is the Account Assignment Reference of Position Management.

Using the Account Assignment Reference - Securities (Substitution Rules) app, you can display, change, and create substitution rules to determine the account assignment references of securities. Account assignment references are assigned to each treasury position. ​You use the account assignment reference to determine the G/L account in which a treasury position is managed.

The substitution rules are executed during the automatic process for determining account assignment references when a securities transaction is created.​

You manage substitution rules by business context. A context represents the circumstances in which the substitutions are defined and applied. It determines the fields that are available for the definition of rules.

At runtime, business users create financial transactions. This triggers the automatic determination of the account assignment references for the corresponding treasury positions, and the rules that you have defined are applied automatically. In case of a substitution the system derives, replaces, or clears values for the relevant fields defined in the substitution rules. The substitutions take place at the time of data entry with no system messages.

View the previous example to learn about how the target field (account assignment reference) is derived.

Using the Define Determination Rules - Account Assignment References app, you can define rules for the automatic determination of account assignment references for parallel valuation areas. You define the rules for each product group and subledger position that enables you to make postings to a position. Business rules for OTC Transactions and Securities are available.

Note

The Account Assignment References - OTC Transactions (Substitution Rules) and Account Assignment References - Securities (Substitution Rules) apps replace this app. The Define Determination Rules - Account Assignment References app is deprecated and will soon be deleted from the launchpad. We recommend that you switch to the successor apps.

Note

The Define Determination Rules - Account Assignment References app is deprecated and will soon be removed from the launchpad. However, if you have the Define Determination Rules - Account Assignment References app already in use, the settings are still relevant for the determination process of account assignment references.

Various account assignment references are predefined in the Define Account Assignment References configuration step under the following: Manage Your Solution → Configure Your Solution → Finance → Treasury and Risk Management → Treasury Accounting.

As outlined above, the predefined account assignment references are used if otherwise no suitable rule can be found and applied in the SAP S/4HANA Cloud system.

Differentiation terms are used to determine how the positions are created. Some differentiation terms are defined by the system for each product group, and others can be selected additionally. The differentiation SEC. ACCOUNT is defined and assigned for all company codes and valuation areas that do not have a specific differentiation assignment. For Securities, the following is predefined:

• Valuation area
• Special valuation class
• Accounting code
• Security class ID number
• Securities account

In addition to that, you can define and assign your own differentiation in the Define and Assign Differentiation configuration activity. This enables you to use account assignments of other areas, such as Cost Center, Profit Center, WBS Element, and Functional Area, to differentiate treasury positions in Treasury and Risk Management. When the flows are posted to Financial Accounting, the account assignment values for a treasury position are also transferred to Financial Accounting.

The simulated period-end closing uses the framework of the operative period-end closing functions. Therefore, the simulated valuation includes, for example, all relevant valuation results that are also generated by the real valuation during period-end closing.

Click on the single elements of the simulated period-end closing below to learn more.

In order to run the simulated period-end closing, the following prerequisites must be met:

• Make sure that the market data (such as exchange rates and interest rates) are up-to-date because the simulated period-end closing operations require current market data.
• Net Present Values (NPV) values need to be stored in advance of the valuation of treasury positions and of the classification. You can enter the NPVs manually (using the Enter Net Present Values app), or start the calculation of the NPVs using Calculate Net Present Values - With CVA and DVA.
• You must execute the simulated valuation before or together with the simulated classification.

Note

The system does not check the availability of current market data for the key date.

In the Simulate Period-End Closing app, key figures are used to verify how balance and P&L figures have been developing since last period end.

The simulated key figures cover all relevant Period-End Close figures, which are usually generated within the period end closing process. The idea for the simulation key figures is to call the wrapped functionality, which is used in the operative transactions, and reuse the calculated results for reporting without generating any persistent flows in and postings from the subledger.

Therefore, the simulated key figures are using the same framework as the operative procedure to assure coherence between reporting and subledger values. Based on the most recent book value from the last period end closing without reset the customer can see at a glance the balance effects, the P&L revenue and expenses as well as potential interest payables/receivables as of today.

You can use the following procedure to work on the simulated period-end closing:

1. Select the treasury positions for which you want to perform the simulated valuation. To do this, you must choose the relevant product groups. In addition, you can use the fields available under General Selections to restrict the selection of the treasury positions. The General Selections area of the interface provides selection criteria - Company Code, Valuation Area, Product Type, and Valuation Class - as relevant for all product groups, as well as selection criteria relevant for specific product groups.
2. In the Simulation Parameter area, you control how the report is run.
   • If you want to recalculate outdated simulated valuation results of the selected treasury positions, set the Recalculate Outdated Sim. Val. indicator. The recalculation can be executed for outdated treasury positions for a specific date or period, or for all outdated treasury positions. Enter the date range for recalculation according to your needs.
   • If you want to carry out simulated period-end closing, you must enter the simulation date as the key date.
3. Choose which function you want to execute:
   • Valuation
   • Accrual/Deferral
   • Classification

The result of the simulated period-end closing is composed of the following:

• For the selected treasury positions, the selected period-end closing operations are executed on the entered simulation date according to the settings of the position management procedure and the relevant configurations for the period-end closing operations based on the current market data.
• A message log is shown for the simulated period-end closing run.
• The results are shown in the results list. Each row represents a treasury position and shows the simulation results, such as the new book value in position currency and in valuation currency and also all other new position component values. You can mark a row and choose Display. In the following Details box, you see the information for the selected treasury position, the new book value of the treasury position in position currency and in valuation currency and all other position component values (empty fields are not displayed).
• The results are stored in database tables.

The Delete Results of Simulated Period-End Closing app deletes the results of simulated period-end closing for a specific date from the database tables.

Simulated Period-End Close results which are invalidated automatically by a real Period-End Close run can be deleted from the database tables in this way.

The result of this action is that simulated valuation results for the selected treasury positions and the position value date entered are deleted from the database table. A message log is shown for the deletion run of simulated valuation results.