Estimated reading time: 7 minutes
Trade finance, traditionally dominated by banks, is integral to supporting global supply chains, acting as the lifeblood of international commerce.
Traditionally financed mainly by banking sector, trade finance has growing need for greater access to capital and finance, particularly to finance SMEs in developing and emerging markets where access to affordable trade financing is limited. This can be enabled by greater facilitation by both banks and non-bank financiers
Recent shifts in global economics, marked by supply chain disruptions, geopolitical instability, and the ongoing impacts of pandemics, have amplified the visibility and urgency of diversifying the ecosystem.
This is not only to bridge these gaps but also to bolster the resilience of global trade mechanisms against future disruptions.
Michael Bickers, Managing Director of BCR Publishing Ltd, said, “The widening of the market for investing in trade finance assets to non-banks seems of critical importance the future of global trade. Helping to raise interest, address the concerns and tackle the barriers to enable this was ITFIE’s presence and other stakeholders at BCR and ITFA’s Trade and Investment Forum. I do believe such meetings have a significant, positive effect to create impetus and direction in moving the initiative forward. “
Amidst these challenges, there is a growing interest from non-bank investors, such as asset managers, insurance companies, and pension funds, who are attracted to trade finance’s profile as a low-risk, uncorrelated asset class with short-term yields that directly support the real economy.
Yet, these investors often lack the necessary infrastructure or expertise to engage directly in trade financing, relying instead on banks to channel quality investments.
This dependency coincides with the phased introduction of Basel 3 reforms, which have tightened the capital requirements for banks and reshaped their ability to meet the escalating demands for trade finance.
Recognising these shifts, there is a critical and growing emphasis on developing frameworks that not only facilitate non-traditional investment in trade finance but also ensure these investments can meet the unique requirements of non-bank entities, paving the way for a more robust, inclusive financial ecosystem.
NLN Swaroop, Global Product Head, sustainability, innovation, FIs & Asset Distribution, Global Trade & Receivables Finance, HSBC, Co-chair, trade finance investment ecosystem, ITFA said, “Trade finance offers a differentiated opportunity to wider variety of financiers and institutional investors with its diversification, low volatility and real economy nature. The ITFIE group, through its various workstreams is focussed on developing a enabling environment which widens access to capital for all value chain players in trade. Greater access to capital enhances resilience in global value chains and has strong interlinkages to the wider themes of digitisation and sustainability.”
The ITFA Trade Finance Investment Ecosystem (ITFIE), spearheaded by the International Trade & Forfaiting Association (ITFA), marks a strategic development in expanding trade finance’s appeal beyond traditional banking sectors to include non-bank institutional investors.
TFG heard from ITFIE working group members at the BCR and ITFA 2nd Trade & Investment Forum, held in London on 16 April 2024. Panelists included:
- Bertrand de Comminges, Managing Director, Global Head Trade Finance Investments Santander Alternative Investments, SGIIC, SAU
- NLN Swaroop, Global Product Head, Sustainability, Innovation, FIs & Asset Distribution, Global Trade & Receivables Finance, HSBC, Co-chair, Trade Finance Investment Ecosystem, ITFA
- Geoffrey Wynne, Partner, Sullivan & Worcester
This initiative is designed to dismantle the barriers that have historically limited investor participation in this robust yet underutilised asset class.
Untapped potential for trade finance as an asset class
Despite its potential for steady returns and a significant role in underpinning global trade, trade finance has remained marginally tapped by institutional investors.
The complexity and niche expertise required has led to its underrepresentation in diversified portfolios.
However, with the landscape of global trade evolving and the volumes increasing, trade finance presents an untapped reservoir of opportunity for stable, non-correlated returns.
ITFA has introduced several targeted workstreams within ITFIE to systematically address the following:
- Simplification of terminology: Streamlining complex financial jargon and documentation to make trade finance more accessible.
- Adjustments in legal frameworks: Modifying legal constructs to better align with the operational modes of non-bank investors.
- Educational initiatives: Deploying resources like workshops and detailed guides to educate potential investors on the intricacies and advantages of trade finance.
“The Rules of the Game”: Demystifying trade terms with a glossary
At the heart of ITFIE’s educational outreach is “The Rules of the Game,” a guide that lays down the foundational knowledge required to engage with trade finance assets.
This guide is pivotal in explaining key concepts such as Receivables, Payables, and the mechanisms of True Sale transactions, making it an invaluable resource for institutional investors venturing into this domain.
Sean Edwards, Chairman of ITFA said, “It is a shame that the evident advantages of trade assets are often hidden from view, ignored or just plain misunderstood because of a lack of accessible language which stops conversations from happening in the first place. This part of ITFIE’s work is designed to overcome this problem alongside our other work in explaining and proposing technology solutions for example and producing standardised documentation such as our new Master Accounts Receivables Assignment Agreement (MARA) which looks to distribute cash-flows rather than individual transactions.”
A comprehensive glossary has been central to ITFIE’s strategy. Key terms include:
- Accounting True Sale: A sale or transfer of an asset that achieves balance sheet derecognition for the Seller of the asset.
- Credit Support: Rights, protections or collateral in addition to Recourse Rights which may include Trade Credit Insurance.
- Funded Participation: The Participant provides funding to the Seller at the outset of their Participation in relation to the underlying Trade Finance Asset.
- Investor: The party that gains access to a Trade Finance Asset through the transfer or assignment by the Seller, or a Participation with the Seller.
- Legal True Sale: The sale, contribution, or transfer for all purposes of the ownership of the Recourse Rights from the Seller to the Participant entitling the latter to have direct recourse to the Recourse Parties.
- Obligor (Debtor): Counterparty that has a financial obligation towards another party, and is the ultimate Recourse Party.
- Participant: Financial sponsor or investor that assumes the risk of non-payment risk of a Trade Finance Asset but that is not a lender of record.
- Participation: The participation in Trade Finance Assets through a bilateral arrangement with the Seller.
- Payables: Payments due from a buyer of goods or receiver of services.
- Receivables: Payments due to a seller of goods or provider of services.
- Recourse Parties: Parties from which the Participant may recovers its participation or investment. Guarantors are Recourse Parties in the event of default by the Obligor.
- Recourse Rights: Rights the Participant enforces to recover its participation in the event of default by the Obligor.
- Seller: The counterparty that transfers the Trade Finance Asset and associated Recourse Rights to a Participant.
- Trade Finance Assets: Receivables / Payables and payment obligations in relation to promissory notes, bills of exchange, loans, letters of credit and guarantees.
- Trade Credit Insurance: Insurance covering the credit risk of the Debtor (See Schedule 2).
- Transfer and Assignment: The transfer of a Trade Finance Asset, whereby the Seller ceases to be the lender of record and the Investor is recognised as the new lender of record.
- Unfunded Participation: The Participant provides its commitment to make payment to the Seller under their Participation in the event of default of the underlying Trade Finance Asset.
Geoff Wynne, Partner, Sullivan & Worcester LLP, who has been leading the drafting with Paul Coles of The Rules of the Game, said, “It is important to make sure the legal frameworks work for all those currently and potentially interested in trade finance to ensure that the terminology is crystal clear. The ITFIE working group is important to delivering on these elements.”
By helping standardise and clarify key terminology and mechanisms, the ITFIE initiative will help increase the accessibility of trade finance, making it a more compelling choice for a diverse range of investors.
Bertrand de Comminges of Santander has praised the initiative for its potential to “facilitate substantial new investments into trade finance.”
ITFA remains committed to the continual enhancement of the ITFIE initiative, with plans to further refine the educational tools and broaden investor engagement.
This ongoing development is aimed at ensuring that trade finance gains further recognition and utilisation as a key component of diversified investment portfolios.
By addressing gaps in understanding and operational alignment, ITFA pushing trade finance to gain traction as a preferred asset class.
