On the back of the International Trade and Forfaiting Association’s (ITFA’s) newly-founded “Young Professionals in Trade Finance & Forfaiting” initiative, which aims to support young trade finance practitioners’ professional growth, GTR teamed up with ITFA to host a roundtable to discuss the current themes and challenges facing the trade and forfaiting market from the point of view of the next generation of trade financiers.
- Johanna Wissing, vice-president in trade finance syndications, Barclays (chair)
- Fawaz Hameed, vice-president, risk distribution & secondary markets, global trade finance, ABC International Bank
- David Lorente, vice-president – global trade finance & risk distribution, BBVA
- Shannon Manders, editor, GTR
- Philipp Moulas, associate – trade risk manager, UniCredit Bank
- Tora Olsson, trade sales associate, global transaction services, Emea, Bank of America Merrill Lynch
- Noa Segoly, associate director, transaction banking, ANZ
- Paul Coles, ITFA board member and head of trade risk distribution, global transaction services, Emea, Bank of America Merrill Lynch
- Lorna Pillow, ITFA board member and first vice-president, London Forfaiting Company
Wissing: The first point in the agenda – and one that is very topical – is the impact of regulation on the industry and its major influence on banking as well as on trade finance, how banks are coping with enhanced requirements in terms of know your customer (KYC) and anti-money laundering (AML), and how banks can deal with regulation in its broader sense.
I think we were all at the International Trade and Forfaiting Association (ITFA) conference in Barcelona last year, where regulation was one of the main points not only on the seminar agenda but also over lunches, dinners and other networking breaks. It was definitely a dominant topic. What do you see at your banks? We are looking into everything: the implementation of Basel III is in progress, there are new regulations coming out of the US, such as Dodd-Frank and the Foreign Account Tax Compliance Act (FATCA), for example, so there is definitely a lot to consider.
Lorente: There is no doubt that an increase in compliance as well as financial regulation requires a big investment from banks, but if you want to serve your clients, you need to adapt and cope with this new reality. However, through risk distribution activities, banks can be more efficient in terms of capital and this has become crucial for institutions with large client bases of importers and exporters, such as BBVA. In the past, some institutions were not very keen to do this kind of business, but it has now become a key area for us.
Moulas: Naturally, banks need to have solutions for distribution and risk mitigation available. In addition, active portfolio management is becoming more and more important due to increasing capital requirements. In the past, distribution activities were mainly based on limit constraints. This is continuously changing in order to ensure adequate return on capital ratios.
Olsson: Going one step further, I think one of the outcomes is that there is also more interest in bringing risk distribution into the capital markets space, and packaging trade assets into a format which can be bought by new types of investors.
Wissing: It is certainly something that we would have seen with some prominent securitisation programmes in the past. I thoroughly agree. I think risk distribution is definitely one means of helping to manage increased capital costs and making sure that transaction returns still stack up. I hear the phrase ‘originate-to-distribute’ more and more from banks and, as long as margins are as tight as we see them currently, that remains key. We are doing most of our distribution on a funded basis which helps enhance returns and manage capital. I must say that, generally, the market seems to be very much turning to that now, so it’s possible to find liquidity from all sorts of banks, whether they are large global players or regional banks.
Pillow: Do you find that the cost of compliance and AML is having a negative impact on distribution? At LFC we have seen over the last 10 years that onboarding counterparties has become increasingly time-consuming and expensive. Regulation continues to evolve but on an ad hoc basis, necessitating continuous changes and enhancements to the internal systems employed by LFC. Is this affecting the way you have been doing business?
Whilst on the subject of compliance/AML, ITFA’s board realises that there are also a number of other technical issues that impact all members, where guidance notes would be very helpful. In relation to this, board and regional committee members will be writing a number of technical papers along the lines of the one we did on Dodd-Frank. The papers will initially cover issues such as the capital requirements directive (CRDIV), as well as good compliance and AML practices.
Hameed: At ABC, we have generally seen an increase in headcount in our compliance function. This is the same across the board among both smaller regional banks and larger global banks. I would say that part of the reason for this is that banks are having to implement new frameworks and policies in addition to updating existing ones. At this point in time, it is probably slowing down business for most of us but, once these policies are normalised and in place, I think efficiency will come back again. Another driver for increased compliance costs is that when new regulations come out, they are always open to interpretation. As a result, banks are hiring skilled people who can interpret such new rules and regulations.
Wissing: In terms of the cost of compliance and AML/KYC, that is certainly an important element but that will likely lead to some correspondent banks consolidating their relationships. Smaller, regional banks – and especially those that have been trying to spread out their relationships to get a bit of reciprocity from everywhere – might find themselves in a situation where they have fewer larger correspondents than they have had in the past.
Pillow: Another thing is the financial impact on banks should they fail to adhere to the ever-increasing number of rules and regulations. In addition, reputational risk is at the forefront of all participants within financial markets. These factors are driving the growth of compliance teams and more sophisticated systems. Clearly this comes at a cost to all banks, however, this has to be weighed up against the financial penalties that can be levied if a bank is found to have acted outside of the rules. The cost to income is higher for smaller organisations, however it is an absolute requirement to enable them to participate in financial markets. Going forward, if regulation continues to increase this may lead to diminishing numbers of niche players. This will in turn lead to reduced market appetite for more difficult risk.
Lorente: I do not see very much impact on pricing due to compliance costs, because there is a lot of competition nowadays. All of us want to increase our book size, so the price is still there or even being driven lower. In the medium term however, these new regulations may prevent some entities from entering certain markets, as you were saying. Less competence in some markets will end up in an increase in pricing.
Wissing: A lot of industry professionals are saying that they expect pricing to increase in the medium-to-long term, which I would agree with. What we are seeing at the moment is an abundance of liquidity and new investors entering the market. There is a lot of appetite out there but what looks like an undersupply of assets. At the moment, banks are looking to invest in trade finance assets, which I think is driving pricing down. I would, however, agree that, in the medium-to-long term, the general costs not only of compliance but also the cost environment in general – be that technology, compliance or legal framework agreements and other aspects – is going to have an effect on margins. What we are seeing at the moment are record lows. I hear it said quite often that we are seeing pre-crisis levels in some markets, so it is definitely quite significant.
Olsson: This is a general period of change in the market, and we are clearly seeing a lot of developments and implementations of various initiatives, which are, of course, creating an environment of volatility. Over time, maybe we will see more alignment and things will settle down.
Coles: Generally speaking, do you think there is enough information about what is affecting the industry out there at the moment or are people sometimes a little in the dark and struggling to get on top of what is happening?
Wissing: I generally think that there is quite a lot of information out there. Of course, there can always be more, and I think that industry bodies such ITFA can make an impact here in terms of working with the regulator, going into specifics, drawing up a paper on XYZ and naming the issues out there. Generally, as an industry, we are quite vocal about these things, but in terms of a body looking after this, this is a great opportunity for ITFA.
Moulas: I fully agree that industry bodies are crucial here. It is already a common understanding in our market that trade finance is lower risk than many other types of financing and assets. Nevertheless it is important to give empirical evidence when speaking with regulators. The ICC Trade Register for example is providing this empirical data about the low-risk profile of trade finance.
Pillow: Do you think there are enough platforms? I know Swift has launched the KYC registry, which is trying to address some of the issues. However there is still a dearth of readily-available information, both on corporates and sometimes even on banks. How do you think the provision of this type of information can be enhanced?
Wissing: It is interesting that you mention Swift, because Barclays is one of the pilot banks for their KYC registry. I think that this is something that, if done right, could be a very powerful tool to drive efficiencies in the collection of KYC data. Swift, for example, is considered by the industry as a highly technologically-advanced company, which also has confidentiality and security measures in place. That said, I think it will take a while for banks – and especially smaller ones – to get their heads around it and really get themselves set up on it. It is definitely an initiative that could really address a need that banks out there have identified.
Moving on to the next point: which challenges do we think we will see in the next 10 years facing the industry?
Coles: Since I started my career in trade finance, things have evolved enormously, particularly in relation to technology. It is good to have a fresh view on the industry and trade finance, because things that, for example, I would take for granted nowadays, the younger generation would look at in a completely different light. What kind of things have you experienced so far and how do you think that will evolve in the next few years?
Lorente: I am positive about the future of our market. However, this will depend very much on the current efforts of our industry to make clear to the regulators the strong link between our activities and the real economy. We need to prove, with consistent data, the low risk profile of our business. We also need better standardisation in our market as well as more transparency in terms of price-fixing.
Pillow: Standardisation is really important too. If we look at where we were a few years ago, every document had to be negotiated with legal, which was time-consuming and expensive. There are now agreements that we take for granted, such as the non-disclosure agreements (NDAs) provided by LMA, Master Participation Agreements (MPA) governed by BAFT for example, which are standardised and help facilitate our business. This standardisation, I think, is going to be very important, in addition to the technology.
Wissing: What are the driving factors for growth in the trade finance markets today, and where are the potential hotspots for new business?
Lorente: Due to the slow recovery in developed markets, I think south-south trade is a hotspot. There are also opportunities in terms of small and medium-size enterprises (SMEs) as some companies in emerging markets are not being tapped by all banks in the market. They need a wider range of trade finance products, which, in many cases, local banks cannot provide. With this in mind, there are already some initiatives in our bank to tap this SME space.
Segoly: You mentioned south-south trade. We are also seeing interest in new economies that are opening up, such as Myanmar, as well as Mongolia to a certain extent, and businesses trying to explore how they can get traditional trade products to work in those markets that are still unfamiliar to them.
Hameed: In terms of new hotspots, the corridor between Asia and Africa is one to look out for. We are seeing regular enquiries from our exporter clients relating to upcoming projects in this region. The ABC Group has a large presence around the globe, so we tend to hear from different offices, and that seems to be the new focus in trade at the moment globally. On a more general note, we tend to see a pick-up in trade financing requirements from corporate customers when there is volatility in markets they are transacting in. Such companies turn to banks for more secured trade finance products rather than transacting on an open account basis which would be the case under normal market conditions.
Wissing: Africa is definitely a hotspot for Barclays. It is a market in which Barclays has had a long-standing presence, and in which we can really add value for our clients globally.
I completely echo what you are saying about Asia, Fawaz. We see an abundance of enquiries from Asian exporters exporting to Africa or working on large infrastructure projects, for which there are large bonding and project finance requirements.
But, Africa does face some macro-economic headwinds and, given the currently very low oil price, the African economies will, in the short run, likely face some challenges. In the long run, however, it is definitely one of the biggest growth markets we see, particularly in infrastructure and telecoms, where there is a lot of activity. It is certainly a market that I am looking forward to working further on. It is interesting and very diverse.
Moulas: For sure, trade volumes in Africa are expected to increase with China being the continent’s biggest trading partner. Nevertheless at the moment, African banks in certain regions still lack size when it comes to balance sheet and equity. For that reason, the involvement of multilateral development banks is becoming more important to capture additional trade flows.
Olsson: For us, Latin America is the region of focus at the moment and where we have a strong presence. In terms of the growth that we have seen in Asia, there may be a broader view that this cannot keep going forever, so banks are generally looking for what the next region of focus is going to be.
Manders: How do you feel about the emergence of unregulated newcomers and the new direction that trade finance may potentially take?
Lorente: Some non-bank investors will enter the market. Where banks are faced with increased regulation, they are not regulated, so it is not a level playing field. One way in which we can deal with this is by investing more in technology, an area which is already considered a key pillar within BBVA’s business strategy. Imagine a competitor coming to the market without the same regulations but having made a huge investment in technology: should they prove to be more efficient than the banks, it could be one of our main issues in the future.
Wissing: I would not fully agree, because I still think that banks offer certain opportunities to clients that other investors might not be able to, in terms of a wholesale product. New players coming into the industry will ultimately be required to comply with all of the same regulation that we as banks do, which should create a level playing field. I fully agree on investment in technology, which is so important and which is a great opportunity for the market. It has always been difficult in the trade finance space, because it can be quite bespoke in terms of documentation, etc. In terms of what banks can offer to their clients, however, it can be a one-stop shop. Long-lasting client relationships will be important in the future in terms of helping clients and providing them with new ideas for their business. Banks can play a role as thought leaders here.
Lorente: Of course, I agree, but FX investors are coming in with platforms and having an impact on the banks’ FX business lines.
Moulas: In addition, the appearance of non-bank investors provides new chances on the distribution side as these types of investors might be able to take risks which banks do not want to keep or take in their own books. Here regulatory arbitrage creates opportunities, for example, through the co-operation with private risk insurers which are facing different capital requirements.
Pillow: They will also be able to offer certain solutions. It is very difficult to predict what will happen. It is somewhere in the middle, in the sense that the banks will be there to offer a one-stop shop for a number of standardised products. However, their clients will, from time to time, have a requirement for more tailored products.
Olsson: I would agree with Johanna. I think we are moving as a bank in that direction: seeing the client from a holistic relationship point of view, covering things like FX as well as trade finance. We are seeing more bespoke solutions such as a joint commercial cards and supply chain finance programme. This is where banks can be unique: offering combined treasury and procurement-focused solutions to clients.
Wissing: There may be things we can learn from how smaller players operate, and banks need to stay on top of these things and embrace technological development.
Segoly: I think that there will be a change in the products that the banks focus on. There is a significant increase in technology and information in the market, which is shaping a lot of the traditional trade products, for which banks typically act as a counterparty. As technology and information develop, the banks’ role as ‘go-between’ becomes increasingly defunct. The smartest banks will be those who embrace new technologies, but also find ways in which to leverage them and add additional value to their clients.
Pillow: I feel that, in terms of some of the products that we provide, there is still a lot of diverse documentation involved. For example if you consider LCs, apart from the checking of physical documents under the LC, there is more checking these days on the movement of the goods, vessel checks and verifying the related parties to the bill of lading. All these layers require intuitive human intervention that cannot be achieved employing current technology. Whereas products such as the bond and syndicated loan markets have already reached a much higher level of standardisation because it is not necessary to verify a large number of disparate documents.
Lorente: I fully agree. Our industry is a paper-based industry. Until we have real standardisation in our market, we will remain the same. The technology is
Hameed: I agree with this as well, we are indeed in the business of the movement of documents and this will be part of our product in the coming years whether we like it or not. Even though developed countries are working towards more technological systems for their trade finance business and are transacting with each other using such systems, there will always be that element of movement of documents in our business as long as our customers are operating in emerging markets.
Pillow: That is where it requires more specialised people to look at this documentation. You are not backed by a system, and there is a lot of human interaction as well.
Lorente: It takes time. Many years ago, documents were sent via telex; now, we see nothing via telex in our market. We just see Swift messages. That is something that took time for many banks, but now Swift is everywhere, and every single bank around the world is using it to confirm transactions.
Wissing: I completely agree that there is a lot of documentation, but it seems to be becoming more automated. If we look at other areas of the correspondent banking industry – for example, in the payments space – instructions are largely standardised, which has helped enable advances in terms of systems and automation. Even in other areas of the trade finance market – for example, the supply chain finance market – there are already a lot of bespoke platforms and automated processes in place.
Ultimately, it is a key investment focus for banks, because I expect to run my supply chain in 10 years from my smartphone. As a client, if I have 10 guarantee transactions to issue on any given day and I want to check what is going on, I would ideally have my bank provide me with a system that I can access via my bespoke login details and I could see exactly where my transactions are: whether they have been looked at by x team and when they are going to be issued.
Things like that will be so important to diversify your offering as a provider of trade finance. As we were saying before, banks have to continue to evolve and develop their solutions to keep pace with what clients are looking for. At Barclays, we have made quite significant investment in these technologies and are working on systems that, once put in place further down the line, will offer a back-to-front-end process for clients to see what is going on with their transactions.
Olsson: And trade finance fits within the treasury or cash management solution, being one part of your banking portal where you can handle everything from accounts to FX and trade finance. At Bank of America Merrill Lynch, we are seeing that type of holistic platform solution being expanded at the moment.
Segoly: On the topic of technology in trade finance, we are seeing a lot of bespoke and smaller solutions being offered in the market to clients. As in the FX market, it will be interesting to see if a solution becomes dominant for the industry and used by the majority, which would help banks to get their technology investments right and, in terms of individual bank platforms, how they would integrate and plug in seamlessly. A client that has a few banks does not necessarily want to use different platforms, so a universal solution would make a lot of sense for the industry.
How do you go about that?
Olsson: I think collaboration between banks is also a key part of this, as is developing closer co-operation between key correspondent banks.
Wissing: That is very much how our market works – we are friends and competitors at the same time, which is quite interesting.
One of the other opportunities we see in the trade finance space that is already largely technology-driven is the supply chain finance sphere, where we have been seeing a lot more requirements from clients for open account trade. That is where the supply chain finance and receivables finance space comes in. Very often, it is seller-led, by either setting up a receivables finance facility for their working capital purposes, or by providing a supply chain finance solution because of the value to key suppliers. We see this as a key growth area for trade in the medium and long run, and I wondered what you have been seeing in that space and whether you also have the feeling that, over the last 12 to 24 months, there has been increased demand from clients for these kinds of solutions.
Segoly: We are definitely seeing a lot of interest recently, especially in supply chain finance. The interesting thing is that we are noticing that, in the primary market for clients, there is a really diverse set of reasons why clients are interested in putting supply chain solutions in place. Some are interested in extending their payable days; others are really looking at strengthening their core relationships with the suppliers and having a tool there that supports them along the way. There has definitely been a lot of interest. A lot of clients are taking their time and doing their homework on a supply chain financing programme before implementing it, and, in some cases implementing pilot programmes before going ahead with full rollout.
Lorente: Supply chain finance is very important for SMEs, because they can discount their invoices and leverage on the risk of the buyer which is usually a larger corporate.
Olsson: We are definitely seeing growth too. We have been a supply chain finance provider in the US market since the trend emerged over 10 years ago, but in the past few years we have seen significant growth within the mid-market segment of buyers, as well as globally. Another aspect of supply chain finance is the secondary side. When programmes grow and expand globally, lead banks have to invite other institutions to participate. In these cases, we are increasingly seeing corporates ask for their other banks to be invited into
Lorente: Something new is the syndication of supply chain finance transactions, which came into the market a few years ago. It was not that common in the past, but it is true that banks are today increasingly being invited to choose other banks to join or participate in such transactions.
Moulas: What we have seen, in fact, is that especially for larger buyer-driven supply chain finance transactions the customer simply requires that the originating bank be capable of bringing in other banks or investors into the facility. The financial crisis has shown that doing business with one bank alone exposes firms to certain levels of risk concentration. This also applies when it comes to the financing of a company’s supply chain, and our clients have adapted to this. For banks, this creates some challenges concerning IT and distribution capabilities. But on the other hand, it provides the opportunity to make profit on the secondary market side.
Hameed: At ABC, we tend to get involved in specific parts of the supply chain. One of the main products where we have seen growth in recent years is in global receivables financing facilities for our clients. One comment that you made and with which I fully agree with is that, historically, corporates would come to your bank and ask you to find other banks to work your facility for them. Now, however, it is being driven by the corporates, where they want to give some business to those banks that they are already dealing with. That is one shift that we have noticed at ABC, where our corporate customers are telling us who to syndicate out to.
Wissing: Apart from talking about trade finance and trends we see in the industry, one of the main reasons why we have called for this roundtable is really to see how we, as young professionals can, on the one hand, help to shape this industry and, at the same time, help the industry to attract more young talent. We feel that there is a generational gap looming and that it is quite difficult nowadays to attract, for example, university graduates into these markets. I am sure that one of the reasons for that is that they do not know what trade finance is all about, but I guess the traditional entry routes – somebody working first in the back office, then maybe in the middle office before working their way up to the front office – do not really exist anymore. I wonder if you have any thoughts on that.
Lorente: Sometimes, when you are starting out, you do not understand the importance of the global transactional banking or global trade finance departments within the bank. Since the crisis, however, it has been demonstrated that banking models linked to the real economy were in fact more successful. Now, all banks are investing a lot more in global transactional banking and there are more opportunities for qualified professionals. In spite of that, there are not many academic programmes specifically for trade finance or transactional banking and it will take some time before we see more specialisation in these kinds of products.
Segoly: I agree. Since the financial crisis, trade has become core to banks. It has become such a growth area that it is attracting more young people, either from university or from other areas in banks. It is an area that we see people wanting to get into and certainly one that is evolving quickly. Because of the technology coming in and replacing a lot of the legacy, manual processing work – such as documentation management – the day-to-day nature of the role is changing rapidly. Banks will have to figure out how to then market those new propositions to young people.
Olsson: I agree with you when you say people from other areas of the bank, because I often have the impression that, once people are in the bank, or young people have come into the bank, they find their way to trade finance. If you ask a university graduate, however, they rarely know about the area. There, we are playing catch-up. Investment banking has always had a presence at careers fairs and in graduate recruitment, while transaction services, and trade finance in particular, are catching up or not even present.
Wissing: In terms of the programmes, graduates do not always know what is out there, because it is not as well known a part of the industry as, say, a debt capital markets or equity sales team. I do think, however, that it has some attractions that other markets cannot offer. The trade finance market, particularly in London, is truly an international business. Second, it has a positive impact on the world economy and on communities; for example, we might help finance trade into a peripheral country or provide key commodities to a country that would not have access to these imports without a bank taking on the transaction risk. I think this is something that will become more and more important, especially for young people who are looking not only for what their return is but also at what positive impact it has on society as a whole. In the trade finance space, I think we do loads of things, whether supporting an SME, which then helps retain or create jobs, or helping support the import of key commodities, that have a really tangible impact.
Moulas: I agree with your arguments. However, certain areas within trade finance are still perceived to be kind of old-fashioned. For example, the documentary business, like the handling of guarantees or LCs might be less attractive compared to tradeable instruments in investment banking. In this aspect I think it is important to improve the image of trade finance, by showing its internationality and entire spectrum, including new types of products. In addition, by creating the ITFA young professionals network, we want to show youngsters that there are a number of innovative and creative minds in global transaction banking.
Pillow: On that point, what are ITFA young professionals doing to help youngsters in their career in trade finance and supply chain? What are your initiatives for 2015?
Wissing: The main initiative will be to set up the mentoring groups, which are important to enhance the knowledge-sharing of more senior, experienced people, many of whom are very keen to pass on their knowledge. I get a lot of enquiries from people asking: ‘When are you ready to start?’ We will be there as soon as we have a full database, and for this we need ITFA members’ feedback.
We then need to go networking among the community. The idea is that we can all exchange ideas and knowledge amongst ourselves, as well as with senior groups. There are certain questions that I probably would not feel comfortable asking in an environment surrounded purely by seniors; amongst younger colleagues, however, it is easier to discuss certain aspects and to get feedback on them.
Pillow: You have just launched this in September, so what reaction has there been from the more senior people in terms of the participation of young professionals. Do you feel that they are encouraged to participate and to learn more? The primary reason why Paul Coles and I are here is that as board members of ITFA, we want to encourage participation by the younger members that are just starting out in their careers. These initiatives are important to ensure succession within our industry. Whilst ITFA is committed to supporting any initiative that ensures a vibrant industry that attracts the best young candidates to be successful, such projects need to be endorsed by the current leaders within our industry.
Wissing: It has been largely positive but there have also been some instances where seniors have taken a step back, because they were worried that people might have work to do outside their day-to-day role, which isn’t the case. The work is done by the team looking after this, which is Philipp Moulas and me at the moment, but we will definitely look to recruit more people to help us. I would say that, generally, it has been well received. People are saying: ‘You were right. You have identified a generational gap. We need to do something about it because we want to pass on this knowledge and make sure that these markets can keep going and evolve further.’ It has been largely positive but I would still encourage banks and other institutions involved in trade finance to put their names forward.
Olsson: Other than mentoring, discussions like this are also interesting. We rarely get together and talk about this on our own. It is usually the seniors discussing and us listening in.
Wissing: It could help us a lot. Nowadays, in terms of your involvement in the market, you are very dependent on your manager. All of us here have very good managers in that they really want to push us forward. Generally, from what I see in the industry, they are all very keen on this, but sometimes it just takes a little reminder up the chain that certain events could really benefit their junior employees. This one here, for example, is a great opportunity.
I am very much committed to this market and I am sure that others around the room are too. I am really looking forward to the years to come and, as long as I am still part of the young professionals, even better.
Many thanks to Barclays for hosting this roundtable.