As the world of regulation heats up, GTR gathered its editorial board to measure the impact on the banking, legal and insurance industries.


Roundtable participants

  • Alan Ainsbury, head of trade and supply chain, RBS
  • John Bugeja, head of trade sales, Lloyds Banking Group
  • Paul Coles, director, global trade risk distribution, EMEA, Bank of America Merrill Lynch
  • Simon Cook, partner, Sullivan & Worcester
  • Daniel Cotti, head of global trade, JP Morgan (chair)
  • Rüdiger Geis, head product management trade services & issues, Commerzbank
  • Nick Grandage, partner, Norton Rose Fulbright
  • Peter Gubbins, co-founder, GTR 
  • John MacNamara, global head of structured commodity trade finance, Deutsche Bank
  • Shannon Manders, editor, GTR 
  • John O’Mulloy, managing director, trade finance and forfaiting, Standard Bank
  • Robert Parson, partner, Reed Smith
  • Jorim Schraven, manager, credit analysis, investment and mission review, FMO
  • Nicholas Shaw, global head of trade finance, BBVA
  • Edward Nicholson, partner, JLT


Cotti: Many of the themes from 2013 that affected global trade have continued into 2014 and we expect them to continue for the foreseeable future. For example, we’ve seen that excess liquidity in most markets has had an impact on pricing under the more stringent capital regulations. This new financial architecture under Basel III, as well as capital liquidity and leverage, has impacted the broader market, from trading to overall lending businesses, and we’ll continue to see this play out. There is also the more crude leverage ratio that is applied, which is driving the composition of banks’ balance sheets and of the various asset classes and deposits.

The demand for trade business from our clients remains very healthy. We’re not seeing as much growth in world trade as we did before the crisis: when we had 8 to 10% increases in world trade every year; now, we have 3 to 4% increases. However, the growth in world trade is still higher than GDP increases and it continues to develop. Our clients are increasing their international cross-border activities and, therefore, are increasing their cross-border trade finance requirements. The competition, however, is very fierce at all levels, be it on the traditional trade side, on the supply chain finance trade side or on the longer term export finance side.

We’ll see a change in pricing over the coming years as banks factor in the cost of regulation. That will happen; the question is when? The implementation of Basel III and of conduct regulations varies from country to country and from region to region, so the marketplace will differ in terms of how pricing models will be affected.

Trade finance continues to be a relevant and necessary product to clients – to corporates and financial institutions (FIs) around the world – and will remain a relevant product for all banks. The industry, however, remains fragmented in terms of market share, and the way we treat our clients. Over the past years, we have seen very serious efforts on the part of the various trade bodies to bring standardisation into the industry, not just from a technical rules point of view but also around product definitions and documentation that we use. I think it is essential that the industry can put more weight behind its claims vis-à-vis regulators, internal decision-makers or investors. We need a much clearer way in which to execute the business, with market-driven instruments and documentation.

I am curious to hear opinions from others.

Bugeja: Where do you see the impact of the non-bank providers in that market space?

Parson: One of the themes we have seen over the last 12 months is a lot of non-bank money coming into this market. Of course, the more exotic the sources of the non-bank money, the greater the multiple of directions that you have to look. It was never a problem when the gentlemen around this table came together. We did not have to spend an awful lot of time working out that all your money is good money. Now, we are looking at lenders’ money. It has brought in a new, interesting and not entirely welcome dynamic to the way that deals are put together. Of course, often you will see a mixture of those funds coming together too.


Cotti: Some of these non-bank institutions have some very unique product offerings that can accommodate a niche market.

Bugeja: The scenario in the UK, which is our market focus, is a little different, because there are a lot of non-bank financial services providers out there. In terms of market share, they are not making much of an inroad in terms of quantum, but their presence does add weight to the commonly held view that ‘UK banks are not doing enough to support SMEs that are desperate to export’. The reality is different, but we recognise that we continually need to find ways to do more.

We are quite happy, in principle, with the idea of having non-bank intermediaries in play, because they typically offer a complementary solution, supporting deals or clients that we probably would not want to. There is a point beyond which we would not want to go in terms of leverage and the need for transaction control, etc, but we can still support that market by working with and sometimes financing the intermediaries.

MacNamara: There are some interesting considerations here, particularly around risk. A lot of these non-bank institutions do not have the same risk considerations that us banks have to bear.

In the commodities space, however, we have to look at the traders. All of us participate in funding these enormous revolving credit facilities (RCFs), in the billions of dollars. The traders are very big in this space and are perfectly capable of running a syndication, but it works well because they also still need us to play. From our perspective, we are still very client-centric, which works well in certain geographies. In China, a lot is going on with the traders in a way that we have not seen since Russia in the early 90s.

Schraven: I am quite interested to hear your perspective on how this regulation impacts differently across geographies. We work mostly in the most difficult countries, where it hits hardest and, in some cases, quite unintentionally so. For example, new leverage capitalisation rules which are partly aimed at dealing with systemic risk in Europe are now preventing even relatively unleveraged institutions, like ourselves, from giving large capital support in high-risk countries. We see low-risk credit products being problematic in low-rated countries, even if the counterparty risk is okay.

It seems that the only saving-grace mitigant is that, in some of these geographies, you get higher margins. From a long-term perspective, however, I am not too optimistic on the impact of regulation there.


Cotti: Is the reason for that the balance-sheet requirement or the financial crime risk requirement?

Schraven: They add up; they feed on each other. We have the financial regulation whereby, if we provide capital support, it more or less gets deducted from our own capital, because we are a regulated bank. In addition, you get AML and KYC, etc, which tend to be more complicated because of information requirements in difficult geographies. The cost of doing this type of business is then rising out of proportion.

Geis: With regards to unbanked banks and the KYC and sanctions issue, it is becoming a topic, so we have to follow the rules. Whatever is necessary to fight crime, we fully support, but we have to avoid the unintended consequences of overdoing things. There is the possibility that, in a couple of weeks, months or years, we are going to have unbanked countries and unbanked banks. Our regulators and policymakers will ask: ‘Why can my corporate from my country not do any business with Zimbabwe?’ etc, which is something that the ICC, BAFT and other institutes have to get together on and work on in order to avoid these unintended consequences.

MacNamara: We have talked about unintended consequences for some time, and we have had some notable allies in this. I think the World Trade Organisation (WTO) in particular has done very well, and we can thank colleagues there for what they have done to help restore the 20% weighting for letters of credit (LCs), etc. I fear, however, that some of our trade finance colleagues have undermined us somewhat, because, for years now, we have been saying that it was not us in trade finance who created the global financial crisis. We were the baby who was thrown out with the bathwater in the kneejerk reaction of Basel III.

Then you look at the latest huge fine on a bank, which appears aimed primarily at their trade finance function. I fear it has undermined our credibility to say we should not be treated the same way as all the others.

Geis: As Dani said at the beginning, we have to get together as an industry and facilitate standardisation. They will listen to us as an industry but not as individuals. We have to make the case: we have to make sure that they do not mix us up with criminals. We are here to foster international trade and to make things happen.

A couple of years ago, we had to find the 0.1% doing illegal things; now, we have to prove that 99.9% are not criminals.

Grandage: Our problem, of course, is that there are so many transactions in trade compared to other things, so it is 0.0001%. You are looking for a needle in a much bigger haystack than other products are.

Geis: I heard Dani say something that I hope he is right about. He said that prices will hopefully have to go up in the next couple of years.


Cotti: That is the theoretical argument. What happened, however, is that the money supply is so much stronger, and the drive for these banks to deploy assets is much stronger than the costs. There has been a very sluggish economic recovery, and it remains uncertain whether liquidity will tighten and risk premiums and spreads will go up.

MacNamara: There is a deal being documented at the moment for one of the big traders, where one of the things they have asked for is that, if there is a change of ownership, they want the KYC on the new owners to be done in 10 days flat. There is a: ‘you snooze, you lose’ clause, so if you do not say anything, you have deemed to accept. It goes for the majority of banks. I look at this thinking: ‘I am not going to get this through compliance’. KYCs can potentially take weeks, so 10 days is a little aggressive. The chances are that we will sign it anyway, but what it means is that, if there is a change of ownership, we will have to exit at our cost.

Parson: This is an increasing problem. If you are in a transaction, you discover that, indeed, there will be changes of ownership along the line, and sometimes these things pop up at the most unexpected moment. If someone is murmuring discontent about the capitalisation, it is: ‘Do not worry because we have a big slab of equity coming in from Mr X next week.’ Immediately, the lawyers are running to their well-stocked compliance department, because, of course, we have armies of people as well to make sure that everything we do is within bounds. I think this is an interesting issue.

Grandage: I do not know what the other lawyers here think, but there is going to be more regulation. It is a fact of life: whether it be bribery, money laundering or sanctions, maybe it will come together and we will get a universal theory of regulation. I do not think we will see that.

MacNamara: Can I ask the American banks what their view of this is? I hear a lot from European banks complaining about particularly the American reach into European pockets, but the Americans have also been under the cosh. What is the view across the water?


Cotti: It is the same and applies to all banks across the board globally, whether it is related to private banking, transaction banking, trade finance or mortgage.

Schraven: One type of regulation that we have not covered yet but on which I am interested to hear your perspective is conflict-of-interest management. This was triggered by Daniel’s introduction on how effectively you are taking an integrated look at returns across clients. We are finding that increasingly difficult. In part this is because we are starting fund management but also because our regulator is pretty much warming up to this conflict-of-interests story. In areas where we are distributing to others and where we also provide equity, this gets complicated. When we distribute different kinds of products among the same clients, and we are not really supposed to look at an integrated picture of returns any longer, but price each product on its own merits.

MacNamara: It used to be called cross-selling.


Cotti: Why would it become an issue?

Schraven: If you are distributing across several products, so you have people behind you for whom you are very explicitly or less explicitly leading transactions for, then cross-subsidising products becomes more challenging.

MacNamara: Loss leaders.

Schraven: Precisely. In a world with all manner of regulation that may favour some product over another, adding the conflict-of-interest perspective complicates the integrated client perspective.


Cotti: Yes, but it does not make it impossible. You just need integrity in terms of the way you run it. Lending, which is at the heart of every corporate banking transaction, with the new financial regulations, can be much more valuable to both the clients and the bank if coupled with other business on top of it, whether it’s cash management, foreign exchange, derivatives or other investment banking products that a bank can offer to the client.

Schraven: The conflict of interest arises when you are doing five different products to one client and, on two of these products, you are distributing to other people, where, in some ways, you remain fronting for them. Maybe those are loss leaders or very marginally profitable. What we are finding is that our regulator is increasingly interested in how we manage these kinds of trade-offs and how we, in effect, act with integrity for the people to whom we are distributing.

MacNamara: I would be quite interested in what the British banks say about this, because this is, to some extent, analogous with what happened in the retail world.

Ainsbury: What you are describing is conduct risk. Banks have to give options to clients across the whole spectrum and then it is down to the client to decide which is the most appropriate.

Bugeja: We have to be really careful. In the old days, we used to talk about cross-selling and maybe refer to that as ‘bundling’, whereby everything was related, but you cannot do that now. With every individual product that you sell to a client in the UK, especially in the lower end, such as the mid markets and the SMEs – it is not a problem with the global corporates – you have to be able to demonstrate that what you are charging for that product is transparent, fair and proportionate, and that they are getting value for money for that standalone product.

O’Mulloy: The fronting issue is going to become a huge factor in the syndicated markets for any type of transaction, particularly in the emerging markets, where we are all likely to be involving – and would normally be encouraged to involve – more local banks and local counterparties. The fronting issue has been at the forefront of discussions between us and other banks, mainly on African stuff, in the last three to four months, all being driven by this rapid escalation in compliance and KYC.

MacNamara: Would you say that LC fronting has become unattractive?

OMulloy’: There are some banks around the table and out across the lovely view there who are being told that they will not front. It just becomes quite impossible. I have come here for a meeting on a distribution deal where we did not discuss what we would take on a syndicated transaction, where the debate between the lead banks was not around who will take the transaction but who the lead banks can front for taking the transaction. It totally changes the situation and changes the liquidity. There will soon be situations where there are syndications where the banks around this table will take each other’s risk fronting. If any local bank wants to come into the transaction with any others, they will be asked for cash upfront.


Cotti: So what is the good news?

MacNamara: There is lots of business everywhere. We are absolutely snowed under. On the one hand, that is positive; on the other hand, it makes us slightly nervous.

GTR: There was a big switch into trade finance over the last few years, when people were pulling out of other lines of business and looking at trade finance as the way to go forward, because it was safer and short term, etc. Does everyone think people are going to start withdrawing from it again and refocusing on the former lending activities instead, because they are just more wholesale
and cheaper to put together?

MacNamara: For a lot of corporates, money is fungible. They do not necessarily care whether they get it from a trade finance provider, an export finance provider or a bond issuer vehicle. They look for flexibility and cheapness. At the moment, a lot of these natural competitors are also low in the water – even lower in the water than trade finance is. As you go around the various options, we still have a good solution in trade finance, and one that is relatively cheap and robust in the face of market volatility.


Cotti: These RCFs will also change over time. Just being there and saying: ‘You can draw x amount of money at any point in time’ is not an economic proposition for anybody. It can be structuralised: ‘You can draw x amount immediately, another amount in three months and another in six months,’ with different capital requirements. The products need to be structured too.

MacNamara: A well-known trader was unable to refinance 15 months ago. There were 70 banks in the room at one stage. Everybody sat through all those descriptions from the lawyers about how basically, as a lender, under an unsecured RCF for a trading company, you had nothing. It was all very depressing. You thought: ‘This has to undermine the enthusiasm for these unsecured RCFs for traders,’ but, no, they carried on unabated. The good news is that this trader is back, their refinancing has been very well supported by the market and their plan is out there in full.

Parson: As a matter of interest, we have all spotted things that are potential banana skins or hurdles to overcome. How many perspective deals can you point to, over the last 12 months, that you think you lost or did not do because of the impact of regulation on it?

We are so much slower at doing this business. Prime investors come in and do the deal in 20 seconds flat. We are going to lose that business, but how many deals that you would have liked to have done do you feel you did not do because you were too slow or too unwieldy in terms of the decision-making process?

MacNamara: We have definitely turned down deals, for the full spectrum of compliance reasons. We have also declined to pitch for deals, for compliance reasons. We have taken the world’s own time to do some of the deals that we have done, for compliance reasons. Anybody touching Russia has been through endless meetings about sanctions, potential sanctions, sanctions language and potential sanctions language.

It has been a huge discussion and nobody wants to transgress sanctions – rightly so, the critical thing is to ensure the exact requirements are fully understood.

O’Mulloy: I would say the impact has been quite significant, especially in emerging markets. The insurance market sanctions language will have further impact.

If you look back only three years – not to 2007/08 – I think the change in behaviour and market appetite is marked. I have never before had a meeting like the one I just described where a syndication meeting started with ‘who can we front’ rather than ‘who wants the deal’?

That is a change that impacts market liquidity. The lead banks are trying to raise maximum liquidity, and sometimes underwrite, so you have to respect each other’s different compliance-led decisions on acceptable counterparties.

Parson: KYCOL: Know Your Customer’s Other Lenders.


Cotti: Did those deals that you declined get done in the market?

MacNamara: One of the deals that we turned down is being done by a trader.

O’Mulloy: I would say most did: sometimes not to the size; often slow. There is still a market.

Geis: An upcoming danger that I see is that we also have to record deals that we did not do, just to prove to the regulator that we did not do everything. There are all these things that we refused to do, due to A, B and C.

MacNamara: Can I ask the insurance side about sanctions language? There has been a big discussion between all the banks as to what sanctions language should be in documentation. How do you think that is going to ultimately play out?

Nicholson: There is an upcoming meeting. The main thrust of the initiative is being taken by the Lloyd’s Market Association (LMA), and the chosen counsel is Clyde & Co. The main brokers in the market have been invited to a presentation of their findings. There is a proposed clause which they have circulated.

MacNamara: Is it a ‘get out of jail free’ clause?

Nicholson: Yes. It raises some obvious concerns. The initial noise from the LMA is that the language that they have proposed in the clause is Basel III compliant.

MacNamara: Basel III does not say anything about insurance. Basel II is a document which, not in the main document but in the FAQs, had this expression about conditionality being acceptable when within the control of the insured.

Nicholson: Speaking from JLT’s point of view, right at the end of the proposed clause it says that, in certain circumstances, it could be necessary for the policy to be cancelled. On the face of it, that puts it way outside whether it is Basel II or Basel III. You cannot then consider it. However, the reading I have of Basel II is that what we are talking about here is deemed as operational risk and so this could yet be workable. What the LMA is stating is the reality. The intention is to clarify the legal position in a workable format.

Grandage: The existing law will be that, if payment under the policy is, itself, sanctioned, you do not pay it. That will always be the case because you do not make an unlawful payment. Certainly, what banks have done is that, for example, LCs now have sanctions policies, and often it goes further than applicable law. The question is: if the underwriters could make a lawful payment under the policy in respect of an entity which is sanctioned in respect of things that that entity does, I am struggling to see why that should be a legitimate get-out for underwriters. Maybe they would say: ‘We lose our subrogation rights’, but I do not know.

Nicholson: The general gist of the clause is that, if the policy has been put in place, it is a contract from which insurers cannot, normally, extract themselves until the maturity of the loan and repayment. If however, at some point in the future, sanctions are imposed, and if the existence of the policy could put the underwriter in breach of the sanctions by being deemed to support the activities of a sanctioned country, an individual or a corporation, then the intention is that the policy should react accordingly, in a way which protects both the interests of the policyholder and the insurer. In specific circumstances the clause could cause the policy to enter a non-action mode – I do not know how best to describe it – such that it will then be reactivated the minute that sanctions are lifted.

Cook: That is, effectively, you saying that you would be in breach of the sanctions, which I think was Nick’s point.

Grandage: If you say: ‘We think we might be’ or: ‘We are worried’, and that gives you a get-out, I think that is going to be a big struggle.

Nicholson: The reason why this proposed clause is long is because the LMA have tried to foresee what would happen. One of the things that would happen is that they and/or the bank who is insured would go to the local regulator or legal system in the jurisdiction concerned and see if an exemption can be made. If that cannot be arranged, they would step back. If there was a default, they are not saying that they are not liable for it, and they may well end up with payment being made into some form of escrow account.

If you look at the Ivory Coast and the silent payment guarantees that were given to some of the traders when they went into the latest bout of civil war, some of the banks were obliged to pay out. I think they ended up paying into an escrow account, and the situation was resolved to everyone’s satisfaction. What the insurance market is trying to do is to replicate that, if you like. I should say that we have not had any legal counsel yet and the LMA has not yet had the chance to explain the clause to brokers, other than providing a copy of the latest draft by email in advance of the upcoming discussion, but I think this is where we are going. One day soon, I am sure your brokers will be updating you and I am confident an equitable solution will be found as the intentions of the LMA are constructive.

Cook: Is that not what you would do in practice anyway, without having necessarily having it written into the contract?

Grandage: Our advice about LCs before the sanctions wording became ubiquitous – and all of the lawyers around the table, tell me if this was not the advice you gave – was that you would not put a sanctions clause in it: if a payment is unlawful because it is sanctioned, you do not make it; if the payment is not unlawful, you are obliged to make it. Our advice was always that it is not appropriate to have it. Politics has changed that – that is the reality.