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Sponsored: Syndication in trade finance: understanding the past, present and future

Global / 27-09-17 / by

The way that trade finance risk is distributed today has changed significantly from 30 years ago and will change again in the decades to come, say Ravi Sivasubramanian, Director of Trade and Working Capital, and Karl Page, Head of Trade Finance Syndications, at Barclays.

 

Evolution of the syndications market

Trade finance has a long and enduring history. In fact, it dates back nearly three millennia, to when promissory notes were first etched onto clay tablets in ancient Mesopotamia.

While the concept of trade finance extends back to antiquity, the widespread syndication of trade finance transactions by banks is a relatively recent phenomenon. Syndication is the process by which a bank mitigates its own credit risk through selling the trade finance transaction (its ‘trade asset’) or inviting other lenders to participate in providing the funds. It has been a feature of the trade finance market since the 1980s, when it predominantly took the form of forfaiting, focusing on traditional trade finance instruments such as letters of credit, bills of exchange and promissory notes.

Banks typically syndicated their trade assets on a transaction-by-transaction basis, according to whether they had exceeded their maximum credit exposure to a particular company or country. They had a ready market of capital providers willing to participate – to the extent that even during the financial crisis of 2007/08, the trade finance syndication market still carried on when other markets froze. In 2008 the BAFT MRPA was launched, which provided an industry-standard template agreement for sellers and buyers of risk to sign into, further supporting participation.

 

2017 – where are we now?

Today, distribution of risk for credit appetite reasons continues to propel trade finance syndication. Yet balance sheet concerns are arguably an even more prominent driver. Basel III rules require banks to hold capital against their risk-weighted assets (RWAs), a category that trade finance transactions fall into. Syndication is therefore a way for a bank to both manage credit appetite and reduce the amount of RWAs on its balance sheet. The pressure on banks to be more efficient in resource allocation has also led to them becoming more proactive about managing both their trade portfolios and the concentration of their exposures, not only to specific companies or countries, but also to different industry sectors and asset classes. This broad approach to portfolio management may be a recent development but it is likely to further influence trade finance syndication in future.

Banks distribute the credit risk of a wider range of trade finance transactions than they did in the past. Previously they focused mostly on distributing bank risk in instruments such as letters of credit and promissory notes, whereas the largest part of the present market consists of transactions entered into directly with corporates, such as receivables financing, supply chain finance and trade loans.

While forfaiting still takes place, it has become more of a niche activity. Instead, risk participations, both funded and unfunded, which are transacted through master risk participation agreements, are banks’ preferred method of syndication alongside insurance. Unlike forfaiting, which is an outright sale of an asset,
risk participations and insurance enable the buyer/insurer to participate in the risks associated with an asset without taking legal ownership of it. In addition Export Credit Agencies (ECAs) and Multi-Lateral Agencies (MLAs) are providing risk mitigation to banks through guarantees and insurance.

Asset securitisation is another trend that has become more prevalent over the past few years as banks have looked to distribute the risk of an entire portfolio, or part portfolio, of transactions. As technology evolves further, and as banks’ ability to manage data improves, it will become even more efficient for them to distribute risk at a portfolio level.

 

Institutional investors

While banks and insurance companies continue to participate in risk distribution, institutional investors such as asset managers, fund managers and pension funds are increasingly attracted to the trade finance market. The trade finance asset class offers them an opportunity to diversify away from traditional assets such as bonds, equities and gilts. Trade finance is a liquid investment and they view it as relatively safe because default rates are extremely low. Since trade finance assets tend to have a very short tenor – usually 90 to 180 days – they are a good short-term home for cash and provide a better yield than money market deposits. Yet presently there is a paradox in that while there is heightened demand for trade finance assets among institutional investors, falling deal volumes mean that fewer of those assets are actually available.

 

What happens next?

In future, banks will keep distributing trade finance assets, both to maintain balance sheet efficiency and to manage the level of capital they need to hold against their operating activities. In addition, they will also be looking for more opportunities to improve the risk-adjusted returns on their portfolios. It is also likely that we will see clearer delineation between the sellers and buyers of trade finance assets, with big, international trade finance banks being the sellers and smaller local banks, or banks that do not carry out trade finance activities, being the buyers.

Buyers will also increasingly consist of institutional investors – a development that will suit banks for two important reasons. Firstly, syndication to a non-bank means they do not risk giving away intelligence on their customers to a competitor. Secondly, buyer banks will face the same challenges as seller banks with regard to balance sheet efficiency and pressure to generate returns. This may ultimately dampen their appetite for trade finance assets.

Already a large proportion of trade transactions by volume are estimated to take place on an open account basis rather than using traditional trade finance instruments. This trend is likely to further accelerate, meaning that corporate risk in transactions such as receivables financing, supply chain finance and trade loans will be the dominant asset class traded in the future. Technology has already begun to disrupt the market thanks to online platforms that allow corporates to buy and sell trade receivables without intermediation from a bank. Although these platforms are effectively taking business away from banks, they could potentially benefit the market more broadly if they publish market data relating to sales volumes and pricing trends. This should serve to make the market more transparent and therefore attract new investors.

Industry bodies such as the ICC, ITFA and BAFT are also working on initiatives to attract a wider industry base for this asset class to address the need to educate new entrants to the market and help them gain access to it.

What can banks do to capitalise on the potentially enormous demand for trade finance assets from institutional investors while competing effectively with online platforms? It is well known that SMEs and emerging markets are under-served so we could see banks exploring more origination opportunities in new markets and new sectors. Helping to close the global trade finance gap through the increased use of trade finance syndication would be an important historical achievement indeed.

barclayscorporate.com

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Information collected at one Site may be shared between Exporta Publishing & Events Ltd and other group companies for the purposes listed above.

We may transfer, sell or assign any of the information described in this policy to third parties as a result of a sale, merger, consolidation, change of control, transfer of assets or reorganisation of our business.

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Services on the Internet are accessible globally so collection and transmission of personal data is not always limited to one country. Exporta Publishing & Events Ltd may transfer your personal data, for the above-listed purposes to other third parties, which may be located outside the European Economic Area and/or with a different level of personal data protection. However, when conducting transfers, we take all necessary steps to ensure that your data is treated reasonably, securely and in accordance with this Privacy Statement.

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We are committed to keeping the data you provide us secure and will take reasonable precautions to protect your personal data from loss, misuse or alteration.

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We have implemented information security policies, rules and technical measures to protect the personal data that we have under our control from:

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Everyone who works for or with Exporta Publishing & Events Ltd has some responsibility for ensuring data is collected, stored and handled appropriately. Each team handling personal data must ensure that it is handled and processed in line with this policy and data protection principles. However, the following people have key areas of responsibility. The board of directors is ultimately responsible for ensuring that Exporta Publishing & Events Ltd meets its legal obligations.

Name of Data Controller


The Data Controller is Exporta Publishing & Events Ltd. Exporta Publishing & Events Ltd is subject to the UK Data Protection Act 1998 and is registered in the UK with the Information Commissioner`s Office.

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Upon request, we will provide you with a readable copy of the personal data which we keep about you. We may require proof of your identity and may charge a small fee (not exceeding the statutory maximum fee that can be charged) to cover administration and postage.

Exporta Publishing & Events Ltd allows you to challenge the data that we hold about you and, where appropriate in accordance with applicable laws, you may have your personal information:

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In certain circumstances, the Data Protection Act allows personal data to be disclosed to law enforcement agencies without the consent of the data subject. Under these circumstances, Exporta Publishing & Events Ltd, will disclose requested data. However, the Data Controller will ensure the request is legitimate, seeking assistance from the board and from the company’s legal advisors where necessary.

Changes to this Privacy Statement

We will occasionally update this Privacy Statement to reflect new legislation or industry practice, group company changes and customer feedback. We encourage you to review this Privacy Statement periodically to be informed of how we are protecting your personal data.

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Exporta Publishing & Events Ltd aims to ensure that individuals are aware that their data is being processed, and that they understand.

  • How the data is being used
  • How to exercise their rights

To this end, the company has a privacy statement, setting out how data relating to individuals is used by the company. This is available on request and available on the company’s website.

Review of this policy

We keep this Policy under regular review. This Privacy Statement was last updated in April 2018.