A group of 14 global financial institutions have come together to drive standardisation for the distribution of trade finance assets on a new fintech platform.
The Trade Finance Distribution Initiative aims to push more non-bank investors to the asset class, thereby giving banks more capacity to originate new trade finance lending.
Participants include ANZ, Crédit Agricole, Deutsche Bank, HSBC, ING, Lloyds Bank, Rabobank, Standard Bank, Standard Chartered, SMBC and another four banks which have not been named.
The TFD Initiative is led by Tradeteq, a technology platform launched last year, on which banks and institutional investors can transact trade assets.
Speaking to GTR, Christoph Gugelmann, founder and CEO of Tradeteq, explains the motivation behind the initiative: “If you think in terms of the structured credit world, there is a market for any bank product out there other than trade finance. You can purchase mortgage-backed securities, credit card debt, auto loans, anything which a bank provides, right now, this second. You cannot do this today with trade finance. But now that trade finance is being more digitalised, there is no reason why that asset class should not be available.”
While trade finance has traditionally been a business for banks only, it presents a compelling multi-trillion dollar investment opportunity for institutional investors seeking sources of attractive risk-adjusted returns with low correlation to stocks or bonds.
“Alternative investors are looking at this as a huge market play for them, if they can crack it,” said Surath Sengupta, global head of trade portfolio management at HSBC, speaking at a media briefing last week.
HSBC itself distributed around US$20bn assets in 2018, up from US$2bn in 2015, but according to Sengupta, alternative investors such as funds, insurance companies and family offices accounted for only 10% of the investments.
“Alternative investors don’t really have the infrastructure to understand and service trade finance,” he said. “Banks have built this over many years. The alternative investors want to come in to a standardised format where they can just look at one risk, understand that risk and buy that risk. They want it in a very standard format, whereas trade finance is very non-standard. What is receivables finance? What is a letter of credit? You have to make it so standard and so simple for them, only then will they find this attractive.”
This is the challenge the TFD Initiative will address. The banks will work together to create common data standards and definitions for global trade finance asset distribution in order to enhance operational efficiency and improve risk management.
In addition to the 14 member banks, the ICC UK and the International Trade and Forfaiting Association (ITFA) have joined as observers.
“The practical work which this initiative is doing is to create proofs of concepts and as quickly as possible go into production around the existing Tradeteq technology,” Tradeteq’s Gugelmann says. “We are providing the solution – the repackaging infrastructure, documentation, data analytics – and now the industry is figuring out if we are missing something. Are there processes which needs to be defined, does the language need to be changed? They will create a market such that if an investor walks in the door of any of these banks, they can expect to have a similar type of reporting, a similar type of legal language of any notes that they purchase, and a similar user experience.”
He adds that Tradeteq already has proofs of concepts in progress with seven of the banks, while other members are still “on the sidelines” and are evaluating the Tradeteq product.
The initiative is mainly focusing on open account trade finance, initially payables and receivables. Gugelmann expects that within the next six months, Tradeteq will be ready to commercially implement its solution with the first banks.
Meanwhile, banks participating in the TFD Initiative are optimistic that the project can drive growth in the trade finance market globally.
“If you look at the term loans market, for example, around the late 1990s is when non-bank investors entered the market, and in 15 years it grew by more than 300%,” says HSBC’s Sengupta. “That’s the exponential growth that happens when you have other liquidity sources come in. It drives transparency, standardisation, etc. That is the moment that is waiting to happen in the trade finance market as well.”
While HSBC is working with Tradeteq on the TFD Initiative, Sengupta emphasises that there “is no particular bias at this stage”, adding that HSBC is talking to “a whole range” of fintech companies working in this space. One of them is CCRM, a platform that like Tradeteq facilitates the buying and selling debt instruments, but is more focused on bank-to-bank distribution.