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A group of 29 banks, insurers, brokers, law firms and industry bodies are working together to release a Basel-compliant trade credit insurance template for bank-supported trade finance programmes.

The project, called the Basel III Think Tank Initiative, has officially been underway since October last year.

It was initiated by brokerage firm Willis Tower Watson and has since been driven by a drafting team that includes an additional eight players: AIG, the Bankers’ Association for Finance and Trade (Baft), Clifford Chance, Markel International, Standard Chartered, Sullivan & Worcester and QBE North America, as well as another major bank that has not been named.

AIG provided the initial template that the drafting group has adapted, and law firms Sullivan & Worcester and Clifford Chance are providing legal guidance as part of the process.

Another 20 participants from across the industry are also part of the initiative and are set to review the drafting group’s work in mid-June. They include banks, insurers and industry associations.

The aim of the Basel III Think Tank Initiative is to release a standardised policy wording that will provide capital relief for banks using short-term trade credit insurance, and that it will become the market standard.

This will help the industry “put the wording to the side and open up capacity for the market”, explains Scott Ettien, trade credit practice leader for North America at Willis Tower Watson, who has spearheaded the initiative.

The use of insurance in trade finance transactions is a common choice for banks looking to increase their risk capacity and obtain capital relief on their transactions. However, today banks use many different policy wordings, meaning they have limited options to syndicate without having to go through long processes of renegotiation.

“We have many bank clients,” says Ettien. “Over the years, a lot of the deals on the supply chain side have been getting bigger and bigger, so the banks are reaching out to participant banks to join their programmes. If you are putting a syndication together, you have to have harmonised wording that all banks and all carriers can agree to.”

That can take time, and the result is that some deals are simply not happening. “An average structured deal might take anywhere between six and 12 months before that deal actually gets drawn down,” says Eric Trijbels, global head of credit insurance at Standard Chartered, who is part of the drafting group. “There are some players we can’t serve because they want to have these deals drawn down in two months. So we are not getting to the table on these.”

According to Ettien, the problem will only become bigger in the future. “We spend all this money and time negotiating policy wording for our individual bank clients, and the bigger these deals are getting the more syndications are going to happen,” he says. “We want to get in front of this. By giving banks and insurers access to an accepted universal and standard wording, it will allow the banks to focus on capacity and pricing and allow the carriers to differentiate themselves with service and ratings rather than on a policy wording nuance.”

 

Similar to Baft MPA

The Basel III Think Tank Initiative will create policy wordings for three jurisdictions: the UK, US and Singapore. Beginning with the UK, the aim is to release the final Basel III-compliant policy in August 2019.

According to Olga Berlinskaya, senior manager for global trade finance sales at AIG, this boilerplate insurance policy wording will create standardisation in a similar way to the Baft master participation agreement (MPA).

First released in 2008, the Baft MPA serves today as the industry standard for secondary market transactions to facilitate the buying and selling of trade finance-related assets. It has been released under both English and New York law, and was revised last year.

According to Baft, the standard has helped reduce the need to carry out much of the expensive and onerous groundwork in ensuring an agreement meets capital rules requirements and other regulatory compliance. This has been critical in enabling banks with strong distribution networks to generate additional financing for clients.

“When the secondary market started to kick off 15 years ago, each and every bank participant in the market used to have their own MPA,” Berlinskaya says. “Then eventually Baft created a template, and one by one, banks started joining the initiative and using it. It makes it so much easier to transact and get things done, and that’s why secondary market volumes are where they are now – in excess of US$100bn.”

She expects the same growth effect as a result of the new trade credit insurance standard. It will not only allow client banks to strike more deals, but also attract newcomer banks that have not previously used the product, she says.

 

Challenges ahead

Bringing so many banks and insurance players together to agree on a policy wording is significant following years of talk in the industry about the need for a standard. In 2016, the International Trade & Forfaiting Association (ITFA) put together a set of guidelines covering the use of non-payment insurance. While this was seen as a step towards improving policy wordings used in insurance documents, the association had at the time decided not to push forward with a prescriptive standardised form.

According to Ettien, there has previously been some resistance in the insurance industry to this form of standardisation because many brokers and carriers consider policy wording as the differentiating factor that can win them clients.

But this mindset seems to be changing. “The fact that so many banks are interested in the initiative and that the legal firms are keen to support it, justifies how much it means to the industry,” says Berlinskaya. “Everyone kept talking – we are now making it happen.”

But there will still be challenges ahead as the drafting group releases the final draft for feedback from the rest of the participating institutions. One challenge is around adoption, explains Trijbels at Standard Chartered. In order for it to work, he says, the standardised policy must be adopted to cover the majority of the bank programmes in the market.

“What you will see is that, in trade finance, there is a lot of policies out there already. A lot of larger clients have their own policies,” he says. “So you may say ‘I now want a standardised wording’, but a lot of these policies are part of larger programmes and heavily negotiated – that’s not easily going to shift. So one thing that we need to start thinking about is how we address the situation where banks get added to a policy that a client already holds.”

At Baft, there is optimism that banks and insurers will see the benefits in adopting the template. Stacey Facter, senior vice-president for trade products at Baft, who is also involved in the new project, expects that over time, just as was the case with the Baft MPA, most of the market will be operating with the standard. The fact that industry players have come this far in agreeing a harmonised policy wording, she adds, is “a big step forward”.

“We’re at the beginning stages and it’s going to take a while to take off. But if it goes the way the MPA went, then we’ll be in a very good place 10 years from now, or even five. Because the MPA has become the industry standard, and each time I travel anywhere in the world, people refer to it. I hope that’s what will happen with this insurance policy – it will make it much easier for the underwriters and the financial institutions. Having all those financial institutions onboard early on, together with the brokers, underwriters and legal firms, will hopefully accelerate adoption,” she says.

Once the template is completed, the Basel III Think Tank Initiative plans to release it via industry associations such as Baft, ITFA and the Association of Trade and Forfaiting in the Americas (ATFA).

While the focus now is on short-term receivables finance, the next step for the group will be to harmonise policies for other trade transactions, Ettien says. “I see a lot of other opportunities to standardise forms for different products, to provide Basel-compliant forms off-the-shelf that have wide acceptance of banks and insurance companies. The next thing we’re going to do, once we finish the short-term trade receivables document, is to move right into projects and loan documents,” he says.