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Navigating through the new regulatory environment was the main talking point of the annual IFA conference held in Vienna this year. Rebecca Spong reports.

Now to adapt to the swathe of new regulations due to hit the market was the key theme of this year’s International Forfaiting Association’s (IFA) conference held in Vienna in September.

Top of the agenda was the impact of Basel III on the trade finance market. The IFA has been one of many industry bodies involved in attempts to persuade the Basel Committee regulators that due to the safe, low-risk nature of trade finance, such assets should be given better capital treatment than what is currently prescribedunder the proposed Basel III regulations.

Earlier this year the IFA, in conjunction with the industry body Baft-IFSA and the ICC Banking Commission, established the ITEC Committee [IFA Technical Experts Committee].

The central aim of the ITEC is to ensure the best possible environment for trade finance, with a strong focus on funded products, which the committee argues is what provides essential liquidity for world trade.

One of the committee’s first tasks was to work with Baft-IFSA and the ICC on developing a set of trade finance definitions that would be presented to the Basel Committee in support of their argument that trade finance is being unfairly treated by the new Basel regulations. These definitions were announced in August and they covered both traditional trade finance and open account products.

Speaking at the IFA conference, members of the ITEC, Silja Calac, head of trade risk management at UniCredit and Paul Coles, director, global trade risk distribution at Bank of America Merrill Lynch, reminded delegates that despite the Basel III regulations having “good intentions”, it can penalise some types of banking activities, such as trade finance, by accident.
They warned delegates that under Basel III, funded trade finance could be treated the same as plain vanilla lending, with no reduction in the risk weighting of trade assets to reflect the low risk nature of trade.

SMEs and corporates in emerging markets would also begin to struggle to access trade finance liquidity, due to the fact their low credit ratings would require banks to make higher capital allocations and drive up the cost of basic trade finance facilities. The ITEC is set to continue its lobbying efforts in the run-up to the Basel Committee’s final presentation of its recommendations to the G-20 in November.

Creating new assets

In the coming year, the trade finance market will also have to contend with new regulatory and legal frameworks that deal with the supplier finance programmes. Interest in supplier finance programmes, ie solutions that leverage on the strong credit rating of the buyer and allow the bank to extend low cost financing to the suppliers, is not particularly new. Many large global banks have pioneered such programmes in recent years.

However, as this supplier finance market grows there is an increasing need to bring more banks in to participate in these programmes, as Anurag Chaudhary, managing director, global head, trade risk distribution, at Citibank explained in his presentation.

He noted that “banks [need] to work as partners since these supplier finance programmes are usually too large for any one bank to manage on an overall basis”. Chaudhary’s talk explored the different possible structures the seller bank – ie the bank that provides the operations, legal and technology and financial platform – could use to sell down supplier finance assets.

Options included an assignment structure, a structure involving the selling of discounted promissory notes and a trust structure where the seller bank declares trust over the account receivable in favour of the participant bank.

The establishment of a workable secondary market for supplier finance will require the development of standard legal bilateral documentation and agreements between buyers, suppliers and the seller bank.

Chaudhary suggested that the creation of underlying master risk participation agreements would make it easier for banks to negotiate documentation. He added that this new asset class could be introduced to alternative participant bank base such as hedge funds, pension funds and insurance companies as a way of tapping into additional funding sources.

Navigating new regulations

Conference delegates also heard the latest developments with the new uniform rules of forfaiting being created by the ICC and the IFA.

Sean Edwards, deputy chairman of the IFA, told GTR that the feedback so far regarding the rules has been “supportive”. He adds: “It’s clear from what we hear that members trust us to produce a viable document.”

SNR Denton partner Geoffrey Wynne also touched on complex legal and regulatory issues surrounding the use of synthetic letter of credit structures. His presentation highlighted the potential pitfalls surrounding such instruments, although he stated that “synthetic transactions are workable in certain circumstances”.

The conference highlighted that the burden of administration costs and regulation for the trade finance market seemingly grows ever heavier.

While the establishment of rules and standard practices could help the trade finance and forfaiting industries grow, there are fears that potentially unfair banking regulation could cause serious damage to the foundations of this market. GTR

KEY THEMES

Herbert Stepic, CEO at Raiffeisen Bank International, heralded strong exports and a return to moderate loan growth in the CEE.

Guo Lixin, head of forfaiting at Bank of China, sees supply chain finance “prospering” in Asia and believes the internationalisation of Rmb is an inevitable long-term trend.

Geoffrey Wynne, partner at SNR Denton, highlights the pitfalls and benefits of using structured and synthetic LC structures.