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Rumour has it that the elves start making toys for next Christmas almost immediately after Santa returns from his magical trip around the world each December.

With an estimated 2 billion children in the world, the elves need to produce around 5.5 million toys every single day of the year just to have enough for every child to find one under their tree on Christmas morning.

At the International Trade Forfaiting Association’s (ITFA) 2024 Christmas party, Trade Finance Global (TFG) spoke with Sean Edwards, Chairman of ITFA, and Dhiresh Dave, Chief Legal Officer and Managing Director – Legal, Compliance and Governance at Falcon Group, to discuss a financing tool that might come in handy for Saint Nicholas: inventory finance.

Filling the inventory finance gap

For businesses, that same bursting warehouse as Santa’s at the North Pole represents not only a logistical puzzle but also a financial one. How can these goods be funded without locking up precious capital? 

That’s where inventory finance comes into play. 

Inventory finance is a financial tool that helps businesses fund goods in the production or storage stages, bridging the gap between supplier payments and sales receipts. It enables companies to manage inventory without tying up working capital, ensuring operations run smoothly and supply chains remain resilient.

Dave said, “There’s a whole range. From the simplest end being the typical loans or repos to the other end of the spectrum, which is bespoke solutions where someone like Falcon would slip into a supply chain and own goods where you need them for when you need them.”

The result is a way for businesses to adapt to the inventory requirements of a post-COVID world.

The post-COVID wake-up call: warehouse disruption, just in case, holding extra inventory

During the pandemic, factories ground to a halt, shipping delays stretched endlessly, and businesses learned hard lessons about vulnerability. Suddenly, just-in-time supply chains didn’t feel so smart anymore, and the idea of buffer inventory went from being a luxury to a necessity almost overnight. Companies needed to keep their operations running, no matter the disruptions.

Dave said, “The interest in inventory really piqued post-COVID, as people were interested in developing a stronger supply chain, and so resilience was initially the driver. How can we stop this from happening again?”

But keeping extra stock can be expensive. It ties up capital and strains resources, which is why so many businesses have turned to inventory finance. With it, they found a way to hold the necessary buffers without breaking the bank. 

Edwards said, “The underlying problem that we’re trying to solve here is the ownership of inventory and the operational issues about managing that and dealing with that inventory.”

This shift has also created new opportunities. Bulk buying from suppliers at a discount became a feasible option with the right financing in place. Consider that a typical motor vehicle can contain up to 25,000 component parts; bringing this material together creates an intricate and sprawling supply chain. Similar industries to automotive, like tech, have embraced this approach. 

Why banks can’t handle inventory alone

Banks are great at handling numbers on paper, but when it comes to dealing with physical goods, they’re out of their depth.  

Edwards said, “I remember years ago, we had to take possession of a warehouse full of cocoa beans. That was not a happy experience. Banks are not very good at doing that. All of that practical management is usually dealt with by an intermediary, and in many cases, banks can’t do it anyway for legal reasons.”

This is where non-bank entities step in. These players have the specialised expertise to manage inventory and supply chain logistics. Acting as intermediaries, they bridge the financial and operational worlds, letting companies focus on their goals without worrying about the details of inventory. These types of non-bank entities can add value for clients by providing support on both the financial and physical dimensions.

Dave said, “When you’re stepping into a client supply chain, the risk to them of you not performing is that the entire manufacturing chain goes down. If you don’t perform properly, they don’t get the parts they need to sell their own product. The upside is phenomenal, but the downside is great as well.”

Non-banks are often better suited to balance these risks, providing reliability and expertise where it’s most needed. 

The future of inventory finance

Inventory finance is a solution for today’s problems and tomorrow’s challenges, but it may still have a lot of room to grow. The market has grown 40% between 2018 and 2023, and is estimated to grow at a CAGR of 10.5% from 2024 to 2033, from $205.7 billion to $558.7 billion.

Dave said, “[The inventory finance market] is still very much in its infancy, given that the interest in it has been driven by supply chain disruption. In current times, the only thing that is certain is uncertainty when it comes to global trade, and a solution to ensure that you have the inventory where you need it and when you need it is something that corporates cannot afford not to have in their toolkit.”

The next step is scaling these solutions. For that, banks and non-banks will need to find common ground. Banks prefer structures that feel familiar, while non-banks push the boundaries with innovative approaches. As these partnerships evolve, inventory finance will likely become more refined and accessible to a broader range of industries.

Awareness is also key. Many organisations still don’t realise the benefits inventory finance can bring. Success stories and growing adoption will help spread the word. Competition among providers will encourage new ideas, making these solutions even more effective over time.

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By addressing the inventory gap, companies can face challenges head-on, keeping their operations steady and their goals within reach. In the aftermath of the pandemic, flexibility and adaptability have become cornerstones of success. and inventory finance delivers both. 

With banks and non-banks working together to refine these solutions, the future for businesses ready to embrace this powerful tool looks as bright as a glowing red nose on a foggy Christmas Eve.

The post PODCAST | Inventory finance: A stocking filler for 2024? appeared first on Trade Finance Global.

In a quickfire session at the 50th Annual Trade and Forfaiting Conference held at ITFA Cyprus, TFG’s Deepesh Patel spoke with Sean Edwards, Chairman of the International Trade and Forfaiting Association (ITFA), about some of the key themes emerging throughout the conference.

1. Demystifying trade finance as an asset class 

One of the central topics was the effort to further establish trade finance as an attractive and accessible asset class, particularly for non-traditional investors. 

Edwards noted that while trade finance can offer an uncorrelated source of returns, educating investors on the nuances of products like supply chain finance and letters of credit remains a challenge.

To address this, ITFA has recently published a trio of guides—one on securitisation, one on upcoming documentation called “Rules of the Game,” and one on what investors are looking for.

These aim to provide clarity on the documentation, structures, and investor perspectives in the trade finance space. Edwards emphasised the importance of these educational initiatives to broaden participation and liquidity in the sector.

2. Sustainability: Navigating the regulatory landscape 

Sustainability has been a key priority for ITFA, with the association focused on assisting its member banks in navigating the evolving regulatory environment around ESG reporting. But the fundamental question is, what’s changed?

“In a way,” said Edwards in response, “nothing has changed and everything has changed. There is a lot more legislation, and regulation, and we’re trying to help our members get to grips with that.”

Edwards acknowledged the lack of homogeneity in sustainability metrics, which has created uncertainty for both banks and regulators. “There’s so much regulation around, that sometimes even the regulators don’t know what they want the banks to report on.”

To address this, ITFA has convened a working group of a dozen banks to develop common reporting standards, providing a collaborative platform for the industry to align on best practices. This initiative, led by ITFA’s Audit Council, seeks to bridge the gap between regulatory expectations and the practical implementation of sustainability measures.

3. Digitalisation: Building the “digital archipelago”

Discussing the progress in digitalisation, Edwards described the industry’s transition as a shift from “digital islands” to a more interconnected “digital archipelago”. While there has been steady progress in the adoption of digital trade instruments and platforms, the challenge remains in seamlessly integrating these disparate systems into a cohesive ecosystem.

Edwards noted that the legal framework supporting digital trade has improved, but conservative mindsets and the need to update legacy systems continue to slow the pace of transformation.

However, he remains optimistic, stating that the “road ahead” is clear, even if the industry is still “on a bicycle rather than a Ferrari”.

4. Advocacy for trade credit insurance 

ITFA has been actively advocating for the recognition of trade credit insurance in the regulatory landscape, particularly around the upcoming Basel IV framework. 

Edwards said, “If banks can get the capital relief as well as the credit relief, then that obviously makes the product a lot more useful.” He emphasised the importance of both types of relief being provided by trade credit insurance and being accounted for in the new regulations.

Additionally, ITFA has observed a growing interest in portfolio-level insurance solutions, which leverage technology to manage larger pools of receivables rather than relying solely on single-name risk coverage.

5. Originate-to-distribute: expanding the investor base 

ITFA has been key in focusing on the need to distribute trade finance assets beyond the traditional bank-to-bank model. Edwards highlighted the importance of engaging with non-bank investors, such as insurance companies, funds, and sovereign wealth funds, to diversify the source of liquidity in the market.

“Changes are making things more expensive,” he explained. “So it’s much more important to distribute risk. But obviously, if we’re distributing it to other banks who’ve got the same problems as us, we’re going to find limited appetite.”

This underscored the need to onboard new investor classes to the trade finance ecosystem.

6. Looking ahead: The 51st ITFA Conference in Singapore 

As the 50th ITFA conference comes to a close, Edwards announced that the 51st annual conference will be held in Singapore, highlighting the association’s commitment to maintaining a global footprint and providing a platform for the industry to convene and address the evolving landscape of trade finance.

It’s essential to document the varied themes which emerged from the 50th annual conference, as the industry’s dynamic nature means that, come the 51st annual conference, these six topics will be almost unrecognisable.

The post VIDEO | ITFA Cyprus: The 6 hottest topics in trade and supply chain finance right now appeared first on Trade Finance Global.

At the 49^th Annual Trade and Forfaiting Conference held at ITFA Abu Dhabi, TFG’s Deepesh Patel spoke with Sean Edwards, Chairman of the International Trade and Forfaiting Association (ITFA), about some of the key themes emerging throughout the conference in a quickfire session. 

Sustainability: A key topic for ITFA 

Sustainability is a priority for ITFA but is approached from a slightly different angle compared to other trade associations. ITFA’s focus is on assisting banks’ efforts in reporting to regulators. 

Edwards pointed out that, “The current state of the dialogue between the regulators and the regulated is not great.” 

Uncertainty still remains, particularly for European regulators, regarding how exactly to monitor the space. 

Currently, there is a lack of standardised measures for sustainability. There is no clear measure of how sustainable a bank is.

ITFA firstly attempts to promote this necessary dialogue, thereafter also seeking to produce data in order to validate the reporting standards that are going to be produced. According to Edwards, this is a priority project for ITFA in the year ahead. 

Trade credit insurance: Trends that will shape the future 

ITFA is very active on the lobbying and advocacy front for trade credit insurance. Important discussions were held at the conference regarding the relationship between Basel IV and trade credit insurance. 

These conversations are important, as a recent survey conducted by ITFA indicated a substantial increase in the use of trade credit insurance. 

Edwards said, “It is very often a silent partner in trade finance, but it’s incredibly important.” 

Whether it is termed “non-payment insurance” or “trade credit insurance”, it is, according to Edwards, “a very important partner” for success in the sector. 

According to Edwards, the new Basel regulations do not recognise specific important aspects of insurance, such as “they don’t recognise that policyholders have got a privileged position treating insurers as corporates rather than financial institutions.”

ITFA has achieved recent success in this regard in its advocacy in Europe through the insertion of the new CRR Article 506 mandating the European Banking Authority (EBA) to investigate the impact on credit insurance. 

This would be the subject of a forthcoming report to determine whether there should be differential treatment accorded to insurers. 

Digitalisation: Distribution and new actors

When it comes to digitalisation, ITFA has seen one significant trend recently: distribution.

Edwards said, “So, firstly, it’s about creating the digital instruments that are easy to distribute and that are attractive to non-bank investors.” 

The ITFA Trade Finance Investment Ecosystem (ITFIE) was formed based on the recognition that non-bank investors wanting to buy trade assets often face significant obstacles spanning issues such as education, documentation, and the ability to access ratings. 

In addition to ITFIE, ITFA organised the Trade and Investment Finance Forum. The aim was to engage non-bank investors, understand their needs, and explore ways to support their objectives. 

This would enable banks to broaden their asset distribution beyond just other banks.

Edwards noted the status quo situation was becoming an “ever-decreasing closed loop” and required changes to address one of the causes of the increasing trade finance gap. 

Edwards said, “We need new blood in there, and that’s what we [ITFA] are trying to do.”

Reducing the trade finance gap: Actionable efforts that can be made 

Addressing the trade finance gap is another aspect related to the matter of bringing new investors into the space. 

ITFA is looking to make trade instruments more attractive to non-bank investors. One instrument for doing so is through digital promissory notes and bills of exchange. 

Relatedly, as such mechanisms reduce the costs of trade finance through growing digitalisation, along with an increasingly liquid secondary market, the sector would be better placed to begin addressing the trade finance gap, now standing at approximately $2.5 trillion. 

Edwards said, “It won’t be the end…but it will be the beginning of the end, we hope…”

Partnerships with multilateral lending institutions 

According to Edwards, communicating key information about the sector and serving educational purposes in collaboration with multilaterals is critical. This communication is key to working collaboratively with certain emerging markets.

ITFA is currently working on the Swift Loan, a simple loan format widely used in Africa. ITFA is seeking to standardise it, making it more easily understandable and increasing liquidity availability in that market. 

Partnering with multilaterals to assist in conveying messages related to these efforts is a crucial next step. 

Edwards said, “I hope it’s going to be mutually beneficial…it’s an open door both ways.” 

Trade dynamics in the MENA region 

ITFA has a MENA Regional Committee, which hosted a session with Etihad Credit Insurance (ECI) and the Abu Dhabi Export Office (ADEX). 

More broadly, ITFA has noticed that the region is particularly interested in digital negotiable instruments. 

ITFA had a partnership with the Abu Dhabi Global Market (ADGM) financial centre and would shortly sign an MoU together looking at facilitation and encouragement of digital trade. 

Edwards said this was an area where “we [ITFA] have the expertise and they [ADGM] have the clout.” 

Furthermore, Edwards felt that the digitalisation of trade was an area where ITFA is “uniquely placed to deliver [on].”

The key themes that can be drawn from the 49^th Annual Trade and Forfaiting Conference held at ITFA Abu Dhabi indicate that the transition towards a greener, more accessible, and digital trade future is swiftly progressing. 

Strategic partnerships to increase access in the sector will be key to driving future progress in key priorities such as net zero and reducing the trade finance gap. 

The post VIDEO | ITFA Abu Dhabi quickfire: 6 key updates in 6 minutes appeared first on Trade Finance Global.

Just about six months ago, Trade Finance Global reached out to a variety of trade finance experts to help answer some questions we had about the industry. Like always, our friends across the industry came through and provided us with some detailed thoughts on the ins and outs of the trade finance world. 

Were they right? Were they wrong? And what will happen in the remainder of 2023? We reached out to our friends again, and they generously gave a post-mortem on their bold predictions.

Want to see Sean Edwards’ predictions in January? Read here

There’s no more ducking and hiding: I am being called to account for the predictions I made to the good readers of TFG earlier this year. Like a doctor called before the Medical Review Board to defend his diagnosis, did I get it right or is the patient sicklier than expected? Worse, are they dead? 

Unlike most medical practitioners, whose patients face a binary outcome, I can take comfort from a greater degree of resilience and the see-sawing volatility which allows me to be right depending on what day of the week it is. 

Generally, I have been right in assuming the benign environment for trade finance, as opposed to trade itself, would remain. Trading remains solid, and there is evidence of, modest, upwards increases in margins despite commodity prices coming off the boil.

Here, I was either slightly over-confident or got my timing wrong. The environment for crude oil has been less rewarding for the producers with the OPEC+ cuts engendering only a very short-lived increase now in reverse.  Metals processes have been subdued, but nowhere have they fallen off a cliff. 

On gas, Europe has benefitted from clement weather conditions and, to its credit, has both accelerated an improvement in the infrastructure required for alternative supplies (LNG from the US and Qatar) and the structural shift away from gas. Although I identified this as a factor, the speed at which this is happening is a pleasant surprise. 

If there was no great reset in prices and demand following what was perceived as a muted re-opening of China, neither were expectations that greater things could lie ahead. Growth in global commodities and, to a degree, goods trade is largely hooked to the Chinese chariot. 

When that falters, we all take a stumble. The resolution of this issue is not just a question of economics, however, with much depending on finding a new political consensus. Given the weight of China in global GDP, even baby steps will help, and I don’t rule out political signaling through trade measures. 

Demand, especially in the US, remains lacklustre as the central banks fight against inflation in the advanced economies with rate hikes.

But, as with China, this factor also gives hope for future growth with most forecasters predicting an end to hikes by Q4 2023 or Q1 2024.

So I maintain my largely benign view and will take a rain cheque on GDP whilst trade financiers remain relatively satisfied.

As before, I will finish with trade digitisation. Since I last wrote, we saw the demise of Marco Polo (which has survived as a mono-product company and a ghost of its former self) and the end of a big vision for trade digitalisation. 

Despite this, I see no loss of appetite to digitise amongst the bigger banks. The build-out is more complicated and fragmented, with far more limited choices for holistic replacement, but, conversely, smaller players are re-invigorated by the opening up of more competitive space. So, timing has taken a wobble, but the direction of travel remains as clear as before. 

The post Looking back: A review of trade finance predictions in 2023 appeared first on Trade Finance Global.

This past week, Trade Finance Global (TFG) stopped by the inaugural ITFA and BCR: Trade & Investment Forum 2023 to learn more about making trade an investible asset class.

In mid-2022, ITFA released their “Whitepaper on developing a Practitioners Guide to making Trade an Investible Asset Class”. ITFA’s whitepaper discusses five key points around trade as an asset class:

• Lack of Standardisation
• Legal and Regulatory Landscape
• Lack of Market Infrastructure / Industry Standard Practices
• Speaking the Same Language
• Supporting Sustainable Trade Finance
• Reputation of the Trade Finance Asset Class
• Other Barriers to Entry

Now, ITFA and BCR have partnered to break down the confusion and misconceptions on these topics.

At the Trade & Investment Forum, Michael Bickers, managing director of BCR, and Sean Edwards, chairman of ITFA, sat down to discuss making trade an investible asset, the move to digitisation, and the legal and regulatory frameworks behind all of this.

A new asset for a new class of investors

Interest in making trade an investible asset is at an all-time high, and not just from traditional banks, funds and investors. The 2023 economic environment is becoming increasingly difficult, with rapidly rising interest rates, supply chain issues, and the collapse of we.trade, Marco Polo, and SVB.

This challenging economic period has led to a demand for new investments. As the number of new players enter the market, there needs to be a coordinated effort to educate everyone.

Edwards said, “What we find today is a lot of people who are trade curious. Some know a lot about it, some know very little. Today was about explaining what trade assets are, what the opportunities are and what needs to be done to actually make that attractive for those investors.”

Importantly, there needs to be dialogue between the traditional players in trade finance, like larger banks and corporates, and the new entries. To facilitate real progress, Edwards says that “we need to have a translator” between the two groups.

Simplification and standardisation: moving in the right direction

Trade finance tools are some of the most important and most used instruments in the world. The WTO estimates that 80% of international trade uses trade finance, and the global trade finance market is valued at $8 trillion. 

However, there is still a perceived barrier to entry because of the complexity of the tools. Edwards talks about this idea, saying, “I think a lot of the investors are being put off by the apparent complexity of trade. Anybody who’s been in trade for a long time will say, well, actually, it’s really quite simple.” 

Breaking down these barriers was a major reason for creating the first ITFA and BCR Trade & Investment Forum. Defining and demystifying trade finance instruments, specifically newer trade technology, is the first step to widespread use and adoption. 

A uniform set of rules is also a major catalyst and the next step for further adoption. The UK is going in the right direction, as the Electronic Trade Documents Bill has passed Parliament. It is important to remember, as Edwards points out, laws don’t create markets, they simply provide a framework and enable the market to be created. 

But there is progress in more widespread adoption. According to Edwards, Lloyds and Metcor are just two examples of ITFA members who are currently issuing digital negotiable instruments (DNIs) or electronic payment instruments (EPUs). 

“One of the lessons we’ve seen with the current problems of digitalisation is that there is not resistance but there’s inertia to adopting digitalisation.

It’s not going to [happen] overnight. But, I’ve spoken to major banks in France, for example, they said they love these types of [digital] instruments.”

Edwards is optimistic about the changes happening in electronic trade, and believes that the ITFA guides will be instrumental in creating a more simplified understanding of these new tools.

Digital progress? Only time will tell

As the past few years have shown, the world changes rapidly, and flexibility is key. While there is no telling what state the global economy, or trade industry will be in by 2024, Edwards believes that the world will have more digital legislation and increased usage of digital tools. 

Since 2019, Bahrain, Singapore and the Abu Dhabi Global Markets have adopted MLETR, and Edwards thinks that more countries will start drafting digital legislation. As the legislation becomes more permissive, more banks will start to use all of the tools available to them.

For many years, there has been endless discussion about the move to digitisation, but there finally is tangible movement in the trade finance industry.

As these tools become more popular, Edwards believes that it will create a snowball effect. Edwards said, “The technology itself is there, it exists, it’s pretty generic. And as soon as people see that market, I think we’ll get a lot more competition in the offering of the tech providers.

So I think by twelve months we’ll have got really way beyond the proof of concept. We’ll have got to real use cases and it will have got to huge scale.”

The post The outlook for trade and investment in 2023 – how the market is changing for trade assets appeared first on Trade Finance Global.

In TFG’s conversations with industry experts, we have learned quite a lot about trade volumes and commodities, trade technology, and trade credit insurance. While there is plenty of uncertainty regarding the global outlook in 2023, it is clear that there are many areas of optimism for international trade.

To start off our 2023 predictions, TFG spoke with Sean Edwards, the chairman of ITFA, who provided his outlook regarding the energy crisis, trade digitisation, and much more.

The time of year has come again to practise the unscientific art of predicting the year ahead. When I wrote last year, I gave myself a massive hedge – that all depended on there being no war in Europe. 

Sadly, this has happened and, whilst it is not the root cause of all the turmoil of this year, it has massively shaped global events. My generally optimistic view on 2022 seemed to be on the road to successful validation – with improvements in supply chains, for example – until that fateful February 24. 

Since then, inflation has been the main concern of both policy makers and the public with rapid increases in the price of energy and food hitting households, making control of inflation a target of governments. But against this I still believe that, on a possibly more selective basis, trade finance has reasons to be cheerful in 2023.

Firstly, banks have strong balance sheets and capital positions as they enter the new year. Of course, that doesn’t mean it will all go into trade, but as recent BGC/ICC figures show, trade continues to be a safe asset class with losses having decreased during the second pandemic year. 

Arguably, this is because of government support but, as governments face the demands of their voters to ease cost of living pressures mentioned above, there is good reason to think they will need to continue with the same policies. 

This masks another trend though, namely that whilst trade volumes might not shrink significantly despite a slowdown in global GDP, a lot of the capacity has been, and will continue to be, taken up by inflated commodity prices. Whilst energy prices have come off the boil, we should not expect them to reduce substantially in 2023. 

Europe’s transition away from Russian dependence will underpin natural gas prices. That prices did not rise more is testament to the swift action taken in Europe to secure supplies for the coming winter which reduced upwards future pressure, but left a floor to the price. 

Crude oil prices will also remain at their current elevated levels for some time in my opinion albeit with less volatility. The war in Ukraine is unlikely to come to an unequivocal end next year with a thoroughly beaten enemy, à la World War Two, and so current stresses on prices will remain. 

Any downward pressure on prices from the oil cap is unlikely too. Just as energy has found a new supply chain in Europe, Russian oil continues to find a market outside of sanctions. 

The effect of energy scarcity on the environmental, social and governance (ESG) agenda is interesting, with less pressure to phase out some fossil fuels such as coal. I expect this to be only a temporary reprieve though as regulators and governments, in the Western world at least, will not stop their policy of transformation. 

The overall march of change has not yet reached its watershed moment, beyond which incremental change will be difficult, but fossil fuels, especially the most polluting ones, have their cards marked. 

Metals prices have been anaemic this year but there was a rebound in some prices, steel and copper amongst them. More is possible next year if China regains some of its lost momentum. The political will seems to be there, and all eyes are on how China will manage its new openness to COVID-19. 

Expectations that [China will bounce back] are pricing in increases for both metals. This should help producers in Africa, for example, but local challenges from sovereign over-indebtedness to political instability may overshadow what would otherwise be positive news. 

Staying with pricing, but moving away from commodities, as I mentioned above, I think that non-commodity producers, especially in emerging markets (EMs), will face higher pricing from their banks. This will feed through directly and indirectly as liquidity in the FI lending markets for EMs suffers from both a drop in liquidity and a re-pricing of risk-induced margins. 

Finally, my favourite subject: trade digitisation. 2022 saw some notable bad news: the closing down of we.trade, Serai, and TradeLens due to a lack of scale and commercial adoption, leaving their backers unwilling to bankroll into the unpredictable future. 

But set against this are some successes. Komgo, which has pursued a cautious approach to expansion to date, and served it well in the commodity trader community. Komgo pivoted toward the larger trade finance market by buying GTC, a multi-bank portal provider for corporates. 

And let’s shoot down the idea that the failure of blockchain to immediately revolutionise the market and boil the ocean is somehow proof that trade digitisation won’t work. 

Blockchain will always have a place as a tool and a technology, but it never had the power to overcome some of the challenges the industry always faced such as inertia, organisational change cycles, and the cost of change. 

Digitisation is inevitable, but it is not always urgent and it will come from a multitude of small successes.

Make sure to join TFG on our journey in 2023 to see if these predictions come true! Follow our newsletter and LinkedIn to stay on top of breaking news and expert analysis.

The post Global trade finance – reasons to be hopeful in 2023 appeared first on Trade Finance Global.

To learn more about the regulatory changes and reforms taking place in the trade finance industry, Trade Finance Global (TFG) interviewed Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA).

According to Edwards, reducing the record-high $1.7 trillion global trade finance gap will be amongst the most important considerations facing the trade finance industry in 2023. The trade finance sector is developing several tools to address this issue.

Updates on the Electronic Trade Documents Bill

Positive reforms to the industry’s legal framework are set to usher in a level playing field with more seamless digitisation procedures.

Edwards believes that it is important to reform electronic trade finance rules, as 80% of trade documentation globally is governed by English law.

There are currently a number of opportunities in trade document digitisation, with advancements in digital financial instruments, specifically bills of lading, bills of exchange, and promissory notes.

These instruments have long been around in digital formats, but the trade system has had limitations in relying on an outdated system.

The Electronic Trade Documents Bill was introduced in the UK’s House of Lords on 12 October, and the bill has now completed its second reading as part of an expedited procedure.

Next, the bill will go to the House of Commons, and ITFA are very confident that it will become law in early 2023.

ITFA and the ICC United Kingdom worked closely with the Law Commission, a statutory independent body in the UK, to bring the bill to fruition.

Adopting the Model Law for Electronic Transferable Records (MLETR)

According to Edwards, the adoption of the Model Law for Electronic Transferable Records (MLETR), currently used in Singapore and Abu Dhabi Global Market (ADGM), has been another big boost for the industry. 

The United Nations Commission on International Trade Law (UNCITRAL) developed MLETR to provide a framework to facilitate the application of digital documents as negotiable instruments in place of physical hard-copies.

Edwards believes that the new e-commerce and free trade agreements are also gathering momentum. “There is testing at the moment of the UK-Singapore e-commerce chapter using actual use cases.”

Blockchain, digitisation and digitalisation

The Asian Development Bank (ADB) released a report in October 2021 that found the global trade finance gap reached a record $1.7 trillion in 2020, a 15% increase from 2018.

Edwards believes that digitalisation is the only practical way of eliminating the trade gap. Absent digitalisation, additional incentives, or subsidies, closing the gap will be extremely difficult.

Edwards said, “Digitisation or digitalisation is not just about blockchain. Blockchain has a very potent case for certain areas, but it is not the only thing powering digitalisation.

Cost efficiency is powering digitalisation, and the desire to move down and into the supply chain is a deep tier financing initiative to get to the smaller suppliers to reduce the trade gap.”

Outlook for global trade in 2023

Global trade is significantly impacted by inflation, and trade volumes have recently increased considerably, in large part due to commodity price hikes. 

For trade finance firms, this translates into requests for bigger facilities and more liquidity for commodity traders.

Small- and medium-sized enterprises (SMEs) are uniquely impacted by the rise in commodity and trade finance prices. One way to solve this problem is by increasing liquidity available to SMEs, or through the tokenisation of assets.

Edwards said, “We need to find ways to work [with] SMEs, as they are becoming increasingly pushed to the end of a longer queue.”

To help solve some of these issues, ITFA is working on tokenisation through its Digital Negotiable Instruments (DNI) initiative. Through the DNI, one can digitise “a very simple instrument… for example, a promissory note.” 

Once the instrument is digitised, it can be tokenised and listed on an exchange. This is just one of several promising ways to help SMEs during the increasingly difficult times.

Edwards believes “There’s a lot of interlinked issues here, but there’s definitely interest in [solving these problems].”

The post ITFA’s Sean Edwards’ year in review and predictions for trade finance in 2023 appeared first on Trade Finance Global.

Implicit in this exercise is that the New Year will give birth to an explosive new phenomenon or, equally sensationally, explode an old one.

The problem is, however, that my crystal ball foresees steady evolution, rather than dramatic change. 

With one exception. So, let’s start with that one.

Supply chain goes mainstream 

When The Economist listed its top words of 2021, the phrase “supply chain” featured prominently, but unsurprisingly. 

When the very foundation of Christmas starts to tremble at the prospect of no tinsel and toys, the public takes note of a process that we trade financiers have long held close to our hearts, and even claim to understand.

The supply chain problems the developed world experienced arose largely because of temporary, circumstantial problems – ships blocking canals, too many mariners incapacitated by COVID-19, a shortage of lorry drivers, and so on. 

But what goes down must come up, and it is a safe assumption that the severity of these topical factors will ease, at least relative to where we are now. 

The more difficult and more interesting question to answer is: when?

Euler Hermes, among others, has pointed to a recovery in the second half of the year.

That appears reasonable, as the main physical constraint – the pandemic – still needs to be mastered, not just medically but in terms of popular and political will to accept the virus as endemic.

At some point, the world will find a balance, but this will take some time.  

We should not make the mistake, however, of confusing a physical recovery with a dramatic rebound in world trade.

The cork is being prised out of the bottle, but the genie is still anaemic for various reasons, including a weaker than expected propensity to spend, with no real boost from pent-up demand; or unspent and under-spent funds “saved”  during the pandemic.

Geopolitical tensions are either surging or unresolved. Beyond the very visible events in Europe, another canker remains: the proper place of globalisation in the world economy. 

The invisible hand of competitive advantage that globalisation allows to flourish on a truly massive scale will remain a strong reason for favouring free trade, and some of the reactions to this issue, such as re-shoring and 3D printing, will take time to implement, and might even be reductive in their effect on GDP. 

But this is a story that will run and run.

Digital footsteps out of the pandemic

The notion that the pandemic has accelerated digitisation hypersonically is, taken literally, one of the biggest false positives of the last two years. 

As I never tire of saying, using electronic signatures is not digitisation. But this does not mean that nothing has happened – far from it. 

Multiple obstacles line the path to the digitisation of trade. Some are internal to those who should be its greatest champions – such as banks and financial institutions – and some are external. 

But first, the good news. 

The endorsement by the G7 of a fundamental cornerstone of trade digitisation – legal change in the shape of the adoption of UNCITRAL’s Model Law on Electronic Transferable Records (MLETR) – could be taken up by the incoming German presidency.

Legal change is a necessary but not, in itself, sufficient catalyst for trade digitisation. 

What must happen is commercial development of powerful systems and platforms. 

With some outlying exceptions, the development model for digitisation at this scale has become a partnership between vendors, platform operators, and banks.

Developers do not seek to boil the ocean, and nor are banks going it alone (for the most part). 

This symbiotic approach encourages efficiency and will be the pattern for trade digitisation this year. 

It has yet to happen at scale, but the pioneers – and those with the greatest vested interests – are realising that they have a responsibility to fund and develop the network.

With competition taking a temporary backseat to allyship, encouraging progress is being made, but this will not happen overnight. 

If 2021 was the year of the Great Resignation, then maybe 2022 will become the year of the Great Integration. 

Customer demand is the other great catalyst, and there also seems to be promising movement. 

As MLETR adoption – or, in the UK, MLETR alignment – starts to become widespread, customers – including commodity traders – are realising that digitisation of ubiquitous instruments such as bills of lading, bills of exchange, and promissory notes is no longer a pipe dream, and are calling for solutions – the sweetest song of all.

ITFA, for example, has successfully worked with Abu Dhabi Global Market (ADGM) to smooth adoption in that jurisdiction, and is now working with the Dubai Financial Services Authority (DFSA) to the same end.

The noble cause of climate and finance

Will ESG save the planet, or is it just “blah, blah, blah”, as one famous climate change activist would have it?

For banks and other lenders, the reality is not about phasing down or phasing out, but phasing in. 

It’s worth pondering just how significant a paradigm shift that is compared to a year ago. 

All financial services firms must now have policies and processes to deal with “green finance”. 

Critics should appreciate this gargantuan step, even if it has not, and could not, immediately solve climate change. 

It is true that there is currently more stick than carrot, however. 

Legislation has already obliged the financial services sector to embed ESG into credit decision-taking.

In the EU, for example, this comes in the form of disclosure rules like the Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive.

This has put banks and lenders squarely, and some would say unfairly, into the firing line. 

If banks are to be among the chief vectors in reversing climate change, then it is fair that they be rewarded for doing this.

Expect, therefore, an increased focus and advocacy on preferential treatment for ESG portfolios (which might not otherwise be profitable). 

One way this could be achieved is through better capital treatment under the Basel rules. 

This is a complex and politically sensitive area, raising concerns relating to bank stability. 

At the popular level, there will also be resistance to rewarding companies that many perceive as perpetrators, by having financed environmentally damaging activity in the first place. 

This will not be resolved in 2022, but I anticipate that discussions on the proper incentivisation will become a part of the landscape.  

As businesses negotiate their way through the thicket of competing standards, there will be more focus on ensuring proper validation and assessment of ESG credentials.

The UN Sustainable Development Goals seem to be the frontrunner in this regard, but it’s still a race. 

The bogeyman of greenwashing has loomed heavily in discussions around ESG from the earliest days, but often only as a toothless and slightly moralistic warning.

This will change. Standards boards such as the International Financial Reporting Standards (IFRS) Foundation, for example, have started to look into producing accounting-type standards.

However, unlike a balance sheet, measurement of ESG data is a more difficult process, which has to take into account the counterbalancing and sometimes mutually cancelling effects of ESG initiatives. 

Here, I see technology playing a big part, not just in track and trace, but in verifying the authenticity of data. 

ITFA has been working with some promising initiatives looking at both upstream and downstream data.

The speed with which all these phenomena progress will, of course, depend on the overall level of world trade.

Early estimates from the WTO and others are for an increase of around 5%-6%, but there is much uncertainty and I foresee no explosive growth. It will be enough that we are left to enjoy a stable recovery, and that is largely dependent on geopolitical factors – on which I will make no foolish predictions.

Read our latest issue of Trade Finance Talks, Spring 2022

Read here

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Global trade volumes vs trade finance lending levels

Despite global trade volumes having almost rebounded to pre-pandemic levels, one of the biggest stories of the pandemic is that trade finance lending hasn’t bounced back in the same way, and is in fact lagging behind quite significantly.

In 2020, the total volume of global trade dropped about 10%, but the total volume of trade finance dropped a lot more – all the way to 2016-17 levels.

“I think it’s partly the nervousness of the banks, and that it’s different across different products,” said Edwards.

“As we expected, supply chain finance actually ramped up quite a lot, and I know that from my own experience at SMBC [Sumitomo Mitsui Banking Corporation].”

According to Edwards, banks continue to be cautious in 2020 and 2021, and were waiting to see if there were many casualties of the pandemic – an outcome that massive government support was able to offset.

“Banks did hold back, and they funded key customers, but not the full range of customers,” said Edwards.

”And obviously that lag, and that shortfall for those other customers is affecting the figures. But it’s getting back to where it was pretty quickly.”

Read this: BREAKING: Global trade finance gap hits new all-time high of $1.7tn due to COVID-19

Supply chain finance – A tarnished reputation? 

Among the parties that Edwards considers unscathed from the pandemic is supply chain finance.

Edwards said supply chain finance has not been impacted by the pandemic, and most certainly hasn’t had its reputation tarnished through its response, despite the collapse of Greensill Capital.

“Speaking from personal experience, the bit of Greensill that actually was proper supply chain finance performed very well, as it should,” said Edwards. 

“And the drop in funding, and the potential vacuum due to the withdrawal of Greensill, was actually filled very quickly by the banks and other platforms. 

Edwards added that supply chain finance has also come out unscathed following several UK parliamentary committee inquiries into the Greensill collapse, which concluded that there is no need to further regulate supply chain finance. 

“Remember that banks themselves, of course, are regulated as suppliers separately,” said Edwards. “But there was no need to regulate the product anymore, so that’s good. 

“There was also a big vote of confidence in trade credit insurance, which underpinned some of the Greensill portfolio and got caught up in the mud – that’s performed well too.”

The LIBOR transition for trade finance

Asked if bankers are pulling their hair out over the LIBOR transition in trade finance, Edwards said it is undoubtedly a huge and expensive project, but it is no longer the existential threat it was once considered to be.

“We’re now in a position where we’ve got the right replacements for LIBOR, so the LIBOR transition is a much smaller deal than I think many people thought it would be,” said Edwards, 

On the topic of LIBOR, Edwards also referenced the ‘LIBOR Transition for Trade Finance Hub’ – a collaboration with ITFA and TFG.

“For our members, we are also about to publish some amendments and agreements to deal with the transition from an MRPA perspective,” said Edwards.

Podcast: The LIBOR transition and trade finance

Trade digitisation – Did we digitise trade during the COVID-19 pandemic?

Across industries, the COVID-19 pandemic has been hailed as a catalyst for new digital solutions, in areas where paper and analogue once prevailed.

On this note, Edwards was less sanguine. 

Although the pandemic has led to more widespread use of technologies like electronic signatures – such as DocuSign – Edwards said this doesn’t necessarily amount to a ‘digitisation of trade’.

Podcast: Electronic Documents and English Law: the roadmap to digital trade documents

“There’s certainly an increased focus on proper digitisation, by which I mean platformisation and digitisation of trade documents – something that’s been a big theme of this conference,” said Edwards. 

“But we didn’t achieve that in 2020, nor was there substantially more investment in it.” 

Among the reasons for the funding gap, Edwards explained, is that smaller banks are still waiting on the sidelines to invest. 

“It’s an expensive proposition, and there are a lot of legacy systems in it,” said Edwards. 

“The important thing is though, that digitalisation is on the agenda, and it will probably happen a little bit sooner, but it didn’t happen in 2020.”

ESG and sustainability

Lastly, Edwards was asked about the possibility that the trade finance industry is simply ‘green-washing’ in response to greater calls for action on climate change.

Far from it, as Edwards explained, the problem lies not in green-washing itself, but in the paradox of choice that trade finance companies are now faced with in terms of ways to go green.

“I think we’re at the ‘light green stage,” said Edwards. “So we’re not fully green, and I think part of the reason for that is: When there is so much to choose from, how do you go green? 

“Do you use the UN [United Nations] Sustainable Development Goals? Are you trying to comply with the EU Taxonomy, or the UK Taxonomy we’re about to have?” 

Another hurdle is disclosure agreements, which are a kind of private standard applied to sustainable or ‘ESG’ loans, and which vary from one lender to another.

“One doesn’t really know where to turn, and one doesn’t know what it means to be green yet,” said Edwards. 

“At ITFA we’ve set up an ESG committee to help us navigate our way through that jungle, but again, it’s like digitisation: it’s definitely happening, it’s definitely on the agenda, and it’s definitely going to stay on the agenda. 

“So I don’t think it’s green-washing, but it’s a lighter shade of green for the moment.”

Lies, Damn Lies and Tradetech/ ESG. What’s next for the future of trade finance?

Learn more about the LIBOR transition by visiting ITFA / TFG’s LIBOR hub

Visit hub

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Regulators have long promoted, as a replacement for LIBOR, compounded risk-free rates (RFRs), where the interest rate and amount of interest payable are only known at the end of the interest period. However, in both the UK and the US, regulators have also recognised the need for forward-looking RFRs in sectors such as trade finance. While it is expected that 90% of market transactions will use RFRs compounded in arrears, the need for certainty at the outset of a transaction in the trade finance sector will undoubtedly lead to the use of forward-looking RFRs in loan documentation, as well as for the calculation of discount rates applicable in relation to, for example, receivables financing transactions where the rate must be known to determine the final amount to be paid to the customer.

The guidance note looks at Term SOFR (SOFR is the Secured Overnight Financing Rate), the ARRC recommended RFR term rate available for US dollars, and Term SONIA (SONIA is the Sterling Overnight Index Average) and Term SONIA Reference Rate (TSRR), the RFR term rates for Pounds Sterling, highlighting issues to consider when entering into new transactions, including a reminder on timing for each. The Schedule sets out key facts for each of the RFR term rates for US dollars and Pounds Sterling in turn. This guidance note does not cover RFR term rates for euros in any detail as these are at a much earlier stage in the process of reform.

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