ITFA EMERGING LEADERS – SHORTLISTED PROPOSALS FOR THE TRADE FINANCIER AWARD 2020, Nov 2020

Article by Michel Meylacq and Charlotte Prior – ITFA Emerging Leaders Committee Members

Dear Readers,

This year, an impressive 19 projects were submitted to the ITFA Emerging Leaders Competition, with 5 projects selected as finalists, as well as a special mention project from a senior member.

The rules of the competition are simple: you must be an Emerging Leader, and the project must bring about a significant contribution to the Trade Finance industry. Projects can take any format and are judged on their relevance and quality of content, level of innovation, accessibility, and creativity.

The idea of the competition is to give an opportunity for efforts of young talents of the Trade Finance industry to be recognised, with winners receiving a certificate of achievement and an invitation to attend the ITFA Annual Conference.

Whilst the winner will be announced in the next few weeks, and will feature in the next ITFA Newsletter, the ITFA Emerging Leaders wanted to honour all five shortlisted projects (you can watch the replay of our five finalists presenting their projects during the Emerging Trade Financier Award 2020 Webinar on https://itfa.org/member-area/itfa-webinars/). We hope that this will encourage more Emerging Leaders to take part in the 2021 competition, with encouragement and support from the leaders of our industry.

Our five shortlisted projects this year are (in no particular order!):

1/ DİDEM ERDOĞAN (Assistant Specialist, Turk Eximbank)

Didem Erdoğan, born in Istanbul, Turkey, in 1991, holds a Bachelor’s degree in Economics from Istanbul University and Master’s degree in Information Technology from Sabancı University. She also studied Economics at the Universidad de Valencia, Spain, for 1 year with the Erasmus Exchange program. During her school years, she did several internships at various public institutions, such as The Central Bank of Turkey, Istanbul Stock of Exchange and the Capital Markets Board of Turkey. She began her career at the Turkish Statistical Institute in March 2016 and at the end of the same year, she began to take charge as an Assistant Specialist in Turk Eximbank which is the only official Export Credit Agency in Turkey. In 2020, she was promoted to Specialist by presenting a comprehensive thesis regarding global practices in software export finance and insurance support. She is also a part of the “Women Leaders of the Future” project launched by KAGIDER (Women Entrepreneurs Association of Turkey) which is a non-governmental organization aimed at strengthening women entrepreneurs.

Project: ECA SUPPORT FOR SOFTWARE EXPORTER – STATUS QUO AND SUGGESTIONS FOR THE FUTURE

Didem said: The software industry, which is becoming more and more important with the impact of digitalization, globalization and other transformations, has become a part of daily lives with the Industry 4.0 concept. The ever-marching spread of the internet, the ease of storage, streaming and processing services have all contributed to the further development of the software industry. Nowadays, every item used is made “smart” thanks to software, and the economies of the countries are leaping forward with the successes in this industry.

Moreover, in less than a century the software market has shown a sharp increase by reaching a multi-billion-dollar industry, and even if trade volumes of software are significantly underestimated – because its trade is usually based on the value of physical goods rather than content and is often bundled with computer hardware – while the share of telecommunications services has declined, computer services receipts have reached more than double in value between 2008 and 2018.

In this context, within the growth of international trade of software, in order to understand the Export Credit Agencies’ (ECAs) export credit and insurance support for software sector, I conducted research of 51 ECAs / Development Banks all around the world, and I also conducted a survey where 71 current or potential software exporters participated to accurately identify the needs of the software exporters.

The results of the research showed that whether related to credit or insurance, it was obvious that software export is not sufficiently supported by the ECAs whose main goal it is to contribute their national export volumes. The barriers for supporting software by the ECA’s around the world stem from one fundamental difference: there are no procedures that are appropriate for the different nature of software as an export item. As a solution, I came up with an idea that it is necessary to first establish a standardization in classification and measurement method and then to introduce new solutions in line with the needs of software exporters so that ECAs would be able to easily support software exports, and thanks to this success, many countries will benefit from converting themselves to the information society and the increase in world trade volume.

2/ JULIAN HEAVEN (Vice President – Trade Finance, Scipion Capital)

Before joining the Trade Desk at Scipion Capital in September 2019, Julian held other positions within the industry where he was responsible for structuring, executing, and managing trade finance facilities through their lifecycle. Julian has gained exposure to a wide range of asset classes, geographies, and trade finance products during his professional career and is supported by a Bachelor of Science degree in Economics from the University of York, England.

Project: A GUIDE TO TRADE FINANCE LAW

Julian said: I believe that Trade Finance is a social science which requires as much of an understanding about economics as it does geography and law. For example, take climatology, a subfield of physical geography dedicated to the study of weather patterns. Arguably, understanding this branch of geography is as important as understanding any branch of economics when it comes to analysing soft commodity trades.

The same point is true with respect to the subject of law. As we, as trade financiers, rely on branches of international law to set the basic rules and standards by which we trade, and we invoke branches of municipal law to establish and enforce our interests in those trades at a local level via contract and property law.

I would argue that as trade financiers we are all geographers and makeshifts lawyers as much as we are economists. This is quite an overwhelming realization for new recruits when coupled with the fact that the educational resources around them are depleting. ITFA has identified that 62% of trade financiers have over 10 years industry experience, which makes the sector incredibly top heavy in terms of knowledge and susceptible to a catastrophic brain drain when these experts come to retirement age.

Ultimately, I believe that for our sector to survive the looming exodus of talent, that the 38% of us that remain in the industry with less than 10 years’ experience will need to pool and leverage our collective knowledge. And so this is how I came to write a guide on Trade Finance Law aimed at helping new recruits within the sector navigate the jurisdictions in which they operate and the challenges they may face in the process.

The guide included an introduction to different legal systems, an African regional case study, interviews with preeminent trade finance lawyers and a practical section giving industry specific advice on how best to approach a transaction in an unfamiliar jurisdiction. The objective of the guide was to provide new recruits with a basic theoretical, historical, and applicative understanding of law from a trade finance perspective. 

3/ ALEX MEARING (Postgraduate research candidate at the University of Cambridge)

Alex Mearing is currently a postgraduate research candidate at the University of Cambridge, interested in Evolutionary & Cognitive Sciences. He previously worked at American International Group (AIG) as a Trade Finance Risk Underwriter. He holds a Bachelor of Science degree from the University of Durham and certificate level membership of the Chartered Insurance Institute.  

Project: Whitepaper: MICROFINANCE-BASED TRADE SOLUTION TO REMOVE CREDIT RISK CONSTRAINTS FOR BANKS & SUPPORT SME TRADE IN UNSTABLE TIMES

Alex said: I’ve been interested in crowd-based financial solutions for some time and it strikes me that there is real potential unexplored, particularly for open account trade. In 2006, Muhammad Yunus won the Nobel prize for Microfinance – Effectively the bringing together of donators and developing-world micro-businesses. The donations are packaged as loans albeit with few means of compelling repayment. What piqued my interest specifically is that this product has observed a 98%¹ repayment rate despite the apparent obstacles.  

I set out wondering if this could be applied to the UK market, wherein businesses are registered and repayments legally supported. There is a growing number of crowd-funding websites, for example, JustGiving or GoFundMe with local options. This indicates an increased appetite for domestic charity (though these funds are often unincluded in sector-level statistics), especially now with struggling local SMEs in the current COVID environment.  

In addition, two of the key factors driving the trade finance gap are credit risk and SME knowledge of trade products. My proposition is the production of a website interface in the microfinance tradition, but which involves funders as partner institutions, and which approaches all the above problems.  

The website would couple domestic businesses with interested donators. However, instead of the funds going directly to the business, they would be held in an escrow account. Interested funders would then conduct their due diligence on the business & trade flows and would onboard the beneficiary as a client. The funder would then finance the trade directly whilst using the escrow funds as full/partial security on which they can call on in the event of default. Otherwise, the donated security funds are returned to the donators at maturity.

The primary benefit of structuring like this is that, unlike a single donator-donatee loan, the escrow security can be used to secure the financing of a potentially infinite volume of repeated trade flows under the same donation. In addition, though donations are charitable, there is likely to be an extremely high repayment rate. This solution could a) hedge/remove obligor credit risk and thereby permit greater funding volumes and b) encourage new client relationships, thereby increasing the wider understanding of trade products, potentially cushioning the fallout from COVID-19 and supporting trade into the future.  

Reference: 1. Kota, Ina. “Microfinance: Banking for the Poor”. Finance & Development: An IMF Magazine, 44(2), 2007 

4/ Anna Rogers, Nick Rango, Max Walker, Priyanka Thakrar, Georgina Barrett (Texel)

Video-project: THE LIFECYCLE OF A TRADE

The team said: We are a team of Credit and Political Risk Brokers from the Texel Group. We are based across Texel’s teams in London and New York, and each have experience of 1-3 years with the Group. As part of our role as brokers, we work to support our clients (who include financial institutions, commodity traders, corporates and multilaterals) through providing expertly structured products.

We have produced a short video to document the ‘life cycle’ of a trade. Everybody who joins the trade finance industry will be very familiar with the traditional diagram of how a Letter of Credit operates – this is certainly something which all new starters at Texel will go through many times when they begin their careers. We thought that it would be useful to produce a diagram which includes a credit insurance policy purchased by a Confirming Bank operating alongside this, to show how CRI can be a useful and effective tool for banks operating in the trade finance space. There is scope to expand the diagram to also indicate how credit insurance can also benefit other parties in the trade, including the issuing bank and exporter, but for simplicity’s sake we have kept to the Confirming Bank only.

5/ ALEJANDRO BARRISTOTTI (Portfolio Managed, Structured Private Debt, NN Investment Partners)

Alejandro Battistotti is a Portfolio Manager in the Structure Private Debt team at NN Investment Partners, a Dutch asset manager. His main focus is structuring export, trade and receivables finance transactions for institutional investors across Europe. Alejandro is a qualified attorney and holds a Master in Law from the University of Cambridge. Having started his career at JP Morgan Private Bank in the UK, his interest in the financial markets and deal making motivated him to move into a derivatives sales and trading role with an Amsterdam based investment firm. In 2018, he moved into the buy-side with NN Investment Partners in the Hague. Alejandro lives in the Hague and he is originally from Buenos Aires, Argentina. 

Project: A NEW INSTITUTIONAL ASSET CLASS IN TRADE FINANCE?

Alejandro said: My project is called ‘A New Institutional Asset Class in Trade Finance?’  and it proposes the notion that if properly structure to appeal to institutional investors, trade receivables, and trade finance assets in general, can become a new trillion-dollar institutional asset class and potentially a way of tackling the Trade Finance gap.

The paper first explores how the interplay between the Basel Capital Framework and Solvency II created the necessary platform for non-bank capital to finance the real economy. The regulatory design has been pressed forward by COVID19 economic downturn that has increased the trade finance gap and the need for working capital, widening spread for TF assets and creating further financial incentive on top of the aforementioned regulatory intention. In a negative rates environment, trade receivables (and trade finance assets in general) present a superb relative value opportunity for institutional investors. The main idea of the paper, however, is that no matter how attractive this opportunity seems, most institutional investors may not wish to digest each and every of risk inherent to financing the real economy and hence the need to properly structure Trade Finance assets in a way that is coherent with the risk, capital and operational considerations that affect institutional investors.

If properly structured, Trade Finance assets offer a superb relative value opportunity versus traditional credit while being extremely efficient from Solvency Capital perspective. The project underlying premise is that the regulation and the market came to the point in which Trade Finance players have to embrace capital market standards if they want to financeable and institutional investors need to embrace the real economy if they want positive returns. If these is achieved the trade finance gap might be solved for good.

Special Mention: MOHAMED ELNAGGAR (Head of Trade Finance Control Unit, National Bank of Egypt)

Mohamed is a trade finance passionate with experience for about 15 years in the banking industry, who is looking forward to expanding his knowledge by getting exposed to new challenges, providing new trade finance solutions, and spreading knowledge to the new trade finance practitioners.

Project: NEGOTIABLE INSTRUMENTS ARE GOING THROUGH A MAKEOVER – THE WHO, WHAT, WHERE, WHY

Mohamed said: My article “Negotiable Instruments are going through a makeover – the who, what, where, why” was written for trade finance global within their international trade professional program. The program aims to introduce new trade finance writers by allowing them to express their thoughts through producing a professional journalistic piece of content on pre-agreed topics defined by their editorial team.

Blockchain technology has been described as a game-changer in trade finance for its capacity to digitize the most complicated sector. But legal challenges hamper the transformation process, as current outdated laws in most countries and jurisdictions do not recognize the digital version of the negotiable instruments.

The article emphasizes the importance of negotiable instruments and their role in trade and supply chain finance. It sheds light on the current initiatives and efforts by market players like the ICC, BAFT, ITFA, and other technology providers who have up and running solutions that cover the legal concerns and ensure authenticity, traceability, security, and credibility.

The article raises a call to governments, law-makers, and other stakeholders to accelerate the adoption of “UNCITRAL “MLETR provisions besides applying the standards for verifying the electronic signature and other security aspects which will expedite the digital transformation in trade finance and cover the legal concerns.