By André Casterman, Founder and Managing Director, Casterman Advisory and Chair of Fintech Committee, ITFA

Collaboration, Innovation, Standardisation and Education were the keywords that our panellists representing HSBC, Reed Smith and Santander Asset Management highlighted during our recent TFD Initiative webinar. The session demonstrated how making trade investible for institutional investors is being achieved by top players in the industry, and how new long-term partnerships will help fill the trade finance gap.

The Wall Street Journal of 22 January 2020 featured an article entitled “Money managers, Lured by Rich Returns, Venture Into Risky World of Trade Finance“: “… large money managers buy trade-finance assets that lenders have already originated instead of funding importers and exporters directly. Often these assets are wrapped up into asset-backed securities.”. In this article, Surath Sengupta, global head of FIG, Portfolio and Distribution at HSBC, said “HSBC has increased the trade financing it sells on to investors and other lenders from $2 billion in 2015 to $28 billion last year [2019].”

This illustrates a key trend as originating banks are expanding their distribution network to new types of funders in order to grow their own trade financing capacity. Rather than limiting themselves to the niche inter-bank space, more banks start partnering with a range of institutional investors and are therefore making trade assets more accessible to those non-bank funders through securities formats such as asset-back notes.

This is a strategic theme for the ITFA membership which is why I invited the following early adopters of TFD Initiative:

We collected the following take-aways and questions from the audience.

Take-aways on working with institutional investors

Take-aways on types of trade asset transfers

Take-aways on the benefits for corporates, banks and funders

“For originators such as HSBC, sharing trade assets with institutional funders provides a path to grow revenues, support clients and develop trade as an asset class whilst lowering capital requirements”, Surath SenguptaGlobal Head – FIG, Portfolio and Distribution, HSBC and Co-Chair, ICC’s working group on Institutional Investors in Trade Finance (IITF)

“Large corporates and regional companies expect stable and reliable sources of liquidity from their banking partners. By relying on a range of institutional investors, originating banks increase their capacity and can serve their clients better and in a more consistent way”, Bertrand de Comminges, Global Head Trade Finance Investments, Santander Asset Management

Questions from audience

How expensive is it to have a trade asset securitisation put in place by an institution? Is the cost depending on size of the portfolio? Or other fixed charges to take into account?

Please contact us for pricing details. The TASC option offers repackaging-as-a-service which is a way to share most of the set-up costs.

Is there a legal mismatching with the instruments underlying governing law, i.e., L/C issued in Bangladesh or Nigeria, and the law governing the SPV?

Please contact Nick Stainthorpe.

Regarding short-term trade finance how can you insure a stable pool of liquidity and preserve client relationships as investors may use such funds as liquidity parking?

Please contact Bertrand de Comminges.

While clients are trusted counter-parties, under stress some clients could commit fraud. As an investor, I would like to know whether you protect yourselves in any way against the fraud risk? Or do you rely solely on the relationship of the lender – borrower?

Please see above key take-aways on fraud risk.

I am interested to hear panellists’ views on 1) large corporate clients’ whose trade assets are being repackaged into securities cannibalising and contaminating their existing bond yield curve and 2) MNPI issues now that we have a security format and the complicated issues around that.

Please contact Christoph Gugelmann, CEO, Tradeteq.

Investors also participate directly under MRPAs – I wonder if in general Trade Finance, being a relationship driven business, is not often too finely priced to pay for setting up SPVs with all the legal costs related to this.

The Trade Asset Securitisation Company (TASC) offers a way to share those costs.

Do banks make a market in the secondary space for these notes if necessary? i.e., if the investor wants to sell before maturity would the bank buy it back? There would clearly be an illiquidity discount but trying to understand if at all possible. This would be key especially for funds offering daily liquidity.

Please contact Christoph Gugelmann, CEO, Tradeteq.

Webinar deck and reply

Please consult the supporting presentation deck and replay of this webinar via the ITFA Member Area.

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