Tuesday, 12 July 2016

CHAIRMAN'S MESSAGE - Sean Edwards, ITFA Chairman / Head of Legal at SMBC

Dear Members and Friends,

It is really difficult to talk about anything else other than the dreaded Brexit and the dire impact it is going to have on the global economy. Global Trading activity heading into the infamous 23 June referendum had been gathering pace since mid-February of this year. Investor sentiment was picking up and this was being reflected in asset prices.

However, closer to the date, investors became jittery and the increased uncertainty over the results of the UK referendum kept the markets on their toes and risk aversion spread quickly only to reverse in the days before the referendum as polls once again indicated a Remain vote might just nudge ahead. However, on 24 June, markets woke up to mayhem, panic last seen in September 2008 (Lehmans'), as the British electorate voted out of the European Union. Clearly, this was not the result many international players were gearing for, and was evidently not the most market-friendly outcome, as all risky assets sold off heavily, with some percentage changes even reaching double digits on the day in major equity indices. It is worth mentioning though that given the large swings, emerging market credit came out relatively unscathed from all happenings in the developed world.
One might argue that, on the positive side, Brexit has brought about interesting opportunities but it would be too premature to estimate the extent of damage and ramifications of the 23 June referendum result, particularly on a global scale. The economic damage could be in its infancy and will only start to show up in statistical economic data in a couple of quarters’ time. The biggest dilemma for investors will be how to tackle this transitory period, as long and even medium-term plays will look more hazy.
Small crises have often been welcomed in our markets but with worries of contagion and central banks having to intervene heavily to steady the ship, this one could well prove just a little bit too big. It is certainly unwelcome.   
On a more reassuring note, we are excited that preparations for the 43rd Annual Trade and Forfaiting Conference are well on track to ensure another memorable ITFA event. To register on-line, to view the conference programme and for any other informative details, please click here. Please bear in mind that since the Early Bird Discount has now expired, we encourage you to register by no later than 31 July in order to avoid incurring the late registration fees. 

In this month’s Newsletter, we present a technical paper titled ''Market Comment on the Repercussions of Negative Reference Rates (for example LIBOR)''. We also invite you to read an interesting article prepared by Marian Boyle (Sullivan & Worcester) on the Insurance Act 2015 - Are you ready? Finally, the ITFA Board is pleased to announce that ITFA is now registered as a non-profit-making association in the Swiss Registry of Commerce.

We look forward to hearing from you with any feedback you may want to share with us by sending an email to myself, any of the Board Members or to our general email, info@itfa.org.

Best wishes,

Sean Edwards

Monday, 11 July 2016


Following the recent decisions by several central banks to set negative benchmark interest rates – in addition to Japan, most notably the European Central Bank (ECB) and subsequently Switzerland, Denmark and Sweden – there are some repercussions that need to be considered by Trade Financiers.

There are several basic aims in moving benchmark interest rates into negative territory, predominantly linked to either:
  • weakening a currency, thereby making its exports more attractive, and increasing the cost of imports in order to stave off deflation; or
  • boosting spending by discouraging savings and promoting borrowing.
The latter is essentially aimed at banks: by making central bank deposits costly, the theory is that they will need to deploy their deposits elsewhere, hopefully in the form of loans which can stimulate an economy.  In turn, the interbank reference rates (such as LIBOR and EURIBOR) reflect the impact of the central bank rates and have consequently also gone negative in a number of cases.

This causes some issues for lines of business that use interest rate benchmarks as a mutually agreeable proxy for the cost of funds for a given period in a specified currency.

Trade Finance is one such line of business, especially since the financing is predominantly risk-based and pricing is typically quoted on a “reference rate plus risk margin” basis, even though the underlying transactions are not deposits.

What are we currently seeing in the market?
Our understanding is that it is becoming commonplace for institutions to set a floor of “zero” for the reference rate in master or transactional agreements, by using wording such as: ''If LIBOR is less than zero at any time of determination, then LIBOR shall be deemed to be zero''.

Why is this a growing trend?
Banks must assess and mitigate risk, in this case interest rate risk.

So what is the issue with setting a zero floor?
Clients may question why the perceived benefit of a negative (i.e. cheaper) rate is not being passed on to them. In reality though, it is not “free money” being provided by the central banks which is then not being passed on to customers; it is a disincentive to holding excess liquidity.

Consider the following related scenarios
LIABILITIES: Clients place funds on deposit with a bank. If the banks receive more deposits than they can redeploy profitably elsewhere (or have to retain some of these funds for regulatory reasons), they typically need to place the excess with a relevant central bank at the prevailing rate. If this rate is negative, the bank is effectively incurring a cost when placing these funds. In turn, these costs are sometimes then reflected in the negative deposit rates charged to clients (although it may not be always the case).

ASSETS: Conversely, if a bank is creating an asset by lending money to a client, it will need to use funds it has obtained from the liabilities side of its balance sheet. As explained above, the cost of obtaining these funds may be impacted by the negative benchmark rates.

What should you do?
In this context, each institution needs to assess how and where it obtains its funding in order to finance assets, and what an appropriate rate may be.

One way of addressing the issue is by using a “cost of funds” rate rather than a benchmark rate, however in practice this also has its challenges as it is harder for a third party (e.g. a borrower) to determine whether the lender’s cost of funds are correct or appropriate.

Any queries emanating from this paper can be addressed to Paul Coles, ITFA Board Member - Market Practice.

Disclaimer: This information does not constitute legal advice and is for educational purposes only.  You should not rely on this opinion as an alternative to seeking legal advice. 

Sunday, 10 July 2016

INSURANCE ACT 2015 – ARE YOU READY? By Marian Boyle, Insurance Partner at Sullivan & Worcester, London

On 12 August 2016, the most fundamental reforms of UK insurance contract law for over 100 years will come into force. The reforms are being introduced to redress the imbalance between insurers and policyholders – insurers being perceived as having too much leverage in coverage disputes because the existing law was overly protective of the insurers' position.
For buyers of insurance, the changes are undoubtedly a very positive development. They do, however, significantly change the way UK insurance business will be conducted. Policyholders who want to take advantage of the benefits of the reforms need to understand the changes and adapt their practices accordingly. This article provides a summary of the areas policy holders need to address. 
Why is insurance important?
The UK insurance market (which is the third largest in the world and the largest in Europe), plays a significant role in underpinning global trade by insuring trade related risks.
Physical assets are almost always covered for loss or damage. In trade finance transactions banks may want to be co-assured on the policies that cover the goods, to take an assignment of the proceeds or at the very least be named as loss payees. They may also require cover to be taken out for the premises where goods are produced.
The obligor’s non-payment risk can be insured, as can the borrower's credit risk on financed deals, and the country or political risks that may adversely affect the borrower's ability to service the loan. Over the last ten years these types of credit policies have become increasingly popular, particularly so where the financer can obtain risk capital relief for the insurance. To qualify for the relief, the robustness of risk transfer needs to very clear and confirmation of eligibility supported by legal opinions.
What has changed?
The Insurance Act 2015 (the ''Act''):
  • radically changes the pre-contractual disclosure process and policyholders' duty;
  • introduces a wider range of remedies, which are designed to be more proportionate, in the event of policyholder breach;
  • reforms the law relating to insurance warranties;
  • codifies the rules that apply if a policyholder makes a fraudulent claim; and
  • provides for damages in the event of late payment of claims.

When the Act comes into force on 12 August 2016, it will apply to all contracts of insurance and reinsurance, and to any variations to existing contracts made on or after that date.
This article focuses on the aspects of those changes that require a change of practice by policyholders.
New duty to make fair presentation
Policyholders will be under a duty to disclose material information known to senior management and any individuals responsible for arranging the insurance. Those responsible for the insurance are responsible not only to the internal insurance or risk management team, but also the external insurance broker.
As under the current law, any information is material if it would influence the judgement of a prudent insurer in determining whether or not to take the risk or fix the terms in so doing. Materiality will therefore depend upon the field of activity (e.g. shipping, banking, commodity trading); the nature of the risk; and the relevant class of insurance (e.g. property insurance, credit risk, marine cargo).
Policyholders will also be under a duty to conduct a reasonable search for information that "ought to be known". This includes not only information within the organisation, or its possession and control, but also relevant information held by third parties outside the organisation. 
Presentation needs to be clear and accessible
There is a new standalone duty to present information to insurers in a manner that is ''reasonably clear and accessible". The Law Commissions (which had spent many years working on the reform proposals that culminated in the Act) were critical of the practice of proposed insurers providing large quantities of un-signposted documentation without any indication as its potential relevance. As a result, the last minute "data dumping" of unstructured information will no longer be permitted.
Practical Impact of Fair Presentation Duty
Start Early
Policyholders need to start considering their renewal process and opening the dialogue with placing brokers about what needs to be achieved much earlier. The presentation is now supposed to be an interactive process with insurers asking questions regarding the information provided. The timetable needs to build in this flexibility.
Get advice
Brokers should be able to provide guidance on what information should be considered ‘material’ for any particular type of risk. Part of the long lead-in time permitted between when the Act received Royal Ascent and came into force (18 months), was to enable insurers, brokers and policyholder bodies to work together to develop guidance and protocols setting out what a standard presentation of risk should include for different types of risks.
Organisations, in particular, need to take advice on what should be the ambit of their "reasonable search” and agree that with insurers. The Act provides for a default regime only. Accordingly, if the parties want to agree that the ambit of the relevant search will be narrower than the terms of the Act, they are free to do so.
Who has relevant ''knowledge''?
It will be essential to identify those within the organisation who fall within the definition of "senior management". The Act defines senior management as those individuals who play a significant role in making decisions about how the policyholders' activities are managed/organised. In a corporate context this is likely to extend beyond simply the main Board, and could be a substantial group of people depending on the structure and management arrangements of the organisation.
Policyholders should consider whether the knowledge of such a large group of individuals is really relevant for the purpose of any particular insurance policy. For example, if a commercial bank regularly takes out individual policies covering their clients’ credit risk, is it practical for every individual falling within the definition of senior management to be consulted about whether they have that relevant "knowledge"?  It is much more likely that the transaction team, who have put the deal together, will have the pertinent information and therefore it would be sensible to amend the policy to reflect that fact.
Knowledge also extends to those individuals who are responsible for the policyholders’ insurance. This includes any corporate risk management function but also the placing broker. Policyholders therefore need to liaise closely with their broker and agree what knowledge is relevant and who is responsible for searching for - and in due course storing - the various categories of historical information that might be needed to fulfil the duty.
More onerous obligations
The duty to undertake a reasonable search for information substantially increases the policyholders' obligations.  Remember, a reasonable search will now include relevant information in the hands of third parties – e.g. agents, subcontractors, consultants, professional advisers and those to whom relevant business functions have been outsourced. Policyholders need to make sure they have considered which individuals or organisations are likely to have relevant information and allow enough time to collate it.
Explaining the crucial importance of responding to the information requests in a rigorous manner will also be key.
Explain the risks
Any individual whose knowledge is considered relevant needs to understand the importance of the information gathering exercise, and the likely impact of getting it wrong. A bland enquiry "do you know anything about X" may not result in the appropriate degree of scrutiny, unless it is put in context.
Make it clear, for example, that the organisation is about to insure a physical asset of considerable worth and that the insurance may turn out to be a wasted expense, if relevant information is not disclosed.
Blind Eye Knowledge
When requesting information, whether from senior management or as part of the "reasonable search" obligations, individuals need to be reminded that knowledge under the terms of the Act is not limited to that which an individual actually knows. Knowledge extends to matters which an individual suspected, and of which he or she would have had knowledge, had they not deliberately refrained from confirming or enquiring about them. This is concept is often expressed by the shorthand term of "blind eye" knowledge. Once again, however, parties are free to agree that knowledge, for the purpose of any particular policy, should be limited to actual knowledge.
Keep records updated
Policyholders need to make and retain detailed records as to the searches they have undertaken and received. Do not assume that the list of individuals relevant for the purpose of the "reasonable search" enquiry will stay static. The commercial activities of an organisation can change radically during the course of a year and the question of what constitutes a reasonable search needs to be revisited at every renewal, and every time a request is made to insurers to amend the policy.
Reforms of the law on Warranties
Under the current law it is open to insurers to add a declaration to insurance proposal forms or policies stating that the policyholder is warranting the accuracy of all the answers given, or their answers form the "basis of the contract". This has the legal effect of warranting the truth of every piece of information given in the proposal. Any inaccuracy, however immaterial, can entitle insurers to treat themselves as discharged from liability automatically.
The Act abolishes clauses of this type and, if included, they will no longer be given effect to.
The Act also replaces the existing remedy for breach of any warranty and provides instead for more proportional remedies. The policy might provide, for example, that the insured warrants that a particular physical commodity will be stored in a secure warehouse protected with 24-hour security personnel. If the relevant storage warehouse is left unattended, the warranty will be breached. The Act provides that for any loss occurring during the period of the breach, insurers will have no liability. If, however, the breach is remedied, and the security arrangements become fully effective, again insurers will become liable for any loss arising after the breach has been remedied.
Practical Implications
Going forward, any ‘basis of contract’ clauses in policies or proposal forms should be struck out. They will no longer be effective in any event, so why keep them?
Policyholders should continue to take insurance warranties extremely seriously. Even though the new remedies will now be proportionate, insurers will still be able to escape liability for any loss that happens during the period of breach.
Make a careful note of any warranties that have been given, consider how compliance is monitored and put in place reporting procedures to keep tracking compliance. Any inadvertent breach must be quickly remedied if remedy is possible. Evidence as to the date and times that breaches are remedied must be retained so that this can be provided to insurers in the event of a loss. If the breach cannot be remedied, get advice promptly on what options might be available e.g. getting insurers to waive breach.
Fraudulent Claims
Under the new Act, if the policyholder makes a fraudulent claim, the insurer is not liable to pay that claim, even it would seem (although this is not beyond doubt) those parts of the claim that are entirely honest. The insurer may also give notice to the policyholder to terminate the contract and may retain the premium.
The Act does not define what is fraud or what amounts to a fraudulent claim. That is left for the courts to interpret that as a matter of common law.
Practical Implications
Everyone involved in an insurance claim needs to be clear that absolute and scrupulous honesty is required. Exaggerating any aspect of a claim, or providing insurers with any documents in support of a claim where there are suspicions as to their authenticity, can lead to serious problems.
The second practical step is to consider whether the fraud clause in your policy appears more onerous than the Act. If so, the justification for including it should be discussed.
Damages for Late Payment of Claim
A late amendment inserted into the Act by the Enterprise Act 2015 introduces an implied term into insurance contracts that the insurer will pay claims within a ‘reasonable period of time’. Breach of that implied term entitles the insured to a claim in damages. This new provision comes into force on 4 May 2017. Under the old rule, even if an insured had suffered significant losses as a result of insurers delaying a claim payment, the insured had no remedy.
Insurers will have a defence under the Act if they had reasonable grounds for disputing the validity or quantum of the claim. It remains to be seen how the Courts will interpret the test of reasonableness, but the introduction of an implied term will undoubtedly give policyholders more leverage if insurers are obviously dragging their feet without any apparent justification.
Practical Implications
The time limit for bringing a claim for damages for late payment of claim is extremely tight. The insured will only have one year from the date insurers paid the claim and this deadline need to be carefully noted.
Changes introduced by the Act undoubtedly place policyholders in a significantly better position.
This is good news for trade finance parties where there has been some scepticism about the value of insurance owing to concerns that insurers would find reasons not to pay. Achieving more certainty about the effectiveness of insurance as a risk transfer or mitigation tool, in a trade finance context, will increase its attractiveness.
However, if policyholders want to take advantage of the benefits that the Act was designed to confer, they need to understand the changes and adapt their practices accordingly.  The manner in which insurance risks need to be presented going forward has changed radically.  Carrying on with "business as usual" could result in claims being denied or policy proceeds being significantly reduced.

Saturday, 9 July 2016


The ITFA team is currently working very hard in order to ensure that its Annual Conference is once again a successful and memorable event. May we take the opportunity to remind you all of ITFA's 43rd Annual International Trade and Forfaiting Conference, which this year will be held in Warsaw, Poland between 7-9 September, 2016. 

We encourage you to register at your earliest opportunity and before 31 July, in order to avoid incurring the late registration fee.

The ITFA Conference is a wonderful networking opportunity, so don’t miss out! It gives trade financiers and forfaiters world-wide an opportunity to get together, exchange views, make new acquaintances and renew contacts.

Friday, 8 July 2016


The ITFA Board is pleased to announce the following two new members.

Crown Agents Bank provides payments, trade finance, foreign exchange and investment management services to frontier and emerging markets, primarily in Africa, the Caribbean and South-East Asia, and act as a commercial gateway for entities seeking to operate in these regions. They have been active in the developing world since 1833, providing solutions to governments, non-government organisations, central banks, commercial banks, non-bank financial institutions, international companies and pension and investment fund managers.

The financial services business was previously owned by Crown Agents Limited, an international development company that partners with governments, aid organisations and the private sector in almost 100 countries around the world. In April 2016 Helios Investors III, L.P., a fund advised by African-focused private investment firm Helios Investment Partners (Helios), has completed the acquisition of 100% of Crown Agents Bank.

Mr. Peter Hampson will be the main contact person for ITFA related matters.

Global Finance & Capital Limited (GFCL) is a global investment advisory firm, authorised and regulated by the Financial Conduct Authority (FCA), UK, providing a wide range of services and expertise in the global markets. GFCL’s focus is development of infrastructure projects globally, with ongoing major projects currently in West Africa.

GFCL is advising various West-African countries, through its strategic partnership with West African Economic and Monetary Union (UEMOA) and West African Development Bank (BOAD), on their Infrastructure development projects in the sectors of Roads, Railway, Airport, Dry port, Energy, Agriculture, Housing, Urban Planning and Industrial Development etc.

Mr. Hiren Singharay is the main contact for all ITFA related matters.

Thursday, 7 July 2016


As per voting during our last AGM, we are pleased to confirm that ITFA is now registered as a non-profit-making Association.

The registration has been completed and published on 4th July 2016. Should you be interested to obtain an extract, please write to ITFA c/o Format-A AG, Pfingstweidstrasse 102b, 8005 Zurich, Switzerland.