Wednesday 1 March 2017

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

Dear Members and Friends,

Believe it or not, we have already come to the end of the first quarter of 2017. Emerging markets have been unfazed so far this year by the worries, or rather, concerns of a potentially stronger dollar against major emerging market currencies. The expected three rate hikes by the US Federal Reserve appear to be already priced-in in current valuations, and so long as EM currencies continue to range trade within current levels, emerging markets are set to remain in demand.

The global search for yield continues, the outlook for commodities has improved markedly and let’s face it, emerging market economies are in a healthier state than a large number of developed economies, with encouraging prospects for GDP growth in 2017. Meanwhile, inflation in emerging markets has continued to creep upwards, mainly on the back of a rise in commodity and energy prices, so base effects largely contributed towards this uptick in price pressure. Although inflationary pressures could well persist on the back of the robustness in emerging market economies, EM central banks are more likely to oversee the recent spike in inflation rather than respond with any form of policy tightening.

In the March edition of the ITFA Newsletter you will find an interesting article titled ''Updates from the S&W Trade Finance Breakfast Seminars'' by Geoffrey Wynne, Sullivan and Worcester. In a contribution by Lloyds Bank, you can read about the effects of Brexit - ''EU Referendum and British Trade''. The ITFA team also provides a brief on the ITFA workshop conducted at the GTR MENA Trade Finance Week. Our regular feature - Chart of the Month, contributed by Dr. Rebecca Harding of Equant Analytics provides an interesting read titled ''March 2017 - Trade Outlook''.

As we have previously announced,  we are deliriously happy to be putting on the 44th Annual International Trade and Forfaiting Conference which will be held in Edinburgh, Scotland between the 6th and 8th of September 2017. This year we will be greeting you at the Caledonian Hotel, an iconic five-star venue in the heart of historic Edinburgh. A networking afternoon with dedicated rooms and a reservation portal to book meetings with all conference delegates will take place on the second day of the conference. At this point we just ask you to Save the Date and to keep following our regular updates.

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,  

Best wishes,

Sean Edwards


Following Sullivan & Worcester’s Breakfast Seminar in London last December, Geoff Wynne has highlighted below a few matters that are worth bringing to everyone’s attention. We trust that these short summaries will be helpful to you when considering whether you need to take any further action or not in the normal course of your business. A copy of the full deck and replay of the seminar can both be found on the S&W website.

FACTA - Where do we stand and what to do

The Foreign Account Tax Compliance Act (FATCA) is a complex piece of US legislation, enacted in March 2010, the primary objective of which is to identify non-compliance by US taxpayers using offshore accounts. The remit of FATCA is far-reaching, and includes a requirement for foreign financial institutions (FFIs) (a broadly defined term which includes traditional banks as well as a broad array of non-bank financial institutions, including hedge funds) to annually disclose information about accounts held by US individuals or foreign companies in which US individuals hold a substantial ownership interest.

Although FATCA is technically a voluntary reporting regime, FFIs that refuse to comply by entering into an agreement with the Internal Revenue Service (IRS) to provide information will face a stringent penalty in the form of a withholding of 30% off all their US-source payments income (such as interest and dividends). Foreign banks are thus essentially forced to cooperate at the risk of losing access to US capital markets.  FATCA provisions are now in effect.

FATCA compliance poses several practical and legal issues. FFIs of various jurisdictions may face a conflict of laws and obligations – the disclosure requirements imposed by FATCA versus local data protection, confidentiality and bank secrecy laws. In order to alleviate this conflict, countries enter into bilateral agreements with the IRS in order to elevate FATCA compliance onto a national level. 

One of the legal effects of FATCA is that many lenders are including FATCA-specific wording in contracts to the effect that they are entitled to withhold tax as and when required by FATCA without the need for gross-up payments, even when such wording does not have contextual applicability. Any lender which is not FATCA compliant by the applicable time limit therefore risks receiving interest and principal net of FATCA withholding.

On a practical level, there are various drafting options for lenders which make FATCA a risk for the borrower, either: by (1) relevant obligors representing that they are outside the scope of FATCA; and/or (2) an actual gross-up and indemnity. Such options are particularly useful if the lenders in question are not certain that they will be FATCA compliant.

Sample drafting to give effect to the first option includes a representation from the obligor that ''it is not a FATCA FFI or a US Tax Obligor'' and a procurement from the [Company] that ''no Obligor will become a FATCA FFI or US Tax Obligor''. Additionally, a lender should consider including wording to the effect that ''…the [Company] shall procure that any Obligor which is a FATCA FFI or a US Tax Obligor shall resign as Borrower or Guarantor (as the case may be)…''.

Sample gross-up wording, whether made by an obligor or lender should refer to the fact that: ''the amount of payment due from the Obligor shall be increased to an amount which (after making any FATCA Deduction) leaves an amount equal to the payment which would have been due if no FATCA Deduction had been required''. The above wording examples are not necessarily enough when protecting a lender from the risk of FATCA non-compliance; they are merely intended as samples.

Article 55 BRRD – Where are we?

Article 55 of the Bank Recovery and Resolution Directive (the BRRD) imposes an obligation on institutions subject to it to include an ‘Article 55 clause’ (described below) in agreements entered into on or after 1 January 2016 and governed by the laws of non-EU countries (Third Country Agreements).

The Article 55 clause in such a case must include: (i) a recognition by the institution’s counterparty that amounts owed by the institution subject to BRRD may be written down or converted into equity as part of a bail-in; and (ii) an agreement by the counterparty to be bound by any such reduction or conversion.

The BRRD’s remit is broad and applies to EU credit institutions (banks and building societies, for example) and certain EU investment firms authorised under the Markets in Financial Instruments Directive (MiFID), the ‘Affected EU Institutions’.

The purpose of the above requirement is to address the question of the enforceability of bail-in powers by a resolution authority against counterparties in Third Party Agreements. Within the EEA, the effectiveness of statutory bail-in powers is ensured by the mutual recognition requirements under the BRRD. Beyond the borders of the EEA where mutual recognition does not apply, the BRRD purports to fill the gap by offering a contractual solution whereby the counterparty is held to the agreed contractual terms, thus preventing potential court challenges in the relevant non-EEA jurisdiction, the resolutions of which would involve examining the relevant governing law and applicable conflicts of law principles.

The nature of some transactions and documentations make compliance with bail-in requirements impractical - short-term trade finance and letters of credit being examples of this. Many take the view that an ‘impractical’ solution (whereby bail-in rules can be applied by resolution authorities in a proportionate manner, including, in some cases by granting a waiver all together) can be applied to all “standard” rules, including those promulgated by the ICC, for example in relation to letters of credit and demand guarantees.

More amendments are underway to the broadly drafted bail-in requirements; where this will leave the Affected EU Institutions will be a topic to follow. One point under consideration is the potential limitation of the BRRD to arrangements which affect bank capital and not its funding or general banking arrangements.

Dodd-Frank Act:

The Dodd-Frank Act (the Act), enacted in July 2010, drastically reformed financial regulation in the US in a bid to avoid another financial crisis, such as the one witnessed in 2008.  Currently, only around 70% of the 398 required rules are in place. 

Two areas of the Act have caused some concern for financial institutions within trade finance and in relation to participation agreements (MRPAs). The first relates to Title VII of the Act, and the second relates to the so-called ‘Volcker Rule’. In essence, both relate to involvement in derivatives and what it would mean if an MRPA were treated as a derivative. 

The Volcker Rule seeks to prohibit banks from the proprietary trading of their own accounts as well as from sponsoring or owning private equity or hedge funds, save for limited circumstances.  The general view is that including MRPAs between financial institutions cannot have been intended as these are regulated by banking authorities.

After much debate, the market has taken comfort in the fact that MRPAs are not derivatives and are therefore outside these provisions, save perhaps for the question of whether a risk participation in a funded transaction is still caught.  A clear statement from the regulator has been sought but not obtained.  Some law firms, including Sullivan & Worcester, have argued that there should be no problem, and that the “identified banking products” exemption should apply in this case as well as in others.  It is for participants to consider whether they can proceed on this basis. To date, there has been no challenge by the regulator to this view.

In line with his stance on the need to dispose of the Act, US President, Donald Trump, has recently signed an executive order which is to scale back the Act in a bid to dismantle much of the regulation that was implemented after the financial crisis of 2008.  The practicalities of scaling back the Act will no doubt involve a long and arduous process, but the question remains as to what regulation, if any, Donald Trump proposes to use in order to fill the US regulatory void.

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

EU REFERENDUM AND BRITISH TRADE contributed by Lloyds Bank

Since June, the outcome of the EU Referendum has dominated headlines – and the thoughts of financial services professionals and business leaders worldwide. Although the historic vote to leave the EU may have presented some organisations with challenges, Lloyds Bank believes there are opportunities for businesses and financial institutions to work in partnership to ensure the future of British trade across the globe.

In the wake of the EU Referendum result, one thing has remained a constant for the British economy: uncertainty. At a time when economic recovery was starting to show promise, Britain voted to leave the European Union, its largest trading partner, and now faces negotiating a withdrawal.

Aside from the initial impacts on exchange rates, stock markets, and interest rates, one of the most significant challenges facing both financial institutions and their corporate clients is that the view of the future remains opaque. Although Article 50 will be triggered by the end of March 2017 it is unclear yet what the UK’s exit strategy will look like. Only as negotiations start to unfold will this picture become clear.

Additional challenges

Compounding the uncertainty, some, including the Financial Policy Committee, see the present high level of the UK’s current account deficit as a potential source of risk (Figure 1 below). Perhaps reflecting this and the level of uncertainty, the Pound is at a 30-year low against the US dollar. To help mitigate some of the risks in the economic outlook, the Monetary Policy Committee has reduced interest rates to an all-time low of 0.25%. This did not stop supermarket giant Tesco and the UK's largest food manufacturer, Unilever, becoming embroiled in a battle over wholesale prices. The latter sought to raise its prices by about ten percent to offset the higher cost of imported commodities. Tesco offered a very public resistance to this move by its supplier.

Although this particular confrontation was resolved, the overall picture might appear somewhat challenging still. But there is often opportunity to be found too. With a fall in the Pound, British goods and services are becoming less expensive – and therefore more attractive – to companies and consumers around the world.

This is an excellent opportunity for UK businesses to export – either for the first time, or expand into new markets as part of an existing overseas strategy. There is also an opportunity for UK businesses to benefit from increased tourist spending. Burberry has seen like-for-like sales climb by more than 30 percent in the three months to 30th September after the falling pound saw overseas shoppers increase their purchasing at a better price. At Lloyds Bank, our vision is to help Britain to prosper, globally. As a major UK financial institution, we are committed to facilitating British trade both now and in the future.

Supporting British business

One of the key ways that UK businesses can achieve overseas success is to leverage the banking system and the way in which financial institutions, including Lloyds Bank, have developed strategic partnerships. Such partnerships not only include bodies such as Britain’s new Department for International Trade, but also a network of trusted partner banks across the globe.

By establishing these new partnerships and reinforcing existing working arrangements with banks worldwide, British financial institutions are able to support business clients as they export into new territories. To be truly supportive of business though, such collaboration needs to function across a number of areas including service excellence, credit appetite, documentation negotiation, funding support, and foreign exchange (FX). And, inevitably, companies looking to expand their export or supplier base may come up against challenges at each step of the value chain, and will require support to overcome them. This should be forthcoming as numerous new partnership opportunities for UK and overseas financial institutions are brokered.

Take a typical manufacturing value chain (Figure 2), for instance. At each of the five steps, UK banks and overseas partner banks will be able to work together to help British exporters settle payments, take advantage of currency movements, reduce risk, and maximise working capital in a post-Referendum world, while maximising business opportunities. Let’s take a closer look at each of those five steps.

1. Tendering/negotiating contracts: With the Pound’s value having fallen against a number of currencies, European buyers further afield are likely to be hungry for high-quality cheaper British exports.

This is where financial institution partnerships that cover a range of different geographies will become even more important for the future of British exports. For example, while traditional trade instruments, such as tender guarantees and performance guarantees could help corporates boost their attractiveness to existing and prospective overseas buyers (and are therefore likely to be in growing demand), UK banks will require the support of local partner banks to issue these guarantees in-country.

Additionally, supporting the beneficiary’s needs across the globe will necessitate the expertise and coverage of a network of partner banks. This creates a win-win situation for partner banks and their business clients as working with UK financial institutions will resolve client trading issues and lead to new business opportunities for those banks.

2. Sourcing of inputs: Due to their often globalised supply chains, British companies ramping up their export activities are likely to see an increased requirement to bring goods and inputs of production into the UK. To manage supplier performance risk, especially as these companies look further afield for new inputs, banks will need to make available products such as Import Letters of Credit (LCs), Guarantees and Standby LCs. In order to be delivered globally, such instruments require strong collaboration between partner banks.

In order that trade relationships are maintained, optimal working capital for both buyer and seller is essential. Partner banks also play a key role in ensuring this is possible. Larger UK corporate buyers may look to use solutions such as Supplier Finance or Bills of Exchange to help bolster their suppliers’ working capital and underpin sourcing. This may require the help of their UK bank to onboard suppliers globally, as well as to make payments into new geographies, and mitigate risk – all of which will require access to a worldwide ecosystem of local partner banks.

3. Manufacturing: Productivity is a crucial consideration for British companies looking to remain competitive in the wake of the EU Referendum. As new technologies such as 3D printing and additive manufacturing become more accessible, there will be a number of companies considering reshoring their manufacturing activities, especially as the cost of off-shoring goes up. Implementing a reshoring strategy will of course require significant capital expenditure, which may also include importing equipment from overseas. However, with interest rates at an all-time low, it’s a great time for British companies to be investing.

As well as driving a flow of Import LCs out of the UK, this increased capital expenditure will bolster the requirement for overseas suppliers to access working capital by discounting receivables and Bills of Exchange from UK corporate buyers, via their own local banks. To assist, UK banks, such as Lloyds Bank, should exhibit the necessary appetite to support these local banks, either by participating in the UK corporate buyer’s risk or providing Bill Avalisations. Additionally, for companies looking to manage their working capital when making significant equipment and machinery purchases, there may be a need for bank syndicates to form in order to support asset-backed lending.

4. Shipment/sales: Understandably, clients considering opportunities with new buyers or in new markets will be looking for support to assess and mitigate risks. As a result, it is likely that more Import LCs will be requested by UK exporters to manage buyers and/or sovereign risk. This will increase the UK banking sector’s need to secure traditional trade business partnerships with overseas banks.

5. Servicing/after sales: This final part of the value chain can be an important differentiator for overseas companies looking for new UK suppliers. By facilitating the delivery of excellent after sales support, through the provision of a warranty or guarantee issued by a local partner bank, for instance, financial institutions can work together to help give British exporters a competitive edge in overseas negotiations.

A bright future for business

Following the Referendum and as Britain starts to negotiate its withdrawal from the EU, the corporate community should continue to look for opportunities to prosper globally. The facilitation of safe and efficient trade by financial institutions can help generate new business opportunities both at home and overseas across traditional trade, open account and FX. We at Lloyds Bank are looking forward to playing our part in helping our clients grow and thrive in this new paradigm.

This article is provided for information purposes only and is not to be construed as regulatory, investment, legal, tax or accounting advice nor should it be treated as an offer or solicitation to offer, to buy or sell any product or enter into any transaction. The information and any opinions in this article are subject to change at any time and Lloyds Bank is under no obligation to inform any person of any such change. This article may refer to future events which may or may not be within the control of Lloyds Bank, and no representation or warranty, express or implied, is made as to whether or not such an event will occur. If you receive information from us which is inconsistent with other information which you have received from us, you should refer this to your Lloyds Bank representative for clarification.


ITFA is pleased to announce that this month two new institutions have joined as members of ITFA.

Intermarket Bank AG is a registered Bank under Austrian Banking Regulation - mainly focusing on Receivables Finance (Factoring, Forfaiting, Reverse Factoring etc) and operating in Austria. Furthermore, Intermarket - as a subsidiary majority owned by Erste Group - is responsible for all Supply Chain Finance related products and strategy within the Erste Group geography.

Erste Group is a leading universal banking group in Austria and CEE - registered in Austria and present with major Banks in Czech Republic, Slovakia, Hungary, Croatia, Serbia and Romania.

Sebastian Erich will be the main delegate for all ITFA related matters.

Established in 1984 and based in London (UK), Jordan International Bank (JIB) operates today with four principal areas of business: Personal Banking, Structured Property Finance, Trade Finance and Treasury Services.

The Bank endeavours to offer the full range of services required by their highly valued clients. Stemming from the overriding philosophy to unlock the doors of opportunity for clients, JIB’s Trade Finance team offers traditional trade finance products, such as letters of credit, letters of guarantee, bonds or standby LC’s, as well as documentary collections, to facilitate international trade for importers and exporters. They are also involved in forfaiting, risk participation, and other traditional trade finance solutions.

With their extensive experience in the MENA region, they strive to consistently facilitate success for their clients and partners. Their highly experienced team of industry professionals in London is supported by its shareholders regional network of Banks in Jordan, Qatar, UAE, and Algeria.

Mohammad Fariz will be the main delegate for all ITFA related matters.


The GTR Mena Trade Finance Week is well known within the Trade Finance community as one of the most successful events in the region. This is the reason why the ITFA board was keen to support the event through an ITFA led workshop. Our own Zeyno DeVries-Davutoglu, Board Member and Chair of the ITFA educational committee led the Stream B workshop. Opening the workshop, Zeyno highlighted the benefits of being an ITFA member and the value the association adds to companies, financial institutions and intermediaries.

The workshops were structured around presentations with the speakers facilitating discussions to allow all participants within the individual groups to enter into practical discussions. ITFA would like to thank the facilitators within their workshop who played a key role in making this happen.

Gary Slawther, Director, Corporate Advisory Resources explained the way such receivables are discounted placing emphasis on the Standard Definitions for Techniques of Supply Chain Finance, non-recourse financing of receivables discounting, forfaiting, factoring and payables finance. This workshop was moderated by Lorna Pillow who highlighted the popularity of the technique to effectively manage cash flows and risk mitigation. Falling margins, surplus liquidity, fewer assets that meet the Banks’ narrowing framework were amongst the topics discussed. Anirudha Panse, Executive Director at NBAD, provided insight on the popularity of receivables financing in the Mena region and what makes the region so resilient even in the midst of mounting political and economic turmoil including the low oil price environment. The recent discussions with Moody’s on Abengoa’s treatment of debt sparked interest amongst the banks who continued to discuss this well after the workshop closed. ITFA will be producing a paper on this theme.

Anurag Chaudhary’s presentation on Supply Chain Finance, also called Payables Financing or Reverse Factoring, focused on real life examples extracted from Citibank’s Supplier Finance programme and the popularity as well as success of the programme with leading buyers and suppliers. Anurag focussed on the legal documentation in originating such bi-lateral programmes leading to a global standard documentation. A case study on Rolls Royce in extending support to their suppliers was very well received by the audience. This gave the audience some insights on how to structure solutions for their clients and was the stepping stone for various methodologies for risk mitigation and asset sales. 

Harish Parmeswaran, Group Chief Operating Officer, Tawreeq holdings, delivered a presentation on the buyer led programmes.

For the third work stream on Risk Mitigation and Insurance, Silja Calac explained the current regulatory challenges faced by banks under Basel III. ITFA recently published Guidelines for its members concerning the use of non-payment insurance as an eligible unfunded credit protection for credit risk mitigation. This followed another initiative that ITFA took in producing a legal opinion to satisfy all ITFA members requirement in ensuring that the BAFT MPA is legally effective, enforceable and meets the criteria of the regulatory requirements within the EU. Silja mentioned to all those present the work that is currently being done jointly with BAFT in updating the current MPA agreement and which will be also available to ITFA members. Risk Mitigation and distribution of assets led to an active discussion on the BAFT MPA agreement and Credit Risk Insurance,  which was moderated by Paolo Carrozza, Commercial Director, Euler Hermes Middle East. ITFA would like to thank Paolo Carrozza for his contribution. This session consisted of a briefing on the growth in the insurance market and its key benefits in acting as an alternative distribution channel.

ITFA would like to convey their gratitude to GTR as their Global Media partner in closing another successful event. Those present from the ITFA board held a meeting with the MENA regional committee and active ITFA members to provide insights as to the enhanced role that ITFA would like to have in the region. Throughout the conference, the feedback to ITFA board members was very positive and the MENA Regional Committee is planning an event in Dubai for April 2017. More details to be provided shortly.

MARCH 2017 - TRADE OUTLOOK by Dr. Rebecca Harding, Equant Analytics

The stage looks set for the UK to trigger Article 50 as planned by the end of March 2017. This will start the process of negotiating the UK’s way out of the European Union, a process which will be at best difficult. As no-one at this stage knows precisely what the trade arrangements will be after Brexit, and as these arrangements won’t come into place for at least eighteen months, it is a good idea to take a snapshot of where we are now in trade terms and, indeed, to look at what the future looks like if nothing changes. At the very least, this provides a reference point for that point in the future when we are, well, where we will be.

Figure 1: Projected annualized average growth of UK trade with global regions, 2016-2020

Source:  Equant Analytics 2017

At first glance the chart shows that although UK exports to the EU 27 and the EU currency area are projected to fall, export growth to the Asia Pacific region (APTA) may be as high as 7.4% annually to 2020. This is a pattern that has been gaining some momentum for the past few years, particularly since the investment of BMW in the UK, which has boosted car exports to China for example. Export trade to the Middle East and North Africa is also projected to grow and much of this is in aerospace and engineering-related supply chains. Trade with North America seems set on a downward path – clearly Theresa May’s recent visit to the US has yet to show through in the projections!