Wednesday, 4 October 2017

A LITTLE BIT OF ITFA MAGIC by Katharine Morton, TFR editor-in-chief

Katharine Morton, TFR editor-in-chief, shares fond memories of the International Trade and Forfaiting Association’s Edinburgh spectacular
My journey started in King’s Cross early enough to take a snapshot of Platform 9 ¾  without the queues of tourists. Edinburgh, the other end of the train journey, was where JK Rowling created the wizard child, Harry Potter. In his opening address, Sean Edwards, chairman of the International Trade and Forfaiting Association (ITFA) reminded the more than 200-strong Edinburgh audience of ITFA of that fact and he promised some “ITFA magic” at the event. He delivered to his word.
This was the 44th annual trade and forfaiting conference event (the third since the association added the ‘T’ for trade). Forfaiting opened up emerging markets to trade, as Edwards pointed out, but all participants in the financing of trade have had to move on while remaining true to the ethos of the expanding organisation (expanding both in terms of membership, geography, and content, from fintech through supply chain finance and insurance).
And that ethos is all about community, as one banker told Edwards, “I’m picking up on a great vibe here. People know each other, like each other and trust each other.” A video gave a snapshot of a busy year for the organisation. Among the achievements have been the August 2017 adoption of URF 800 by UNCITRAL.
IFA from 1999-2014, then ITFA
If the motto ‘staying enthusiastic through the years’ was appropriate for the organisation in its 18 years of operation, then the keynote economics address was a little more sobering in tone. Jeremy Lawson, chief economist at Standard Life, started with an optimistic note before tempering it. The upbeat note was his view of the healthy cyclical recovery of the global economy, albeit a little moderated of late. The caveat was the importance of the geopolitical environment.
Lawson asserted that the recovery has been driven as much by emerging markets as developed ones. “It’s a bipolar world at the very least – the Chinese economic policy cycle is very important for the rest of the world.”
China’s aggressively accommodative fiscal policy and looser monetary policy has helped support commodity prices, Lawson said. He was also relatively sanguine about the US economy in terms of its fundamentals. Even though the US cycle has entered its 33rd quarter of growth, “growth cycles don’t die of old age. They die because of changes in policy or imbalances.”
He asserted that the EU economy is going from “strength to strength” because of favourable monetary conditions and fiscal policy not being a drag on growth.
Elsewhere, Lawson argued that most economies are moderately above trend growth with a benign backdrop.
However, and it’s a big caveat, central banks are about to shift their balance sheets significantly and are “starting to dilute the punch” – with signals of shrinking balance sheets and tapering asset repurchase programmes by as much as US$2trn in the next 15 months. If not handled properly there could be a risk of monetary policy mistakes – which Lawson called a mini taper-tantrum. “I don’t know how self-sustaining growth is in the global economy,” he said.
Digital receivables: things are getting better (and soon-ish)
The landscape of digitising receivables is one that could be about to change dramatically. For sure, that’s a story trade finance professionals can be forgiven for saying they have been hearing for a while now, but the prospect of secondary market liquidity in trade finance receivables could be set to improve.
An interesting discussion, moderated by ITFA’s Edwards, was kicked off by LiquidX’s Glenn Kocher giving his view of the current ‘flavours’ in the market. More and more, players can see how to use the technologies and how they are embedded to complement and augment the existing product and origination effort. Investors in trade instruments can be broadly categorised into a very few, large, well-established ones with a big distribution capability and the rest without much breadth.
Kah Chye Tan from CCRManager (see his interview with TFR from July/August 2017), looks to make distribution easier for banks, but there is no ‘silver bullet’. He argued there needs to be change and more discipline and better use of technology in four ways. First, the market needs better market pricing for investors to invest, which requires better transparency from banks. Second is transparency in terms of registering trades, and third is better settlement of trade finance instruments, and fourth is someone to act as a custodian.
Angus Scott from Euroclear discussed the challenges arising from lack of standardisation leading to lack of scalability. In many ways trade finance is a very simple asset, simpler than many bonds, but the difficulty in part is that the instruments are short lived, small ticket size with multiple jurisdictions. Standardisation and technology should be able to help. The ways things are done elsewhere in the securities markets may not need to be exactly the way things need to be done with trade, and the solutions don’t have to be on the blockchain.
Scott explained how simple settlement/post trade actually is. It has four different elements – the notary function (integrity of eg, how many ‘things’ there are to be recorded; the settlement itself which is exchange of title of eg assets for cash. The big deal is what is cash and how to take out the risk (liquidity after all has a cost). The third element is custody – which is basically a fiduciary record keeping. Fourth is financing – how can you finance it and reduce the cost of capital of holding the things?
The message to the ITFA conference was clearly ‘watch this space.’ The other conclusion was the difference between digitising and getting rid of paper. Certainly nobody on the panel thought that even though trade could and should be digitised, paper is going to disappear any time soon.
Cross fertilisation with BAFT
No ITFA conference would be complete without discussion of documentation. An important update in the Master Participation Agreement (MPA) was given by Stacey Facter from BAFT and Paul Coles, ITFA Board Member - Market Practice. Facter talked about the cross fertilisation of BAFT and ITFA on the project which looks to resolve for both English and New York law (with English Law as the original starting point for the revisions). Stacey thanked ITFA for driving the MPA update process thanks to the ITFA members survey, which formed the basis for the working group discussions. Coles noted that there may be some resolution by the end of the year, although he pointed out that it has so far taken 10 years to get to today’s positions.
What do corporate treasurers want?
The second day opened with a timely reminder of the needs of the end user of trade finance products – the corporate. Markus Sablatnig, EMEA treasurer at Amcor, a global specialty packaging company based in Australia, provided the right note when he told the audience in private detail what he was looking for in trade finance banks, highlighting the nature of supply chain finance being more of a marathon than a sprint.
Later in the day the important issue of IFRS 9 accounting standards (the successor to the bane of corporate treasurers’ lives IAS39) was raised by PWC’s Iain Kirkpatrick. He gave an enthusiastic wakeup call to the audience that the accounting standard goes live in 2018. Good news was that there is unlikely to be much difference in the judgements of the big four accounting firms as the standards board has been trying to give consistent answers.
Banking Africa the right way
Doing it right in Africa was a topic that exercised a lively panel on how best to bank the continent. A show of hands revealed that around 70% of the audience had undertaken trade in Africa, but for a further show of hands of how many organisations really understood how to do trade finance in the continent, the numbers dropped dramatically.
When the discussion inevitably turned to the thorny issue of bank derisking in Africa, moderator Duarte Pedreira from Crown Agents Bank, saw a strong case that in Africa, it was risk avoidance on the part of the banks rather than reducing risks. A case in point, Pedreira said, was his experience in Sierra Leone. There, the largest local bank made a very big effort to become compliant with KYCC and other regulations, hiring large numbers of temporary staff and in the space of three months have turned their situation around. “It’s staggering. The willingness is certainly there and if you tell them it’s a risk issue and give them the possibly to come up to standards, they are willing to invest and put in time and effort – then if we are not then banking them, it’s because of not wanting to do it from a revenue point of view. If you have minimum revenue thresholds – they jump at the opportunity.”
Private insurance markets had a role to play in the market, and there are few countries the insurance markets won’t go into, and some of the panel saw opportunities in bank derisking from the perspective of insurers. All agreed though that the areas suffering most from the estimated global US$1.5trn trade finance gap (estimated at around US$210bn in Africa) was the MSME sector.
For sure, good governance, effective local banks and audited (single book) accounts were all seen as important. Whether technology can be part of the answer is a difficult question particularly given the lack of data scientists in Africa. ITFA is stepping up with an Africa committee which Pedreira will chair. Education and communication are certainly key to improve the potential for accessing trade finance in the future.
Trade finance insurance drew centre stage as a topic and the thorny issue of how insurance compares or contrasts with guarantees, risk participations, surety bonds and other risk sharing techniques for credit risk mitigation. The current challenges and benefits for banks of each product were analysed by the panel chaired by Geoffrey Wynne, partner at Sullivan & Worcester, including the welcome advances provided by the new UK Insurance Act and the opportunities of risk participation agreements (RPAs).
Questions from the audience showed that the perception that ‘insurance doesn’t pay’ still weigh heavy from the Argentina debt crisis. Nonetheless, times have moved on, as have the wordings and documents and the panel were quick to assert that would be like comparing apples and oranges.
From financial wizardry to gala magic
It’s rare that men get to dress up more than women at special events. The ITFA Gala Dinner provided such an opportunity as all the men were given the chance to don kilts and sporrans and the full highland garb, while us women wore tartan sashes. Hopetoun House, overlooking the misty Firth of Forth provided the magical setting. A lone bagpiper set the evening off and before long we were touring the splendid house, eating haggis, drinking scotch whisky and dancing Scottish reels. The evening was topped off by a full pipe and drums marching band. Truly magic. Thank you ITFA.

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