YP contribution in the shape of a brief interview with Paul Coles - Pouya Jafari, Wells Fargo

MARKET PRACTICE UPDATE by Paul Coles HSBC

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

Dear Members and Friends,

It is no secret that the world economy, and therefore trade, is gaining traction. Economic data points have been indicating that this has been the case over the past 12 months or so. And recent central bank activity by the US Federal Reserve is testament to this. The momentum in global activity has spilled over onto 2018 from what has been a year of transition. In the IMF’s recent World Economic Outlook Update, it therefore comes as no surprise that the forecast for the world economy’s growth in both 2018 and 2019 has been revised upwards to 3.9 percent. The Asian Development Bank has reported a fall in the trade gap down to “only” US$1.5 trillion. Whilst unsatisfied demand remains enormous, and new technologies are just starting to make a dent, the trend is on the right course.  

Emerging markets began the New Year as they started off, in a strong vein, but the weakness brought about from rising benchmark yields in the US crept in. Having said that, demand for emerging markets remained robust and is expected to stabilise, with premiums rising albeit slightly from current levels. As had been expected, following the strong show in emerging markets in the past 18 months, the sharp correction witnessed of last year was far from inevitable, and spreads could widen in a much smoother fashion. Further growth of interest rates in the US will inevitably translate into higher borrowing costs for EM issuers, and could also, in the long run result in a slowdown in activity but this does not necessarily have to be a sharp and panic-inducing process.

Registrations to the 45^th ITFA Annual Conference have started to flow in. We encourage you to register and take advantage of the Super Early Bird Package which is available till mid-April. Cape Town awaits us - a coming-together of cultures, cuisines and landscapes. The members of the ITFA Board are extremely keen to welcome you to this fantastic coastal city in South Africa.

In this edition of the 2018 ITFA Newsletter you will find an article written by André Casterman, the very active chair of our Fintech Committee, entitled ''Collaborating with Fintechs does not mean taking risks, quite the contrary’’. James Collins has contributed ''The Updated Wolfsberg Principles 2017 – now called the ‘Wolfsberg Group, ICC and BAFT Trade Finance Principles''. We also publish a  notice concerning the establishment of an ITFA Insurance Related Think Tank (IRTT) to supplement the Insurance Committee’'. Our regular feature - Chart of the Month, contributed by Dr. Rebecca Harding of Coriolis Technologies Limited provides an interesting read titled ''Re-focus on UK services’’.

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

COLLABORATING WITH FINTECHS DOESN'T MEAN TAKING RISKS, QUITE THE CONTRARY by André Casterman, Chair, ITFA FinTech Committee and Founder, Casterman Advisory

There are various ways for financial institutions to benefit from advanced technologies and business models provided by so-called FinTech's. For those still hesitating to make the step, one approach is to start collaborating with FinTech's that help them in a non-intrusive, incremental way thereby limiting business risks. For those who are more bullish, taking stakes in handpicked FinTech companies will be the way to go, albeit riskier. Whichever way, collaborating with Fintech’s will drive transformation and accelerate change.

The Bank - FinTech collaboration is the way to go

Whereas most of the early FinTech talks spurred fears of so-called imminent disruption, a change in mindset occurred in 2017 as most FinTech's realised that the shortest path to revenue generation is to partner with banks rather than compete against such established and trusted institutions. Over the last 2 years, multiple deals between banks and FinTech's have been announced demonstrating not only the viability but also the strategic importance of such collaboration. In the payments space, examples include Standard Chartered Bank’s and Santander’s investments in blockchain-based global payments network Ripple. In trade financing, examples include HSBC’s stakes in TradeShift and Kyriba as well as DZ Bank’s and DB’s stakes in TrustBills.

Whilst such "collaboration" comes as a change vs. the early days, it is actually not new at all. Financial institutions have been using third-party software solutions for the last 5 decades. What is really new with FinTech's is that incumbent institutions can now easily take advantage of very advanced ways to drastically improve or, when desired, to re-invent their businesses. The “FinTech – Bank” deals led by some banks aim at taking bold moves to deliver serious growth opportunities. Making it happen is however easier said than done. Let's focus on execution.

Options for banks to work with FinTech's

To keep it simple, let’s consider two collaboration options as per Figure 1:

·         Option 1 - Incremental. In this first prudent approach, banks take advantage of FinTech propositions to improve or extend their existing and proven business models. Benefits for banks include incremental product enhancements, increased operational efficiency, reduced costs and improved user satisfaction. In this case, FinTech propositions are usually software solutions introducing technologies that co-exist with legacy systems. Collaborating with such Fintech's is low risk given the absence of impact on existing business models and practices. Also, as some FinTech technologies integrate very smoothly in legacy environments using non-intrusive IT techniques, short time to market is to be expected on top of earlier listed benefits. This first option offers a path to major efficiency increases and product enhancements whilst minimising risks.

·         Option 2 - Radical. In this second approach, banks partner with FinTech's who have invented and own a new business model. Banks do this when they realise important changes in client expectations and behaviours are happening and that business practices are being disrupted by Fintech's. In order to embark on such FinTech adoption path, banks need to have a bullish ambition (1) to get into new markets such as additional geographies and/or underserved client segments and (2) to embark in new business models and practices (e.g., joining a market place). Such FinTech platforms usually aim at connecting all participants involved in complex business transactions, so as to enable specific features such as auctioning, multi-banking, escrow service, title registry, transaction tracking, ... Assuming the bank's risk appetite is as high as the RoI of the prospective opportunity, banks will consider taking a stake in their chosen FinTech partner. This helps them be part of the governance and benefit from growing valuation of the FinTech company itself. It sometimes offers dividend payments as well.

Figure 1 illustrates both "Incremental" and "Radical" options whilst Figure 2 provides more details on key differences between both approaches.

Figure 1. Path to Bank – FinTech collaboration

The majority of financial institutions being risk averse, they favour taking an incremental approach which is described above as the low-risk Option 1. Figure 2 outlines key differences between both options:

Figure 2. Key differences between both FinTech adoption options

 

Given the strategic importance of the matter, some banks started to industrialise the "Radical" approach. A recent example is Standard Chartered Bank's new business unit called SC Ventures which will lead digital innovation across the Bank, invest in FinTechs companies and promote rapid testing and implementation of new business models.

As Michael Gorriz Group Chief Information Officer of Standard Chartered Bank said: “As new technology continues to play an ever more important role in banking, there is a huge opportunity for us to promote more innovation, and at the same time develop and deliver digital solutions that work for our clients and for us.”

Whether favouring the Incremental or Radical approach, one business area where such Bank – FinTech collaboration delivers tangible and immediate benefits is related to Data Management. As Alec Ross, Futurist and Author puts it in his recent book: "Data is the raw material of the information age". Financial institutions that fail to take advantage of their client transaction data miss a huge opportunity to match emerging client needs. They ought to understand that data represents a new type of economic asset feeding top management decision making. As the nature of innovation is changing, data becomes a decisive factor in the success or failure of businesses.

 

The new ITFA FinTech will guide you through the FinTech landscape

At a Board Meeting which took place in September 2017, the ITFA Board identified the future impacts of FinTech innovations on the receivables space and decided to set up the ITFA FinTech committee.

The ITFA FinTech committee is starting its activities in Q1 2018 and will organise educational opportunities for ITFA members to discover the various options to take advantage of FinTech propositions. The potential FinTech impacts on payments and trade finance are expected to be huge, so information on new technology options, improvements in business processes and new business models are paramount for transaction bankers to face the wave of change.

Resourced with representatives from FinTech companies and banks, the ITFA FinTech committee will act as a neutral forum for the ITFA membership to keep abreast of FinTech innovations impacting the trade finance and risk distribution spaces. It will focus on four key market-level themes: Collaboration, Platforms, Infrastructure and Data.

We hope the ITFA FinTech will become a venue for the ITFA membership to debate common issues and grow their understanding of FinTech propositions impacting the trade receivables space. A FinTech panel as well as other educational opportunities will be available at the ITFA 45^th Annual Conference that will take place in Cape Town between 4-6 September 2018.

Members of the ITFA FinTech committee

ITFA FinTech Committee Chair

·         André Casterman, Casterman Advisory

ITFA Board Members

·         Paul Coles, HSBC (ITFA Board Member)

·         Sean Edwards, SMBC (ITFA Chair)

Banks

·         Adeline de Metz, UniCredit

·         Daniel Rymer, Mizuho Bank

·         Farah Shaikh, Crown Agents Bank

Platform providers

·         Ka-Kit Man, CCRManager

·         Johanna Wissing, LiquidX

·         Markus Wohlgeschaffen, TrustBills

THE UPDATED WOLFSBERG PRINCIPLES 2017 - NOW CALLED 'THE WOLFSBERG GROUP, ICC AND BAFT TRADE FINANCE PRINCIPLES' by James Collins

A personal comparison and commentary by James Collins, currently working as Senior Manager, Trade Finance with Bank of Ireland and member of the ITFA Market Practice Committee.

A collaboration between the Wolfsberg Group, ICC and BAFT led to two years’ work aimed at making the 2011 Wolfsberg Trade Principles not only more up to date, but also more accepted and adopted by a broader audience than was previously the case. The revised Principles were published in January 2017.

My notes, originally prepared for my own benefit, comparing the new Wolfsberg Principles against the 2011 version can be found in the Members’ Section of the ITFA website.  However, I would encourage all Trade Financiers to take the time to read the full version of the new Principles if you can.

A possible perception of the old Wolfsberg Principles was that it applied only to the larger, global trade banks.  In considering an update, it was deemed that most Financial Institutions would be more likely to take up the guidance if the ICC was involved.  The input and involvement of BAFT would of course add greater geographical scope and relevance too.  The result should be seen as more universally applicable guidance than before.

In the Foreword to the 2017 Principles, the authors highlight that the core principles have not changed.  Neither have the responsibilities of the banks involved in international trade to meet all of their Know Your Customer requirements and have good knowledge of the business they are conducting.  Banks must still adhere to all relevant regulations on Money Laundering, Terrorist Financing, Bribery and Corruption, Sanctions etc.

What they have focused on is providing more detail concerning risk mitigation and the challenges and limitations faced by the banking community are also covered.  Recommendations are given to policy makers, law enforcement agencies and so on, regarding what actions need to be addressed to help FIs meet their obligations.

Having studied the new Principles, the changes are subtle more than dramatic, yet effective in their subtlety nonetheless. They are written to assist and guide FIs to manage the current obligations and interpretations made on Trade Finance business.  Pragmatically, the Principles accommodate the current compliance view of trade finance and its treatment as a high risk business.

The way the Principles are now set out and divided into the various sections and topics make them a lot easier to read too.

The Principles are split into two sections:  The Core and Appendices.

The Core itself is divided into four parts: introducing the Core; Control; Escalation; Glossary.

Under these headings, such topics as: Parties in Trade Transactions; Financial Crime Risks; National and Regional Sanctions, Embargoes and the Non-Proliferation of Weapons of Mass Destruction (NPWMD); Challenges; Recommendations; Customer Due Diligence; Name Screening; Activity Based Financial Sanctions; Export Controls; Limitations; Three Lines of Defense are covered.

The Appendices cover the application of the Principles in respect of: Documentary Credits; Bills for Collection; Guarantees and Standby LCs; Open Account.

We have all experienced first-hand the ‘world of compliance’ in the six or so years since the Wolfsberg Principles was first published. In summary, I think the new Principles are much more clearly set out and they give fuller and better guidance in key areas than previously.  Smaller banks can feel more included and that the Principles are equally applicable to them as they are to the larger banks.  I think the involvement of the ICC and BAFT has complemented the good work of the Wolfsberg Group and you can sense this collaboration in the more accessible style these Principles now have.  Previously, although I might have agreed with the sentiment of the 2011 Principles, I feel that the new update gives clearer guidance and is less subjective.   Practitioners now find more direction on how to navigate this ‘new world’.   Indeed, a key benefit the new principles have over the earlier version is time; by this I mean they are more considered and therefore arguably more appropriate for the trade finance industry today.

I understand the Group is also quite advanced with principles covering Open Account and FI Refinancing.  From the Work the group has done on the Trade Finance Principles, I anticipate that guidance on these further topics will be equally as applicable, clear and helpful.

James Collins, ITFA Market Practice Committee member. 

Disclaimer:  The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

NOTICE CONCERNING THE ESTABLISHMENT OF AN ITFA INSURANCE RELATED REGULATORY THINK TANK (IRTT) TO SUPPLEMENT THE INSURANCE COMMITTEE

We are pleased to announce that the Insurance Committee has established an Insurance Related Regulatory Think Tank.  The Think Tank’s objective is to clarify and build the right space for the credit insurance product as a proper Credit Risk Mitigant viz. the regulation applicable to Banks.

To achieve that objective the Think Tank will:

• gather information with a view to compiling a library of information on regulatory topics to be available to ITFA members. This information will be made available on the ITFA website. As a starting point ITFA’s Guidelines on structure and content for CRR compliant non-payment insurance policies is available here
• act as a resource point for exchange of information between members
• act as a conduit for dealing with relevant member queries by keeping any queries anonymous and circulating to members for feedback.

The Think Tank would welcome the support of ITFA members and would welcome any contributions that members may have in particular:

1) by providing information (articles, useful websites etc...)  to be considered for inclusion in the ‘library’

2) identifying insurance regulatory topics or queries for consideration by ITFA

3) sharing with the Think Tank, which other organisation ITFA should reach out to, to work on credit insurance / regulatory topics.

Communication with the Think Tank can take place via email. If preferred your communication will be forwarded in an anonymous way by the ITFA secretariat.

For any further questions, the members of the Regulatory Think Tank are:

• Carol Searle from Texel Finance
• Juliette Barre from XL Catlin
• Huw Owen from Liberty Specialty Markets
• Cengizhan Kaptan from Raiffeisen Bank International
• Sebastien Heurteux from BNP Paribas

NEW ITFA MEMBERS

TradeIX Limited is a ''Network of Networks'' open platform for trade finance, focused on low-cost transaction execution in a highly-secure environment by connecting pre-approved parties through APIs and leveraging blockchain technology.

TradeIX has a strategic partnership with R3 and their leading blockchain protocol for the financial services industry, Corda. TradeIX is also a member of the Linux Foundation and work with the Hyperledger consortium.

Mr. Richard Tynan will be the main contact person for all ITFA related matters.

Aon Credit International is a leading insurance broker. Working with both corporations and financial institutions their specialist global team provides innovative credit solutions for non-payment and investment risks. 

For corporations, they focus on helping clients use insurance and guarantees to improve working capital across payables, receivables, guarantees and investments. 

For financial institutions, the team is passionate about leveraging credit, political risks and surety insurer capacity as alternative distribution methods. In an evolving and complex regulatory environment, whether the driver is managing credit risk, credit concentration or capital optimisation, their Structured & Capital Solutions team has experience - across multiple finance product lines - of creating solutions for both single transaction and portfolio coverage. 

Mr. Aaron Bailey will be the main contact person for all ITFA related matters.

International Bank Liberia Limited is a commercial bank licensed and operating under the laws of the republic of  Liberia and providing full fledge commercial banking services to the Liberia public. These activities include, but are not limited to providing commercial loans and overdrafts, international remittances and trade finance by the issuance of letters of credit and guarantees.

Mr. Henry Saamoi will be the main contact person for all ITFA related matters.

CHART OF THE MONTH by Dr Rebecca Harding, Coriolis Technologies Limited

Chart of the month - Re-focus on UK services

In February 2017 the UK’s Office of National Statistics issued a warning about the UK’s fabled trade surplus in services. The ONS stated that it had been looking at pullicly available data, most notably available from the United Nations, provided different data on trade in services to that calculated by the UK government. It argued that the data from other countries, suggested that the size of the UK’s surplus may be considerably smaller than has been assumed to this date.

The ONS has a point. If you look at publicly available international data, it does seem that the data is inconsistent. Germany, for example, says it exports twice the level of financial services to the UK than the UK says it imports from Germany.

The only way round this problem is to reverse the flows and take an average which, using AI techniques, is weighted in favour of the better reporting country historically. This still produces surpluses with the world in business and financial services (Figure 1). However, the UK has deficits in all other service sectors except pensions. At an individual country level, the UK has a deficit in financial services with Germany.