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

The sun has set on ITFA’s most successful conference to date.  A record number of participants attended the main conference and the educational seminar, held at Dubai Chamber with the assistance of our partners at the ICC, which was the most interactive and lively I have attended. One of the challenges we set ourselves in organising the conference in Dubai was to impart some of the accumulated knowledge of our particular brand of originating, managing and distributing trade finance risk to bankers and financiers in the Middle East and, with wide local and regional attendance, I feel that we rose to that challenge very well.

As I mentioned during the opening night dinner this was a conference of firsts and lasts. The “first first”, and, for me, the most personally significant, is that I have now become your Chairman. This is, of course, a great honour but equally a great responsibility as ITFA is now, I believe, at a seminal point in its existence. As the frontiers, and even the meaning, of supply chain finance, of which we are part, evolve and expand, the association has the opportunity to play an important part in this dynamic and very elastic sector. Which brings me to the second first, namely the new members of the Board. As we have already announced , the existing Board has been joined by Zeyno De Vries-Davutoglu of Credit Europe Bank, Chris Hall of Lloyds Bank and Anurag Chaudhary of Citibank. With the current members of your Board, I believe we have a strong team to make an even stronger impact.

Some of these changes would not have been possible without two of the lasts I would like to mention.  Paolo Provera, our chairman for these last six years, has retired from his position and Dubai was therefore his last conference as Chairman. ITFA and his members owe him a large debt of gratitude. Under his faultlessly charming leadership, the association has broadened its profile and enhanced its professionalism. He will certainly be a tough act to follow. Dubai was also the last conference of Daniel Schär our treasurer. Finally, our conference organiser of the last 15 years, Faye Hamilton, has retired from business life. Her last conference was as always flawlessly organised and her successor, Ana Sjolund, who assisted Faye as a conference hostess, will have a high standard to live up to. (As I write we are exploring our venue options for next year).

It is not necessary for me to remind the membership of the recent turmoil in world markets and especially in commodities. The situation is volatile and may yet recover or at least stabilise but one of the strengths of our particular market is its relative resilience due to its broad base. Moreover, the large pool of unbanked receivables globally which can be unlocked, in part, by use of the techniques we excel at underpins the prospects of future growth. ITFA has an important part to play in fostering that growth and ensuring it reaches its full potential.   

Last but not least, with the Christmas season fast approaching, the ITFA Board is pleased to invite all ITFA members to attend the yearly informal gathering; the ITFA Christmas Cocktail Party. To view the invite please click here. The event is being held at The Roof Garden, Kensington, London on Monday 7th December 2015 at 19:00 hrs. As always, we encourage you all to attend this valuable networking opportunity, so please…save the date!

As always, 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

TRANSFERABILITY OF RIGHTS UNDER DEMAND GUARANTEES IN GERMAN LAW, by Jorg Gloss, Berliner Sparkasse - Branch of Landesbank Berlin AG, Corporate Development and Legal

The technical paper deals with the "Transferability of rights under Demand Guarantees in German law" written by Mr Jörg Gloss, Berliner Sparkasse - Branch of Landesbank Berlin AG, Corporate Development and Legal.

1.    Different perspectives: Demand Guarantee as an obligation and Demand Guarantee as collateral security

It is quite a difference in perspective whether a bank issues a demand guarantee or whether a bank accepts a demand guarantee as collateral security.

In both situations a bank will be interested in a guarantee that provides clear terms for a demand (in most cases either a simple demand or a demand together with a declaration and/or a submission of specific documents) with as little examination duties as possible for the respective guarantor.

For banks issuing guarantees the transferability of the rights under a guarantee is not very attractive as the potential additional administrative effort in examining demands by or payments to assignees is invariably not compensated for. This potential additional administrative effort consists in the examination of the assignee’s (or of several assignees’) entitlement to the rights under the guarantee in order to avoid the risk of a payment to a person not entitled.

Either the original beneficiary and assignor has given a written notice of assignment to the guarantor or the guarantor may demand from the assignee submission of the assignment agreement.[1]

The perspective of a bank which wants to benefit from a demand guarantee (issued in connection with the receivable) when purchasing a receivable à forfait is obviously different. The forfaiting bank wants to have transferred to it the rights under the demand guarantee and possibly to transfer these rights to subsequent purchasers. 

2.    The Law governing the assignability of a claim or right

According to the applicable EU-Regulation[2] the law governing the assigned claim shall determine its assignability. Therefore, if the demand guarantee is – either expressly or according to article 4 of the said regulation - governed by German law, the assignability of the rights under it shall be determined by German law. 

3.   The Distinction between the Right to Proceeds and the Right to         make a Demand under a Guarantee

The beneficiary’s right to the proceeds only arises once a demand is made which complies with the conditions stipulated in the guarantee, in most cases a specific declaration. On the other hand the right to make a demand and consequently the fulfillment of these conditions which (although abstract and to be examined on a documentary basis) are aimed at a specific security purpose (e.g. security for the payment of a purchase price, security for the performance of specific contractual obligations) may depend on different and more complex criteria, e.g. on specific events in a contractual relationship and their evaluation. The distinction between the right to proceeds and the right to make a demand under a guarantee is reasonable and has been an established distinction for considerable time.[3] 

4.   Assignment of Proceeds

Once a demand complying with the conditions stipulated in the guarantee has been made the right to proceeds comes into existence and can be assigned. According to section 354a of the German Commercial Code a provision in the guarantee prohibiting such assignment will not render the assignment void. But the guarantor may still choose to pay to the original beneficiary thereby being released from its payment obligation (in the context of a demand guarantee issued by a bank it is neither practical nor likely that payment will be made to the original beneficiary after a notice of assignment has been received by the guarantor).

The conditions for the applicability of the mentioned section will almost regularly be met: the right to proceeds is a claim for money and the agreement giving rise to the right to proceeds (the demand guarantee) will in most cases constitute a commercial transaction for the parties of the guarantee as defined in section 343 of the German Commercial Code. 

5.   Assignment of the right to make a demand

5.1 Assignment of the right to make a demand where the guarantee is silent as to its transferability

Many demand guarantees do not contain any provision as to their transferability or the assignability of rights under it. Reported court judgments do not relate to an assignment of the right to make a demand under a demand guarantee which is silent as to its transferability. Published articles and commentaries differ in their views. The following thoughts are based on what I perceive to be the most persuasive legal argumentation. 

5.1.1    The right to make a demand as an accessory ancillary right

Section 401 of the German Civil Code provides for a transfer of the accessory rights when transferring the rights to which the accessory rights belong. There is case law applying this section “per analogiam” to ancillary rights closely related to the rights which are to be transferred. One could think of arguing the assignability of the right to make a demand under an independent, non-accessory demand guarantee by applying the mentioned section “per analogiam”.

But it is almost impossible to conceive the right to make a demand under a demand guarantee as an ancillary right only. Rather considering the nature of a demand guarantee the right to make a demand is the most important and essential right. Furthermore, the application of a statutory rule “per analogiam” should be restrictive. Therefore, the mentioned section should not apply to the transfer of the right to make a demand under a demand guarantee[4].

5.1.2    Restriction of Assignability of a claim

According to section 399 of the German Civil Code the assignment of a claim is not allowed if either the performance to the benefit of a person other than the original creditor would change the content of the performance or if the assignment is excluded by agreement with the debtor (either expressly or by implication, e.g. the right to performance by the employee in an employment contract).

The content of the performance of the guarantor’s obligations under a demand guarantee (examination of a demand and subsequent demand rejection or payment) would not change by the fact that the demand is made by an assignee.

Due to the security agreement between the party instructing the guarantor and its counterparty (the beneficiary of the guarantee) the guarantee carries a specific security function closely related to the underlying contract (e.g. to serve as security for the performance of payment obligations or of other specific contractual obligations). In addition, the exercise of the security function of a demand guarantee does not require any evidence that the right to make a demand has crystallized. Rather, a formalized demand according to the conditions stipulated in the guarantee is sufficient to trigger the payment obligation of the guarantor.

These circumstances show that a demand guarantee presupposes a considerable amount of trust by the guarantor and the party instructing it and ultimately privity to the underlying contract by the beneficiary. Neither the party instructing the guarantor nor the guarantor would extend the necessary trust to grant the right to make a demand to any other person.

Although the guarantor is not a party to the underlying contract, the guarantor knows about the security function of its guarantee obligations, is well aware of the trust extended to the beneficiary and takes a vital interest in avoiding any increase of the danger of fraudulent or unrightful demands under its guarantee.

Professional guarantors like banks do not simply rely on the credit risk of their instructing customers and forget about the identity of the beneficiary. For compliance purposes and in order to protect its own reputation and the reputation of its demand guarantee business a guarantor is always keen to understand (although not to accurately assess) the underlying situation including the security function of the demand guarantee, the identity of the beneficiary and its role in the underlying contract.

The necessary trust involved in demand guarantees is equally shared by both the party instructing the guarantor and the guarantor itself.

It does not seem clear, whether a demand guarantee securing a payment obligation the performance of which may easily be evidenced (as opposed to demand guarantees requiring declarations and/or documents relating to specific breaches of contract), presupposes a lesser degree of trust.

For these reasons a demand guarantee is to be construed as containing an implied exclusion of the assignment of the right to make a demand. Section 354a of the German Commercial Code does not apply to the right to make a demand because it is not a claim for money.

An assignment of the right to make a demand would require the consent of the party instructing the guarantor and of the guarantor and an according amendment to the guarantee.

5.2  Assignment of the right to make a demand where the demand guarantee provides for the assignability of such right

5.2.1    German Law

At present there are at least two reported judgements of the German Federal Court of Justice[5] holding that an assignment of the right to make a demand is possible to the extent such assignment is expressly allowed in the demand guarantee.

Such assignability provision in the demand guarantee would indicate from the beginning that the party instructing the guarantor and the guarantor agree that the beneficiary is entitled to delegate the trust inherent in the demand guarantee to the assignee(s) of its choice[6].

5.2.2     URDG 758

The URDG 758 are even more cautious in allowing the transfer of a demand guarantee (transfer constructively meaning the issuance of a demand guarantee with identical conditions to the new beneficiary).

Not only must the demand guarantee expressly indicate that it is “transferable” but:

-    Even if the guarantee is transferable a transfer is still subject to the consent of the guarantor

-  The guarantee may be transferred more than once but it may not be transferred partially

-   The transferor must submit to the guarantor a signed statement that the transferee acquired the transferor’s rights and obligation in the underlying relationship.

6.   Conclusion

In order to assign the right to make a demand under a demand guarantee governed by German law it is highly recommendable to expressly provide for the assignability of the right to make a demand under it. Such a provision would, of course, need to be covered by the instruction or consent of the party instructing the guarantor and by the consent of the guarantor.

In order for the assignor to avoid any liability in case of a fraudulent or unrightful demand by the assignee and new beneficiary, the latter should expressly assume (e.g. in the forfaiting agreement) the obligation to respect the security purpose of the demand guarantee. This obligation should generally not be a burden for the assignee and forfaiter or subsequent assignee and forfaiter because it will also become the creditor of the secured receivable and thus be in a position to monitor the performance under the receivable.

As a further precautionary measure the forfaiting agreement should include an obligation by the original beneficiary of the demand guarantee (assuming that it is a party to the forfaiting agreement) to make a demand under the guarantee at the request of the forfaiter.

Alternatively, a new guarantee may be issued directly to the benefit of the forfaiter.

If the demand guarantee is subject to the URDG 758 the requirements stipulated in art. 33 URDG 758 will have to be met.

---

[1] According to section 410 of the German Civil Code, which would be applicable to the relationship between assignee and debtor (here the guarantor) in accordance with art. 14 (2) of the EU Regulation 593/2008 (“Rome I”) if the demand guarantee is subject to German law

[2] EU Regulation 593/2008 (“Rome I”), art. 14 (2)

[3] The distinction is reflected in Art. 4 URDG 458, Art. 33 URDG 758, R. 6.06 ISP and in articles 9 and 10 of the UNCITRAL Convention on Independent Guarantees and Stand-by Letters of Credit (adopted by the UN General Assembly on 11 Dec. 1995 and in force since 1 Jan. 2000 between Ecuador, El Salvador, Kuwait, Panama and Tunisia and up until today also Belarus, Gabon and Liberia)

[4] In a decision of 1987 the German Federal Court of Justice (BGH NJW 1987, 2075) referred to section 401 of the German Civil Code in holding that the right to make a demand was assigned together with an accessory suretyship (“Bürgschaft”). Most commentators are of the view that this decision should be treated with caution when applying it to independent demand guarantees. The facts are quite singular and an accessory suretyship can only be assigned together with the secured claim.

[5] BGHZ 90, 287, 291; BGH WM 1999, 72,73

[6] According to the German Federal Court of Justice the assigning beneficiary of an independent security right is under the obligation to oblige the assignee and new beneficiary to respect the security purpose of the demand guarantee (BGH NJW 1997, 461, 463f.)

TO FORFAIT OR NOT TO FORFAIT? by Sofia Lotto Persio, Editor - Global Trade Review (GTR)

Clearer definitions of forfaiting are being developed to make it easier for people to answer this question and understand forfaiting’s risks and opportunities. Sofia Lotto Persio reports.

Any conference with a session on supply chain finance (SCF) will invariably invite the speakers to upload a PowerPoint slide with a definition of the term – a challenging task due to the number of instruments to consider and the lack of a standardised common reference.

This may soon change, as a coalition has come together to define SCF in all its forms. The International Chamber of Commerce (ICC), along with the Bankers Association for Finance and Trade (BAFT), Factors Chain International (FCI), Euro Banking Association (EBA), International Factors Group (IFG) and International Trade & Forfaiting Association (ITFA) have joined the effort to create SCF definitions once and for all.

Forfaiting is described by the Global SCF Forum’s draft publication released in June this year as “a form of receivables purchase, consisting of the without recourse purchase of future payment obligations represented by a negotiable or transferrable financial instrument or claim, at a discount or at face value in return for a financing charge”.

Sean Edwards, head of legal at SMBC and ITFA’s Chairman, is one of the people involved in the drafting process. He explains that, with the development of the new definition, his intention has been to show that forfaiting is very much part of SCF techniques, and a very important instrument for managing trade receivables. “What I wanted to draw out was the wide variety of underlying instruments that could be used with forfaiting. Where forfaiting and factoring start to blur together is in the discounting of book or invoice receivables. Traditionally it was hard for a pure forfaiter to do this without recourse, as book receivables contain contract performance risk, and a factor would traditionally have had recourse in those situations. If you can amend the terms of the receivable, however, so that it is unconditional, then you can purchase a book receivable or invoice without recourse,” he tells GTR.

Edwards adds that while usage of SCF instruments is on the increase, it has become less easy to ascertain which category they fall under, particularly in emerging economies where forfaiting, factoring and receivables discounting often merge into one another in some hybrid forms. He mentions as examples: short-term loans accompanied by standby letters of credit; bank payment obligations (BPO) forfaited between recipient and obligor banks; and banks under a supplier finance arrangement selling an obligor’s irrevocable payment undertaking as a separate instrument into the forfaiting market.

Professionals in the forfaiting market, however, warn against restricting the definition to too narrow a meaning. “The key unique selling point of forfaiting is that it is a very flexible product which can be tailored to the client’s requirements,” says Simon Lay, deputy CEO of Fimbank. “Forfaiting is a word people use, but it covers different meanings for different institutions. The forfaiting entities, those who provide the services, tend to be those that have a structure which allows them to give quick, flexible financing solutions to the client. The client does not really want to know what you are going to call the financing technique, he just wants to know you can finance that contract for him in an efficient way,” he adds.

Edwards acknowledges that there is a certain overlap between the definitions of forfaiting, factoring and receivables discounting: “There is a lot of common ground between all three techniques and I think that one of the big benefits of the definitions is to set out the commonalities and differences in one document. From that more effective hybrid, structures and arrangements may become apparent and be created, which will assist innovation.”

The draft of the SCF definitions is available online for feedback, with the release of a final version expected by the end of the year.

According to Lay, it is now the banks’ responsibility to ensure these are enforced. “The rules will only become fully adopted when banks apply them in their regular dealings with each other, rather than adopting a ‘wait and see’ approach.”

Commenting on the forfaiting definition itself, he says: “Although this is a new definition, it really gives a very traditional explanation of forfaiting but also adds the interpretations of the universal rules for forfaiting (URF 800). Whilst a lot of effort has been put in producing these rules, they are still not a major component in discussions between primary and secondary market participants. Forfaiting tends to operate under fairly traditional customs and practices. However, the rules serve as a useful reference document to interpret such practices and to give structure and guidance in any dispute.”

Creating awareness in emerging markets

Associations such as ITFA are doing their part to promote awareness of forfaiting and its rules. Adding to its historical partnerships with the ICC, BAFT, the Asian Development Bank and the European Bank for Reconstruction and Development, ITFA signed an agreement with Afreximbank in April 2015 to promote best practices, attract non-bank funding and develop a primary and secondary market for African-traded debt papers, among other initiatives.

It is believed that having clearer definitions of SCF instruments would increase not only the awareness but also the availability of different trade finance products in emerging markets. “It will make it easier for people to do transactions, especially for banks in Africa,” says Benedict Oramah, Afreximbank’s incumbent president. “It makes it easier for them to adopt it, and the common language of risk would be accepted by everybody. Without this you have problems. We see it ourselves because people may not understand trade finance risk, or the difference between conventional trade financing and forfaiting.”

NEW ITFA MEMBERS

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

United Bank Limited (UBL) is the second largest private bank in Pakistan, registered in 1959. Currently it has more than 1,300 domestic branches and an international footprint in 11 countries including - UAE, Bahrain, Qatar, Yemen, Oman, UK, USA, Switzerland, China and Tanzania.

UBL is proud of its long history in the Middle East. In the UAE, they were privileged to be the second international bank to open its branch in Abu Dhabi in July 1967.  At present “Bestways Group” of United Kingdom is the major stake holder (51.60%) of the Bank. The group is mainly involved in the largest cash & carries business in UK, together with other activity.

UBL is the leading market participant in the Corporate, Retail, Investment, Treasury & Capital markets and Trade Finance business with consolidated equity of USD1,454.1mln, assets of USD13.500mln. UBL's GDR’s are listed on the London Stock Exchange and shares are listed on Karachi, Islamabad & Lahore stock exchanges.

Muhammad Omer will be the main delegate for all ITFA related matters.

Emirates Islamic Bank PJSC was incorporated in 1975 and is headquartered in Dubai, the United Arab Emirates. Emirates Islamic Bank PJSC is a subsidiary of Emirates NBD PJSC. The total assets as of June 2015 reached USD 13 billion, which also makes it ranked as the third largest Islamic bank in the country.

Emirates Islamic (EI) was formed as a full-fledged Islamic bank to provide the highest standards of Islamic banking services for individuals and small businesses as well as large corporations through 60 other branches.

EI focuses on corporate finance, capital market, commercial banking, and private banking services in and out of the Middle East. EI combines banking expertise and insights of Middle East with strong Islamic banking credentials to tap into opportunities in the world.

Ahmed El Sahhar will be the main delegate for all ITFA related matters.

Natixis is the corporate, investment, insurance and financial services arm of Groupe BPCE, the second largest banking group in France (with two retail banking networks namely Banque Populaire and Caisse d’Epargne). 

At Natixis, the long-term best interests of clients come first. Based on a strategic dialog and a 360 vision of their needs, challenges, risks and interests, they build a long-term trusting relationship with clients. All resources, talents and energy are geared to providing the best client support. They harness all their expertise and combine them to design the best banking, financial and insurance solutions.

Natixis has three main business lines: Corporate & Investment Banking, Investment Solutions & Insurance, and Specialised Financial Services. Listed on the Paris stock exchange, it has a CET1 capital under Basel 3 (1) of Eur1.4 billion, a Basel 3 CET1 Ratio (1) of 10.6% and quality long-term ratings (Standard & Poor’s: A/Moody’s: A2/Fitch Ratings:A).

Lakhdar Hamadi is the main delegate for ITFA matters.

Commercial Bank of Kuwait (CBK) is one of the largest financial institutions in Kuwait with a strong and growing corporate and retail banking franchise providing innovative financial and investment solutions to every growing customer base.

Established on 19th June 1960, CBK is the second oldest bank in Kuwait. From retail banking to major project finance, CBK is mobilising its substantial capital base and decades of expertise to assume a cutting edge role in the Kuwait economy.

The Bank has emerged as a lead financier, ranging from a flow of loans to diverse power, construction and notable infrastructure projects in Kuwait.

Mr. Tan Tat Thong will be the main delegate for all ITFA related matters.

UPCOMING EVENTS - SAVE THE DATE

With Christmas only two months away, the ITFA Board is pleased to invite all ITFA members to attend its yearly informal gathering; the ITFA Christmas Cocktail Party. To view the invite please click here. The event is being held at The Roof Garden, Kensington, London on Monday 7th December 2015 at 19:00 hrs. 

Invites to the Christmas event have already been sent to the Main delegate of each member association and to non-member individuals who attended the Dubai Conference. Please keep in mind that the invite is for MEMBERS ONLY and access to the event is restricted to confirmed guests only.

As always, we encourage you all to attend as this is a valuable networking opportunity. The informal setting will definitely make it an enjoyable event, were all present can get into the Christmas spirit and unwind. We look forward to seeing most of you there. So please...save the date!

On a different note, we wish to remind our readers of the 9th German Export Finance Conference (30th November – 1st December, Berlin). Major exporters, agencies, financiers and banks will be meeting at this event, which is dedicated to discussing the latest European trade finance challenges facing exporters and financiers. 

Another interesting event which is being held between 8-9 December in London is the AML Risk Reduction and Compliance Europe conference. The event breaks down into 2 complementary days: Legislation, regulation and the future of the AML industry; and AML, KYC and CDD: Examining your processes and improving outcomes. For all the necessary details about this event click here.

CHAIRMAN'S MESSAGE - Paolo Provera, Chairman ITFA

Dear ITFA friends,

The time has come for me to say goodbye and resign from the position as Chairman of ITFA.

As you probably know, I have resigned from my previous employment to take a sabbatical period for relaxing and thinking about my private and professional future.

It seems only yesterday that day in September, 1999 when I was in Heidelberg and a group of passionate forfaiters founded the IFA with a great team spirit and a lot of ideas and initiatives; some of them are still in the market and some others have retired since then, but thanks to them we have created a solid Association.

I joined the IFA Board in 2004 acting as Regional Head and then Treasurer until 2007, when I had the privilege to be elected Chairman.

Under my Chairmanship I had the honour to work with excellent people who contributed to our success and brought ITFA’s flag to be internationally recognized and nowadays even collaborates closely with important international Associations and plays an important role in the world Trade Finance market.

Nonetheless, I was lucky to have had the possibility to organize the last 14 Annual Conferences which gave me the chance to meet fantastic people and to visit amazing venues; your kind appreciation for each Conference was the best satisfaction of my professional life.

I take this opportunity to say thank you to all those forfaiters who worked with me during my long period at ITFA, not only for their superb contribution but primarily for their loyalty and friendship, and to each one of you for your support and trust.

Although I may feel sad at this moment, I am happy to hand over the Association in very good hands and I wish the new Chairman and the new Board every success in obtaining the same satisfactions I have managed to fulfil.

I will always cherish the memories I have made throughout my time at the Association and I look forward to seeing you all in Dubai, where I will be delighted to bid farewell to each and every one of you in person.

Briefly touching upon the upcoming conference, one of the key topics which will inevitably be discussed is the prevailing volatility in markets, particularly during the month of August. Fears of a slowdown in China sent shivers down investors’ spines, thereby sparking risk-off mode as risks of contagion into emerging markets began to materialise faster-than-expected. Chinese fears continue to drive market and investor sentiment and the key monetary policy moves by the major central banks coupled with the sharp decline in commodity prices and recent strength of the US dollar against emerging market currencies, will be the key themes to watch out for in the weeks ahead.

Warm regards,
Paolo Provera 

RECEIVABLES FINANCE: FORFAITING by Clarissa Dann, Editor - Trade & Forfaiting Review (TFR)

Clarissa Dann reflects on her past four years of attending ITFA’s forfaiting and trade finance conferences and observes that this vital tool in the receivables armoury has huge potential. 

You have to hand it to the International Trade and Forfaiting Association. In the run-up to their 42nd annual conference (this time in Dubai), I find myself reflecting on how this professional body has used the basic purchase of future payment obligations on a without recourse basis to inspire an entire global community.

Part of the family

This personal reflection is partly down to a certain amount of self-indulgence on my part. I took up the TFR helm on 1 August 2011 and found myself in Vienna a month later at the then IFA’s 38th incarnation of what has always been a high point of the receivables finance calendar. 

The passion for education shone out back then – thanks to chair Paolo Provera and vice chair Sean Edwards – this was a crash course in trade finance par excellence, and was the start of something of a love affair with this committed and passionate network of trade financiers. As one Russian first-timer put it last year at the 41st conference in Barcelona, “I feel I have gate-crashed somebody’s wedding, and have been made to feel part of the family.”

In the beginning

Having put the trade into its forfaiting title in Barcelona last year, what was formerly the IFA has achieved a lot since its formal foundation with officers and committees on 4 August 1999 in Zurich and launch at the Heidelberg conference a month later. 

With previous chairs having included Lucio Matassoni (now at OCBC and formerly at SMBC), and FIMBank’s Margrith Lutch-Emmenegger, current chair Paolo Provera (formerly of ABC Bank and now exploring new opportunities) took up the helm in 2009 and set about uniting the different geographic regions and developing the ITFA’s Asian reach (Bank of China having representation on the Board). A multi-linguist (I was trying to work out what language Provera did not speak), he is widely regarded as “one of those guys that enabled people to make things happen with fabulous people skills”.

It’s what you call it

“What’s forfaiting?” I am repeatedly asked, when those outside this eclectic industry quiz me.

Eyes glazed over when I started talking about straight discounting and I don’t go there with formula used to work out the net value of a discounted debt. I explain that it is a very important tool in the receivables finance armoury which takes us into supply chain finance country before outlining what you can do to get paid more promptly if you are supplying pickles to Lidl.

Forfaiting is generally regarded as the buying or selling of the right to future payment through discounting of future cash flows, but the inclusiveness of the term has sometimes led to confusion over what it can mean. It can cover a wide range of receivables, it may or may not be trade related, it includes the discounting of letters of credit (LCs) or other payment obligations, but traditionalists tend to see forfaiting as trade finance through and through because of the need to have an underlying rationale for the business. 

UniCredit’s global head of trade products Markus Wohlgeschaffen (a regular as a panellist and a speaker), thinks forfaiting has suffered from an issue of “not being disciplined in our nomenclature”. “I find it bizarre that people see forfaiting as a special animal – it’s just a tool,” he explains. But it still suffers from identity challenges. 

Wohlgeschaffen says this is one of the reasons for the ICC Banking Commission’s project to create a consistent and common understanding of supply chain finance.

Edwards, representing ITFA views, has been part of the drafting group and contributed the definition of forfaiting. “When you put up all the component parts in the spotlight and you set them alongside the other receivables purchasing techniques such as factoring, you quickly see that there is nothing outdated or irrelevant about forfaiting. The skills, conceptual approaches and structures sometimes get overlooked by some trade financiers or are simply used under a different name.” He continues, “In both cases, the wider trade finance industry could be missing a trick so looking at the essence of this technique is a very worthwhile exercise.”

Historically, forfaiting for many has been, says Edwards, “a matter of promissory notes and bills of exchange funding the export of capital goods”. He adds, “That those markets still exist is often forgotten by many critics. Large export markets such as Germany have thriving forfaiting communities as do large parts of Asia where the preferred instrument is the letter of credit.”

Impacts and outcomes

The beauty of forfaiting is that it allows suppliers to offer longer-term payment terms to buyers without adversely impacting their liquidity or inflating their balance sheets. “It’s one of the most important instruments to unleash trapped liquidity,” confirms Wohlgeschaffen. 

“I find the ITFA is one of the most active organisations that delivers tangible results and the fact they have enlarged it with a ‘T’ shows they really understand what is going on in trade,” he enthuses. He cites the adoption by the ICC Banking Commission of the Uniform Rules of Forfaiting (URF800) in January 2013 after three years of drafting as a “huge achievement”.

Another example of the body’s forward thinking is how to attract new talent into the industry. Having launched the so-called “Young Professionals Network” in Barcelona, work is well underway to build a strong network of junior colleagues to foster the education and career development of the next generation of trade financiers and forfaiters in trade finance.

Volumes and price compression

The inexorable rise of open account trading is directly correlated to the long-term growth of forfaiting. This, combined with the ever growing tendency of suppliers to provide stretched payment positions will, say observers, lead to increased take-up of the instrument.

However, right now, most providers confirm that forfaiting volumes “have dropped” although unlike the Factors Chain International statistics, there is, as yet, no repository of global forfaiting statistics; there are efforts being made to change this with the assistance of the Asian Development Bank (ADB). The main reason for the slowdown in activity is the slump in commodity prices. Says Wohlgeschaffen, “At UniCredit we have experienced reduced volumes of forfaiting transactions, but if we ignored the commodity trade finance sector there would actually be an increase.”

London Forfaiting Company (LFC) director Tony Knight makes the point that “there is far too much liquidity chasing a narrow group of countries as a consequence pricing in, for example, Turkey, bears no relation to the risk.”

Sources of business

A number of institutions have “discovered” sub-Saharan Africa, where there is still a requirement for classical trade finance products and, for the most part, a good performance record. While most would agree that in Angola and Nigeria, the reverse is at play because of the collapse in oil price, Knight observes that the other smaller countries in sub-Saharan Africa, where LFC enjoys a regular flow of business, “have attracted growing interest, again putting downward pressure on pricing while there is no discernible pick up in credit metrics”.

It was at last year’s ITFA conference in Barcelona where Afreximbank president elect Dr Benedict Okey Oramah told delegates, “Opportunities therefore exist for forfaiters willing to take African payment risk. In this context I believe that Africa will underpin the rebirth of forfaiting business. Africa will be forfaiting’s new frontier”.

It is not all doom and gloom on pricing, however. Knight adds, “We still attempt to generate the majority of our business from well-established relationships with a number of export clients. While this entails more work (structuring advice, letters of credit, FX), it brings added value and builds upon the relationship with the exporter.

On pure forfaiting, Knight says LFC has no pressure to trade if it does not feel the opportunity is right. “We have a diverse risk appetite and strong liquidity as such LFC employ trading as a portfolio management tool. This enables LFC to take a considered view on transactions that do not readily fall within the volume trade finance market. As a consequence there is less competition and a pick-up in pricing.”

From Knight’s perspective, “there is no point trying to compete in the volume countries such as India and China”. LFC looks further afield or at different aspects of the trade cycle and interjects where it sees an opportunity, or when there is a correlation between risk and margin.

'R' is for...

You may hate it, but you may need to learn to love it. I am, of course, talking about regulation. In this environment ITFA would not be giving its members a proper service if it did not get stuck into the various issues affecting the wider trade finance industry.

One of these has led to a very concrete solution being provided by ITFA. CRR (the Capital Requirements Regulations, one of the measures which enforces the new Basel III rules in Europe) obliges banks to obtain legal opinions on the effectiveness of any credit risk mitigants (CRM) they use. One such CRM is the sub-participation agreement. ITFA, working with BAFT, commissioned and negotiated a generic market legal opinion with Sullivan & Worcester on the BAFT MPA which avoids the need for each bank to obtain its own opinion or at the very least significantly reduces the scope and therefore expense of any such opinion. All ITFA members are expressly allowed to rely on the opinion.

ITFA has also assisted BAFT in the United States to lobby the US authorities to avoid sub-participation agreements being classified as swaps under the Dodd-Frank legislation.

Joining the 21st century

One of the current impediments to forfaiting’s wider adoption is the difficulty in documenting and evidencing the debt. “Until there is an absolutely standardised document for every trade document in the world, forfaiting will stay manual,” says Knight. UniCredit’s Wohlgeschaffen is concerned about the lack of progress on the digitisation of forfaiting and sees this as a collective responsibility. “We want to offer clients the facility to upload the data that represents an invoice without being forced to present a paper one”, he says. “We are in the process of revamping our trade finance IT platforms and we have partnered with IT vendors to support this endeavour. Whatever our corporate clients upload, be it an invoice or an LC, it will be possible to initiate and execute a forfaiting transaction,” he concludes. 

All that needs to happen now is for everyone else to do the same.

NEW ITFA MEMBERS

The ITFA Board is pleased to announce the following four new members to its fast growing family.

The Saudi British Bank (SABB), a Saudi joint stock company was established in 1978 and is an associate of the HSBC Group. The Bank commenced its activities with the taking over of the operations of The British Bank of the Middle East branches in the Kingdom of Saudi Arabia (KSA).

Over the years SABB has developed a market leading trade finance proposition which is supported by a team of 132 dedicated trade associates located in all major business centres and various industrial and inner-city commercial areas within KSA. SABB’s Trade and Supply Chain team assists customers in implementing efficient and optimal financing structures to meet their trade and working capital requirements while minimising market risk. During 2014, SABB had successfully commercialised its Receivable Finance proposition. SABB has also rolled out various initiatives aimed at enhanced client experience and risk mitigation.

SABB retains its strong links with the HSBC Group, which provides an unrivalled international access and connectivity for the benefit of its clients, and remains the leading international trade bank in the Kingdom supporting and servicing both domestic and foreign companies. SABB has been awarded the trade finance bank recognition by Global Finance (7 times in a row), The Asian Banker (Best Trade Finance Bank in KSA – 2014) and GTR (MENA Leaders in Trade Award 2009-2011,2014).

Arup Roy will be the principal contact in relation to ITFA matters.

United Bank UK’s principal activities are to provide retail banking products through its branch network in major cities in the UK; wholesale banking, treasury and money transmission services to financial institutions, and trade finance facilities to businesses of all sizes.

Sunita Mehta will be the principal contact in relation to ITFA matters.

Liberty Specialty Markets (LSM) offers specialty and commercial insurance and reinsurance products across key UAE, Middle East, US and other international locations. The team, in particular, is a leading provider of insurance protection. Their global client base includes government agencies, international banks, multinationals and global commodity companies as well as a wide variety of exporters and contractors.

Classes of business include: non-performance by private and public obligors, non-payment by private and public obligors, fair and unfair calling of contract bonds, and political risk for fixed and mobile assets. The team of 15 consists of expert underwriters and analysts based in London, Paris and Singapore.

Elizabeth Dexter will be the principal contact in relation to ITFA matters.

RK Harrison has delivered insurance solutions to meet the sophisticated requirements of wealthy individuals since 1882. They deliver expert insurance developed by brokers who are as passionate about the service they provide as the items they insure. 

RK Harrison Financial Risks works within the political & structured credit and international trade credit insurance markets as insurance brokers. By creating insurance that is fit for purpose, they offer their clients value for money. Their experts build solutions that meet precise individual requirements, so clients only pay for the coverage they need.

Mr. Neil Galletti will be the principal contact in relation to ITFA matters.

UPCOMING EVENTS - SAVE THE DATE

With the ITFA 42nd Annual Trade and Forfaiting Conference only a few weeks away, the ITFA Board is working extremely hard with the last minute preparations to ensure  that the event is one to remember.  To register for the Conference on-line, please click here. 

This year’s Conference is going to be held between Monday 28th September and Wednesday 30th September, 2015  at Jumeirah Beach Hotel in Dubai.

So please do not forget to register and save the date! We look forward to seeing you all in Dubai.

On a different note, we wish to remind you all that IBC is organising a 2-day Conference titled: ''Trade Credit Finance, Risk & Insurance - exploring corporate finance and risk management in open account trade''. This event is going to be held between the 23rd and 24th September, 2015 in Central London. For more details about the conference please click here.

TUTORIAL - BECOMING FAMILIAR WITH VARIOUS FUNCTIONS ON THE ITFA WEBSITE

As time flies by, we find ourselves tackling yet another tutorial session. By now, I'm sure you have all become very confident using our ITFA website, which was the intended aim of these tutorial sessions. In fact, this will be the last tutorial as we have tackled all the main areas of the website which you might need to access and edit.

With the help of these tutorials, our users now have the know-how on how to successfully use the various functions of our ITFA website - www.itfa.org.

In this issue we will be tackling the function of editing organisation details. So the question arises:

How would one go about editing 'his/her' organisation details?

To edit an existing organisation, hover on the 'Organisations' menu item and select 'Organisations'.

Search for your organisation and click on the title to edit the organisation details.

Once you have updated all the required fields, simply click on 'Update'.

I sincerely hope that you enjoyed these sessions and will be experimenting with the functions you now know how to use.