Given the above, the goal is to evolve from programmatic or transactional solutions to the building of an efficient and transparent market. What the market needs is a digital solution that enables new investors to purchase risk either via a seamless digital platform or as a portfolio, and removes the need for them to establish material operational capabilities.
I. PROBLEMS ADDRESSED
Trade finance is the lifeblood that makes businesses thrive in our communities, and it is imperative that the finance community works together to support the growing requirements. In order to meet this aspiration, it is paramount that banks seize the opportunity of using digital technology to raise trade finance to the forefront as a highly attractive asset class. This will allow the market to harness the capacity of new, alternative investors.
One potential solution is the TFD Initiative, a collective effort launched on a trial basis in April 2019 with the support of – among others – more than a dozen banks (including ANZ).
Hope for a solution is strong given that the participants in the TFD Initiative collectively agree that attracting non- bank capital won’t be easy due to the following pain points:
• Investors have other options such as the equity and bond markets that are transparent and technologically advanced, and which provide a more satisfying investor experience.
• Securitising trade assets across different jurisdictions can be complicated and regulatory treatment inconsistent for banks – which is a further barrier.
• Current trade instruments are short-term - less than a year - which means yields are difficult to predict. Typically, investors want certainty on yield and tenor, both of which they can lock in with existing bond or loan products.
That said, the initiative’s launch is propitious: it comes at a time of rapid progress in digitising trade – a process that has in part been driven by collaboration across the financial services industry to create distributed ledger solutions, and in part by the building of digital trading platforms by regulators in places like Singapore (the Networked Trade Platform (NTP) – that country’s trade information management platform) and Hong Kong (eTradeConnect, a trade finance platform).
ANZ is involved with both NTP and eTradeConnect, as well as with CCRManager, which provides trade-linked financial solutions. And in Australia we are pioneering the use of distributed ledger technology to underpin trade finance guarantees.
Of course, there are alternatives to the TFD Initiative, as illustrated in the chart below. But to date, the TFD Initiative is the platform that most aggressively addresses the urgent need to close the financing gap via non-bank investors.
II. THE TFD INITIATIVE IN DETAIL
Until now, there has not been a common platform to connect all players – corporates, banks and investors – across regional markets in the trade financing ecosystem. The TFD Initiative brings the opportunity to build a market that will provide benefits across the value chain.
It aims to deploy digital platforms that aggregate the data behind each participating bank’s trade finance deals and make them available for sale to investors.
Doing so provides an efficient, streamlined distribution of trade finance assets that can bring greater liquidity to the trade finance space, including from non-bank investors that have a different risk appetite compared to traditional banks. We believe this will help to close some of that $1.5 trillion trade finance gap, by allowing banks to build a market for distribution so that freed-up capital can be redeployed into new financing.
So How Does It Work?
The banks, which will still be the originators, put the assets on the platform. Then, using machine learning algorithms , the platform identifies and packages those assets against eligible investors or against criteria that investors have determined they require.
Once it has determined a match between two parties, it pushes that into a structure the investor needs.
This process also creates opportunities for intermediaries to warehouse and build portfolios from multiple sources to distribute as investment instruments.
For their part, non-bank investors can parse the data to a granular level to determine the type of assets they want to purchase – whether by tenor profile, jurisdiction, the underlying goods being financed, potential yield or any number of a range of possibilities.
For example, should a potential investor be interested in, say, cotton trades from India with a 120-day tenor and a 1.5 percent annualised yield, they could search for trade finance assets that match those criteria.
III. MULTIPLE BENEFITS
The benefits for seekers of trade finance are clear: The TFD Initiative will open up the pool of interested providers once the network is established and non-bank investors begin to engage and originate assets from it. It’s also likely that investors will make reverse enquiries -- i.e. some investors might ask the banks for certain risk exposures that the banks might not be prepared to offer. Perhaps a non-bank provider would step into that gap themselves knowing they have a means to recycle their capital when needed.
The initiative also brings advantages to banks, not least in terms of greater efficiencies and in helping to reduce capital constraints. And it brings non-bank investors exposure to assets from different parts of the world, allowing them to balance lower-risk against higher-risk asset classes to build a more blended yield return.
The initiative currently deploys a standalone, scalable platform, but in time it will plug directly into investors’ and banks’ systems, further driving demand and supply efficiencies. In short, the TFD Initiative is a development whose time has come. Why? Because trade digitisation is gaining momentum via collaboration between government and banking consortiums, which will ultimately feed a digital distribution network even more efficiently.
In addition, the initiative will provide seekers of capital with new financing options, and offer providers of capital an efficient new asset class.
And lastly, the initiative overcomes the legacy perception that the documentation that underlies trade finance makes it onerous to distribute the risk – versus distributing the risk on, say, a syndicated loan. To date, trade finance hasn’t lent itself well to a syndication structure, though that is changing. With time, those perceptions will change too.
In the end, the level of interdependency and integration in trade supply chains today demands trade financing solutions that cater to not just one component, but to the entire eco-system. While fully digitising trade will take time and is likely only possible in the medium-term,5 the evolution of trade distribution to a “market build” digital model supports this objective perfectly.