Where white eagles dare - IFTA's 2016 meeting in Warsaw

News | 25 September 2016

ITFA

While Warsaw has rebuilt itself for the next generation, trade and receivables finance is at a crossroads. Clarissa Dann reports on themes of true sale and sub-participation from the 2016 ITFA conference

When delegates of the 43rd Annual Trade and Forfaiting Conference raised their glasses at the gala dinner held at Warsaw's former fortress Forteca, it was in celebration of not only a very busy year, but the successful repositioning of this closely networked professional body as a hub of trade receivables practice.

Some of us who had attended past ITFA conferences at coastal venues (Dubrovnik, Malta and Dubai being particularly enjoyable) were not entirely convinced that a city that had endured so much destruction - or rather obliteration following the 1944 Uprising - would have quite the same pulling power. But Warsaw could not have been more appropriate. The cobbled streets of the new 'Old Town' reinforced the message of how, with a bit of thought and attention to detail and traditional techniques, something sustainable and transformational was possible. A bit like trade finance itself.

In his opening remarks, chair Sean Edwards (who assumed the mantle from outgoing chair Paolo Provera a year ago in Dubai,1) made the point that while the ITFA's origins lie in forfaiting, it has "grown considerably in scope and ambition over the past few years". Not only was the body a key contributor to the Standard Definitions for Techniques in Supply Chain Finance, but a Russian edition of the Uniform Rules of Forfaiting (URF800) had been launched in Moscow earlier in the year2, and ITFA is supporting Russian forfaiters with issues surrounding FX convertibility.

It seemed light years since the balloons were launched in Barcelona3 to mark the addition of the 'T' for 'trade' in ITFA's identity at the 2014 incarnation of this annual reunion (because that is what it is), and this year's programme reflected this wider perspective ranging from opportunities in Iran, how to make sub-participation agreements get the deal away and an update on what progress the industry is (and is not) making toward fully digitising its processes.

Global to local

First to the floor was Dr Rebecca Harding
(see also page 14), who took delegates through the somewhat choppy waters of policy risks
in the form of mounting compliance costs,
a low interest rate environment and quantitative easing. Global uncertainties surrounding the fall-out of Brexit, the outcome of the US elections and question marks over emerging market growth are, she said, "keeping trade finance practitioners awake at night".

Countries are becoming more protective, she said, pointing to the fact that some 21 restrictive measures a month have come in over the past eight months. In addition, greater local content and resources is shortening supply chains, so a lot of services trade is global but manufacturing is becoming more local. "Trading is still there, it is still big but it is morphing into something very different. Global trade patterns are already shifting more towards supply chain-focussed trade," reflected Harding.

Reiner Jahn, vice-president of the German-Iranian Chamber of Commerce Association, took delegates through his personal experience of doing business in Iran. Since implementation of the Joint Comprehensive Plan of Action on 16 January 2016, the majority of EU sanctions have been lifted. However, despite misleading assumptions in some media that this meant all sanctions had gone, a number of embargoes are in place with many US sanctions still in place.4

The Tehran government, he said, has been emphasising that it needs around US$50bn of investment a year to modernise the infrastructure with some 90% of it coming from international investors for the next ten years. To reassure would-be investors, the government introduced the Foreign Investment Promotion and Protection Act (FIPPA) to guarantee investor capital against nationalisation and expropriation. "It is supposed to give reliability to foreign investors and this is one of the reasons they do not understand why the international world is still so hesitant," reflected Reiner. But murmurings among delegates afterwards were pretty conclusive - in this climate of de-risking and punitive fines, most global banks just are not going to take the chance.

He pointed out that Iran requires deferred payment structures with deals needing deferred tenors of 360 days or more - unless they are long-term ECA transactions. "There are a number of European banks around, especially the larger ones that maintain US dollar clearing, that do not want to be touched by any payments of cash flows touched by Iran, " explained Reiner. Financing transactions can mean as little as simply opening an account, he added. However, it is not all doom and gloom. "Some banks are only interested in receiving third party payments. But other participants are prepared to advise letters of credit opened by Iranian banks for exporters".

The next generation

Chris Hall, head of trade asset management (TAM) for Lloyds Bank's global transaction banking, is the ITFA Board member responsible for the ITFA's young professionals programme. In memory of the late Martin Ashurst ( a trade financier and forfaiter passionate about the development of young people), the ITFA launched its mentoring programme in December 2015 to help present trade finance as an attractive career path.5

Asif Dad of Barclays and Michel Meylacq of AIG were asked by the ITFA board to share the findings of their research among young professionals and how delegates could support them by becoming mentors and promoting the industry itself. High on the wish list were calls for better exposure, defined career paths and targets, interactions and experience with professionals, support mechanisms such as training and information services, greater opportunities to show skillsets and more networking opportunities among other young professionals.

"To listen to them gives you a wonderfully warm feeling," enthused Edwards. Delegates were clearly impressed with the passion of these young people to get their story across and there was clearly more engagement in the programme by the time Dad and Meylacq had finished.

Sub participation agreements

No ITFA conference is really complete without some sort of review of risk participation agreements and a reminder of why true sale is so important. Having had my first experience of this at what was then the IFA 2011 event in Vienna,6 delegates were treated to a thorough revision course from Dentons' (as he was then) Geoffrey Wynne on this particular way of buying and selling risk, along with the distinction between the English and New York approaches. Wynne said that the BAFT Master Risk Participation Agreement7 is "a good document", but one that could be "improved in the new regulatory environment".

Reminding delegates that institutions using unfunded and funded participation agreements as credit risk mitigation need to satisfy the Article 194.1 CRR requirement to obtain legal opinions on enforceability. He added that the ITFA, BAFT and Sullivan & Worcester have worked together to provide a generic legal opinion on the enforceability of the BAFT master risk participation agreement for the purposes of Article 194(1) of the CRR (the name given to EU Regulation no 575/2013 covering credit risk mitigation techniques). Further work to improve the BAFT MRPA needs to take place and ITFA, it has been promised, will contribute to this important effort. ITFA members certainly have plenty of views as to what needs changing!

 

Figure 1: Risk participation Source Sullivan and Worcester

Source: Sullivan and Worcester

 

Changing market environment

With the digitisation agenda having gathered momentum in the trade finance space over the past year, it was good to see essDOCS' managing director Jacco de Jong's lively presentation of why corporates are chomping at the bit to digitise their trade finance processes. Drivers are:

  • there is greater interest and awareness in large part of what digitisation can do driven by the fact that electronic bills of lading (eBLs) are now a reality;

  • paper-based processes are costly, time consuming and cumbersome in the modern world;

  • electronic documentation allow companies to accelerate working capital, improve compliance and visibility, facilitate straight-through-processing;

  • working capital improvements arise predominantly from: (i) accelerated payments; (ii) reduced demurrage; (iii) reduced courier fees;

  • Increased operational efficiency caused by ability to share outsourced processes with business partners;

  • reduction of risk; and

  • other corporates stepping up their interest in improving financing processes.

De Jong explained, "Corporates went digital ages ago, but as soon as they interact with banks they have to go back to print. Even though the banks have portals and e-solutions, but a lot of it is still paper driven and this has to change. This saves cost and reduces risk for the banks as well. From a bank perspective, compliance is a nightmare. Digitisation will contribute to ease the burden of compliance by being able to filter document data if and when needed, even retrospectively."

He added that he does get calls from blockchain companies interested in accessing the essDOCS network of 4100 customers. "They are also looking for triggers around the fiscal supply chain that they can use to invoke a blockchain transaction. If you ship goods from A to B, you need a data trigger and our industry sees the blockchain as an opportunity for use of our electronic documents."

Just as some delegates were looking distinctly uncomfortable about what all this might mean for them and their client databases, he shared his scepticism that all of this might be just around the corner. "It will take time before it becomes mainstream and crystallised into something really structured that can be used globally. A distributed ledger scenario is just one element; it still requires standards, a network of parties, performance data, workflows, access tooling, regulatory approval etc.", said De Jong.

But, perhaps this sort of disruption needs to present itself sooner rather than later. After all, delegates had heard heads of trade in an earlier panel session moderated by Citibank's Anurag Chaudhary say that banks are under huge pressure to reduce expenses. "Not only are trade volumes going down, but pricing is going down, there is massive liquidity in the market," observed the US global trade bank's global head of supplier finance, John Monaghan. This means, said Monaghan, "pricing on origination and distribution is going down", although he hastened to add that risk priced for client distribution is still saleable on the secondary market. The fall in commodity prices is another challenge, observed the panel - what was a US$100m shipment is now worth US$50m.

The spectre of true sale reappeared again with a cautionary tale surrounding the Moody's downgrade of Spanish renewable energy corporate Abengoa at the close of 2015.
Matthias Heck, senior analyst in the corporate finance group of Moody's investors Service,
had published a case study on the company's large reverse factoring programme.8

Heck's point was that reverse factoring, where a bank places itself between a company and its suppliers and pays the company's invoices to the suppliers at a possibly faster rate than it otherwise would have done "has debt-like characteristics for the buyer of a good or service, once the bank has paid the supplier". However, this is not what shows up on the accounts because "auditors sometimes accept that companies include reverse factoring as part of the trade payables in their accounts".

It was, thought some of us, rather brave of Heck to appear on a panel at all with an audience full of receivables finance devotees, passionate about trade's superior position in the pecking order of work-outs - above that of bonds and other debt. After all, the memories of when trade did and didn't get paid in Kazakhstan were still rather raw. When asked to clarify what he meant in the report, Heck confirmed, "We understand that payables finance are uncommitted lines which means they can disappear quickly from company financing portfolio. We don't know at what point in time the bank is paying the supplier." Food for thought indeed.

Insurance update

Having announced its 'Guidelines on structure and content for CRR compliant non-payment insurance policies', it was good to hear how the ITFA insurance committee had been busy since its formation a year ago, coming up with some practical tools to help the industry. Designed to address the effect of the UK Insurance Act 2015, which came into force on 12 August 2016, the committee stressed that the document is "guidance only", and there is no "standard wording" as each client or broker develops their own. Elizabeth Dexter of Liberty Specialty Markets explained that each policy is "tailored to meet underlying payment obligations". Its function, added Silja Calac (committee chair and senior surety underwriter at Swiss Re Corporate Solutions) in a press conference, is to "help banks to better understand how to meet regulatory requirements on capital".

Sullivan & Worcester (partner Geoff Wynne is legal adviser to the insurance committee) has signposted which parts of an insurance policy are relevant to CRR or IA 2015. Wynne observed the latter reverses an imbalance that had been in place for at least 100 years favouring the insurer - to the point that a lot of bankz assumed there was no point in taking out insurance because "they don't pay the claim". The Insurance Act 2015, said Wynne, has done a lot to get the message out that non-payment insurance is now a good product. Perhaps at the 44th ITFA Conference (venue still to be confirmed), the programme will be in a position to share some case studies of how this has all been working in practice.

And, of course, to present their achievements in the other projects this ever active association is planning for the year ahead.

Clarissa Dann is editor-in-chief of TFR

The 43rd Annual International Trade and Forfaiting Conference was held from 7-9 September in Warsaw, Poland.

 

References: 
  1. See TFR's report on the 42nd annual ITFA Conference: www.tfreview.com/node/12878/

  2. Now available on the ICC website http://bit.ly/2dpmbyH

  3. See TFR's report on the 41st annual ITFA Conference: www.tfreview.com/node/10894

  4. See here for the full timeline: http://jcpoatimeline.csis.org/

  5. Martin Ashurst Trade Finance Mentorship Forum - Call for Mentors: http://bit.ly/2dlfCPt

  6. See TFR's report on the 38th annual ITFA Conference: www.tfreview.com/node/2558

  7. Baft 2014 master loan agreement announcement: http://bit.ly/2dMoXeT

  8. Abengoa's reverse factoring programme: http://bit.ly/2dlfuPN

Give Feedback