The liquidity missionary - Kah Chye Tan's latest endeavour

Opinion | 15 August 2017

Kah Chye Tan, former chair of the ICC Banking Commission (and co-founder of the ICC Academy) is an industry pioneer with an illustrious career in banking and finance. Now, as CEO and founder of Tin Hill Capital and chairman of CCRManager, he spoke to Katharine Morton about his new mission

Katharine Morton: How are you enjoying your changing role?

Kah Chye Tan: You know, I actually enjoy it very much. I always enjoy solving problems. I enjoy creating new solutions to solve real-world problems.

And what are the problems you're trying to solve at the moment, those of secondary market liquidity in trade finance?

Kah Chye Tan: I would put it at a higher level. I'm trying to solve banking problems. There are many problems in the world, there are many opportunities as well and one has to add value where one can add maximum value. And where I can add maximum value is really in challenges relating to trade. As in imports, exports and domestic trade, and how trade finance can support trade, how payments can support trade, and how FX can support trade.

The other thing is, there are many new companies - start-ups, call it whatever you want - out there, with the belief that they are able to come up with the right solutions, right products to compete with banks. There's no lack of talented people out there, and I'm leaving that space alone. Where I want to focus on is: how can I help banks and non-bank financial institutions (NBFIs) to be more efficient in servicing their customers? Effectively, the banks and NBFIs are my customers. I'm trying to create a banking ecosystem to make that entire process a lot more efficient. A large part of the capital, credit and liquidity will continue to be provided by the existing banking ecosystem, and that will likely remain so for many more years to come. I want to make this ecosystem a lot more efficient, a lot more scalable, a lot more customer-friendly.

So, the idea for Tin Hill is to sponsor different projects in the area of trade finance, payments and FX to support banks and NBFIs' business in facilitating their clients' imports, exports and domestic trade. The idea is that project one plus project two, one plus one is more than two. CCRManager in many ways is our first project. We have a pipeline of about five to six different projects that we want to roll out. But, as you can imagine, it will take another six months or so to bed CCRManager down and put it on steady state. We will not start on the second project until then. So, hopefully, by this time next year, I can tell you more about what we intend to do next.

Intriguing. You've had a long career in the trade finance industry, including a lot of work that you've done with the ICC. How have you seen the market evolve, and is it in a better place than it was a few years ago?

Kah Chye Tan: There's a lot of headwinds and tailwinds. A lot of competing forces at the same time. On the ICC side, or on the regulatory side, we have achieved a lot, such as what we have accomplished on the CCF [Credit Conversion Factor], bringing it from 100% down to 20% and 50%, that's a massive reduction. However, we have probably ticked off all the low-hanging fruits, the remaining issues are pretty tough to resolve. So, while I will continue to encourage the WTO and ICC to work collaboratively with the regulators, I'm trying to find solutions to help my clients to be more efficient in their capital, credit and liquidity consumption. That's the reason why we created CCRManager. So, that's one important trend.

Obviously, digitisation is another important trend. I don't actually think digitisation is new. I see it as part of a continuum of change. I saw a big push with the advent of the internet when I started my career just before the dotcom boom, so I was fortunate enough to see how this thing has evolved over the last 20/30 years. To me, it's a continuing journey. But, it has probably reached a point whereby we have gone way beyond hardware, as in computerisation, to the internet, as in information-sharing, to where we are today, where it's all about data and the smart use of data analytics. And I think we will probably be seeing an explosion in the use of smart data analytics in the next one to five years. In areas such as risk management, and that can be KYC, fraud management, customer service, financial management, and in the area of financial management it can be about pricing analytics. The pricing of trade finance can be incredibly opaque.

How can data help to unlock the potential with institutional investors?

Kah Chye Tan: Firstly, we need to make better use of the pricing data that each bank has but is currently not shared with the wider community. Institutional investors like to invest in assets whereby they can benchmark the performance of their assets against the market performance. While I do appreciate that people do make money from opaque pricing I believe that we need to measure that silo needs for the greater good of the community. For that reason, in CCRManager, we will be providing secondary trade finance pricing.

Moving on to the second area. The vast majority of institutional investors invest based on public ratings provided by agencies such as S&P and Moody's. Credit ratings and analytics for trade finance continue to be very challenging and not well covered by the established rating agencies. Lots of people know how to do credit analytics if you give them a balance sheet with the P&L and a cash flow that comes with it. You can do analytics on it because it's a static report they are looking at. To do good analytics for trade finance, you will need to do analytics on payments, on the receivables, on the performance of the purchase order, that is not a static thing. That is a continuing process that happens 365 days a year. That's where data analytics can come in and help. The third area that is very important is the entire pre- and post-trade settlement process.

How so?

Kah Chye Tan: Today, as long as you're selling a loan to a bank or an insurer, that's fine. The bank and the insurer that bought that transaction from the selling bank are happy that the selling bank continues to service the transaction. Actually, they want the selling bank to continue to service the transaction.

We all talk about the great liquidity coming from institutional investors. But the institutional investor has a very different behaviour when they say, "if I buy the transaction from you, you have sold the transaction and I don't want you to continue to service the transaction, because you will have a vested interest in the transaction. Why should you have a vested interest in that transaction after you have sold it to me? After you have sold it to me, I want an independent agent to service that transaction." This servicing can be collateral management or settlement processes.

And who is that agent?

Kah Chye Tan: There's no such agent for trade finance today. Such an agency needs to be created. But, going back to what I said earlier. So, what the agent does is all about data management. We as the banking community need to package all our information correctly such that an independent agent can manage it. Otherwise, I'm afraid that we can only have pockets of successes with a very limited number of institutional investors but we will not be able to scale up.

I hear about organisations such as Greensill Capital doing things along the supply chain with IPUs [irrevocable payment undertakings] and trying to, not securitise trade instruments, as such but make them a security and trade them - is that along the same sort of lines?

Kah Chye Tan: It is, but precisely my point - you talk to every individual out there. How many fund managers invest in trade finance? The same five names get repeated all the time. At best, if you stretch it, let's say 10 to 15 names get repeated all the time. There are thousands and thousands of institutional investors out there, why are we always talking about the same five to 10 names? That's precisely what I meant by it's not scalable. So, unless we have a scalable settlement function, I'm afraid we will not be able to fully capitalise on the opportunity presented by the institutional investor.

And what does that agency look like? Is it like a custodian?

Kah Chye Tan: Yes, it's about [having a] custodian, and I would say that custodian of assets and collateral is the fourth and last missing piece of the jigsaw puzzle. Let's look at the time line of a trade transaction. It goes from 90 days from the time, let's say, a letter of credit is issued. It might not be LCs, but using the LC as an example - from the time you issue the LC to the time the LC gets settled, that's 90 days. Let's make a comparison to, let's say, an auto loan. When you disperse the loan, you disperse the loan. There's nothing more you need to do other than collecting the monthly repayments. In the case of trade finance, the LC, it's a 90-day process, and in that 90 days, it keeps transforming. It's an LC issuance, it's an LC advising, it's an LC confirmation, it's an LC negotiation, it's an LC reimbursement, and finally it's an LC repayment, and if there's no repayment, it's an LC recovery, and it goes on and on and on.

So, you have the two examples, the auto loan example and the LC example - both are sold on day one. In the case of the auto loan, if it is sold, it is sold, and a third party collection agent will simply process the monthly repayment on behalf of the buyer of the auto loan. In the case of the LC, you sell it on day one, the selling bank continues to do the LC advising, the LC negotiations, the LC confirmation, default management, recovery management and it goes on. So, the question from an institutional investor is 'you told me you sold it to me, but you continue to service it, you continue to be in that process, you continue to decide when to force repayment, when not to force repayment, etc. You never really sold it, it is not independently managed. As an institutional investor, I want that transaction to be independently managed, even as a default, I want an independent service agent to press for payment.'

But if you leave it to the selling bank who continues to service it, and there's a default on the LC, the bank would say, "actually, we should not press for repayment yet, because other than the LC business, this client is quite important for me on the foreign exchange side, they do a lot of FX business with me as well, and they also do some commodity derivatives business with me, etc, so we really do not want to press for default right now."

But if you're an institutional investor and you have bought it, and there's a default, there's a default. You press for payment. And that's the role of the independent asset manager, because an independent asset manager will say if there's a default, and according to the agreement, you pursue a claim. But, if you leave it to a bank, because of the multi-banking product relationship, the bank may or may not pursue a claim.

What about a credit insurance type arrangement?

Kah Chye Tan: In the case of a credit insurer, they are the buyer of the risk, instead of the institutional investor. When the credit insurer is the buyer of the risk, or a bank is the buyer of the risk, they are very familiar with how banks work, how the bank has a multiproduct relationship and very familiar with how the bank needs time to work through the repayments process, because of that multiproduct relationship. And they're quite ready to engage with the selling bank on a continuing discussion on how to resolve non-payment, because they're used to that process. Whereas if you're an institutional investor - say a pension fund - you try to explain to a pension fund, when there's a default, why you can't press for payment. If there's a default, they will want to press for payment because that is what they are accustomed to when they buy a bond, a credit card or an auto loan.

So, what's the answer in terms of how you fit in with this and what you you're trying to do?

Kah Chye Tan: I'm not in the space of the primary business, because I'm leaving that to the banks. The banks deal with corporate customers, I don't. My job here is to help them to service their corporate customers better. So, in the secondary space, I'm saying there are four important enablers that are needed. CCRManager will help to provide capabilities in these four areas.

And when you say credit information, you are not looking at the Moody's type of analytics, it's more about at an invoice level.

Kah Chye Tan: Correct. [A credit ratings agency] like Moody's, for example, looks at the balance sheet, they look at a P&L, they look at cash flow once a year. And, they look at that piece of paper, and put a rating against it. In our case, we're talking about 365 days of data analytics. Every day, hundreds or thousands of invoices are being issued, paid or received payment, and we need to analyse that. Every day, thousands of purchase orders are being issued. You need to analyse that. So, we're talking about the account credit analytics, credit history.

So, what does success look like?

Kah Chye Tan: We always say that trade finance should be an independent asset class. It has always been an independent asset class, the only challenge we have is that it's not liquid. It's not highly tradable, there is no truly open market for it, there's no pricing transparency to it. Today, you can log into the internet immediately and see what is the stock price for British Telecom, for instance, what is the credit rating for British Telecom? But if you ask what is the price to discount BT's invoices? Your guess is as good as mine.

Some corporates who have supply chain finance programmes, or some of the platform providers would be able to provide anonymised information on this, or is this the sort of area you'd be looking at providing information on?

Kah Chye Tan: A lot of platforms are doing that. One challenge we have - a challenge and an opportunity - is that the overall market is so huge. But, because it's so huge, it means that everyone's looking at a small segment of the market. The issue is what they are looking at - say for instance the pricing data, the credit history data of BT, is it truly representative of BT's payments? Because BT is pretty big. So, that platform may only be supporting one little segment of BT's purchases. So, again it's, both an opportunity and a challenge. The opportunity is huge, the challenge is so huge that individual platforms look at this small segment. Again, that is not an area I'm attempting to solve, that to me is like boiling the ocean. I would leave this challenge for another day.

Boiling the ocean - that's an expression I hear a lot in trade finance.

Kah Chye Tan: So, what we're trying to do in CCRManager - is work within a more confined space, that's the secondary trade. And we're saying that a lot of secondary trade can be conducted on our platform. Not all, but a lot. So much can be conducted on our platform such that we are able to give high quality data in terms of pricing, credit history, settlement and collateral management.

Kah Chye Tan spoke to Katharine Morton at the World Trade Symposium 2017, organised by Misys and Financial Times Live

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