Treasury Today Country Profiles in association with Citi

Trade finance: pushing the (MT 798) envelope

The ‘revival’ of traditional trade products has been widely covered in industry journals, but providers are not just returning to their ‘old favourites’ – they are also looking to innovate in the space.

It goes without saying that instability in the Eurozone has affected corporates’ attitude to open account trading. But a number of other events that have occurred over the last six to nine months, including the concerted action of the central banks to inject a dollar line of credit into the trade market, have also had a significant effect on the trade landscape, and normalised pricing down, according to Sam Sehgal, EMEA Head of Trade Finance at Citi.

Sehgal also notes that trade finance is a counter-cyclical business that is currently booming. “In times of recession and downturn, funding and risk mitigation needs go up – which is what trade finance really offers. We are seeing huge demand from our customers at the moment,” he says. But what are corporates asking for and are the banks able to deliver it?

Bring on the buzzwords

Globalisation and collaboration are two forces that have also had a heavy influence on trade of late. International barriers have been broken down and the banks have opened up to working with their peers in multi-bank facilities, according to Avarina Miller, Senior Vice President at Demica. “On the one hand, the banks may not have the capacity to provide credit limits or liquidity to meet the full requirements of the client, or best pricing in all the currencies/locations of their need. On the other hand, corporates may wish to avoid bank concentration risk in the current financial environment,” she says.

Banks are developing programs to support this corporate demand. On the technological front, there appears to be a clear leader in this respect – with SWIFT and its MT 798 standard solution flying the kite for the multi-bank trade industry since 2008. “SWIFT is trying to take the lead with its own platforms and products as it has this existing ubiquitous capability. They have a solid background for trade globally and once they gain traction, they will have a significant competitive advantage thanks to the adaptability and reach of their products,” says Sehgal.

As a growing number of large corporates are now using SWIFT for cash transactions, adding trade flows for these companies would not involve complex implementation. Furthermore, with the MT 798 standard, both banks and corporates have the freedom to make their own operational decisions and yet can connect with all of their counterparties, achieving cost savings and avoiding vendor lock-in.

Tell us something new

But SWIFT is not stopping there. Next in the company’s sights are old fashioned processes. For example, with traditional instruments (ie letters of credit [LCs] and guarantees), documents need to be exchanged, according to International Chamber of Commerce (ICC) rules, not only between the buyers and sellers but also between the banks themselves. That slows down the delivery of the documents and then slows down the access to the goods for the buyer. There may also be additional inventory costs for the buyer if delivery is delayed.

Yet, the right solution is not to change what is ‘working’, according to André Casterman, Head of Banking and Trade at SWIFT, but to create something new in line with the LC that offers the same benefit in terms of risk mitigation and financing, with the additional advantage of the open account world where the documents are exchanged directly between buyer and seller. “The LC is very attractive for certain business transactions such as the high value risky items. But the industry is creating a new instrument next to the LC to enrich the number of options for corporates to secure their trade transactions,” he says.

That’s as much as he will give away for now, but Treasury Insights will be sure to keep you posted.