Insight & Analysis

A trade finance revolution to plug the funding gap?

Published: Feb 2020

A recent report suggests that the UK is likely to remain a strong financial centre post-Brexit. With a reported influx of new buy-side institutions ready to invest, and the fintech community on the case, could a sizeable chunk of the trade finance gap finally be plugged?

Cargo ship carrying crates over water at sunset with a plane in the sky

For corporates, the potential trade pain caused by the UK government’s apparent willingness to move away from alignment with the EU may be a concern beyond January 2021’s final Brexit transition date. But the introduction of international Basel IV regulations, set to take effect from January 2022, could add to their woes.

The new banking requirements, to be implemented by national authorities, could see UK institutions alone having to raise another £50bn in capital to meet the rules. This may limit the banking system’s ability to provide large volumes of credit for corporates. “Access to funding is only going to get harder – unless the market can find alternative methods to fund trade and close the gap,” warns Christoph Gugelmann, Co-founder and CEO at Tradeteq.

With global corporates and SMEs collectively needing an estimated US$1.5trn more in funding, the obvious solution is to open up the market to other, smaller participants who collectively can fund corporates.

Fortunately, he sees “a number of buy-side institutions that are ‘cash-rich’ and fully ready to fill the funding gap”, allowing the established banks, as well as corporates, to continue functioning in the sector.

Indeed, a recent report from Bovill suggests that over 1,000 banks, asset managers, payments firms and insurers from the European Union are planning to set up a base in the UK, post-Brexit, to serve their customers. “With new entrants to the UK market, the opportunity for a wider pool of participants is set to grow,” comments Gugelmann.

Whilst these buy-side institutions may be ready to invest, a current lack of infrastructure allowing easy access to trade finance assets may still the brakes on growth. To this end, he argues that innovation in the trade finance space “is desperately needed to make the outdated and paper-based industry more efficient, close the gap and improve processing times”.

Unlocking capacity

The industry appears to be awakening to this fact. With the aim of supporting innovation capable of changing the trade landscape, over 30 banks, non-bank financial institutions and industry bodies came together last year to form the Trade Finance Distribution (TFD) initiative.

This is an industry-wide collaboration set on creating the necessary infrastructure to support a more accessible trade finance industry and encourage smaller participants to get involved with the market.

Making trade finance assets distributable in this way will bring two benefits for treasurers, says Gugelmann. “Firstly, it will grant more capital to the market, allowing businesses access to the funding they need. On a macro scale, it means international trade can be bolstered as businesses will no longer be limited by the trade finance gap that has potentially held them back from increasing their exports.”

Secondly, he believes that through the work of the TFD initiative, asset managers and investment funds will have access to a whole new asset class. “This ensures that investable notes will be created, giving institutional investors the opportunity to purchase and sell them on the market. Given that bond yields in the current market are producing very low returns, and equities remain a risky investment, the purchasing of trade finance assets will be an appealing option for financial institutions.”

Diverse funding

The Bovill report indicates significant growth in the UK market which could provide an opportunity for treasurers to capitalise on a more diverse market. As co-founder of the first electronic trading platform for the institutional trade finance space, Gugelmann is naturally keen that innovations in the international trade sector continue supporting the twin priorities of funding access and improved processing.

“The increased capital available for trade finance lending will allow treasurers to easily manage their liquidity and cashflow requirements while mitigating the effects any future (UK/EU) trade deal may have on costs,” he concludes. “With more financial companies based in the UK, the ability of these firms to collaborate to find new solutions to any funding problems which may occur will likely increase.” With persistence and ingenuity, it seems that the trade funding gap may yet be plugged.

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