From the unintended consequences of Basel III to the growth of South-South trade flows, we talk to Sameer Sehgal about the current and future trade landscape. We also tackle the impact of the Eurozone crisis on trade and examine the need for increased focus on financial supply chain solutions.

Collaboration among banks has been a key theme recently. How does Citi partner with competing financial institutions to drive transaction flows for clients?

With rapid globalisation, clients increasingly require structured solutions and collaboration from their financial institutions, thereby enabling them to unleash their own commercial growth objectives. This is particularly important as no one bank acts as a ‘one stop shop’. At Citi, our financial institutions (FI) arm is an invaluable pillar of our strategy. Consequently, it’s a segment in which we have extensively invested over the last few years.

To start with, we partner with roughly 3,500 banks globally in facilitating international trade. We have invested in both systems and talent over the last few years, allowing us to efficiently handle increased trading volumes and positioning us as a leading Trade Services Bank, which our clients critically rely on for cross-border solutions.

We have also expanded our global footprint through either new branches or partnerships, allowing us to create end-to-end solutions for clients across geographies. Whether it be trade flows between Africa and the Americas, or Asia and the Middle East, Citi’s on the ground presence and strong relationships with financial institutions in these markets, provide an excellent platform to service and support our clients.

It goes without saying, one needs to constantly evolve. We therefore continue to focus on designing new solutions, and proactively developing with changing times and market needs. We offer these solutions to our FI clients to help them more effectively tap into their respective markets.

Of late, we’re witnessing a shortage of US dollars in the market and are working closely with our FI clients in finding solutions that a) enable them to access liquidity and b) ensure international trade is not negatively impacted.

What is Citi seeing in the market place currently and what are the most important trends at the moment?

I think the most topical impact at the moment is the heightened risk perception in the market. A great deal of factors contribute to this, such as political change in the Middle East and North African countries coupled with the European credit crisis. And contrary to the corporate credit crisis we experienced in 2008, the current European credit crisis seems to be a wider sovereign issue. While one would like to be more optimistic, conditions in the wider global economy may not improve over the next six to nine months. Therefore, we are seeing corporates cautiously planning for the road ahead.

For example, we see exporters looking to hedge possible counterparty and sovereign exposures. They want confirmation that their proceeds will be realised. One therefore sees a trend back to basics as letters of credit (LCs) replace open account trades, and a far greater need to confirm LCs. Not surprisingly this trend is being extended to obligations owed from the developed world as well.

Given Citi’s footprint and experience in this business, we are reaching out to our customers and providing them the comfort and solutions they require. We’re also working closely with our FI clients in structuring solutions for their own customer base.

How does Citi’s relationship with financial institutions globally help clients overcome adverse credit environments and ease administrative burden?

There are three main roles that we take in supporting our clients through our FI partnerships. The first is to connect the exporter and the importer together: as I mentioned, we support our financial institution partners through our global footprint to allow clients greater access to trade services across geographies.

Another area where we are very ‘hands-on’ is training. At Citi, we take our role and relationship with our clients very seriously. We continue to support our FI relationships through dedicated training teams which on a regular basis a) share knowledge and experience, both theoretical and practical, with our clients and b) keep our customers informed of changes in laws and regulations that impact day-to-day trade.

Thirdly, given the challenging trade environment we are working with both clients and government agencies to structure financing solutions, facilitating continued international trade.

Another key topic this year has been regulation. How is Citi working with regulators and market bodies as the implications of Basel III proposals continue to be debated, refined and understood?

Given that we offer trade services in more than 80 countries, Citi works very closely with the regulators across the globe. We view this as an important part of our role as a responsible financial institution. We regularly engage with regulators on a number of topics helping markets to evolve – including the implementation of policies impacting international trade. We actively participate in working committees and work groups where such issues can be discussed and best practices adopted. For example, advise on technology and the way in which the effective use of automation can catalyse trade processing in various countries. State of the art, internet banking solutions can also help expedite communication between various constituencies within a trade transaction.

We’re also working very closely with the ICC, WTO and regulators in several markets with regard to Basel III. As currently proposed, Basel III would cause the pricing of trade products to increase, and could mean banks refocusing on their core clients, thereby reducing trade finance for the SME sector. It’s been our priority over the past three to four years to work closely with the financial community to represent these concerns with the Basel committee. I am happy to note that the engagement has been very positive. Basel has recently taken steps to address concerns with regard to trade, and have just modified the one year tenor floor to actual maturity of the trade transaction. This is a very positive signal for the trade business, and we look forward to working with Basel to make it even more trade friendly.

How do you see the challenges in the regulatory landscape impacting both your FI and your corporate client relationships?

Naturally, regulation plays a pivotal role for the banking industry and trade is no different. To start with, the governing rules for trade published by the ICC have a far reaching impact on the products and solutions we structure. In country, regulatory and foreign exchange guidelines determine the arena in which we operate. Laws supporting technology in various countries decide the extent of automation we can offer to our clients in those markets. And then regulations such as Basel are fundamental to the way we operate, and services we can offer our clients. It is for this reason that some markets are more skewed toward funding solutions versus others which operate under unfunded instruments. Similarly some markets see more negotiable instruments, while they are not prevalent in other markets due to stamp duties. And in some countries it’s easier to offer our technology solutions such as CitiDirect, while in other countries we are required to operate manually.

How has the Eurozone crisis impacted trade in the EMEA region?

The European debt crisis has had a deep impact on the banking sector, and I dare say this impact will be felt for years to come. At present, European banks that specifically have exposures to the beleaguered economies require capitalisation. They are therefore either conserving liquidity until greater clarity emerges on how much they need to reserve, or are already starting to face liquidity concerns. Hence, we’ve seen a gradual reduction in trade lending across the EMEA markets as the sector waits for the situation to stabilise. We are working closely with our FI and corporate clients to help them meet their trade finance needs.

You alluded to US dollar liquidity earlier. Trade and commodities are often denominated in US dollars and European banks are struggling as it is very expensive for them to swap euros to dollars. How is Citi handling the situation?

We are committed to servicing the trade asset needs of our clients. Over the last few months, we’ve helped structure numerous solutions, providing our clients with access to liquidity allowing them to fund their growth strategies. That extends to our commodities clients as well, to whom we continue to provide coverage for their flows across the globe.

What are the most significant trends you are seeing in global trade flows today?

Globalisation continues to be the single most important overarching trend. Our clients’ supply chains invariably stretch across the globe as do the markets where they do business. This has flattened the landscape and has indeed resulted in a survival of the fittest scenario.

Within this macro trend, there are currently micro-trends around economic protectionism. Countries are implementing regulations to protect domestic industries, which run contrary to a free economy and the principles of globalisation. However, this seems temporary, and we hope that over the next 12-15 months barriers to entry and exit for international trade will diminish.

Another interesting trend is the gradual shift of the centre of gravity for international trade – from the ‘developed world’ to the ‘emerging markets’. This phenomenon is better known as South-South Trade, and has been accentuated over the last 12 months as Asian and Latin American countries have continued to relatively prosper.

Global warming is a fourth trend impacting global trade flows. Global warming is changing seasonal patterns and hence requires companies to reconfigure their production schedules and product mix to suit the altered climatic trends. This is having an impact on logistics and shipping rates as well.

The final trend in 2011 that I would like to highlight is the need for a healthy co-existence of customisation and standardisation. As previously mentioned, clients are moving away from open accounts back to LCs. With the global financial crisis of 2008, global trade volumes were very high while pricing was low. However, as the crisis continued, volumes fell while pricing increased.

In 2010, there was a slight resurgence of volumes and pricing began to fall. However, in 2011, we have once again seen a ‘back to basics’ focus. Volumes are falling and pricing is beginning to rise, which is in line with the general heightened risk perception. As such, we are therefore seeing a flight back to simple letters of credit and confirmation. That said, there is still an ever increasing demand for customisation and innovative solutions.

Looking rather more near term, how do you see the trade environment developing in the next six to nine months and how is Citi reacting to this?

To emphasise an earlier point, I think we will see the banks prioritising the markets they serve, clients they support and products they provide. This offers enhanced opportunities for banks to work more closely with each other to provide solutions to their respective customers. One can therefore sense a spirit of ‘co-opetition’ amongst banks, where ‘co-operation’ and ‘competition’ co-exist in a healthy manner.

Elsewhere, we continue to see innovation in the trade space. The shelf-life for new products seems to have reduced. As we develop new technology, products and solutions, they are rapidly copied and resold across a variety of markets within just six to nine months.

Given the trends that you’ve highlighted here, what would your parting advice to customers be?

I would urge corporates to engage in dialogue with their banking partners to ensure supply chain stability and sustainability in 2012. I would also suggest reviewing client risk exposure that our customers are currently taking on, such as counterparty or sovereign. Finally, having a backstop liquidity source at all times is prudent at this juncture.

We at Citi have a wide array of products to help our clients achieve their commercial objectives, and a wide footprint to support their end-to-end requirements. Additionally, our broad client coverage provides us an excellent base to service trade flows globally and knit customers together. We offer a broad array of trade products for both financial institutions and corporates, allowing clients to achieve their funding and risk mitigation objectives.

Citi has almost 200 years of experience in facilitating global trade – from the first time we funded trade ships between Liverpool and New York in 1812, to today’s ever changing environment. We have remained committed to helping our clients achieve their global growth ambitions through contingent or unfunded, advisory or actual flows.