New ITFA paper seeks feedback on trade as an investible asset class

The International Trade & Forfaiting Association (ITFA) has published a new whitepaper on making trade an investible asset class and is seeking feedback from industry participants to build on this work further to collectively develop the trade finance ecosystem.  

The initiative comes through the ITFA Trade Finance Investment Ecosystem (ITFIE), which was created under the chairmanship of Alexander Malaket, Opus Advisory and Surath Sengupta, HSBC with a group of institutional investors, banks’ legal firms, technology and other key players in the ecosystem. 

As a first output of the ITFIE, a working group led by N L N Swaroop, HSBC and Geoffrey Wynne of Sullivan & Worcester, yesterday published the ‘Whitepaper on Developing a Practitioners Guide to Making Trade an Investible Asset Class’, which highlights the challenges and recommends some solutions to make trade finance more widely accessible and investible by institutional investors. The aim of the whitepaper is to collect viewpoints and feedback to developing a standardised framework, creating a legal directory and defining a technological framework for trade finance. 

The whitepaper explains that there is a need to widen the scope of the trade finance ecosystem: “The financing of international trade has long been the domain of banks with bulk of the global market share historically concentrated amongst banks. Trade finance is experiencing a level of visibility unparalleled in its long history and there is clear recognition of the need to widen the trade financing ecosystem and bridge the trade finance gap to support the global supply chains that are the arteries of trade. This includes SMEs based in developing and emerging markets, where the challenges in accessing affordable trade finance are most acutely felt.” 

The whitepaper highlights that banks alone will be unable to address global unmet demand for trade financing, as a result of balance sheet constraints and limitations in risk appetite. Therefore, there is a compelling need to create an ecosystem and enable a framework to facilitate access to trade finance by advancing the evolution of trade finance as an asset class for alternative investors. This could include asset managers, insurance companies, pension funds and others who seek a risk/return profile that aligns with the character of trade finance portfolios. 

Commenting on the developments with TXF, Christoph Gugelmann, CEO at Tradeteq, and an industry contributor to the report, states: “Investors are in search of yields above comparable benchmarks and trade finance regularly pays above the risk commensurate yield level. Trade finance, therefore, has all the components that investors look for. It is a multi-trillion-dollar asset class based on the flow of physical goods and services, making it less susceptible to financial market volatility.  

“The problem is capital markets access has been limited due to cost barriers and the need to repackage portfolio risk. For an investment bank to execute on behalf of a client, the transaction costs for a low risk, low yielding product would regularly exceed the asset spread of short-term bank exposure. This limits access to a small portion of riskier assets.”   

Gugelmann adds: “The ITFA white paper outlines important considerations to make trade finance a palatable investment proposition, including the need for uniform principles, digital infrastructure and legal frameworks. Progress is being made and we’re seeing the steady dismantling of old complex processes with little transparency and the creation of infrastructure to enable straight-through-processing of hundreds of thousands of instruments in a low-cost way.”

Anyone wanting to contribute their views should provide feedback through the following survey link: (https://itfie2022.questionpro.eu/survey) or contact the authors. Feedback is requested by 15 July, 2022.