Industry leaders calibrate the blueprint for trade distribution

We recently gathered institutional investors active or showing early interest in the trade investment class. As part of a full-day event that took place in London, a panel of trade finance and tradetech practitioners debated the evolution of the blueprint for the trade distribution market. We initially produced this blueprint in 2019 as reported in GTR, so this time we revisited it and calibrated our focus.

We welcomed 5 experts on stage to contribute to this strategic discussion:

The panel started by sharing widely debated market trends with the institutional audience. Here are the highlights:

• Trade finance represents multiple investment classes; an important distinction must be made between (1) FI risk (e.g., letter of credit) on one hand and (2) corporate risk (e.g., receivables) on the other;
• Distribution is a separate function from - and it supports - origination; origination starts with the obligor (corporate or SME) whereas distribution starts with the originator;
• Various digital trade platforms and bank trade portals exist in the global trade & receivables financing origination space; those enable corporates to transact with financial institutions using a variety of risk and financing instruments; however, in the distribution space, the number of technology solutions is very limited and most trade distribution platforms only tackle the FI risk distribution, except one;

Laurence Anderson, Head of Financial Institutions EMEA, Global Trade Finance, SMBC Bank International: “Standardising distribution practices and processes is a pre-requisite for the industry to achieve scalability.”

• The challenge though is to automate the distribution of corporate receivables given the high volumes of assets being sold by originators to investors;
• Banks have traditionally distributed and syndicated transactions amongst themselves but this inter-bank market is becoming too narrow, thus the need to reach out to new liquidity providers;
• Banks want to engage with capital markets through asset managers and institutional investors to benefit from various levels of risk/funding appetite and to address regulatory requirements around capital adequacy;
• Distributing trade assets requires long-term partnerships, and operational excellence thus the need for the appropriate engagement and technology solution;
• Credit insurers have a key role to play to support new institutional liquidity providers.

Richard Evans, Managing Director, Global Head, Trade Asset Distribution, Citibank: “Being a major trade bank, Citibank has grown its distribution activities since years. We now want to work more closely with institutional investors and are keen to contribute to the further development of the industry blueprint for trade distribution.”

The panel then debated the evolution of the blueprint for trade distribution and concluded that:

• Growing trade distribution is strategic to close the multi-trillion funding gap;
• Trade distribution supports the originate-and-distribute model;
• Securitisation-as-a-service is required to bridge #banking and #capital #markets and to democratise access to the originate-and-distribute best practice.

Why a blueprint for trade distribution?

The blueprint for trade distribution aims to help banks achieve three objectives: (1) accessing capital markets, (2) increasing net interest income, and (3) adding value to transactions as needs evolve (e.g., embedding credit insurance and ESG related features).

Lenna Russ, Chief Revenue Officer, Tradeteq: “Securitisation-as-a-service is the holy gray to scale trade distribution as it bridges banking and capital markets, and democratises access to the best practice.”

The blueprint can be outlined as follows:

The panel demonstrated that technology makes a huge difference as trade distribution expands from the low-volume FI risk syndication to the high-volume receivables distribution. Features such as securitisation-as-a-service, automated replenishment and reconciliation, standardised practices, embedded value add, and end-to-end digital experience are critical to deliver on the 3 above stated objectives.

Thomas Krieger, Head of Trade Risk Distribution, Corporate Clients Lending, Commerzbank: “Standardisation is critical and I urge the industry to align around industry standard practices, both for Corporate as well as Financial Institutions trade finance assets.?As a very active market participant, Commerzbank does not?want?to connect to multiple?bilateral?distribution platforms?but prefers a market place to develop as a reference platform.”

Those capabilities are outlined below and aim to achieve the 3 above stated objectives:

Avoiding the typical pitfalls

The blueprint aims at aligning industry participants around a common vision and avoiding repeating the pitfalls of previous attempts in this space such as:

? Trade distribution platforms targeting the inter-bank space only to digitise the MRPA space fail as niche market doesn’t represent a positive business opportunity;

? Trade distribution platforms aiming to extract basis points from inter-bank transactions fail as banks margins are too thin to be shared with such technology providers;

? Ex-bankers moving to the fintech space to build distribution platforms and ignoring the specific requirements of capital market investors and asset managers;

? Lack of industry alignment as some major banks launch parallel initiatives in the inter-bank trade distribution space, thereby duplicating expensive efforts.

I already shared some guidelines for technology platforms but it seems some errors will be repeated over and over, in particular by bank consortia. Here is my 2020 piece of advice for platforms entering the trade distribution space: "The evolution of trade distribution practices and implications for technology platforms" where I stated:

André Casterman, TFD Initiative: "Whereas the inter-bank distribution practices may be adopted by some institutional funders, banks should not expect this to become the norm for that category of funders."

Going beyond technology

Through TFD Initiative, we implemented this blueprint with early adopters between 2019 and 2022 and we are now in the process of onboarding additional originators and investors. The technology proposition is available, so what else can we do to scale this market?

Richard Evans, Managing Director, Global Head, Trade Asset Distribution, Citibank: “The key question for us as an industry is whether we will want to collaborate on trade distribution and align on leveraging a single industry utility.”

The next opportunity for banks is to go the extra mile and assess the option to scale the distribution market by establishing a new financial market infrastructure dedicated to the trade distribution space and relying on an industry-owned governance and supervision. Combining the most advanced technology solution with an industry-owned supervised entity will further expand the trade finance distribution space, unlocking the liquidity needed to support the expected growth of global trade and to comply with tightening regulations.

André Casterman, Chair Fintech Committee, ITFA & TFD Initiative: "As an industry, we can do more as I shared on my recent blog published in?Trade Finance Global (TFG)?[last paragraph]. Building on the proven distribution technology, banks could establish a new utility and set up a financial market infrastructure owned and governed by the market. This would scale the market and go beyond the provision of technology capabilities."

Additional insights shared during the panel

Here are insights shared by our 5 panellists during the debate:

Laurence Anderson, Head of Financial Institutions EMEA, Global Trade Finance, SMBC Bank International

• “Integrating new distribution processes into existing booking systems remains a huge endeavour. Thanks to off-the-shelf SaaS trade distribution technologies, we are able to dedicate IT resources to internal system integration, therefore avoiding the need to re-develop what is available off the shelf.”
• “Standardising distribution practices and processes is a pre-requisite for the industry to achieve scalability.”

Richard Evans, Managing Director, Global Head, Trade Asset Distribution, Citibank

• “Being a major trade bank, Citibank has grown its distribution activities since years. We now want to work more closely with institutional investors and are keen to contribute to the further development of the industry blueprint for trade distribution.”
• “The key question for us as an industry is whether we will want to collaborate on trade distribution and align on leveraging a single industry utility.”

Thomas Krieger, Head of Trade Risk Distribution, Corporate Clients Lending, Commerzbank

• “Standardisation is critical and I urge the industry to align around industry standard practices, both for Corporate as well as Financial Institutions trade finance assets.?As a very active market participant, Commerzbank does not?want?to connect to multiple?bilateral?distribution platforms?but prefers a market place to develop as a reference platform.”
• “Getting access to a market place?with many market participants offers?more opportunities to engage with new counterparties.”

Lenna Russ, Chief Revenue Officer, Tradeteq

• “Securitisation-as-a-service is the holy gray to scale trade distribution as it bridges banking and capital markets, and democratises access to the best practice.”
• “Clients expect end-to-end digital experiences starting with sourcing through a market place, onboarding digitally, transacting digitally and automating as many deal execution and reporting processes as possible.”

André Casterman, TFD Initiative

• “Digitising FI-to-FI distribution is interesting but will not move the needle. Securitisation is required to transform trade assets into notes, or tokens, as expected by institutional investors.”
• "Whereas the inter-bank distribution practices may be adopted by some institutional funders, banks should not expect this to become the norm for that category of funders."
• “Automated distribution processes are essential to lower operational costs as banks need to sell high volumes of payables and receivables to institutional investors. That's where technology makes a difference in terms of increasing net interest income and return on equity. This also means: banks better spend IT resources on internal system integration, not on re-inventing the wheel.”
• "As an industry, we can do more as I shared in my recent blog published in?Trade Finance Global (TFG)?[last paragraph]. Building on the proven distribution technology, banks could establish a new utility as a financial market infrastructure owned and governed by banks. This would open the door to further scale the market and go beyond the provision of technology capabilities.

Previous TFD Initiative publications

Check out the GTR article of July 2019 "Creating a blueprint for global trade finance distribution".

Check out the July 2020 article entitled "The evolution of trade distribution practices and implications for technology platforms"

Check out the September 2022 article entitled "Fintechs tackle the trade industry's most complex conundrum: "interoperability"