Global regulators look to ease Basel III’s impact on trade finance.
The future of trade finance is looking brighter this week after Basel regulators announced they were easing some of the capital rules imposed by Basel III regulations. Although the giants of trade finance and International Chamber of Commerce (ICC), both of whom lobbied extensively for separate consideration of trade finance as an asset class, secured a partial victory, many agree it’s not enough. There are concerns the remaining provisions of the new rules will still unnecessarily over-regulate this traditionally low risk area and limit global trade, especially in low-income countries. While we wait and see if further compromises occur, the trade finance industry continues in the development of multi-bank solutions that offer efficiencies and central control to treasury groups, and increased leverage when negotiating trade finance fees.
Some corporate treasuries have already seen an increase in the price of bank fees associated with trade finance vehicles due to regulatory tightening. While the impact of increased fees is a concern of corporate treasury, second is the ability to support company sales to lower-income countries. Much of what the trade finance industry is predicated on is the support of export sales to countries where finance may be limited. The ICC had been promoting this view and the importance of trade finance for the world economy to Basel regulators.
When it comes to trade finance instruments such as Standby Letters of Credit, Guarantees and Commercial Letters of Credit, the somewhat burdensome paper process requires detailed documentation that needs to be all in order and match precisely with other backup information. And with the requirements of each type of instrument varying from bank to bank, the myriad of bank-specific documents and legalese adds to the work and consumes treasury resources. While banks individually have countered this inefficiency with online portals and electronic solutions for their customers, corporations with multiple bank partners still find themselves with a big mix of solutions.
Multi-bank Trade Finance Solutions. Multi-bank trade finance solutions can alleviate the labor-intensive paper process as well as help treasury departments to track corporate exposures and fees, and otherwise coordinate with their banking partners on a global basis.
One large multi-national headquartered in Europe traditionally allowed each country’s treasury arm to transact locally with a partner bank’s country office. This made negotiating fees globally a challenge as each locality was considered separately, and each bank calculated fees differently. Additionally, allocating credit lines for local countries under a corporate “umbrella” posed challenges as reallocations needed to be managed manually and there was not one system to capture global exposures. The time lag in communications between local and headquarters bank offices further complicated the reallocation process.
This particular corporate decided to join multi-bank solutions provider Bolero. This company’s offering allows corporates to present documents to their banks electronically, via one channel for all trade instrument requests. So the decentralized country offices now use one single process for all trade finance requests. If their bank partners are not a member of the Bolero network of providers, then they no longer are able to do business with the corporation. While this is may not be the best tactic for long-standing bank partners, the reality is that the need for global transparency, central management of credit lines, coordinated effort in fee negotiations and improved straight through processing (STP) for LCs and guarantees took precedence.
Additionally, a SWIFT plug-in is being developed for Bolero. Last spring SWIFT announced its partnership with Bolero for trade finance integration purposes. SWIFT messaging will extend the industry’s reach to all of SWIFTS banks and the adoption of ISO 20022 standards for trade finance, which Bolero is also helping to create, will further standardize messaging and promote industry integration.
According to Bolero, the demand for multi-bank trade finance solutions “is no longer restricted to a small number of large global corporate customers.” Therefore, large, medium and small companies in a variety of industries are “increasingly driving adoption of a common multi-bank solution.” This goes for commodity traders as well. While a large number of banks globally are live on the Bolero platform, regional banks throughout the world also continue to join, for instance, Danske Bank signed up in July and Banco Santander in September.
As one senior VP of Trade Finance at an MNC said, “we are not married to Bolero. Integration has had its kinks; however, we are working through them.” And, there is some competition for platform solutions. One key competitor, Trade Card, in New York also offers a trade finance platform that gives corporates a means to process trade finance needs as well to effect payment.
Clearly, trade finance is an essential facility for world trade. Whether the most recent Basel III changes are enough to continue to support a robust market for this financing will be hashed out over the coming months. Fortunately, trade finance solutions such as multi-bank platforms continue to be enhanced, and treasurers can leverage group volume in the negotiating of trade finance fees, which will continue to experience upward pressure amid Basel regulatory uncertainty.