Latest news: Investment opportunities in trade finance and loan services
The Trade Finance Investor Day 2024 took place at the Four Seasons Hotel, Park Lane, London, in November 2024, where key players in the trade finance industry gathered to discuss the future of trade finance as an asset class for institutional investors.
The challenge lies in integrating the ambition of positioning trade as an asset class with the focus of the European Commission on the CMU (Capital Markets Union). Collaboration, rather than competition, is essential in overcoming many challenges. Major players are seeking partnerships with banks, credit insurers, and development institutions to scale their operations.
France enacted similar legislation in June 2024, following the UK's lead in digital trade legislation. The UK passed the Electronic Trade Documents Act (ETDA) in 2023, granting digital trade documentation the same legal recognition as physical counterparts.
Digital-first, SME-focused origination actors, including alternative lenders and B2B platforms, view trade finance as a significant business opportunity. These actors are uniquely positioned to bridge gaps in underserved markets, leveraging digital capabilities and customer proximity to extend new sources of liquidity to their clients.
Asset-backed securitisation (ABS) and private securitisation of trade finance assets are emerging as powerful drivers to mobilize liquidity for trade finance from institutional investors. ABS offers investors an opportunity to diversify their portfolio and access a stable and attractive asset class for capital market investors, characterized by low default rates, self-liquidation, and short tenors.
Technologies such as AI, end-to-end workflow automation, blockchain, and tokenization hold significant promise in terms of unlocking transparency, efficiency, and accessibility to new liquidity pools in the future. End-to-end workflow automation, for instance, can mitigate a significant portion of operational risks, making trade receivables sufficiently predictable for wider distribution in structured credit markets.
Rating agency methodologies and extensive, data-driven analysis play a central role in determining whether the topping-up of securitized assets can be achieved, raising the bar for larger, multi-tranche securitization transactions. Legal enforceability issues, regulatory non-compliance, operational challenges like tax leakage, dilution, and set-off risks, and fraud pose challenges that require robust legal, structural, and monitoring measures to mitigate.
Commerzbank holds the view that the use of insurance certification can contribute to the availability of the trade finance asset class for investors. Guenther Poettler, Managing Director, Head Cross-Product Structuring at Deutsche Bank, emphasizes the need to make trade finance as an asset class more fungible and improve the risk-return dynamic through securitization.
The need for education is highlighted to align the goals of the European Commission with the ambition of positioning trade finance as an asset class for institutional investors and securitisation. The goal is to position trade finance as a key enabler of the CMU vision, emphasizing how it can drive meaningful progress by introducing something new and impactful.
The European Capital Markets Union (CMU) is currently under discussion, and there is a need to articulate the role of trade finance as an asset class to avoid being left behind. Sources for further information include adb.org, corporates.db.com, forbes.com, and finance.ec.europa.eu. Christoph Gugelmann, CEO and Founder of Tradeteq, claims that these insights contained in this article were shared at the Trade Finance Investor Day 2024.
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