| Hernando Pérez | ||||||
The $700 billion trade-finance market is one of the few large pools of tradeable fixed-income assets that has not yet attracted the attention of institutional fixed-income investors. Changing that, and propelling the fragmented and illiquid trade-finance market through the same developments that transformed the emerging-market debt market in the 1980s is the ambition of a group of bankers and traders who last month launched Internet Trade Finance Exchange (ITF).
It’s a closed online marketplace that aims first to take custody of trade-finance assets in what is called a digital warehouse – for which Deutsche Bank will act as custodian – and then, if its depositors wish, offer these for sale through auctions or via continuous offerings, finally providing settlement and clearing.
“The aim is to create liquidity and transparency of pricing for trade-finance assets that will enable fixed-income investors finally to deem this an asset class,” says Hernando Pérez, president of ITF and a veteran of emerging markets debt trading and structuring.
Once an institution deposits trade-finance assets in ITF’s digital warehouse, it can outsource the often quite complex administration of those assets to the Bankers Trust Company subsidiary of Deutsche Bank. The institution pays for administration on a usage basis, rather than building up high fixed costs. Institutions can designate a period over which potentially interested buyers can view them and associated documentation. It’s likely that auctions will then be held running for perhaps three hours, with ITF generating additional earnings both from $5,000 membership fees and from transaction commissions. ITF does not take positions itself.
Immobilizing assets and their documentation within the digital warehouse is crucial. ITF will not trade assets that are not first deposited in the warehouse. One of the stumbling blocks to modernizing the secondary market in trade-finance paper is the propensity for forfaiting assets to jump between holders, attracting new representations and warranties to their associated documentation in the process. Managing all that is the first step to promoting liquidity and pricing transparency.
Pérez is unsure how long it will take to reach an acceptable level of liquidity, but hopes to do at least $1.5 billion of business in the first year. The platform already has 180 registered members including half of the top 10 biggest banks in the world. It has already, with minimal marketing, had trial members seeking to post and deal in distressed trade finance assets. It hopes that institutional investors will follow. Pérez says: “I’ve talked to Argentine, Peruvian and
Mexican pension funds. They will all buy into these instruments, and they’re awash with cash.”
