Trade finance: Luring investors into trade finance assets
The $700 billion trade finance market is one of the few large pools of tradeable fixed-income assets that has not yet attracted institutional fixed-income investors. Changing that, and propelling the fragmented, illiquid trade finance market through the same developments that transformed emerging market debt in the 1980s, is the goal of bankers and traders who this month launched Internet Trade Finance Exchange (ITF).
It’s a closed online marketplace that aims first to take custody of trade finance assets into a digital warehouse – for which Deutsche Bank will act as custodian – and then 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 ITF president Hernando Pérez.
EYciency of course is anathema to bank traders that thrive on obfuscation of pricing. But Pérez believes ITF still has a good chance of attracting enough financial institutions as members to encourage corporations and investors also to use the system. He declares: “Banks do trade finance to get a chance to do other services for clients, such as capital markets deals. The return on capital in trade finance itself sucks.” For that reason, ITF hopes banks will see the platform as a mechanism to cut overheads. Once an institution deposits trade finance assets in ITF’s digital warehouse, it can outsource the often quite complex administration of them to the Bankers Trust Company subsidiary of Deutsche Bank.
Institutions can deposit all their assets and just designate certain of them for sale and also designate a period over which potentially interested buyers can view them and associated documentation.