TFD Initiative – The Trillion Dollar Opportunity

This means institutional investors that would normally operate in other areas of investing, may well invest heavily in the area of trade finance – one of the most dependable drivers of revenue for many of the top tier banks.

• ANZ Australia and New Zealand Banking Group
• Commercial International Bank (Egyptian)
• Deutche Bank
• HSBC
• ING
• Lloyds Bank
• Rabobank
• Standard Bank
• Standard Chartered Bank
• Sumitomo Mitsui Banking Corporation
• The International Chamber of Commerce (ICC)
• The International Trade and Forfaiting
  Association (ITFA)

Above is a list of the ten major banks – alongside other
observing bodies and asset managers – that have agreed to launch the drive
behind this initiative, which is believed to focus on creating common data
standards and definitions that enhance trading and production efficiency.
Furthermore, the TFD initiative is also aimed at the improvement of risk
management which will sustain a blueprint for global trade
finance asset distribution.

There are many reasons behind the initiative being a
profitable venture for many areas of the world’s finance market. The first one
is that trade finance is currently an area of banking that is worth over $12
trillion dollars globally per year, and it is still growing.

As more emerging markets grow their international trading
capabilities, so does the market for trade finance. But it is not only the
underdevelopment of global participation that is what has attracted enough
attention to create the TFD, but also the lack of advanced technology involved
in the area of banking.

The
Initiative Explained

The basic concept behind this, is a single platform that
uses smart technology to link the gap between trade suppliers and the providers
of liquidity that assists trading levels all around the globe.

Surath Sengupta, the Global Head of Trade Portfolio
Management for HSBC spoke on the initiative “while trade finance is currently
an attractive asset class for banks, we believe technology will unlock
investment from non-bank investors by removing complexity and making the
underlying asset data both more structured and accessible”. This essentially
then makes the product (trade finance assets) more readily available to a wider
audience, which will create further demand – hopefully promoting more global
trade.

The benefits of having standardised rules around the globe
with regards to trade have been displayed many a time. A good example would be
the Incoterms
so many trading firms rely on all around the globe. By developing new
solutions, using up-to-date technology to package the many portfolios of trade
finance into a universally recognised investment tool the TFD initiative is
opening the flood gates for investors all around the world, all shapes and
sizes.

The two pillars that are driving the perceived benefits of
this scheme are the historical benefits experienced from a) increased global
trade and b) access to more funding which therefore drives point a.

The benefits of increased trade are no new aspect of world
economics. One of them being comparative advantage – a rather well acknowledged
benefit of international trade being more accessible.

Adam Smith wrote in 1776; “If a foreign country can supply
us with a commodity cheaper than we ourselves can make it, better buy it off
them with some part of the produce of our own industry, employed in a way in
which we have some advantage” (Book IV, Section ii, 12)

In 1960, global trade accounted for 24.13% of global
GDP. Today, it accounts for over 70%.

From this
graph, we see the Exports of Goods and Services as a percentage of GDP depicted
together as a global trend line. The range of the data is 1960-2017, showing a
strong positive trend line.

The major
dip in global exports and imports in 2008 was the financial crash. This is
understandable, the crisis affected trade immensely as countries production
suffered and incomes and wealth were hit hard.

However,
starting at 24.13% in 1960, and finishing at 71.7% in 2017, it shows a
considerably strong increase. In fact, it shows a 66.43% increase over the 57-year
period.

This then
calculates to an average of 1.157% increase in global trade as a % of GDP, each
year.

Similarities

The demand
for a standardized platform and packaging is something we are seeing in various
different sectors. Within the blockchain network R3 Marco Polo, we have the UTN
– Universal Trade Network which is aiming at producing an agreed standard way
of trading through all platforms of blockchain network.

Furthermore,
with the aforementioned Incoterms first introduced in 1936 by the ICC (International
Chamber of Commerce). Since then it cannot be denied that the
introduction of a set of standard rules and interpretations has improved and
advanced international commercial transactions. What’s more, these sets of
standard rules have altered throughout time, just as the parameters of trading
internationally have. And this is an important concept.

Just as trade has evolved over the years, alongside the
Incoterms which are regularly revised, the technology used in the large sector of
banking should be also.

By providing a regulated, standardised process for
investing, the financial backing upon which global companies can fund their
trade is increased massively.

Execution

TFD initiative is introduced through Tradeteq, who “open
trade finance to the global capital markets, empowering banks to distribute
trade finance assets”. In late 2018, the company received £4.86 million to
further develop their investing platform. Reportedly, more than £150 million
worth of assets has been processed through the platform.

The £4.86 million was largely invested by ADV, a
tech-investing firm that prides itself on investing in companies for the long
term. Some of ADV’s previous investing recipients are Snap, Push Doctor and
BSecur. Some successful, industry leading ventures already.

Nils Behling, Founder and CFO of Tradeteq said “Trade
finance is the oldest banking product and the only one that couldn’t be
efficiently accessed by institutional investors”.

An impressive platform posed by some well-aged institutions,
backed by some credible observers is set to change the world of trade finance.

Way
back when… we used Balance sheets

Coming off the back of the 2008 financial crisis, we saw a
significantly large increase in banking regulations – rightly or wrongly implemented
in an attempt to discourage/ disallow the system that allowed such greed to
cause the crash in the first place.

What then came, was a move to the “originate-and-distribute
model”. This involves firms keeping much of their lending portfolio off of the
balance sheets in order to maintain their flexible working capital. This is of
course in contrast to “originate and hold” method, in which banks would create
the loans and hold them on their balance sheet until maturity.

The Originate-and-Distribute model allows banks to transfer
the loan after creation, which does not inflate the balance sheet but allows
growth for non-banking financial intermediaries.

How does this tie in? The technology posed by Tradeteq and
their team of supporters enable this to happen more efficiently and on a much
larger scale.

With this technology, Banks will continue to increase the
role that non-bank investors play in the trading of Trade finance assets, which
will completely transform the market. Chris Southworth, Secretary General for
the ICC said, “if we are going to bridge the $1.5 trillion trade finance gap,
we need to understand how banks and non-bank trade finance specialists can
combine to deliver the necessary finance to fund world growth”.

If we are going to bridge the $1.5 trillion trade finance gap, we need to understand how banks and non-bank trade finance specialists can combine to deliver the necessary finance to fund world growth

Chris Southworth, ICC UK