Trade finance and regulation trafigura
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Trade finance and
The risk of unintended
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Trade finance has long been of vital importance to the world economy. It has oiled
the wheels of international transactions, and in the process acted as a catalyst for
investment, greater consumer choice, and technological advancement. It has
therefore been at the core of the process of globalisation.
Demand-driven, trade finance has historically perhaps been rather taken for
granted. It has been generally perceived to be liquid and well-functioning. But since
the global financial crisis, it has experienced periods of dysfunction that have
exacerbated the world's economic woes.
It is now also rapidly evolving in the face of financial innovation and proposed
regulatory change. In particular, the efforts to improve the resilience of the financial
sector embodied in successive variants of the Basel III regime are having a profound
effect on entities involved in cross-border business activities, particularly in
emerging markets. Not all of these regulatory changes are being welcomed however.
Hence, many companies and financial institutions are having to reconsider how they
will approach trade finance in future.
Llewellyn Consulting was approached by Trafigura to provide a comprehensive
assessment of the current condition of this central element of the global financial
system, and the challenges it is confronted by. In assembling this paper we have, in
addition to reviewing the relevant published materials, talked at length to people in
the policymaking community, and to the major actors in the sector - both those
who use trade finance, and those who supply it.
It is clear that trade finance continues to matter enormously, and that there would
be serious risks to a still fragile global economy were its smooth functioning to be
interrupted. And a number of the experts in the field consider that there is a risk of
this happening, albeit inadvertently.
All of this points to a need for an informed discussion; a constructive approach; and
a willingness to be flexible where the evidence points to the need.
John Llewellyn, Preston Llewellyn and Russell Jones
Partners, Llewellyn Consulting
? Trade finance, long taken for granted, is of central importance to the global economy.
? One form or another of trade finance underpins around 90% of world trade.
? International trade has always been at the core of economic development, particularly since WWII.
? Disruptions to trade finance are infrequent but, when they occur, are highly damaging.
? International trade cannot flourish without support from banks and co-operation between firms.
? Local banks are taking market share from global entities in a dollar-denominated and short-
? New structures and products are being developed, but standardisation and better
understanding are needed.
? Default and loss rates on trade finance products and related guarantees are low.
? Until 2008, the supply of trade finance was demand driven, seldom if ever constrained, and
hence of little concern to policymakers.
? However, trade finance was a conspicuous casualty of the 2008 global crisis, and exacerbated
the collapse in trade volumes.
? Policy initiatives facilitated a rapid recovery: but latterly world trade has failed to match
global GDP growth.
? This reflects slower emerging market (EM) - especially BRIC - growth, and long-term
? Some pockets of stress aside, finance has not been a major constraint on trade growth since 2009.
? However, there is now growing concern over the possibility of (albeit inadvertent) over-heavy,
insufficiently nuanced, regulation.
? Practitioners recognise that trade finance requires a stable and soundly-regulated global
? But trade finance being of central importance to growth and an inherently low-risk activity,
it warrants being handled with care.
? In particular, it is important that separate regulations in the areas of capital, leverage, and
liquidity do not add up to more than the sum of their parts.
? Ensuring a wide pool of actual and potential providers would increase the resilience of trade
finance in the face of shocks.
? Commodity trading is of central - and not always fully appreciated - importance to economic
growth, of developing and developed countries alike.
? Practitioners consider that the risks involved in commodity trading are perceived as greater
than in fact they are.
? This misperception risks leading to undue restrictiveness of regulations governing the
provision of commodity trade financing.
TABLE OF CONTENTS
I DEFINING TRADE FINANCE 7
Box 1: Distributing trade finance to non-bank investors 11
Box 2: Commodity trade finance 12
Box 3: Bank and non-bank intermediated forms of trade finance 13
II THE LOW RISK NATURE OF TRADE FINANCE 15
III TRADE AND ECONOMIC DEVELOPMENT 16
IV THE IMPACT OF THE GLOBAL FINANCIAL CRISIS 18
V THE POLICY RESPONSE POST-LEHMAN 20
VI INCOMPLETE RECOVERY 21
VII TRADE FINANCE AND SLOWING TRADE GROWTH POST-2011 24
VIII TAKING STOCK 25
IX ISSUES AHEAD 27
X THE MAIN AREA OF CONCERN: REGULATION 28
XI CONCLUSIONS 34
XII ANNEX: BASEL REGULATIONS AND TRADE FINANCE 35
Trade finance oils the As the World Trade Organisation (WTO) succinctly puts it: "Finance is the lubricant of commerce".1
wheels of trade That said, historically the underlying mechanics of global trade finance have attracted relatively
little attention. Trade finance was generally considered both by those who utilised it, and by
those who oversaw it, to be readily available when required and to function satisfactorily. After
Long overlooked, all, throughout the post-World War II era, and in particular since the 1980s, international trade
it has come under and the process of globalisation were at the forefront of global economic development.
duress of late ... Over recent periods, however, trade finance has experienced periods of stress and dislocation,
not least following the bankruptcy of Lehman Brothers in 2008, and again in 2011, when the
euro area sovereign debt crisis precipitated funding strains for European commercial banks.
Global trade finance is also in a state of flux. It is in the throes of significant structural change
... and following the related to the entrance of new participants and products, and major changes in the regulatory
financial crisis, the market architecture within which it operates.
is in flux Maintaining the vitality and resilience of trade finance is crucial if the integrity of the system
of international trade, with all its proven benefits for economic progress, is be sustained.
1 Auboin. M. `Improving the availability
of trade finance in developing
countries: an assessment of remaining
gaps'. WTO Staff Working Paper
ERSD-2015-06. June 2015.
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