In recent years, many banks have created more capacity by distributing trade finance assets to third parties. The process of trade finance distribution started as an interbank market, with banks using it as a tool to manage country, sector and buyer limits between themselves.
However, given today’s pressures to support more and larger trade financings, having the additional option of selling trade finance assets to non-bank investors could help banks to remove more risks from their balance sheets, and find new avenues for growth.
Opening trade finance assets to non-bank investors also has the potential to unlock hundreds of billions of dollars of new liquidity, helping to plug the gap between trade finance capacity and demand. Investors such as pension funds, insurers and hedge funds have already invested in trade finance assets, but more investors could become interested if the attributes align with their institutional market needs.
Of the $7.5 trillion in bank-intermediated trade finance deals conducted in 2018, some $300—400 billion was distributed between banks. In comparison, less than $100 billion was sold to non-banks, according to Tradeteq, a World Economic Forum member.
Moreover, the issuance platform for illiquid credit believes that the distribution of trade finance assets to non-bank investors could grow to a $3 trillion market in the next five to eight years.
Fintechs are also changing the game by developing platforms that can enable banks to efficiently automate the provision of trade and SCF to corporates and their suppliers, whilst also providing real-time transparency into the status of the transactions. By offering multi-channel platforms, they are playing an important role in the distribution of trade finance assets to third parties.
The Marco Polo Network (MPN), which boasts 30 of the world’s largest banks—including BNY Mellon—as members was launched in 2017 as a blockchain-based software platform for trade financing (see Figure 4), as well as payments and working capital. The network also opens up the potential for the development of a liquid secondary market in trade finance by enabling the sale of trade assets to alternative liquidity providers that are members of the consortium.
Joon Kim is the global head of trade finance product and portfolio group for BNY Mellon Treasury Services.
By John Velis, FX and Macro Strategist for the Americas, BNY Mellon
Globalization was in retreat, it was claimed, and “reshoring,” “nearshoring” and “friendshoring” were the growing trends in trade. Frictions between major trade partners encouraged the search for alternative sources of supply and distribution.