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ICC 2015: Rethinking Trade & Finance

08/10/2015

The 7th edition of the ICC Banking Commission global survey once again provides a fascinating insight into the current status within the Trade Finance world.

 

It is interesting to note that, despite a growth slowdown in China and other emerging markets, over 60% of respondents to the survey reported an increase in trade finance activity.  This evidences that risk mitigation is still of high priority to many participants in the market.

 

The fact that the increased demand for risk mitigation is not supported by a similar increase in global trade activity demonstrates that the demand is as a result of the perception by traders of burgeoning risk.

 

This is further supported by the increase in demand for confirmation of letters of credit, and that such demand is expected to continue to increase.  Whether or not banks can meet such demand is highly debatable as SWIFT statistics show the number of confirmed letters of credit actually declining.  Having said that, it is refreshing to note that banks apparently continue to be in a position to satisfy customer demand, with over 60% reporting available capacity.

 

In addition, and perhaps not surprisingly, many banks expect their fee structures to be revised upwards over the coming months. The increased focus on KYC assessment, combined with greater pressure from AML and sanctions requirements, has placed a severe strain on operational cost for many banks.

 

Whether or not this is a good picture remains to be seen. Increased demand, higher fees and greater regulatory pressure could be a volatile mix.

 

It is gratifying to note that no increase in refusal rates on first presentation of documents under letters of credit has been reported.  Such a trend reversal is only to be welcomed and, based on further feedback, it appears that banks expect further positive movement in this regard.

 

How has this happened? Enhanced awareness by traders and banks of the intricacies of letters of credit based upon improved training and distribution of pertinent material may be a contributing factor. It is to be hoped that the publication, by ICC, of ISBP 745 (International Standard Banking Practice for the Examination of Documents under UCP 600) has played a significant role.

 

Perhaps supporting perceived increased risk factors is the revelation that almost 25% of respondents reported an increase in claims under guarantees, with less than 14% reporting a decrease. This is a worrying trend and is further compounded by over 16% of respondents reporting an increase in the number of court injunctions seeking to prevent payment under trade instruments.  This is a trend not seen since 2009 and is exacerbated by 18.5% of respondents indicating an increase in fraud allegations.  Banks and traders will need to pay close attention to this trend, with further risk-alleviating actions perhaps required.

 

The ICC Banking Commission has been very proactive in the past in highlighting the lower risk profile of trade products compared to other lending products.  This has been particularly useful in obtaining a greater understanding from regulators. Therefore, it is good to see that survey respondents support this viewpoint.

 

The ICC Trade Register takes this analysis even further and it is worth noting the reinforced finding in respect of the favourable risk profile of trade financing.

 

As always, the survey analyses SWIFT messaging trends and traffic flow - it is estimated that around 90% of all letter of credit transactions are issued via SWIFT MT700. SWIFT trade volumes for MT4xx and MT7xx messages decreased by 1.79%, an even bigger drop than that experienced in the previous year. Both letters of credit and documentary collections evidenced a decrease in messages - category 7xx by 1.41% and category 4xx by 3.09%.

 

It is worth noting the regional differentiation between usage of products: letters of credit are more prevalent in Asia-Pacific, whilst documentary collections have the upper hand in Europe and North America. As the survey states, this suggests contrasting risk appetites with a greater demand for more secure risk mitigation in Asia-Pacific.

 

Letter of credit volumes, though lower than last year (down 2.5%), are still higher than volumes in 2011 and 2012. Statistically, the average value of a letter of credit fell by US$10,000 to US$643,000 in 2014. This is likely to be attributable to the declining price of certain commodities. For 2014, it is reported that 8% of MT700's were issued with a request for the advising bank to confirm, and 3% with an authorisation to add confirmation (i.e. May Add).

 

A striking fact is that the renminbi is the second most used currency (used in over 10% of letters of credit) and is increasing year-on-year. The US dollar remains the prime currency for letter of credit volume, being used in over 82% of transactions.

 

The survey also provides a most interesting analysis of the top importing and exporting countries using letters of credit.

 

The full survey can be downloaded at

 

http://www.iccwbo.org/Products-and-Services/Trade-facilitation/ICC-Global-Survey-on-Trade-Finance/

 

 

 

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