Latest update: Trade financing and lending opportunities for investor participation
The European Capital Markets Union (CMU) is currently under discussion, and there's a growing emphasis on understanding the role of trade finance as a distinct asset class in achieving the CMU vision.
The goal is not just about expanding existing asset classes, but introducing something new and impactful. This perspective is echoed by the recent legislative moves in both France and the UK. In June 2024, France enacted legislation similar to the UK's Electronic Trade Documents Act (ETDA), passed in 2023, which grants digital trade documentation the same legal recognition as physical counterparts.
These players, uniquely positioned with digital capabilities and customer proximity, are poised to bridge gaps in underserved markets, extending new sources of liquidity to their clients. However, the lack of understanding in the market has exposed a need for cross-stakeholder collaboration in global trade digitalisation.
Trade finance, as an asset class, is generally diversified across products, industries, and client types, and it is often characterized by low default rates, self-liquidation, and short tenors. To make it more accessible for institutional investors, the main actors involved in building the European Capital Markets Union (CMU) within the European Commission are focusing on improving transparency, standardizing reporting requirements, and supporting credit issuance strategies by regulated Alternative Investment Funds (AIFs) that finance loans.
Asset-backed securitisation (ABS) and private securitisation of trade finance assets are emerging as powerful drivers for bridging the gap between new entrants and institutional investors. Guenther Poettler, Managing Director and Head Cross-Product Structuring at Deutsche Bank, stated that securitisation can make the trade finance asset class more appealing for investors.
ABS offers investors an opportunity to diversify their portfolio by giving them access to asset classes they wouldn't otherwise reach, in a pooled, rated, and sometimes liquid format. This could be a significant step towards achieving recognition of trade finance asset classes for institutional investors.
Digitalisation in trade finance could further enhance access to high-quality, real-time data, improving asset origination and distribution. Technologies such as blockchain and tokenisation hold significant promise in terms of unlocking transparency, efficiency, and accessibility to new liquidity pools in the future.
Major private debt funds, alternative lenders, and fintech platforms are increasingly seeking partnerships with banks, credit insurers, and development institutions to scale their operations. Collaboration, rather than competition, could be the key to overcoming many of the hurdles in the trade finance market.
Positioning trade finance as an asset class is a primary educational challenge for the industry. This was a key theme discussed at the Trade Finance Investor Day 2024, held at the Four Seasons Hotel, Park Lane, London in November 2024.
In conclusion, the future of trade finance in the European Capital Markets Union looks promising, with a focus on collaboration, digitalisation, and education. As the industry continues to evolve, it's clear that trade finance will play a significant role in driving meaningful progress and introducing something new and impactful.
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