Why hasn't trade asset distribution taken off yet?

It has been presented as a miracle solution to help banks free up liquidity under Basel III regulations, and as a great way for investors to diversify their portfolios, so why isn’t trade asset distribution more commonplace?

Around this time four years ago, Bank of America Merrill Lynch organised its first Trade Risk Distribution Investor Forum in Singapore. It was attended by about 50 executives from 30 global banks, all there to discuss why redistributing trade finance assets made sense in light of new capital regulations and leverage ratio requirements.

“With an evolving regulatory environment, the shorter end of the yield curve provides a unique opportunity for trade assets, ensuring that trade risk distribution will continue to build on its present momentum,” said Kuresh Sarjan, who was at the time head of Global Trade and Supply Chain Finance, Asia Pacific at BAML.

Banks have been beating the same drum over and over again since then, as a quick online search for the history of trade asset distribution confirms. Interviews, opinion pieces, client presentations: the majority of global banks agree that distribution is a win-win: originators get to release liquidity and increase returns, while investors get access to a diversified pool of low-risk assets. Yet in 2018, it still isn’t a very common practice.

In April 2015, a representative of Citibank made a presentation to an audience full of bankers on why investing excess liquidity in trade assets would bring greater returns than other investment strategies. In it, he inadvertently mentioned one of the main reasons the market still hasn’t developed as much as one could expect: “Compared to other asset classes, the secondary market for trade assets is unstructured, and asset sales are undertaken via word-of-mouth.”

A transparent structure surrounding the distribution of trade finance assets is exactly what has been lacking in order to make this practice an everyday reality for both originators and investors. For banks and other trade financiers, the cost and amount of work associated with packaging a portfolio of short-dated trade finance loans for the secondary market and identifying potential investors has been prohibitive. For investors who may not have known much about trade assets, finding opportunities from individual banks and predicting returns has been too difficult.

Fintech developments are changing the game: Tradeteq is a platform where originators can list opportunities and transact seamlessly with investors, who in turn can obtain transparent return predictions. By focusing specifically on institutional investors, the company opens liquidity opportunities way beyond the interbank sector. Since Tradeteq's soft launch last year, US$130mn of assets have already been processed through the platform, covering obligors in seven jurisdictions. The company is based in London and recently opened a Singapore office.