Published: April 01, 2012
I think the most important issue on treasurers’ and finance managers’ minds is the impact of continuing global economic uncertainty. No country is now removed from any other in terms of its economic prospects, and the effects of globalisation are nowhere more apparent than in trade. In 2011, world trade grew by just 5%, compared with growth of 13.8% in 2010 as the world’s economies rebounded from the 2008/9 global financial crisis. Although the total value of trade is now at an all-time high of $19.2tr, this is largely accounted for by higher commodity prices, whereas most countries are seeing more or less flat trading volumes (source: World Trade Organisation, April 2012).
Globalisation has meant that a trade transaction is rarely a simple exchange of goods between buyer and seller. Trade counterparties are often in different countries or regions, with intermediaries transferring goods between them. Not only are buyers and sellers of a finished product often geographically remote from each other, but the product itself will frequently be made up of components sourced from many different suppliers and locations, and will cross many borders during its manufacture, assembly, finishing and warehousing.
This complexity combined with economic uncertainty is resulting in greater demands from our corporate customers, both buyers and sellers. Managing risk and liquidity throughout the supply chain is essential from component manufacturer through to the final customer, and requires highly competitive and sophisticated solutions for exchanging documentation, making and receiving payment, and financing transactions. Companies are managing myriad risks throughout this process, including counterparty, country, FX, interest rate, liquidity and regulatory risks. This is where banks such as J.P. Morgan can make a real difference by facilitating and automating trade processes, including the associated cash flows. We finance the supply chain and provide visibility and control over trade transactions and cash balances globally. We also provide risk management solutions that address the variety of risks inherent in the cash and trade cycles.
The Basel III rules for capital and liquidity have been put in place to strengthen the financial sector and the banks. Unfortunately, some of the rules will have unintended consequences. For example, trade finance is an asset class that is performing extremely well compared to investment banking, clean loans, and other forms of lending. Despite very low levels of default or losses (just 0.002% throughout the financial crisis and during subsequent years), trade finance is being treated as an equivalent risk in terms of the capital and liquidity ratios that banks are required to hold. This will undoubtedly have an impact on international trade by making trade finance more expensive and therefore increase the cost of doing business.
Historically, the trade finance industry has been very fragmented, and currently lacks comprehensive statistics, uniform reporting and product definitions. To resolve this, a group of 17 international banks with a shared commitment to trade finance have formed the Global Trade Industry Council (GTIC), of which I am the Chair. This Council aims to co-ordinate efforts within the trade finance industry to establish more uniformity in its activities, reporting and product descriptions, and to act as an advocate on behalf of its members and the wider industry.
The GTIC is working closely with the International Chamber of Commerce (ICC) to create a permanent trade asset registry which will form the basis of annual reporting that demonstrates the strength and risk-aversity of the trade finance sector. We are keen to invite more banks to participate in the Council, to add weight to proposals and distinguish between short-term trade transactions and other forms of lending in terms of the liquidity and capital ratios that are required for trade finance.[[[PAGE]]]
The GTIC is a leading body for driving change and developing cohesion within the industry. One element of this is to create standards, replacing the current fragmentation that exists. So far, we have created industry standards for trade definitions with BAFT-IFSA (Bankers Association for Finance & Trade and the International Financial Services Association), and we are working with the ICC on a standard definition for the BPO (Bank Payment Obligation), which we expect will shortly become an ICC-endorsed instrument in the same way as a Letter of Credit. It is an exciting new development with broad application across the trade finance sector.
The goals of the GTIC — transparency, standardisation and professionalism of the industry—are also core ambitions of J.P. Morgan, and the firm has played a major part in its formation. Trade finance is not simply a financial instrument, it is the enabler of economic stability and growth, and of increased prosperity for the world’s most vulnerable populations. We at J.P. Morgan are passionate about supporting our customers’ business internationally, and trade is at the forefront of this passion. Because we have invested heavily in developing our global presence through organic growth, we are able to maintain our unique culture and approach.
Engaging, retaining and developing the right people, and supporting them with the right technology, is essential to our DNA at J.P. Morgan This is especially apparent in our trade finance investment. As well as carefully hiring expert teams and providing rigorous ongoing training and support for them globally, we have introduced new technology. Trade Channel, J.P. Morgan’s browser-based, front-end system, allows companies to monitor all their activities with J.P. Morgan globally, with dashboards, flexible reporting and real-time information. Trade Channel is integrated with our cash management and foreign exchange solutions to provide seamless access to comprehensive financial data and to facilitate well-informed decision-making. We offer supply-chain finance solutions that reduce working capital demands, increase working capital efficiency and provide underlying stability to extended supply chains. Our solutions are supported by an expansive international trade network to support our customers’ need for a truly global trade solution, with expert consulting services focused on local policies and business regulations.
Supporting customers’ trade finance requirements is frequently the first step in forming a deeper, more strategic relationship. We have developed particular strength in working with European and North American customers doing business in emerging markets, and conversely, emerging market customers seeking to expand their activities in Europe and North America. For example, we have built expert, multi-disciplinary teams in North America, Africa, Europe, the Middle East and in Latin America to help Chinese corporates import and export goods by opening accounts and conducting settlements in multiple currencies, including RMB and USD. We are helping these companies to set up sales offices and production sites, providing them with working capital, processing payments, issuing letters of credit, and financing imports and exports across all industries. This is just one element of our objective to be not only the best trade bank in a specific market, but the trade bank of choice for our customers, bringing a high-quality experience, a deep understanding of their business and end-to-end global solutions extending across their geographic footprint.[[[PAGE]]]
Although RMB trade settlement volumes remain small, they are set to increase significantly over the next five years to as much as 50% of Chinese imports and exports. Consequently, multinational companies either sourcing from, or selling into China, need to find out what the opportunities are, and how they can best take advantage of them. As volumes increase, more suppliers with an expense base in RMB will demand RMB settlement, which may jeopardise companies’ supply chains if they are not in a position to respond.
With our three franchises—US commercial banking, corporate banking and investment banking— J.P. Morgan can deliver large-scale, holistic solutions that address every aspect of our customers’ financial strategy. We are one of the top five banks globally in trade finance, with a growing market share amongst FT500 companies. With long-term relationships and cohesive solutions across cash, trade and FX, we saw trade loans grow year-on-year by 73% during Q4 2011.
This year we will see new governments in the United States and China, and a new president in Russia, which will influence the world order and economic confidence. The regulatory landscape remains opaque in some respects, but it seems likely that it will become more, rather than less difficult to do business, and banks and their customers alike need to be prepared. In particular, companies need to focus not simply on headline regulations such as Basel III, but also on local regulations that can change substantially and rapidly.
Treasurers and finance managers can be certain that the coming years will bring uncertainty and unforeseen events. These tend to occur quickly, with significant ramifications in terms of risk, liquidity and market volatility, so they need timely, accurate and complete access to global information to inform their decision-making. While I would personally like to see greater regulatory transparency and stability, and more rational, consistent behaviour across the global banking market in terms of pricing of assets, we cannot dictate how the markets, and individual players within them, will evolve. Throughout an extended period of turbulence and beyond, we are committed to sustaining our customers and strengthening our business through our investment in people, products and technology, and to play a leading role in the wider industry.
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