1. Trade finance meets the internet
Imagine if trade finance paper were distributed as widely as
Eurobonds amongst investors. Banks providing trade
services would process a much higher percentage of the $3
trillion of global trade receivables outstanding. Corporates
would easily free their balance sheets of trade credits. And
investors of all types would be able to take advantage of the
attractive risk/reward characteristics of a unique fixed-income
asset class (see the chart below that illustrates the lower
volatility of Argentinian and Brazilian trade finance spreads
compared to bonds). Despite the huge size of the market, to
date trade finance has
not had the same
profile as the bond
market. But this is
changing.
New horizons
In 1999 veteran
Deutsche Bankers
Luigi La Ferla, James
Parsons and Richard
Tull set up LTP Trade,
a company delivering
new services for the
trade finance industry.
LTP’s objective is to
improve transparency, and
expand volume and liquidity in
the trade finance market.With
over 40 years’ experience in
trade finance between them,
they are well qualified to
deliver. “The trade finance
industry is undergoing signif-icant
changes,” says CEO Luigi
La Ferla. “The application of
new technology presents a
tremendous opportunity to
expand its scope.”
Trade finance versus bond spreads
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20
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12
8
4
La Ferla, Parsons & Tull
Trade finance in the internet age
The centrepiece of LTP Trade’s product range is LTPtrade.net,
the first internet-based real-time dealing, information and data
platform for the trade finance market. Together with State
Street, LTP Trade has also created the first central settlement
and safekeeping system for trade finance dealing.
LTP Trade is strictly a service provider and not a principal.
The LTPtrade.net platform has created a marketplace that
allows banks and financial institutions to transact trade finance
business with one another online and to obtain information
that assists buying and selling decisions. “The information
content is very important,” says Richard Tull, chief marketing
officer.“As well as its dealing capabilities the system provides
financial and price information plus news and research
material specifically for trade finance investors.”
There are more than 250 individual members using the
system, with an average of 10 more joining every week.
Financial institutions from around the world are represented,
including both heavyweight global trade finance banks such as
HSBC and specialized investing institutions such as Nedcor
Bank in London.
Practical technology
The LTPtrade.net system was built with a significant
investment in new software that has been custom-designed for
the trade finance market. LTP Trade’s industry experience was
a critical starting point for the design of this system.However,
perhaps the most important factor behind the platform’s ready
acceptance by the market has been LTP Trade’s emphasis on a
collaborative approach with users.
The feedback process is continuous and version 2.0 of the
system is due for release early next year.“There’s no substitute
for experience,” says James Parsons, chief operating officer.
“Version 2.0 will incorporate everything that we have learnt
from the first six months of online dealing and will enable us
to deliver additional value to trade financiers.”
Is this really making a difference?
But what’s actually happening online amongst those 250
users? It seems that sellers are exercising considerable creativity
in meeting their objectives. Some are using the platform for its
convenience of access to the trade finance markets. For
example, Vedran Perse, managing director of Inter Ina, the
London trading subsidiary of INA (Croatia’s state-owned oil
company), observes:“This platform allows more lenders in the
trade finance market to get to know us and makes our trade
financing more efficient.” Inter Ina asks relationship lenders to
settle over the platform for the logistical convenience that it
delivers and provides new institutions with an opportunity to
develop a primary relationship.
Other sellers, such as Landesbank Baden-Wurttemberg in
London, have used the platform to sell trade finance assets at a
time when their internal resources have been stretched by an
influx of primary business. Others again have valued the new
offering formats that an online marketplace makes available.
For instance Bank Austria Creditanstalt International AG, a
well-established participant in the existing secondary market
for trade finance,was the first to conduct a full online auction
of trade finance paper. As David Jones, head of forfaiting in
London commented at the time:“We are keen to find ways to
improve the market’s efficiency and liquidity.” An auction
achieves this by making simultaneous offers on fully
transparent pricing terms in a short timeframe.The success of
the first auction immediately led other active trade finance
banks to adopt this offering style over the platform.
New buyers
If the sellers have been creative, how has it been for buyers?
The results of LTPtrade.net’s fundamental aims to enhance
transparency and provide information have been well
sponsorship statement
0
Brazil EI
Argentina FRB
Brazil trade
Argentina trade
Spread % p.a.
EI = eligible interest bonds FRB = floating rate bonds

2. received. Digital images of trade finance documentation are
posted on the platform so that buyers know precisely what
they are purchasing prior to making their commitment.
Together with the information resources, investors are put on
a level playing field. As Paul Landers of Rabobank
International, a user of the platform, commented:“The ability
to access all of the information needed to assess a transaction
means that the market can now operate much more
efficiently.”
Perhaps the most important measure of success however is
whether the platform is attracting new investors to the asset
class. Some users of the platform have already confirmed that
they have purchased assets of a type that ordinarily they would
not have considered.LTP Trade has also been working hard to
provide an environment where new channels are created for
the flow of trade finance assets between banks and institutional
investors so as to further enhance the market’s liquidity.This is
where the involvement of State Street is particularly
important.
Settlement
State Street’s settlement services have a number of
implications. The first is that both buyers and sellers transact
via a trusted third party, each taking settlement risk on State
Street and not on one another. The second relates to the
settlement procedures themselves. In this day and age there are
few asset types that still use physical settlement. For instance
transfer of title in bond trading moved to register entry with
institutions like Euroclear years ago. Institutional investors in
particular will usually not contemplate the purchase of assets
which require physical delivery.
Part of LTPtrade.net’s service includes the provision of free
safekeeping with State Street for users of the platform.“State
Street has been a pioneer and innovator of global accounting,
trading and money-market order management systems for
over a decade,” says Richard T. Flood III, vice president for
State Street’s Global Trade Banking in Europe.“We share LTP
Trade’s vision for a
world of demater-ialized
trade finance
assets changing
hands by book
entry.”
As an institution
dedicated to servic-ing
institutional
investors, and with
over $6.2 trillion of
financial assets
under custody, State
Street’s settlement
and safekeeping
services add consid-erable
credibility to
the attraction of the LTPtrade.net platform for new investors
in trade finance assets.
Research
Nevertheless it’s difficult to buy assets if you don’t know what
is driving their price. In markets such as foreign exchange,
bonds and equities, a worldwide army of analysts research
these issues daily. Interestingly, however, until now there has
been little or no comparable groundwork examining the value
and price dynamics of trade finance paper.
LTP Trade’s Risk Management division produces
independent research that adds value across the trade finance
market, for both existing and new participants. The division
also delivers independent valuations for investors, such as the
WestLB – Tricon Forfaiting Fund, together with a range of
other quantitative risk management services such as value at
risk computations. And the LTP Trade Finance IndexTM,
representing a basket of investable trade finance assets, provides
the trade finance market with a benchmark for comparison
with other asset classes.
A market on the move
The trade finance market is evolving and LTP Trade’s services
are clearly spot-on in assisting its growth. The company
confirms that demand from the market for its range of
products has already put it in profit. It’s refreshing to find an
internet-based company for which “cash burn” does not seem
to be an issue. However LTP Trade is not resting on early
success; there are bigger plans for 2001. The company has
already outgrown its head office in London and is opening
offices in major business centres worldwide.“Our mission to
develop trade finance as a more widely recognized asset class
is already achieving results,” says La Ferla,“and we are making
significant further investment in the dealing platform,
settlement services, res-earch
and quantitative
risk management serv-ices.”
With commit-ment
like this, it seems
that the day when
banks can distribute
trade finance assets like
bonds is not so far off.
For further information, please contact:
LTP Trade Limited
Luigi La Ferla +44 207 7667 6861
Richard Tull +44 207 7667 6859
James Parsons +44 207 7667 6862
www.ltptrade.com
info@ltptrade.com
sponsorship statement
Some platform users have already
confirmed that they have purchased
assets of a type that ordinarily they
would not have considered
LTP Trade Finance IndexTM
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10/98
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4/99
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10/99
1/00
4/00
7/00
10/00
6%
5%
4%
3%
2%
1%
0%
Spread over Libor