The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

Quality Liquid Assets (HQLA) to cover
expected net cash withdrawals during a
30-day period of stress. The LCR is driven
by regulator-assumed cash withdrawal rates
based on a combination of product and client
factors over a 30-day stress period.
Whilst the final requirements are subject
to revision by the BCBS,^1 they will include
liquidity buffer requirements for core trade
finance products, e.g. contingent obligations
(in the form of import/export letters of
credit and guarantees), undrawn credit and
undrawn liquidity facilities.
LCR requirements for the treatment
of contingent obligations, which are most
relevant for trade finance, are expected to be
set by local regulators (for European banks,
this will be the EBA). It remains to be seen
whether current UK liquidity regulations (e.g.
FSA Individual Liquidity Guidance (ILG)) and
planned CRD IV outflows are aligned for
trade finance contingent obligations.
The Basel Committee has recommended
that low cash withdrawal rates are assigned
to trade finance transactions. Both banks and
clients have to evaluate the consistency of
how national regulators are implementing this
recommendation.
In the meantime, it is important that banks
and their clients work to review existing
facilities and limits, ensuring that they are
correctly classified (e.g. as contingent
obligations, credit or liquidity facilities).

Leverage Ratio

Distinct from the FI AVC and LCR provisions,
the Leverage Ratio is designed to prevent
excess leverage, which was identified as one
of the causes of the recent financial crisis.
Set at 33 times qualifying Tier 1 Capital, this
is a non-risk-based measure aimed at

1 Basel Committee on Banking Supervision, final rules
expected early 2013.

ensuring the application of adequate capital

to all exposures, including off balance sheet,

e.g. trade and undrawns.

In practice, it is expected to be applied

at a legal entity and bank group level (i.e.

not at a product level). Whilst this would

currently include (low-risk) off balance sheet

trade instruments (e.g. guarantees count

as equivalent to bringing on balance sheet

100% of the exposure), there may be some

revisions in the final CRD IV legislation.

Other regulatory pressures

There are also other regulatory pressures on

banks, which may have an effect on trade.

In the UK, the Independent Commission on

Banking (ICB) has proposed ring-fencing

some core banking services. It is not yet

clear how these proposals will affect trade

services: much depends on which side of any

ring fence trade services fall. However, just as

with the Basel proposals, any local regulatory

changes will force banks to reassess resultant

impact business strategy and portfolio mix,

given an evolving market place.

Conclusions

While the release of the final Basel III and

CRD IV rules in 2013 will allow market

participants to understand the detailed

application of the legislation, the spirit and

intent of the banking regulators globally is

already clear. There will be a negative impact

on trade products, despite their inherently

higher liquidity and lower risk profiles. There

are some strategies available to banks to

mitigate the effects of the FI AVC and LCR,

and the appropriate analysis will provide the

best foundation to explore new business and

product opportunities in the ever-evolving

financial marketplace.