UK regulators have urged banks to tighten up their trade finance operations following a series of high-profile corporate scandals. In an unusual ‘dear CEO’ letter of 9 September, the Financial Conduct Authority and Prudential Regulation Authority jointly noted that in the past 18 months several commodity and trade finance firms had run aground at a “significant financial loss”. As such, the letter cautioned top bankers that there are inherent risks within trade finance, given that its global complexity encompasses large volumes of trade flows involving multiple currencies.
It said: “Firms need to demonstrate that they have taken a risk-sensitive approach to their control environment that ensures the relevant risks are effectively mitigated. Our recent assessments of individual firms have highlighted several significant issues relating to both credit risk analysis and financial crime controls. These issues have exposed firms to unnecessary risks that are material in both a conduct and prudential context.”
Grouping those issues into categories, the letter highlighted shortcomings in risk assessment, counterparty analysis, transaction approval and transaction payments. On the first point, the watchdogs cited an “often insufficient focus on the identification and assessment of financial-crime risk factors, such as the risk of dual-use goods or the potential for fraud”. In terms of relevant client risks, they wrote, “assessments have been too generic to cover the different types of risk exposures that may exist in trade finance client relationships, such as the industry or jurisdictions in which the client operates.”
Ironically, the stern missive met with some criticism of its own. In a letter to the Financial Times, International Chamber of Commerce secretary general John WH Denton sought to put the regulators’ intervention in context – noting that some of the vulnerabilities they had pointed out “cannot be solved by banks in isolation”, but hinged on policy reforms and technological advancements.
In Denton’s view, a “narrow focus” on rare, but widely publicised, market failures “risks impairing the flow of essential capital to businesses at a vital moment in the recovery from the coronavirus pandemic”.
Upgrades for Fitch-rated non-financial corporates (NFCs) eclipsed downgrades in the first half of the year, the rating agency has revealed. In a 13 September bulletin, Fitch pointed out that most of the upgrades were not reversals of rating actions taken in 2020, when a record deterioration produced the highest number of corporate downgrades in 20 years. On the contrary, Fitch-rated NFCs that were holding steady during that challenging year have managed to polish their credentials.
Fitch noted that 2020’s pandemic- and lockdown-related pressures led it to downgrade almost a fifth of the ratings in its corporate portfolio, with 7% of issuers docked by multiple notches. “However,” it said, “as pandemic-related restrictions have relaxed and as many economies return to growth, the most severe credit pressures have abated and the number of positive ratings actions has started to rise.” Fitch’s corporate portfolio is now showing a higher number of upgrades than downgrades for the first time since 2017.
Reversals of earlier decisions accounted for just 22% of H1’s upgrades, with Fitch attributing the lion’s share to “issuers’ resilient financial performance during the pandemic or their more conservative approach to funding”.
In terms of how the best-performing industries fared, Fitch said: “Natural resources and commodity sectors, including oil and gas companies, have benefitted from healthy commodity prices that recovered quickly after the initial shock at the start of the pandemic. The increase in working from home has spurred the need for house extensions and renovations, supporting demand for building materials. The pandemic has also increased demand for healthcare products and services. These industries have recorded more frequent upgrades so far in 2021 than most other sectors.”
xceptional interest greeted the release of the UK’s first-ever green gilt, with total demand exceeding £100bn, according to Reuters. Unveiled on 21 September, the 12-year bond raised £10bn for a variety of green government projects that are likely to bring positive news for non-financial corporates working on the fulfilment side. In addition to clean transportation schemes, the bond will also fund activities related to energy efficiency, renewable energy, pollution prevention and control, live and natural resources, and climate change adaptation.
While the UK is regarded as a late starter in the field of sovereign green bonds – with France, Germany, Italy, Spain, Hungary and Poland ahead of the game – an HM Treasury statement underscored the scale of the UK offering, hailing “the largest-ever order book for a sovereign green transaction”.
In a first among comparable sovereign issuers, it added, “the UK has committed to reporting on both the environmental impact, and the important social co-benefits of green expenditures financed by green gilts, such as job creation, access to affordable infrastructure and socioeconomic advancement”.
Sold to institutional investors and scheduled to mature on 31 July 2033, the new gilt will be followed later this year by a second issuance aimed at the retail market. HM Treasury hopes that together, the gilts will provide a minimum of £15bn in green funding, with projects involving zero-emissions buses, offshore wind and the decarbonisation of homes and buildings set to begin within this financial year.
Bookrunners on the sale were Citigroup, Barclays, BNP Paribas, Deutsche Bank, HSBC and JPMorgan Chase. In a statement, BNP Paribas country head for the UK Anne Marie Verstraeten said: “It is essential for finance to mobilise capital in the transition towards a net-zero economy in the UK, and this inaugural green gilt demonstrates the momentum in finance to address critical climate and biodiversity challenges on the road to COP26.”
Following a June consultation, the International Organisation of Securities Commissions (IOSCO) has published guidance on the use of artificial intelligence (AI) and machine learning (ML) tools within the global securities trade.
In a 7 September statement, the standard-setting body said: “The use of AI and ML may benefit market intermediaries, asset managers and investors by increasing the efficiency of existing processes, reducing the cost of investment services and freeing up resources for other activities.
“However, it may also create or amplify risks, potentially undermining financial market efficiency and harming consumers and other market participants. Moreover, market intermediaries and asset managers’ use of AI and ML is growing, as their understanding of the technology evolves.”
With that in mind, IOSCO urged securities vendors to adopt the following measures:
