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Trade finance – how it’s catching up with the digital age

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Trade finance – how it’s catching up with the digital age

Uzair Bawany, COO at Traydstream, explains that the ancient process of trade finance is finally being transformed thanks to the application of artificial learning, machine learning and robotics.

Although it drives the global economy, trade finance processing remains in a time warp and hasn’t really progressed over the centuries. Despite the modern digital world that we live in, current trade finance operations still involve manual, paper-based processes that are duplicated across multiple parties. The net result is that these activities remain extremely costly, time intensive and inefficient. At long last, the trade finance process is now the target for massive disruption to move into a new era of digitisation and efficiency.

Why change is required

A good example of the problem is the transfer of trade documents. A supplier will draw up the documents and send them to its bank, which will then send the documents to the buyer’s bank, which will then send them on to the buyer. All parties involved basically perform the same process, which is an enormous waste of time and resources – and can take many weeks to complete.

This status quo creates major inefficiencies at every point of the trade finance process, as well as security and compliance risks – with heavy fines and an abundance of regulatory obligations, becoming increasingly commonplace.  Some firms have tried to digitise parts of the process with electronic Bills of Lading and other similar components to a transaction, but this really isn’t solving the real issue – as checks still need to be performed.

Imagine the scenario of a trade transaction between two oil majors, transacting a large oil shipment. To start the trade, the shipment is made and the exporting major prepares its’ documents – this process could take between three and four days. The documents are then handed over to its bank for checking against the Letter of Credit, which could easily take two more days. At this point, it would be highly likely that the documents are sent back to the major for corrections due to discrepancies – which further delays the end-to-end chain. These documents are then physically sent to the buyer’s bank that will take another two days to process. If all is well, the buyer will get the documents to concur and be ready to pay.

This end-to-end process could take ten to twelve days, not to mention the holiday impact – depending on jurisdictions. That said, oil majors, typically benefit from a faster turnaround, and so the process can be quicker. On the other hand, with SME’s, or other sectors, this process through the banking system could take much longer. It’s also a process that goes on day in day out for all companies trading in the international arena.

The biggest barrier to addressing trading inefficiencies in the finance sectors has been the inertia to change. As trade finance processes have remained the same for decades, it’s hardly surprising there is a certain comfort factor associated with this.  Additionally, over the last ten years, financial organisations have been faced with huge regulatory pressures and increased capital costs. A general political climate where banks need to become more utility-like in their approach has also meant that “change” has not been their priority.

Thankfully, we are now seeing a new industry focus on efficiency and accuracy, driven by the huge attention on expense management – which is forcing organisations to be more receptive to change. Life after Brexit is also another key driver – especially when dealing with the inevitable changes in trading rules. Solutions are therefore being sought that enable operational processes to become leaner and fitter – and this feels like a behavioural shift which is more endemic.  This can only be a good thing for the industry.

Technology game changers

To overhaul the trade-finance industry and more specifically – the documentation process, senior management and business leaders in the banking and finance sector are embracing technology and championing it through their respective organisations. Digitalisation and leading-edge technology are now the key areas of strategic focus – driven by the promise of potential cost reductions, efficiency and compliance benefits.

New technologies, such as robotics, are positively disrupting the trade finance sector, specifically with the automation of key processes such as moving documents and data, enacting document comparisons and performing due-diligence checks. Other technology innovations like artificial intelligence (AI) and behavioural learning can arm trading partners with transparency and predictability in global trade and provide a greater capacity to identify potential non-compliance and fraud risks.

In practice

New digital, cloud-based, platforms are emerging that enable banks and corporates to complete trade finance operations, in minutes – rather than days. Through the use of best in class technologies, in a safe and secure manner, information can be shared, checks can be conducted and the entire process can be consummated quickly. These platforms work by scanning trade finance documents and extracting the data using advanced Optical Character Recognition (OCR) software which the platform can use downstream. Subsequently, the data is run through a very sophisticated artificial intelligence and machine learning-based, rules algorithmic engine.

These platforms are able to come up with responses and decisions which humans currently take on a daily basis, enabling the entire process to become data-driven – as opposed to paper dependent – with an exceptionally high rate of accuracy and precision. These automated steps include document discrepancy-checks, due-diligence, and regulatory and compliance screening, thereby making the role of the user, more the exception rather than the rule in discovering errors, and removing the need for mundane, repetitive activities.

The underpinning of any global system for banks and corporates needs to be in a very safe and secure environment, so platforms use the best in class measures to keep data partitioned and protected.  Very soon, blockchain technology will also be integrated to further enhance transaction processes and research is currently being conducted on live trades. Once incorporated, it will reduce the trade cycle time even more.

Positive outcomes

This new technology wave promises to reduce the costs and complexities of trade finance for banks and corporates, and even enhance working-capital management. The use of Smart contracts (i.e. digitised contracts), AI and Machine Learning to automate processes –  ensures a more streamlined operational process across the whole Trade ecosystem.

The ability to access, examine and approve original documents remotely and separately from other parties—anywhere across the supply chain— will improve logistical efficiency at banks, ports and terminals. By enabling individuals in different countries to collaborate on drafting digital documents, it will also reduce errors, centralise processes, maintain data integrity and accelerate the completion of agreements from weeks – to minutes.

Another key benefit of digitalisation is by increasing visibility and by making processes more efficient and reliable, it becomes easier to comply with regulatory requirements. With the increased control and visibility over documents, and the capability to instantly transfer documents across the globe – this can help organisations reduce the risk of fraud too. Documents can be issued or endorsed only by authorised users and can be configured to prevent unwitting transfer to sanctioned parties.

There are also wider economic benefits. As the cost of processing a letter of credit decreases, this reduces the entire cost of trade finance operations. The ease of process also facilitates customs-clearance procedures—allowing goods to move through supply chains more easily and reach consumers faster.

Looking forward

Although change won’t happen overnight, and transformation is still at an early stage, there’s clearly great potential for technology to create major efficiencies and opportunities in the trade finance sector. Ultimately, as finance sector organisations continue to show increased interest in collaboration, and as technology continues to innovate – the multiple benefits for all parties operating in trade finance will be transformational.

Trading

Trading Strategies

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Trading Strategies 1

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Trading

Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 2

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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European trading firms begin coming to terms with the new normal

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European trading firms begin coming to terms with the new normal 3

By Terry Ewin, Vice President EMEA, IPC

In recent weeks, the phrase ‘never let a good crisis go to waste’ has received a large amount of usage. Management consultancies, industry associations and organisations, including the Organisation for Economic Co-operation and Development (OECD) have all used it in order to discuss how the current crisis, caused by the Coronavirus pandemic, presents an opportunity for new and worthwhile change.

The saying is also commonly used to indicate that the destruction and damage that is caused by a crisis gives organisations the chance to rebuild, and to do things that would not have previously been possible. This has the potential to impact financial trading firms, where projects that this time last year would not have made much sense now appearing to be as clear as day. In Europe, banks and brokers alike are beginning to think about what life will look like post-pandemic, and how their technology strategies may need changing.

We can think of three distinct phases when it comes to a crisis. Firstly, there is the emergency phase. This is followed by the transition period before we come to the post-crisis period.

Starting with the emergency phases, this is when firms are in critical crisis management mode. Plans are activated to ensure business continuity, and banks and brokers work to ensure critical functions can still take place so as to continue servicing their clients. With regards to the current crisis period, both large and small European banks and brokers were able to handle this phase relatively well, partly due to the fact that communications technology has reached the point where productive Work From Home (WFH) strategies are in place. For example, cloud-connectivity, in addition to the use of soft turrets for trading, has enabled traders from across the continent to keep working throughout lockdown. From our work with clients, we know that they were able to make a relatively smooth transition to WFH operations.

In relation to the current coronavirus crisis, we are in the second phase – the transition period. This is the stage when financial companies begin figuring out how best to manage the worst effects of the ongoing crisis, whilst planning longer-term changes for a post-crisis world. One thing to note with this phase, is that no one knows how long it will last. There is still so much we don’t know about this virus. As such, this has an impact on when it will be safe for businesses to operate in a similar way to how they were run in a pre-pandemic world. But with restrictions across Europe starting to be eased, there is an expectation that companies will start to slowly work their way towards more on-site trading. For example, banks are starting to look at hybrid operations, whereby traders come in a couple of times a week, and WFH for the rest of the week. This will result in fewer people in the office building, which makes it easier to practise social distancing. It also means that there is a continued reliance on the technology that enables people to WFH effectively.

Finally, we have the post-crisis period. In terms of the current crisis, this stage is very unlikely to occur until a vaccine has been developed and distributed to the masses. Although COVID-19 has caused mass economic disruption, many analysts are predicting a strong rebound once the medical pieces of the puzzles are put into place. It may not be entirely V-shaped, but the resiliency displayed by the financial markets thus far suggests that it will be healthy.

Currently, many European trading firms are taking what could be described as a two-pronged approach.

The first part of this consists of planning for the possibility of an extension to phase two. Medical experts have suggested that there could be some seasonality to the virus, with the threat of a second wave of COVID-19 cases in the Autumn meaning that the risk of new restrictions remains. If this comes to fruition, there would be a need for organisations to fine-tune their current WFH strategies and measures, and for them to take greater advantage of the cloud so as to power communications apps.

The second component consists of firms starting to think about the long-term needs of their trading systems. Simply put, they are preparing themselves for the third phase.

It is in this last sense, that the idea of never letting ‘a good crisis go to waste’ resonates most clearly.

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