The Court of Appeal has reversed a decision regarding an offer under a Bankers Association for Finance and Trade (BAFT) Master Risk Participation Agreement (MRPA), in a case between Kimura Commodity Trade Finance Fund Limited and Yieldpoint Stable Value Fund, LP.

Explaining the BAFT MRPA

The BAFT MRPA – the most recent version of which was released in 2018 with a few updates since – has been regarded as a market standard document by which holders of trade assets such as loans, receivables and contingent payments (e.g. letters of credit) can act as sellers of participations in the risk in those assets to a counterparty, the participant.

The sale can either be funded, where the seller receives payment upfront from the participant, or unfunded, where the participant only pays if there is a default.

The purpose of such an arrangement is to transfer the credit risk of default in the underlying transaction from seller to participant. The seller sells ‘without recourse’ to itself and leaves the participant to take the risk of non-payment in the underlying transaction by obtaining recourse against the obligor in that transaction – the recourse party.

The parties enter into the BAFT MRPA which, as its description implies, is a master agreement so either party can be a seller or participant in a specific transaction. The mechanism is to document the participation by an Offer under which the seller offers to sell and the participant agrees to purchase a participation. So far so good?

The current case

In this case, Kimura was the seller and Yieldpoint was the participant. The parties had a BAFT MRPA and the specific transaction was documented by way of an Offer and Acceptance – and this is where the problem emerged.

The parties appear to have discussed the fact that Kimura wanted to have a funded participation and so transfer the risk of non-payment to Yieldpoint. Yieldpoint wanted to participate for only a limited period even though the underlying transaction might not have the same maturity.

In an attempt to reflect what Yieldpoint wanted, a maturity date was inserted into the Offer without any further qualifications or provisions.

By the time of the maturity date of the participation, the obligor had not repaid the underlying transaction. Yieldpoint claimed its funding back. Kimura resisted, arguing that that Yieldpoint had recourse only to the obligor and it had not paid.

The decision

The exact terms of what the parties intended were the subject of the court decision. The court at first instance accepted Yieldpoint’s argument that, because of the maturity date provision in the Offer, the participation was to be repaid on its maturity date without regard to the position in the underlying transaction. 

That drove a coach and horses through the without-recourse structure of the BAFT MRPA. However, the document does say that in case of conflict, the terms of the Offer prevail.

Now, the question is whether a simple change – like inserting a maturity date – was sufficient to turn the participation into one of full recourse or not.

Fortunately for Kimura, the Court of Appeal reversed the decision and held that participations under a BAFT MRPA, including this specific Offer, were indeed without recourse to the seller. Notwithstanding the insertion of a maturity date, that was not sufficient to make Kimura liable. So Yieldpoint was only entitled to repayment of its participation if the obligor had repaid.

Outcomes

People will argue whether the case was rightly decided or not. 

The fact that the parties litigated is a stark reminder of what can happen if a transaction does not go how the parties envisaged. Simply put, Kimura wanted funding and would have regarded their document as achieving funding on a without-recourse basis. 

Yieldpoint appeared to believe that they were funding Kimura but without concern for what might happen in the underlying transaction.

At first glance, this seemingly strange conclusion turned on whether inserting a maturity date achieved the complete reversal of what a BAFT MRPA is normally used for. In other words, ignoring all the provisions about an obligor being a Recourse Party and the seller’s obligation being limited to paying over Recoveries – these being defined terms in the BAFT MRPA.

The fact that Yieldpoint convinced a judge of their argument is a lesson in itself, but the reversal by the Court of Appeal would appear to restore reason and reflect the support of the BAFT MRPA structure of a without-recourse sale by the seller with recourse limited to the Recourse Party.

How will the BAFT MRPA be used in the future?

If funding is to be by way of full recourse then perhaps using the BAFT MRPA is not the best way of proceeding. Or, if it is to be used, then it would be beneficial to include far more detail on what exactly is being agreed upon.

Maturity dates per se may work to this end, but where they do not exactly reflect the repayment date of the underlying transaction, care must be taken to reflect whether or not repayment of the participation is contingent or not.

Perhaps the main conclusion to draw is that careful drafting is needed when reflecting whatever is the subject of an Offer. The BAFT MRPA form of Offer is but a list of headings to be completed correctly to reflect what is offered and on what terms. 

Failure to be specific can result in potentially costly litigation and an unpredictable result.

The post Yieldpoint v Kimura: a victory for market practice, or just a warning on how to draft? appeared first on Trade Finance Global.

Estimated reading time: 6 minutes

The trade finance industry offers a diverse range of instruments, structures, and mechanisms, all aimed at transforming trade opportunities into tangible realities. One such mechanism employed by financial institutions is the utilisation of Master Risk Participation Agreements (MRPAs). 

These agreements enable active risk participation, allowing financial institutions to effectively manage and distribute risks, safeguarding the interests of all parties involved while promoting a resilient international trade ecosystem.

In this episode of Trade Finance Talks, Mark Abrams, Managing Director, Global Head of Trade & Receivables Finance at Trade Finance Global, spoke with Geoffrey Wynne, Partner and head of Sullivan’s Trade & Export Finance Group, to explore the evolution, significance, and future prospects of MRPAs.

Understanding the evolution and function of MRPAs

Risk Participation Agreements (RPAs) are a means of sharing risk in trade finance transactions, which originated primarily between banks. These agreements enable financial institutions to transfer a portion of their transactional risk to other parties while maintaining a customer-facing role. 

As Wynne explained, “When a bank wanted to stay forward facing to the customer while it transferred part of the risk of that transaction to another party, participation agreements were a great way of doing it.”

In addition, Wynne highlighted the two main types of risk participation: funded and unfunded. 

In funded risk participation, he noted, “Funded risk participation is where the seller of the risk is funded by the participant on day one and then pays the money back when it’s paid back.”

This type of participation ensures that the participant is directly involved in financing the transaction from the beginning. On the other hand, unfunded risk participation covers the risk without immediate funding. 

The participant is obligated to pay only in the event of a default, earning a return for assuming the risk. This type of participation allows for risk transfer without the need for upfront funding.

Furthermore, the need for standardisation in risk participation agreements became apparent when various banks independently drafted their own set of agreements. The lack of consistency coupled with the complex nature of trade finance prompted a group of banks to take action and initiate a standardisation process. 

This collaborative effort led to the introduction of MRPAs, including the widely recognised BAFT MRPAs, in 2008. The standardisation of MRPAs has established an industry-wide framework for banks and their counterparties in the global trade finance market. It simplified trade finance transactions, streamlined negotiations, and enhanced transparency.

To complement the BAFT MPRA, ITFA launched the Master Participation Agreement for Unfunded Participations in 2019 (drafted by Sullivan), mainly for insurance companies. More information on this, for the purposes of Article 194 of CRR, can be found here, where TFG spoke to ITFA’s Silja Calac.

The challenges and considerations when engaging in MRPAs 

Dealing with MRPAs involves navigating challenges and considerations that require striking a balance between the interests of both the seller and participant while adhering to regulatory and compliance obligations. 

Wynne emphasised this balance, stating, “We tried to balance the position between the seller of the participation and the participant. The seller says to the participant: here are all the documents, if you accept my offer, then you’re in the transaction.” 

Evidently, companies should carefully review the provided documentation, assess their risk exposure, and align the terms of the MRPA with their objectives and risk appetite.

Alongside the need for balance, regulatory and compliance considerations come into play. The core objective is to ensure the effective transfer of risk from the seller to the participant. 

Wynne pointed out, “From a regulatory and legal point of view, the idea is to make sure that the risk is transferred from the seller to the participant.” Sellers seek assurance that the risk is successfully transferred, whether through selling or funding, to remove it from their books. 

Conversely, participants want to ascertain their rights to the underlying transaction and understand their obligations, particularly if they are funded. It is essential to align the MRPA with regulatory requirements, ensuring transparency, accountability, and clear delineation of rights and responsibilities for all involved parties.      

Unlocking trade finance opportunities: The impact of MRPAs on the trade finance gap and driving inclusion

The standardisation of MRPAs plays a notable role in reducing the trade finance gap and promoting inclusion within the industry.  MRPAs provide a standardised method of transferring risk, making it easier for participants to evaluate and join transactions. 

As Wynne said, “You’ve got a standard way of transferring risk. Consequently, it makes life a lot easier.”

The use of BAFT-based MRPAs as an industry-standard framework has enhanced transparency and facilitated more efficient participation in trade finance transactions, “Since the transaction will be based on BAFT, the participant already has a pretty good idea of how it’s going to become involved in it,” Wynne added. 

Besides facilitating risk transfer, MRPAs open doors for non-bank originators and investors to enter the trade finance market. By signing an MRPA, these entities gain direct rights and increased confidence in their participation. 

Wynne underscored the simplicity of this approach, stating, “If you sign this MRPA, you are getting direct rights against the party paying. It is that simple.” 

The inclusion of guarantees or credit insurance further mitigates credit risks and reinforces confidence among non-bank originators and investors.

Moreover, MRPAs demonstrate versatility in accommodating different market participants. While originally designed as a two-way document for sellers and participants, Wynne explained that the current usage often involves one-way agreements tailored to specific needs. 

He noted, “A lot of the work we do now is one way, which is exactly right.” This adaptability allows for variations in structures and arrangements, offering flexibility to meet the diverse requirements of market participants.

Lastly, the adoption of MRPAs promotes accessibility for smaller buyers and sellers who have historically faced challenges in accessing trade finance instruments. As Wynne stated, “If you really want to be in this marketplace and are prepared to sign a promissory note that says you will pay in 90 days’ time, while you can get the funding to the seller in ten days, there’s arbitrage, and there’s the marketplace.” 

Through streamlining the funding process and expediting access to funds, MRPAs create a thriving marketplace that welcomes participants of all sizes.

The future of MRPAs: Addressing investor needs and evolving dynamics

The future of MRPAs in the trade finance landscape is propelled by the commitment to maintain the relevance and accessibility of MRPAs for a wide array of market participants. Reflecting on the evolving dynamics of MRPAs, Wynne pointed out the importance of refinements and updates, such as the removal of LIBOR. 

However, he emphasised that the key consideration lies in the relationship between sellers and participants, traditionally dominated by banks. To foster inclusivity and expand access to trade finance through participation, addressing investor concerns, such as cumbersome documentation, becomes paramount. 

Wynne expressed his confidence, stating, “There will be changes to meet the investor’s needs. That’s where I see this going.”

Editors note: TFG has added a reference to ITFA’s MRPA for a comprehensive overview of the different Master Particpation Agreements.

The post VIDEO | How MRPAs are paving the way for collaboration in Trade Finance appeared first on Trade Finance Global.

Santa came early this year to the International Trade and Forfaiting Association’s (ITFA) annual Christmas event.

Instead of toys and games, this year, ole Saint Nick brought something even more exciting for all the bankers and traders: a shiny new set of digital trade rules!

To learn more about this latest surprise under the tree, Trade Finance Global’s Deepesh Patel spoke with Geoff Wynne, partner and head of the Trade & Export Finance Group at Sullivan and Worcester. 

URF 800 – time for an update to forfaiting rules?

In 2013, ITFA and the International Chamber of Commerce (ICC) introduced the Uniform Rules for Forfaiting, known as URF 800.

The URF 800 governed the forfaiting market, covering the discounting of the promissory notes that exporters would acquire from importers. 

Forfaiting solves cash flow problems by allowing the exporter to sell their medium and long-term accounts receivable to a buyer, usually a trade finance institution or a bank, at a discounted price.

These promissory notes allow importers to delay payment on the goods they purchase for a period of time. The exporter can then sell this promissory note at a discount to a forfaiter, receiving payment now, rather than in the future. 

In turn, these promissory notes can be resold on secondary markets. 

In effect, the URF 800 creates the rights and obligations for parties in both the primary and secondary markets.

In 2013, when the URF 800 was first conceptualised, technology looked different than it does today.

Nearly a decade of digital advancement has created the need to reevaluate and redefine the rules governing these instruments. 

Some other rules governing various aspects of the trade finance landscape were simply supplemented with a digital addendum – such as the UCP 600’s electronic counterpart, the eUCP in 2019. The UCP 600 and eUCP are the ICC’s set of rules that govern issuance and usage of Letters of Credit.

Such an approach suggests that digitalisation is considered a mere afterthought, a feature that does not reflect the needs of today’s increasingly digital–first world.

Wynne said, “ITFA took the view that, in fact, it would be better almost to revolutionise how you dealt with the transfer of a digital payment obligation by creating the uniform rules for transferable electronic payment obligations (URTEPO).”

“URF 800 will cover and continue to cover paper transactions, but as the world evolves, we’re getting to electronic digital payment obligations.

“When you want to transfer those digital payment obligations, you now have a set of rules that govern how those can be transferred.” 

New rules for transferable electronic payment obligations

When conducting international commercial transactions, buyers and suppliers that move to a digital payment obligation now have a set of rules that deal with how that payment obligation can be transferred.

This follows the standard laid down by the URF 800 and reflects the fact that a commercial market will come into existence for electronic payment obligations in the same way as it has for paper payment obligations.

However, to be legally enforceable as rules, they need to be subject to a governing law. 

This requires a legal system that will recognise electronic promises, electronic signatures, and the digitalisation of promissory notes and bills of exchange.

In the UK, the Electronic Trade Documents Bill – which is expected to become an act sometime in early 2023, will provide all of these legal features.

The URTEPO play a role in bringing about this wider digital ecosystem.

Wynne added, “It’s all part of facilitating a move into the digital trade world and complying with the laws as they come out that will recognise how you can create and then transfer the newly created digital promise.”

Read the rules!

The URTEPO can be used today if practitioners use electronic payment undertakings as part of ITFA’s digital negotiable instruments (DNI) initiative. 

Wynne said, “As of today, we’ve published rules. Read them. Use them. Build them into your contracts so you can have shorter, simpler contracts and move us further into the digital trade world.”

You can find the published set of rules here: ITFA’s URTEPO rules.

Special mention to Paul Coles, Chair of the ITFA Market Practice Committee / HSBC Bank plc (UK), Geoffrey Wynne, Sullivan & Worcester (UK) for Drafting, and ITFA Members: Ani Bulut, Vakifbank (Turkey), Doreen Fick, ABSA Bank Limited (South Africa), Duncan Friggieri, London Forfaiting Company Ltd (Malta), Izabela Czepirska, Komgo (UK), Lorna Pillow, London Forfaiting Company Ltd (Malta), Sean Edwards, SMBC Bank International plc (UK), Tat Yeen Yap, MonetaGo (Singapore), and Yemi Paul, HSBC Bank plc (UK).

The post VIDEO | Updated digital trade rules: ITFA, URTEPO, and streamlining payment obligations appeared first on Trade Finance Global.

Sullivan’s Geoffrey Wynne highlights the key legal and regulatory themes to pay attention to in 2019.

If you are based in the UK, then much of the legal and regulatory discussions are around Brexit and what might change depending on exit or no exit and on what terms.  Regulators have been, when they can or see the need, producing regulations and papers particularly around sanctions (for example the Venezuela (Sanctions) (EU Exit) Regulations 2019) and maintaining them.  The Office of Financial Sanctions Implementation (OFSI) has essentially provided that existing licences will be replaced by the same ones post any Brexit. That is, in many ways, a pointer to which issues are being focused on in 2019.

Sanctions, laws, and regulations relating to issues involving anti-money laundering, financial crime and bribery, and corruption keep compliance teams in banks and other financial institutions fully occupied or, rather, preoccupied.

Sanctions

Sanctions are a moving target and are increasingly used for political ends.  This can be accepted if all regulatory bodies moved at the same time and in the same way.  But recently there has been a difference of opinion between regulators for example, with how to deal with Iran. The US has taken a stronger line than the EU. The EU has adopted anti-compliance regulations seeking to prevent EU institutions from following the US measures.  The EU is tougher on chemical weapons than the US. Any party with a presence in the US might well want to follow the US in all this.

Trade Wars

Trade wars are having an adverse effect on the movement of goods and what can be delivered where.

AML

Anti-money laundering is moving swiftly from the 4^th Directive, to the 5^th Directive and on to the 6^th Directive.  Each time more responsibility is being placed on financial institutions.  That means it remains difficult in many institutions to grow a trade finance practice.  This leaves a huge trade gap to be financed. The amount is well over $1 trillion.

Compliance

Many financial institutions find compliance so costly and over burdensome that they choose derisking (giving up relationships) and not to on-board new relationships.  This limits the available parties to contract with. In addition, concerns about financing goods which might be “dual use” limit what can be financed. Some of the most innocuous commodities, such as sugar and fertiliser, can be dangerous (and criminalised) in the hands of the wrong parties.

In the UK there continues to be action against breaches of financial sanctions with the Policing and Crime Act 2017 coming into force.  Fines can be up to £1 million for any breach.

Regulation

Basel III’s next iteration (called by some Basel IV) continues to preoccupy financial institutions and increasingly, the insurance market.  It could adversely affect trade and credit insurance if enacted in its present form. There are lobby groups trying to obtain changes. The issue of risk weighting of trade finance assets continues to be a problem.   However, on the insurance front there is some good news: the Prudential Regulatory Authority (PRA) has reviewed its position on the timeliness of claims under credit risk insurance policies and other guarantees in the use of credit risk mitigation under the Capital Requirements Regulation (CRR) regime.  This has removed many of the concerns for banks in using insurance policies as a credit risk mitigant.

The new accounting standard IFRS 9 needs some absorbing and as to how banks will treat assets on their books and whether they are banking assets or trading assets.  This will have an effect on valuation and potentially the use of credit risk mitigants. Adverse determinations could mean an increased requirement for capital to support those assets.

Sometimes regulations which on their face appear to be helpful can have unintended consequences.  One example is the General Data Protection Regulation (GDPR) which is an EU-wide regulation and is also followed in many other countries.  It is designed to protect personal data in particular. However, restricting the dissemination of some of this data could accidentally stop institutions from being able to exchange information that might otherwise prevent money laundering or financial crime.

Another example is the Late Payment Directive and how it is implemented.  This is designed to assist suppliers in being paid on time. It forces buyers to pay early and not to delay payment.  However, the market of receivables financing often called ‘supply chain’ is designed to allow banks to bridge the gap of short payment times to suppliers and longer payment terms to buyers.  The Directive could make this more difficult. Furthermore, extending payment terms has been criticised by some Rating Agencies which want such extensions reclassified as bank debt rather than trade.  This has potentially adverse effects on the balance sheet of buyers and the whole market of buying trade debt. It seems misconceived in many cases.

Fintech

The Fintech space which has so many uses in helping with aspects of the above and the speed with which trade transactions can be transacted is waiting to see what regulations might do.  There is a concern that too tight regulations will set the market back. By contrast under-regulated activities have their own dangers.

2019 is proving to be a mixture of trying to do business, and wait and see in the regulatory sphere.

The post Sullivan: Legal and Regulatory Themes in 2019 appeared first on Trade Finance Global.