Asset-based lending, common in the US, but little known in Chile or Latin America, generally needs a solid foundation if it is to flourish in the region, and assist trade finance and global growth. The importance of establishing and maintaining a registry that captures not only the security interest in a company’s fixed assets (as the present Chilean registry does today, for example), but also, just as importantly, such ‘intangible’ assets as accounts receivable (A/R), cash and investments is critical to future development. Without the ability to access such information, global banks such as JP Morgan will find it challenging to serve global customers seeking financing for their Latin American suppliers. In order to provide supply chain finance (SCF), lenders must be able to secure an ownership interest in the underlying A/R.
Since the financial crisis in 2008, Latin America has been a bright spot in a somewhat murky global economic picture, but the region’s continued growth depends on making major changes to its legal and financial infrastructures. In 2010, Honduras placed a modern Secured Transactions Law (Ley de Garantias Mobiliaras) on its books. The law enables trade financing with loans that have been secured by inventories, A/R and other kinds of non-real estate assets. Working with the National Law Centre for Inter-American Free Trade (NLFCIT), JP Morgan helped Honduran bankers and public officials understand and prepare for the significant impact their new law would have on business. The Honduran secured financing legislation was harmonised with the more modern legislation of the US and Canada, an initiative that was proposed throughout the region once the Honduran law went into effect.
The National Law Centre, with full support from the US State Department, developed the Organization of American States’ (OAS) Model Law to help bring modern trade finance techniques to Latin America. Despite these positive developments, the pace of adoption and ratification of secured financing legislation across the region continues to be frustratingly slow.
Dr Boris Kozolchyk, executive director of the National Law Centre for Inter American Trade, reports that: “At the present time, Guatemala and Honduras have enacted laws inspired by the OAS Model Law on secured transactions that are now fully operative. In addition, Honduras has a world class, fully functional registry. Mexico has a similar world class registry in operation but still needs to enact a law presently before its Congress, as do Colombia, El Salvador and Peru. Meanwhile, Chile and Costa Rica are contemplating similar enactments and registry improvements.”
Because Latin American businesses have not historically depended on documentary trade instruments as much as other regions, such as Asia, the banks supporting them need this kind of legislative framework in order to provide trade finance within their open account environment. SCF will always lack the traditional characteristics of trade finance, which provide security and risk mitigation throughout the supply chain at a reasonable cost. In the new world of trade, the challenge is to provide companies, particularly Small-to-Medium Sized Enterprises (SMEs), with trade financing that is relatively inexpensive and safe. To accomplish this, SCF providers must know and understand their rights to the trade receivable. When securing interest in a receivable, there needs to be clarity as to what constitutes that receivable. Providers must have an understanding of the country laws which apply to the transaction, and must be able to enforce their rights in a cost-effective manner.
Across Latin America, identifying local law requirements for payment obligations remains problematic. Formal requirements, such as notification to a governing body or a local registry in order to make the transaction effective, vary from country to country. Without universally acknowledged debt instruments, trade finance bankers are challenged to help their customers maintain an uninterrupted flow of goods and services through ensuring supply chain liquidity. Additionally, banks often rely on the securitisation of receivables to raise low-cost funds. But in order to use the securitisation market successfully, they must aggregate receivables across multiple obligors to create the bundles of risk that are acceptable to investors.
Only when legal requirements are understood is this kind of bundling practically and legally achievable. When these issues are not addressed and harmonised, financing for open account transactions cannot be an effective way to facilitate trade in Latin America.
My experiences in Chile have made me optimistic about the prospects for modernised trade finance infrastructures throughout Latin America. There is now a lively debate among businesses, members of the legal profession and governments about the current challenges to trade and economic growth, and general agreement on the urgent need for advocacy and action regarding secured transactions laws that will enable asset-based lending.
On the trade finance side, global banks such as JP Morgan stand ready to play a role in sustaining Latin America’s growth. Besides financing, we can bring efficient and secure settlement processes, risk mitigation and sufficient liquidity to supply chain participants across the region. The fragility of the global economic recovery, and Latin America’s big role in sustaining it, has added new urgency to our shared mission.
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The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?