Trade Finance: Revolutionizing a Medieval Market

Trade Finance Market Poised for Huge Online Growth

In a new report entitled , Celent Communications examines new alternative trading systems (ATS) for trade finance assets, probably the most unwieldy financial instruments to be traded online to date. This US$2.5 trillion market consists of bank-guaranteed financing to facilitate the importation of goods and commodities, particularly by emerging markets. Due to the complexity of these instruments, however, the secondary market remains underdeveloped.

Whether a new offering or a sale in the secondary market, a trade finance asset is backed by a cumbersome set of documents and deals vary widely in structure, making them ill-suited to automation. For this reason, the development of alternative systems for trade finance assets is an intriguing case study of the application of online technologies to difficult, irregular asset classes.

According to Neil Katkov, the author of the report, "Due to the complexity of trade finance instruments, investors tend to shun this fixed-income asset class, even though yields often match or outperform comparable bonds. The first generation of trade finance exchanges will go a long way to reducing these barriers to participation and draw new liquidity to the market."

He went on to comment, "However, the current trade finance exchanges are essentially online B2B exchanges. Trading in these complex, irregular assets won't really take off until they are standardized so they can be traded on more advanced systems. We expect this to happen by the end of 2003, at which time we will see exponential growth in transactions. In the long term, this increased activity will draw more of the far larger pool of primary issues - estimated to exceed US$3.6 trillion by 2005 - into the secondary market. At that point, the trade finance market will rise from its current obscurity to become a significant asset class for institutional investors."

A Table of Contents is available online.

of Celent Communication's Wholesale Banking research service can download the report electronically by clicking on the icon to the left.