New report examines the implications of transitioning away from LIBOR to SOFR for the trade finance industry.
WASHINGTON — BAFT, the leading global financial services association for international transaction banking, today announced the publication of SOFR: Trade Finance Priorities to inform the policy community and the industry on the impact of a possible transition to the Secured Overnight Financing Rate (SOFR) from the London Inter-Bank Offered Rate (LIBOR).
Trade is essential to GDP growth and supports commercial flows and supply chain sustainability globally. In 2019, global trade flows totaled $18.1 trillion, with an estimated $9.77 trillion of that sum comprised of bank intermediated trade. USD LIBOR is the most widely used benchmark across the trade finance industry globally. As the market prepares to transition away from LIBOR to Risk Free Rates (RFRs) by the end of 2021, BAFT member institutions have been working steadily to prepare for the change.
“This report examines the impact of the transition from LIBOR on the trade finance business and concludes there is an imperative for a forward-looking term rate to ensure the uninterrupted provision of financing to support cross border trade,” said Diana Rodriguez, vice president, international policy at BAFT. “We were pleased to see the Alternative Reference Rate Committee’s (ARRC) September publication of a Request for Proposals for a Term Rate administrator, and we welcomed subsequent dialogue with the Federal Reserve Board on the findings of this paper. We look forward to continued progress toward the publication of a forward-looking term SOFR in the first half of 2021 for use by the Trade Finance market.”
The white paper is the culmination of several months of analysis by the BAFT IBOR Transition Working Group’s Suitability of Rates subgroup, as well as input from a global BAFT member survey. The working group also considered findings from the BAFT Future Leaders’ Group on IBOR Transition and incorporated elements of their work in this paper. Though members have made progress in identifying areas where overnight SOFR could be used, BAFT believes most transactions require a forward-looking rate to provide certainty to trade buyers and sellers.
“As experienced trade finance professionals, the working group members have provided market views stressing the critical importance of a forward-looking term rate from a trade finance practitioners perspective,” stated Priyamvada Singh, managing director & regional head, product, propositions & structuring, global trade and receivables finance, HSBC Bank USA. “Considering trade finance products are globally used to finance a significant volume of merchandise trade, and that users of trade finance products globally span a wide range of companies, especially a majority of Small and Medium companies (SMEs), the members recognize the need for industry consensus for a workable solution that can provide cost certainty and pricing transparency for robust adoption.”
“Establishment of a SOFR term rate and clarity on the timing of its launch are critical for the trade market to finalize conventions and support the transition away from LIBOR,” said Doug Laurie, director, global programme lead- LIBOR transition loans at Barclays. “Getting the SOFR transition right will have an impact on banks and their customers globally given the dominance of the U.S. dollar for trade transactions.”
Rodriguez of BAFT and Laurie of Barclays will host a workshop on the implications of the transition to SOFR for trade finance on Friday, Nov. 20, 2020 at 8:00 a.m. ET during BAFT’s International Convention.
To read the full white paper, visit our Library of Documents under the BAFT Guidance and Industry Practice section or click here.
BAFT is the leading international financial services association whose membership includes large global and regional banks, service providers, and fintech companies headquartered around the world. BAFT provides advocacy, thought leadership, education, and a global forum for its members in transaction banking, including international trade finance and payments. For nearly a century, BAFT has expanded markets, shaped policy, developed business solutions, and preserved the safety and soundness of the global financial system.
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