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Trade Finance Facilitation Program (TFFP). Inter-American Development Bank Private Sector Department. - June 14 - . TFFP – The Context. During times of volatile international capital flows and/or temporary liquidity squeezes, international banks actively involved in trade finance:

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Trade Finance Facilitation Program (TFFP)

Inter-American Development Bank

Private Sector Department

- June 14 -

tffp the context
TFFP – The Context
  • During times of volatile international capital flows and/or temporary liquidity squeezes, international banks actively involved in trade finance:
    • Force up confirmation fees or loan margins
    • Reduce or cancel “bank limits” or
    • Reduce or cancel “country limits”

Some examples:

        • Argentina 2001 – 2002
        • Brazil 2002 – 2003
tffp the context cont
TFFP – The Context (cont…)
  • Without these limits
    • Local banks in IDB’s Borrowing Member Countries (BMCs) face difficulties providing trade finance to their exporters & importers, thus
    • Hindering their prospects for economic recovery & growth
tffp purpose
TFFP – Purpose
  • Play an anti-cyclical role by providing liquidity to the international “trade finance system”, particularly during times of economic difficulties
  • Support and develop intra- and inter-regional trade
  • Help local banks in IDB BMCs establish track records with international banks
tffp key success factors

As to:

Leveling the playing field for international trade and global integration

TFFP – Key Success Factors
  • Modeled based on the lessons learned from the successful implementation of the EBRD’s TFP
  • Consistent with the recently implemented TFP by the ADB
tffp key success factors cont
TFFP – Key Success Factors (cont…)

Use of an “open architecture” approach

  • Developing a complete network of local and international banks (“Issuing” and “Confirming” Banks, respectively)
  • Supporting all of IDB’s BMCs
  • Covering a substantial portion of the exposure on a comprehensive basis
tffp key success factors cont1
TFFP – Key Success Factors (cont…)

An efficient response to market needs

  • Run by a team of specialized trade finance professionals
  • Use of standardized “market-tested” documentation
  • Quick turnaround on individual transactions and use of SWIFT instructions
tffp key success factors cont2
TFFP – Key Success Factors (cont…)

Cost effective

  • Uncommitted Lines (I.e. no commitment fees)
  • Small enrollment & annual membership fees charged to Issuing Banks
  • Market-based guarantee fees commensurate with the level of IDB’s coverage on individual transactions
tffp transaction schemes

Exporter

Importer

1. Sales Contract

2. L/C Application

4. L/C Advice/Confirmation

PCG - TFFP

Issuing

Bank

3. L/C

Negotiating Bank

1. Importer & Exporter conclude a sales contract providing for payment by L/C

2. The Importer instructs its (Issuing) bank to issue a L/C in favor of the Exporter

3. The Issuing Bank asks the Negotiating Bank to advise / confirm the L/C

4. The Negotiating Bank informs the Exporter that the Issuing Bank has issued the L/C

and that the Negotiating Bank confirms the corresponding payment at maturity.

Steps:

TFFP – Transaction Schemes
  • L/C Confirmation – Imports
tffp transaction schemes cont
TFFP – Transaction Schemes (cont…)
  • Bills of Exchange (“BofE”) and Promissory Notes (“PN”) Guarantees
  • - Imports -

Exporter

Importer

1. Sales Contract

4

2

PCG - TFFP

Presenting Bank

5

3

Negotiating Bank

1. Sales Contract & Shipment of Goods

2. Shipping Documents & Delegation for Collection

3. Shipping Documents and Bill of Exchange or Promissory Note

4. Shipping Documents (subject to acknowledgement of Bill of Exchange or Promissory Note)

5. Bill of Exchange or Promissory Note payment guarantee.

Steps:

tffp transaction schemes cont1

Exporter

Importer

1. Sales Contract

5. Advance Payment (Time 0)

6. Goods or Advance Reimbursement (Time 180)

2. Stand-by L/C Application (Time 0)

4. Stand-by L/C Advised/Confirmed (Time 0)

7. Advance Reimbursement (*) (Time 180)

PCG - TFFP

Negotiating

Bank

3. Stand-by L/C (Time 0)

8. Advance Reimbursement (*) (Time 180)

Issuing Bank

(*) In case of neither shipment of goods nor reimbursement of advance payment by the Exporter

TFFP – Transaction Schemes (cont…)
  • Stand-by L/C Structure – Exports
tffp main components cont

An Example

  • Transaction Parameters
  • Type LC Confirmation
  • Face value US$100,000
  • Term 6 months
  • Confirmation fee 100 bps (or a spread of 200 bps p.a.)
  • Coverage required 80%
  • IDB pricing level 75% of Conf. fee proportional to the coverage required
  • Guarantee Fee Calculation
  • Guarantee Fee = Face Value (US$100K) X Confirmation Fee (100 bps) X Coverage Level (80%) X IDB Pricing Level (75%)
  • Resulting Guarantee Fee US$600, or 75bps over covered amount (US$80K) during the L/C’s term or 150 bps p.a.
  • Confirming Bank’s Remuneration US$400 or 200 bps over covered amount (US$20K) during the L/C’s term or 400 bps p.a.
TFFP – Main Components (cont…)

Pricing Market-based Guarantee Fee commensurate with the spread paid by Issuing Banks to Confirming Banks on Eligible Transactions and consistent with the level of risk absorbed by IDB on each such transaction.

tffp main components cont1
TFFP – Main Components (cont…)
  • Participants
  • Issuing Banks
    • Privately-owned and incorporated in IDB BMCs
    • Demonstrated track record in trade financing activities
    • Established relationships with international correspondent banks
    • Satisfactory credit worthiness based on the application of a standardized risk assessment methodology
    • The Issuing Bank would also be required to comply with Environmental, Social, Labor and Health & Safety (“H&S”) capabilities
  • Confirming Banks
tffp application process
TFFP – Application Process
  • Confirming or Issuing Bank contacts IDB
  • Transaction, tenor & pricing agreed between parties
  • SWIFT application sent to IDB
  • Normally 1 to 2 day processing by IDB
  • IDB sends SWIFT PCG (guarantee) to Confirming Bank
tffp documentation
TFFP – Documentation
  • Confirming Bank Letter Agreement
    • includes general terms and conditions for all PCGs made from time to time
  • Issuing Bank Reimbursement Agreement
    • includes various undertakings and acknowledgements about IDB’s subrogation rights under a PCG
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