Interview: BAFT SVP Scott Stevenson on trade finance, COVID-19, regulations, ESG

Scott Stevenson is the new senior vice president for trade at BAFT (Bankers Association for Finance and Trade). 

BAFT is the leading financial services association for international transaction banking. In his new role, Stevenson will lead BAFT’s trade-focused policy, practices, and education initiatives, and support its trade-related councils and committees.

What was your journey before joining BAFT? 

I started my international banking career with First Interstate Bank of California (FICAL), which was the flagship of First Interstate Bancorp – a multi-state holding company operating in 13 Western US States. First Interstate was later absorbed by Wells Fargo. 

I was appointed as a FICAL country manager in Manila, to what I thought would be a three-year international posting. The posting led me to live and work in Asia for the next 16 years in a variety of job positions and ASEAN countries.

FICAL’s primary international business was correspondent banking, and in 1992 Standard Chartered Bank purchased FICAL’s international business. From 1992 to 1998 I was Asia’s regional head for financial institutions, based in Singapore.

In 1998 I was invited to join the World Bank as a member of their newly formed corporate restructuring team – formed in response to the Asian Financial Crisis. I was based in Jakarta for two years where our team was seconded to the Indonesian Minister of Finance.

I then moved over to the International Finance Corporation (IFC) in Washington DC as a chief investment officer in their Global Financial Markets Department. 

Given my commercial background in trade finance, I was asked to move to IFC’s new Trade and Supply Chain Department, where I was the senior global manager, based in Istanbul. Our flagship programme was the Global Trade Facilitation Program (GTFP), which grew to be a $5 billion programme operating in 82 countries with over 250 emerging market banks.

After moving on from IFC, I did two years of consulting work where our client base consisted of development institutions based in Latin America, MENA, and sub-Saharan Africa.

That was then followed by my work as a senior advisor for AF Capital Partners, which provided guidance to investors who were looking for financing from development institutions/multilateral development banks (MDBs) for project or structured finance projects in the emerging markets.

The next stop was BAFT.

How did your experience at AF Capital Partners, International Finance Corporation (IFC), and the World Bank Group feed into your decision to take up the new role at BAFT? 

Before I joined the World Bank Group, I was a commercial banker, but my corporate restructuring work in Indonesia during the Asian Financial Crisis really brought home the need for a banking system to have professional senior management, effective corporate governance, and prudent well-trained regulators.

The Banking meltdown in Indonesia started in the corporate sector, where easy money and massive currency mismatches resulted in non-performing assets (NPAs) in the banks’ books.

At IFC, I initially worked as a chief investment officer – in IFC’s Global Financial Markets Department – leading teams in making both debt and equity investments in emerging markets’ bank and non-bank financial institutions. 

This up-close and personal view of the inner workings of indigenous banks and their regulators furthered my fascination with the global banking industry. 

I was then asked by IFC to help lead in the formation and implementation of their Trade and Supply Chain Solutions Department. 

As the senior global manager, in addition to having the day-to-day management responsibilities for the $5 billion GTFP, I also served on the WTO Trade Finance Experts Panel, the ICC Banking Commission, as well as the World Bank’s Trade for Aid initiative. 

I also represented the multilateral bank’s trade programmes and their emerging markets clients in dialogues with the Basel Committee regarding the potential, untoward knock-on effects that Basel III implementation would have on the availability and pricing of trade finance. 

My work at AF Capital Partners really brought home the amount of time, organisation, presentation, and expense it takes to put together project financings and non-recourse structured finance in the emerging markets.

The public-private partnership (PPP) model is an effective financing tool, but there can be difficulties in aligning interests. This is particularly true when an MDB or export credit agency (ECA) is involved in the financing, and stringent ESG guidelines must be met.

The ESG issue is further exacerbating the discrepancy in ESG requirements between governments and MDBs – the latter are often more stringent. I saw numerous projects not moving forward due to ESG prerequisites.

This is a rather long-winded response to your question, but the bottom line for me was that I see my new BAFT role as a logical continuation of my professional career.

Evolution of the trade finance landscape

Looking at trade finance today, how have you seen both the ECA and shorter tenor trade finance landscape evolve?  

What strikes me most is that the number of international banks that view trade finance as a core product continues to shrink. 

A lot of this retreat is driven by increased costs, be it regulatory impact on capital allocations, KYC, and AML supervision, or simply senior management’s aversion to the potential reputational risks that might come from trade finance fraud. The pullback is clearly evident.

In terms of ECA financing, it is clear that the gloves have come off and it is now a very competitive environment.

Part of this is driven by the relaxation of the rules that individual ECA’s subscribe to regarding national content, but many of the ECA’s, the US EXIMBANK included, are showing a sense of commercial urgency and an understanding that their value is driven by customer satisfaction.

BAFT’s biggest concerns – regulations, fraud, ESG

In 2019, when TFG spoke with BAFT CEO Tod Burwell, he said the association’s biggest concerns were around new regulations, negative interest rates, and technological transformations. After the two years we’ve had since then, how do you think those concerns have shifted? 

Regulation continues to be a key concern. When an international bank is operating in numerous regulatory jurisdictions with no common reporting requirements, it can add significant pressure to a bank’s operating costs. 

KYC and AML – furthermore – potential fraud in trade transactions all demand prudent supervision, and at times the bank does not feel that the reputational risks are worth the return.

The growing integration of several advanced technologies, such as artificial intelligence (AI), blockchain, the internet of things (IoT), etc., with trade finance solutions is further propelling the global market growth. 

These technologies allow organisations to use natural language processing, predictive analysis, etc., to recognize market patterns, resolve concerns, and take appropriate measures.

Additionally, there is an escalating utilisation of electronic systems, such as optical character recognition and quick response codes, which enhance the digitalisation of trade financing operations and simplify the manual process of document identification.

The new concern on the horizon involves environmental, social, and governance (ESG) standards, and how and when they will be applied to trade financing activities.

Such standards are already a feature of project finance, and most of the MDBs have adopted IFC’s ESG standards for their own investment operations. 

Now, several European countries are exploring standards for ESG requirements within trade finance, but it is just a matter of time before they become a universal requirement.

COVID-19 impact: digitisation and product offerings

How has the COVID-19 pandemic changed your thinking with regards to the execution of trade finance, and how has it changed what you see as the industry’s key targets and priorities around digitalisation and the product offering going forward? 

The sudden outbreak of the COVID-19 pandemic has led to the rising adaptation of digitised trade financing activities via numerous electronic systems, such as optical character recognition, quick response (QR) codes, and radio frequency identification (RFID) readers to remotely manage trade and commerce operations. 

The trend towards digitalisation was already underway, but the pandemic has greatly accelerated implementation plans. However, BAFT produced a white paper in July 2021 analysing the progress on trade digitisation. 

One of the key takeaways is that the technology strides are not being implemented as quickly as possible due to a variety of factors.

Legislation and regulation in many countries are taking a variety of forms with little standardisation. Commercial enterprises are slow to adopt new technologies and are waiting on the sidelines for the sector to settle into more accepted approaches. 

BAFT is advocating a unified approach, including global trade associations supporting digitisation through member action, ICC engagement with national and global groups to strengthen national digitisation efforts, and pushing banks to use available electronic rules to improve acceptance of electronic documents.

LIBOR transition

Can you tell us about BAFT’s work on the LIBOR transition so far? What are your thoughts on the LIBOR transition, and how do you see it working out in practice after the end of 2021? 

Since January 2020, under the guidance of Diana Rodriquez, BAFT has led a global working group of BAFT committee members on LIBOR transition. 

The committee aimed at ensuring a smooth transition away from LIBOR and advocating for a forward-looking term Secured Overnight Financing Rate (SOFR). 

Following months of demonstrating the need for trade finance, the ARRC issued a set of best practices for the use of forward-looking SOFR term rate and related FAQs on August 26. 

The ARRC recommends that all market participants act now to slow their use of US dollar LIBOR and leverage the next six weeks as a key window to reduce such activity, to promote a smooth end to new LIBOR contracts by the end of the year.

Under supervisory guidance that has been endorsed by a wide array of jurisdictions worldwide, market participants have been encouraged to cease entering new contracts that use USD LIBOR as a reference rate as soon as possible, as LIBOR is set to cease by December 31, 2021.

As a result, USD LIBOR’s liquidity and usefulness will likely diminish as new use comes to an end. To facilitate that transition, the ARRC continues to recommend the adoption of its selected alternative, SOFR. 

We expect that the majority of market participants will transition to SOFR first, with a smaller segment of the market referencing other rates, such as BSBY (Bloomberg’s Short-Term Bank Yield Index), for select supply chain transactions. 

As the cessation of LIBOR approaches, the working group is focused on providing industry guidance on how to transition trade finance products. 

Recently, we released updates to the BAFT MPA (Master Participation Agreement) to account for the cessation of LIBOR, and expect to issue an update on the MTLA (Master Trade Loan Agreement) shortly. 

We also published a frequently asked questions (FAQ) guide over the summer, and expect to update the FAQ guide within the next month to reflect recent developments. 

BAFT’s standard definitions for supply chain finance

In 2016 BAFT published its first set of standard definitions for supply chain finance (SCF), and hopes to expand these into additional categories. Tell us more about the importance of standard definitions of SCF for BAFT and its members, and where you see the expansion project going in 2022? 

It has been recognised by several leading industry associations and practitioners globally that there is a need to develop, gather, and disseminate standard market definitions related to supply chain finance – an increasingly important dimension of the financing of domestic and international commerce.

The expression ‘supply chain finance’ (SCF) today covers a wide range of products, programmes, and solutions in the financing of commerce, including international trade.

It has been used to refer to a single product, or a comprehensive range of products and programmes of solutions aimed at addressing the needs of buyers and sellers, especially when trading on open account terms, in the increasingly complex supply chains in which they are involved. 

The current inconsistency in definitions, nomenclature, and general language around the financing of trade linked to open account terms and to the support of global supply chains is proving to be challenging for buyers, sellers, finance providers, service providers, and other stakeholders alike.

This issue has immediate implications for the accounting and regulatory treatment of supply chain finance structures, and, consequently, impacts market uptake, the engagement of traditional as well as emerging providers of SCF solutions. 

The inconsistent – even contradictory – language currently in use is complicating advocacy efforts and diluting the effectiveness of communication aimed at articulating the value proposition around supply chain finance, at a time when it is increasingly important to domestic commercial activity and the facilitation of global trade. 

BAFT continues to work through the Global Supply Chain Finance Forum (GSCFF) to add and adapt the Standard Definitions for Supply Chain Finance Techniques as business continues to evolve.

However, our primary focus at this time is continuing to engage with regulators and accounting standards bodies to ensure clarity of the various techniques and the appropriate accounting disclosure requirements.

Challenges and opportunities

What do you think are the biggest challenges and opportunities, both for you personally and for BAFT, over the next 12-18 months?

The BAFT membership and constituency within institutions is quite diverse, which leads different individuals to derive greater value from different aspects of membership.

For example, relationship managers find the global community to be the single most significant value they derived from membership in BAFT, but for operations or compliance personnel, the best practices and education might be the most important. 

The strategic pillars for BAFT are:

The challenge for BAFT, and for me personally, is to ensure delivery and performance in accordance with these strategic undertakings

Senior VP priorities

What do you want to achieve in your new role at BAFT? 

I have only been in my new position at BAFT for over one week, but what has struck me is the energy, enthusiasm, and professionalism that is found within this association.

The products and topics are not new to me. What is new and exciting, however, is how proactive the member committees and councils are in attacking the tasks before them. 

This is all volunteer work on their part, but judging by their production you would never know this.

For my part, I would like to share my mutually derived objectives for the coming year, as I think they clearly illustrate BAFT’s strategic focus.

They are:

• Advance digital trade agenda for the industry
• Drive advocacy for trade policy initiatives
• Support efforts to broaden BAFT’s role in providing trade education to the community
• Ensure effective and efficient operation of trade councils and committees
• Participate in industry initiatives

Looks like I have my work cut out for me!