Trade finance – is it business as usual?
Since the UK referendum, there has been little impact on the trade finance market. Trade finance is typically short term, matching trade flows that are actually occurring. Until we know more about what form the UK’s trading relationship with the remaining EU member states and the rest of the world will take, trade and its related financing will continue in much the same way and on much the same terms.
The trade finance market may be impacted by a number of factors in the short to medium term, for example, currency fluctuations leading to expanded or reduced trade flows between certain countries or an increase in bank pricing, though this traditionally makes trade financing a more attractive option for market participants (compared to corporate financing). Ultimately these types of impact are no different to those felt in any period of instability or uncertainty, where the impact on trade finance has traditionally been felt less painfully than in other finance sectors.
The impact of low commodity prices and greater regulatory obligations has had more effect on trade flows in emerging markets. Brexit should have little impact on the continued development of these markets, and indeed may hasten that development if the result is greater bilateral trade agreements. Trade finance traditionally has a counter-cyclical element, so where corporate finance is proving hard to obtain due to factors such as market uncertainty, trade finance can be a viable option.
Trade financiers will want to watch developments: in due course, non-EU banks participating in the trade finance market out of subsidiary offices in the UK (and UK banks without an EU subsidiary) may need to consider their right to passporting into other EU member states, but this isn’t limited to the trade finance market and the retention of passporting rights will be on the agenda when exit discussions commence.
No changes to normal trade finance documentation are required at present, though this should be kept under review, particularly as transactions are put in place that might overlap the UK’s exit from the EU – likely to be more than two years from now. This is a possibility in the future when the nature of the UK’s exit is known but there will be plenty of time for documentation to adapt to any changes in legal requirements. Parties should still choose English law to be the governing law of their agreements where this is currently the case.
Ultimately, trade flows will change as the UK’s new trading relationships are finalised, tariffs may be imposed where previously there were none, but trade finance will evolve to meet the demands of a post-Brexit world.