What it means to be an SFC-licensed Trade Finance platform headquartered in Hong Kong
With its position as a trade hub for Asia and one of the top three finance centres globally, Hong Kong is a highly suitable location to establish a platform serving the global Trade Finance market.
However, since Hong Kong’s Securities and Futures Commission (SFC) does not require trade finance providers to be directly monitored, why did Velotrade go to the considerable effort of obtaining a Type 1 (Regulated Activity) License when the company commenced operations in 2017?
This SFC license is typically required by companies dealing in highly regulated capital markets such as buying and selling equities. By contrast, the platforms that provide trade finance to cost-sensitive Small and Medium sized Enterprises (SMEs) are more lightly regulated.
Despite the lack of regulatory pressure, Velotrade went ahead with a twenty month application and approval process, receiving its SFC license in November 2018 and becoming the first trade finance platform to do so.
Velotrade obtained several advantages during this process that were not readily available to its peers:
1. Making Trade Finance more attractive to institutional investors
Establishing a marketplace for a new alternative asset class such as Trade Receivables requires significant credibility on the part of any business and SFC approval is a key steppingstone towards achieving this goal.
Velotrade’s SFC-approved status means that a wide cross section of the investor community is attracted to working with the company to diversify their portfolios by including this non-correlated, short term investment with a highly competitive rate of return.
These qualified professional investors include Institutional Investors, Private Equity Funds, Asset Managers, Hedge Funds, Family Offices and Individual Professional Investors.
As Velotrade is already regulated by the SFC, institutional investors can undertake an accelerated due diligence process compared to other platforms. This is a key factor in making Velotrade a more appealing platform for trade receivables.
Additionally, the SFC licence helps users to comply with internal risk management rules that have previously prevented many institutions from investing in Trade Finance.
2. Raising the credibility of the alternative investment sector in Asia
The value of regulation cannot be over-estimated in helping to firmly establish a relatively new investment sector such as Trade Finance.
Having obtained SFC approval, Velotrade is advancing mainstream acceptance of invoice financing platforms as a whole and building its appeal as one of a range of alternative assets available to investors who are looking for better returns in the low interest rate environment since the 2008 global financial crisis.
In addition to the core advantages of a high degree of reliability, strong yield and low correlation to equities, SFC recognition demonstrates that Velotrade can meet standards of transparency and managerial quality that professional investors of all sizes demand.
By seizing the initiative and obtaining an SFC license, Velotrade has set this new standard for the industry for others to follow. The goal is to develop an industry that is better trusted and better understood by the broader investor community in order to minimise the risk of future issues around unregulated activities such as money lending between peers.
3. Growing the pool of investors in a more efficient marketplace
Rapid development of an active marketplace on the Velotrade platform has been supported by SFC regulatory status, helping to build confidence among invoice sellers that they can leverage it to obtain the best possible deal.
The Velotrade platform offers self-service access for both pre-approved invoice sellers and investors, where deal matching is efficiently handled to match individual requirements at the best price.
A broader cross section of investors is available to sellers because Velotrade has attracted a wide spectrum of interested parties due to its focus on developing a better regulated new asset class.
By growing the number of both invoice sellers and institutional investors who participate on the platform, Velotrade is able to achieve a significantly higher level of market efficiency.
4. Helping to address the global gap in Trade Finance
Trade Finance was previously dominated by traditional banks. However rising regulatory compliance costs have failed to deliver a suitable level of service customisation, flexibility or speedy delivery to SME clients and invoice selling platforms like Velotrade have been established to meet this growing market need.
The company has developed a reputation as a reliable Fintech player using in-house technology which enables self-service transactions to be efficiently conducted via computer or mobile app.
For investors, there is a confidence-inspiring appeal in obtaining access to a wide-ranging selection of invoices from companies in multiple business sectors, many of which regularly deliver goods to Multinational Corporation customers.
Currently there is a massive trade finance gap in un-supported transactions of US 1.5 Trillion dollars, according to the Asian Development Bank, and Velotrade is well-placed to help reduce this large scale market shortfall while continuing to provide high quality investment opportunities for institutional investors.