What would you come up with if you were locked in a room and given 30 minutes to design a solution to one of the most persistent challenges in international trade finance?

That was the situation we set up for a group of trade, finance, and insurance professionals at the ITFA Annual Conference in Singapore, where Trade Treasury Payments (TTP) hosted a closed-door roundtable under Chatham House rules with eight such experts.

They were tasked with designing a trade finance product to improve access to working capital for micro, small, and medium-sized enterprises (MSMEs) in emerging and developing markets.

Team One’s proposal: Securitisation of SME trade finance assets

Team One pitched a securitisation-based structure to channel investor capital into SME trade finance. In essence, the idea was to bundle a portfolio of trade finance receivables or loans (originated by banks to SME exporters) and package them into tranches that could be sold to institutional investors. By transferring risk to investors, banks could free up balance sheet capacity and regulatory capital, allowing them to extend more trade credit to SMEs. This structure draws on the concept of a synthetic CLO (Collateralised Loan Obligation) or portfolio securitisation tailored to short-term trade assets.

Key features of Team One’s securitisation model included:

• Multi-bank pooling: Aggregating a large, diversified pool of trade finance exposures (e.g. invoice financings, letters of credit, supply chain finance receivables) from multiple banks or markets to achieve scale. The target portfolio could be in the order of billions of dollars to attract investor interest and achieve risk diversification.
• Tranching of risk: Structuring the portfolio into tranches (e.g. a junior “first-loss” piece and one or more senior pieces). The first-loss tranche absorbs initial credit losses and would be sold to investors with an appetite for higher risk/return. Senior tranches could potentially be retained by banks or placed with more risk-averse investors. This stratification allows credit enhancement for senior notes and aligns with regulatory Significant Risk Transfer requirements for capital relief.
• Investor placement: Marketing the junior (and possibly mezzanine) tranches to institutional investors such as hedge funds, insurance companies, or development finance institutions. These investors earn an attractive yield to take on SME credit risk. Notably, trade finance assets have historically exhibited low default rates and high recoveries, making them an appealing option for diversification.
• Bank capital relief: By offloading a portion of credit risk, banks could lower their risk-weighted assets (RWA), thereby freeing regulatory capital. The structure would be designed to meet regulatory criteria (under Basel/CRR) for unfunded credit protection or securitisation, so that the bank can substitute the portfolio’s risk with the tranche investor’s risk profile.

Some more considerations

By pooling SME-focused trade finance portfolios (potentially across multiple originators or countries), the securitisation could attract new funding into the SME trade space. For investors, the appeal lies in diversification and yield as trade finance returns are largely uncorrelated with broader markets and defaults have historically been low (even through crises, loss rates for short-term trade loans are only around 0.1–0.2% on average). These qualities can make a well-structured SME trade CLO an attractive proposition, provided it is structured and managed carefully.

Unfortunately, securitising SME trade assets is not a simple task. Trade finance portfolios are dynamic, with short tenors requiring continuous replenishment of assets over the life of the deal. As such, originating banks must keep generating new eligible trade transactions to replace matured ones. Additionally, investor due diligence on SME exposures can be more intensive, and achieving an investment-grade rating on senior tranches might be challenging without enhancements (such as third-party guarantees or overcollateralisation). Team One emphasised the need for standardisation and data transparency so that investors are comfortable with SME risks that they may perceive as opaque.

 

Real-World Parallel: SME Supply Chain Finance Securitisations

We have seen some analogous real-world efforts in related asset classes. For example, banks like Standard Chartered and Santander have securitised portfolios of supply chain finance (SCF) receivables to institutional investors, transferring risk on trade payables due from numerous buyers (many of which are SMEs). These deals often use an SPV to issue notes backed by the receivables, with multilaterals like the IFC or insurance sometimes involved to enhance credit. While not identical to Team One’s model, it shows the capital markets’ growing role in trade and supply chain finance.

In summary, Team One’s securitisation approach is about tapping the deep pockets of capital markets to support trade. By structuring SME trade finance as an investable asset class, it could multiply the financing available relative to what banks alone can provide.

Team Two’s proposal: Insurance-wrapped trade finance facilities

While Team One looked to capital markets, Team Two championed an insurance-based solution. Their proposal centred on leveraging trade credit insurance (TCI) and guarantees to enhance SME trade finance portfolios, thus incentivising banks to lend more to SMEs. In practice, Team Two envisioned banks extending more trade loans to SMEs, backed by insurance policies or guarantees that cover a large portion of the credit risk. This is akin to wrapping the exposures with a credit risk mitigant so that, from the bank’s perspective, the counterparty risk is transferred to a stronger party (an insurer or guarantor). The insured/guaranteed portfolio could then also be more attractive to investors or securitisation.

 

Key features of Team Two’s insurance-wrapped model included:

• Trade credit insurance coverage: Banks (or an SPV holding trade assets) would obtain trade credit insurance policies covering non-payment risk on the SME receivables. The coverage might be provided by private credit insurers (e.g., Allianz Trade, Coface, Atradius, etc.) or by public insurers/export credit agencies. Globally, trade credit insurance covers nearly $3 trillion of trade receivables at any time, roughly 14% of world trade by value. This insurance pays out if buyers default on trade debts, thus protecting the lender.
• Portfolio or umbrella policy structure: Rather than individual policies for each transaction, Team Two suggested a portfolio policy that could cover a batch of SME transactions meeting certain criteria. This could be arranged as a bespoke insurance facility between the insurer and bank, possibly with the involvement of a broker or a multilateral agency to coordinate.
• Capital relief via credit risk mitigation: If structured properly, an insurance policy can be recognised as credit risk mitigation (CRM) under banking regulations, similar to a guarantee. This means the bank can substitute the insurer’s credit rating for the SME’s rating when calculating capital requirements. For example, an SME loan that normally carries a high risk weight could, when insured by a well-rated insurer, be weighted at the insurer’s risk level (often much lower). This provides a direct regulatory capital benefit, encouraging the bank to lend more. However, to qualify, the insurance must meet strict criteria of being direct, explicit, irrevocable, and unconditional. The policy cannot have onerous escape clauses (like arbitrary cancellation or exclusion that would undermine payment when a default occurs).
• Use of multilateral guarantees: In addition to (or instead of) private insurance, Team Two highlighted the use of guarantees from development institutions. Such guarantees effectively act like insurance. Being from a highly-rated multilateral, they can carry a 0% risk weight for banks under certain rules, meaning full capital relief on the covered portion.

Some more considerations

The insurance-wrapped model can be more accessible for mid-sized banks and trade financiers than complex securitisations. It leverages the expertise and balance sheets of the insurance sector to take on SME risk. Many trade credit insurers have extensive databases on buyers and can often provide limits on SMEs that banks find hard to underwrite on their own. By transferring risk to insurers (or public guarantors), banks can safely increase their SME lending. Importantly, this can often be done quicker and on a bilateral basis since a bank can negotiate a policy with an insurer for a portfolio within weeks, whereas a securitisation might take months to arrange. Additionally, insurers and guarantors provide a seal of credit quality that can help if, later, the bank wants to refinance the assets. For instance, an insured trade portfolio could be placed into a securitisation where the first-loss risk is effectively borne by the insurer, making the notes safer for investors.

One concern is the capacity of the insurance market. If every bank dramatically increases trade loans with insurance, will insurers have the appetite to take all that risk? The private credit insurance industry’s insured exposure is large (trillions), but it is also subject to risk management and reinsurance limits. However, the presence of public insurers and multilaterals can augment capacity. Export credit agencies (ECAs) often step in for high-risk countries or SME segments that private insurers shy away from.

Another consideration is cost. Insurance premiums will cut into the margin of the loans and, if not priced carefully, could render financing too expensive for SMEs. Typically, though, trade credit insurance premiums for short-term trade are a small percentage of insured turnover (often in the order of 0.2–0.8% of value per annum, varying by country/sector). When the benefit is a significant capital relief (which lowers banks’ cost of capital allocation), it can be worth the cost.

Real-world parallel: MDB-guaranteed emerging-market loan platforms

Institutions such as IDB Invest and MIGA have launched large-scale guarantee frameworks to expand trade and SME lending in emerging markets. In 2025, for example, the two announced a $500 million trade finance guarantee programme covering short-term loans from regional banks to exporters across Latin America. MIGA’s political-risk and non-payment cover allows participating banks to extend more credit while maintaining regulatory capital efficiency. The structure mirrors Team Two’s concept of pooling risk through an insured SPV or guarantee wrapper to make emerging-market assets investable for institutional investors.

In summary, Team Two’s insured SPV model focuses on mobilising institutional investor capital for emerging-market SME finance. By combining credit insurance with a rated conduit structure, it converts diverse, small-scale trade loans into an investable, high-grade asset class. The approach extends the reach of bank lending by linking local trade flows to global pools of long-term capital through insurance-backed risk transfer.