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DAVIDGUSTIN,ChiefStrategyOfficer,TheInterfaceFinancialGroup April,:AM| Fundinghasgrownmoresophisticatedwithsupplychainfinanceprogramstolargecompanies,drivingmarginsdowninmanycases.Thereareseveralinterestingissuesaroundpricing:Platformprovidersmakemoneyontransactionsnotexplicitchargesfortheirsales,marketingandonboardingefforts.Howareplatformcostsembeddedinpricing?Whataboutthirdpartyplatforms?Managedservices?IfSyndicationmodelsarebeingusedtocreatemorecapacityforbuyers,howdoesthatmodelimpactpricing?Forexample,thewaymanylargebankoriginatorsmakemoneyisbydistributingmostprogramstootherbanks. Iftheyhavea$bnoutstandingprogram–theymaykeep$mandsell$.billionwithadistributionmarginofbpsbetweenwhattheyoriginateandwhattheysell.Iftheyhavealeverageratioofor:,theycanmaketheirreturnmodelswork.Ifnewfundingplayersareparticipatinginthemarket,HedgeFunds,InsuranceCompanies,andEuropeanandAsianBanks,isthatmoneygoingtobethereifcreditcyclestakeaturnfortheworse?IsExpectedLossPricedAppropriatelyforSupplyChainFinance?Pricingtosuppliersisbeingpricedclosertothebuyerriskandthebuyer’sshorttermborrowing.FundingistypicallybenchmarkedoffofUSDorEuroPrimeorLiborandwillfluctuatemonthlybasedonincreasesordecreasesofthoseindexes. Isriskmispriced?Ifyoureallypriceriskyouputacapitallossonexpectedlossanditsapremiumtothattiedtoyourcostoffundingandoperationscost.IfabankbuysaAAAgovernmentbond,itscapitalcostiszero. U.S.treasuriesarenotreallyriskfreebutthatiswhathowtheyaretreatedfromaregulatorystandpoint. ForSCFprograms,thekeyquestionisiftheexpectedloss(“EL”)forthecontractforthatpartyisassessedproperly.  ExpectedLossistiedtothecovenantsoftheprogramaswell. YoucanlookatCreditDefaultSwapdataonthecounterpartiesasaproxy toEL,butCDSwasnotdesignedforthispurpose. Becauseoftightpricing,moresolutionsarebeingtargetedattheMiddleMarket(AIG PrimeRevenue asanexample).Butamiddlemarketcompanyof$Mondaytermswithsuppliers,andCOGSis$,evenifyougot every supplieronboarded,itsonly$Mprogram.That’sthechallengethere. SoarewepricingExpectedLossproperlyintheseprograms? Iwouldbeinterestedinhearingfromyou.

Is Supply Chain Finance Pricing Mispriced?

DAVID GUSTIN, Chief Strategy Officer, The Interface Financial Group April 5, 2016   Funding has grown more sophisticated with supply chain finance programs to large companies, driving margins down in many cases. There are several interesting issues

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