Practice and rules – unsynchronised

On many occasions I have been asked if the development within Trade Finance is evolution or revolution. In many ways I have had a hard time answering this question. For sure there is not much “revolution” to it. And there are evolutionary elements; for example the MT798 seems to signal a new ways for the Trade Finance banks and their customers to communicate; and there may be smarter ways to present the documents. However the documents are still the same – and the rules – e.g. the UCP 600 – in many ways is not that different from the very first UCP version dated – 1933. Nineteen thirty three!!!

Amazing when you think about it. Just think about how different the world otherwise is today – compared to 1933.

So why on earth is it so difficult to really change and develop the Trade Finance instruments?

Last week I re-read the Draft ICC opinions to be discussed at the next meeting in the ICC Banking Commission. The first Draft Opinion is TA.806. The query starts with this LC condition:


The question basically is how the nominated bank is to react in such case – and what if no such endorsement is made on the reverse of the LC?

The analysis is really interesting. First it acknowledges that such condition in a condition in a freely negotiable LC is to prevent beneficiaries undertaking fraudulent actions by presenting documents to more than one bank.

However it also underlines that nowadays most LCs are sent via SWIFT and the beneficiary will only receive an electronic version of the SWIFT message; and as such there is no original. I.e. no physical document that can be endorsed on the reverse.

To me – a core reason why it is so hard to “develop” the Trade Finance instruments lies in dilemmas like this one:

There is now an “electronic practice” on how to issue and advise an LC – but as such the UCP 600 includes the possibility to make the LC “negotiable with any bank”; i.e. a practice from a time when the drawings under the LC was managed via endorsements on the physical / original LC. In other words – when the freely negotiable LC was invented it made perfect sense, because there was an original document (the LC) to keep track of the drawings made – no matter to which bank the documents were presented. Now however it potentially places nominated banks as risk.

Without stating it directly the Draft ICC Opinion discourages a condition like the one above, although it matches perfectly with the LC availability; negotiable with any bank!

This is just one example that although there is “evolution” in the handling of the LC (in this case the issuing and advising the LC) – there seems to be no development whatsoever (!!) in the rules governing the LC. Or taking it one step further: the LC rules seem to be stuck in a time warp; i.e. all development to the LC instrument must be made on that basis (developed before 1933). Which of course makes development difficult.

If you look through the UCP 600 there are many more examples like this – for example:


Article 3 – saying that branches of a bank in different countries are separate banks.

Today banks are global – and the actual handling of the LC may not be done in the country of the applicant or beneficiary.


Article 6 – saying that an LC available with a nominated bank is also available with the issuing bank.

In this case the beneficiary may present documents to either the nominated bank or to the issuing bank. Those may not be in the same time zone. So if the LC is managed via a multibank system – then when is the LC actually expired?


Article 11 – covering pre-advised LCs

This article dates back to a time when a pre-advise was sent via TELEX – and then the original paper LC would follow. Today practically all LCs are issued via SWIFT – and no pre-advise is made. And no TELEX.


Article 21(a)(iv) – saying that the sole original non-negotiable sea waybill must be presented.

Today it is practice to issue non-negotiable sea waybill in PDF format – there is no “original” – just as there is no “original” LC.


Article 26 – covering goods shipped “on deck” – i.e. that is prohibited.

Today most goods are shipped in containers … looking at a container vessel it is clear to anyone that the majority of goods shipped are actually “above deck.”


Article 33 – saying that banks are not obligated to accept a presentation outside its banking hours.

This seems to match badly with the emerging practice of ePresentations; i.e. where a scanned presentation is made to the nominated bank – or for that matter directly to the issuing bank.


Concluding this – I think it is fair to say many parties are trying hard to develop the LC instrument … but find it quite hard because of the fact that when it comes to the LC rules there is absolutely no development – no evolution.

The practice and the rules are simply – unsynchronised.

I have previously argued that a new way to revise and publish the Trade Finance rules must be found. More than anything I think that the above proves that …

There is still a need for the LC – but we must help it adjust to the world as the world adjusts. So far we have not been good at that.


Take care of each other and the LC.


Best regards



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