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:
+PRESENTING-
NEGOTIATING BANK MUST CONFIRM ON THE REMITTANCE LETTER/ COVERING SCHEDULE THAT
THE AMOUNT OF THE DRAWING HAS BEEN ENDORSED ON THE REVERSE OF THE CREDIT.
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
Kim