TFPD_09: The UCP 600 and ISBP are impossible books to read – part 1 of 2
Trade Finance Paradigm #9: The UCP 600 and ISBP are
impossible books to read – part 1 of 2
The next of the eight Trade Finance Paradigms is: The UCP
600 and ISBP are impossible books to read – part 1 of 2.
I remember only too well when I skipped my job as a freight
forwarder to work in a trade finance department at a bank. I was given (amongst
others) the UCP 500 to read. It was a Danish version – so I understood each and
every word (well almost). And yet – I understood nothing. Absolutely nothing.
It was all black. I was reading words – but did not understand what they were
trying to tell me.
During my time at the trade finance department – issuing and
advising LCs and examining the documents, I kept the UCP 500 close – and would
try to read in it as much as I could. Linking the actual issues to the articles
in the UCP 500 – gradually (and very slowly) made me understand what was being
said. Later I came to realise that it is the kind of book – where you need to
understand what it says – in order to understand what it says (!!).
Somehow this may not be too surprising. The UCP 500 – and
now the UCP 600 is in many ways an awkward collection of provisions that aims
in many directions.
Some articles are very practical – and related to the
document examination. For example UCP 600 article 14(i):
“A document may be dated prior to the issuance date of the
credit, but must not be dated later than its date of presentation.”
Others are really abstract - for example related to the
obligation of the parties, for example UCP 600 article 7(c):
“An issuing bank undertakes to reimburse a nominated bank
that has honoured or negotiated a complying presentation and forwarded the
documents to the issuing bank. Reimbursement for the amount of a complying
presentation under a credit available by acceptance or deferred payment is due
at maturity, whether or not the nominated bank prepaid or purchased before
maturity. An issuing bank’s undertaking to reimburse a nominated bank is
independent of the issuing bank’s undertaking to the beneficiary.”
It is easy to see that there is a huge difference in “level”
in the two above examples.
Now – I hear all the time that exporters and importers do
not read the UCP 600. And in many ways I do not blame them – because it is
really a tough job understanding what the articles of UCP 600 really tells you.
Reading the UCP 600 from cover to cover for the first time – AND understanding
it (!!) is close to impossible!
The problem is that the UCP 600 deals with may issues – for
the purpose of (sometimes) different parts of the LC process. Therefore – you
should NOT read the UCP 600 from cover to cover – but read what you need to
know for the purpose of what your “needs” are in terms of doing what you are
doing right now; e.g. preparing the documents.
So I thought it appropriate to offer a rough guide on how to
read the UCP 600 – based on how you are involved into the LC process. Of course
it does not hurt to read more. But if you start here – I think you get a good
start – a good basis to expand from:
The senior management of a company using LCs as a payment
instrument:
Using the LC should be an integrated part of the company’s
risk strategy. Therefore it is vital that the person(s) making that strategy
thoroughly understand what kind of risk are being covered – as well as the
basic principles of what an LC is.
This means that they should focus on:
Article 1; the application of the rules.
Important of course …
(Article 2 and 3; definitions and interpretations
This is in brackets because most may not be relevant for the
purpose of this part of the process. However it is – as an example – important
to know that an LC is “irrevocable,” information found in article 3 between the
use of singular/plural and what “signed” means.)
Article 4 and 5; credits versus contracts – and documents
versus goods etc.
It is important to note – and to know – that an LC is
“abstract” i.e. problems in the contract or with the goods do not influence the
LC as such.
Article 7 and 8; the undertaking of issuing and confirming banks
This is VITAL when drafting the risk strategy.
Article 34-37 – the disclaimer articles.
Important to know!
That’s basically it. When you understand the above articles
you are fully capable of understanding the LC from a risk perspective – e.g.
when drafting the risk strategy.
The person(s) responsible to drafting the LC application
(importer) – or the LC template (exporter) to be sent to the buyer:
The first step towards having a successful LC that serves
its purpose is to make sure that it is issued in a good and solid way.
This means that focus should be on:
Article 1; the application of the rules.
What is important in this context is that UCP 600 articles
may be modified or excluded in the LC. In other words if an article is not
appropriate for the specific transaction, it may be modified in the LC … and it
will be the LC wording that applies.
Of course modifying or excluding UCP 600 articles should be
done with great care – as you may do more harm than good if you are not
careful.
Article 2 and 3; definitions and interpretations
Are important to know.
Article 4 and 5; credits versus contracts – and documents
versus goods etc.
Are important to note as well – as those clearly illustrate
the banks approach to this. For example you cannot simply quote text from the
contract in the LC. It must be “transformed” into something that can be
ascertained from the documents.
Article 6 – availability, expiry date and place for
presentation
Another vital article! Where must the LC be available? I.e.
which bank(s) are obligated when a complying presentation is made where???
Article 9 and 10; advising and amendments
Those should be noted as well.
Article 12; nomination
Another really important article. It illustrates that the
role of the bank is really important – and (as an example) that even though the
LC is not confirmed – a nominated (not confirming) bank can still be obligated
under it – but it requires an express agreement.
Article 14, 15, 17, 18, 19-28, 30, 31, 32, 33
Are all very practical articles mainly related to the
document examination – hence must be well know to anyone part of the process of
issuing LCs.
Article 38; transferable LCs
This article is important if the LC is transferable.
The person(s) responsible for the documents:
This is mainly related to the preparing of the documents
(exporter) – but may also be of interest for the person(s) receiving the
examined documents from the issuing bank (i.e. the importer – LC applicant).
The next step towards having a successful LC that serves its
purpose is to prepare documents that comply with the LC. In order to do that
one must know the following UCP 600 articles quite well – as well as the ISBP
(more on that in part 2 of this blog post).
This means that they should focus on:
Article 2 and 3; definitions and interpretations
Those are really important to know. Especially article 3.
Article 10; amendments
When there are amendments to an LC – it is important too
keep track on which amendment is accepted – and which is not … and what does
the “LC as amended” look like.
Article 14; Standard for document examination
This article is vital – because it displays precisely how
the banks doing the examination will approach this.
This article is really helpful for the person preparing the
documents.
Article 17-28 and 30-32
Are all NEED TO KNOW articles for the person preparing the
documents. These include practical rules – that must be complied with. For
example that a bill of lading must indicate the name of the carrier.
In addition – the ISBP must able be known quite well. As
said … this will be the topic of part 2 of this blog post.
By the way … if you are a trade finance banker … you must
know UCP 600 well – just as you must know the ISBP quite well … just as you
must know about related topics such as transport, insurance and incoterms.
In any case – the point is that the UCP 600 is a huge mix of
different rules … and the trick is NOT reading them from cover to cover – but
rather to know which articles that must be read related to the part of the LC
process in question.
The above being said – it is of course beneficial to have a
good overview of what is in the UCP 600 – so that an issue can be looked up on
a case-by-case basis.
Part 2 of this blog post will deal with the ISBP – and how
to read that one … Look out for it, and
… take care of each other and the LC!
Kim