MT700 or MT760 or ISO 20022 – that’s the question


I confess that I have been blind as a mole, but it is better to learn wisdom late than never to learn it at all.'

 Sherlock Holmes

(The Man with the Twisted Lip)

 

 

I must admit that I have always been an “LC Guy” … It is not that I do not like guarantees or collections – but somehow I find it more fascinating to work with LCs.

 

In this Blog Post I will focus on guarantees – and reveal my reluctance towards it – and also why things are beginning to change….

 

Since the day I started working with trade finance I never understood why a guarantee had to be worded like it was London year 1890. Why not just say things in a simple and direct way? A guarantee is in many ways the simplest instrument in the “trade finance family:” It is issued by the guarantor – and if (which is rare) a complying demand is made, the guarantor pays. 

 

Simple as that! However in reality it is not so. Often there are long – hard to read (legal) texts that puts into question what actually is to be presented to the guarantor in order to get paid.

 

And then there is the “form” of the guarantee. Often it is a signed letter (I guess for the purpose of underlining how old-fashioned it really is!) – or SWIFT can be used. Here it is primarily the MT760 message type that is used. This is a message type that is basically one big “free text field” – i.e. no real standard. And again: Worded like Sherlock Holmes would have worded it.

 

There is however another type of “guarantee” that are used; in some parts of the world “more” – in other parts of the world “less.” That is the Standby LC.

 

In my article "Guarantees versus standby letters of credit” (DCinsight Volume 18 No 1 – January-March 2012) I compare the guarantee to the Standby LC – so I will not do that here.

 

The point of bringing up the Standby LC is that this is a guarantee in the form of an LC. This means (amongst other things) that another SWIFT message type comes into play – namely the MT700 (Issue of a Documentary Credit). This message type has more fields than the MT760. The MT700 is often used for Standby LC – some banks may however face some challenges. For example:

 

Often the MT700 is available in the banks “LC system” and the MT760 is available in the banks “Guarantee system.”

Since a Standby LC it is in reality a guarantee; fees must be calculated as any other guarantee – i.e. in the banks guarantee system – which would not allow the use of a MT700.

The MT700 is build to cover a commercial transaction; i.e. not 100% designed to an undertaking like a guarantee or a Standby LC.

 

In other words: A bank that would like to issue a guarantee in a solid, standardised and structured way may have a hard time doing that.

 

Or rather … it had!

 

Because just recently 20 new electronic message formats to support demand guarantees and standby LCs were approved. Their formats are all based on ISO 20022, which is a technology standard for the financial industry developed by the International Organization for Standardization (ISO).

 

These 20 messages cover the full life cycle of a demand guarantee or Standby LC – from the application for issuance to termination. It even facilitates the interaction between the corporate customer and the bank (for example when the corporate customer applies for the issuance of a Standby LC). And it does so under the ISO 20022 regime where everything is based on clear and precise standards. And that is standards that are designed exactly for those instruments!

 

This is in other words what the trade world has been waiting for – for many many years! So one would expect that banks and corporate customers flock to use them … but hmmm …. It does not seem that way. David Dobbing from SWIFT has said that the adoption of these messages “is anticipated to be progressive over a number years and dependent on market factors including vendor support and bank readiness.” (DC World Volume 17, Number 7 - July/August 2013).

 

Okay fair enough – but I really urge banks and vendors to implement these new standards – better now than later!

 

Just under this Blog Post I have added a list of the new messages.

 

The ISO 20022 message documentation and XML schemas can be freely downloaded from the ISO website, www.iso20022.org.

 

Take care of each other and the guarantee instrumentS!

 

Best regards

Kim

 

 

-----------------------------------------

 

The ISO 20022 Demand Guarantee and Standby Letter of Credit Message Set Comprises:

 

Application

UndertakingApplication<tsin.005.001.01>

 

Issuance

UndertakingIssuance <tsrv.001.001.01>

UndertakingIssuanceAdvice <tsrv.002.001.01>

UndertakingIssuanceNotification <tsrv.003.001.01>

 

Amendment

UndertakingAmendmentRequest <tsrv.004.001.01>

UndertakingAmendment <tsrv.005.001.01>

UndertakingAmendmentAdvice <tsrv.006.001.01>

UndertakingAmendmentNotification <tsrv.007.001.01>

UndertakingAmendmentResponse <tsrv.008.001.01> UndertakingAmendmentResponseNotification<tsrv.009.001.01>

 

Non-Extension

UndertakingNonExtensionRequest <tsrv.010.001.01> UndertakingNonExtensionNotification<tsrv.011.001.01>

 

Termination

UndertakingTerminationNotification <tsrv.012.001.01>

 

Demand Processing

UndertakingDemand <tsrv.013.001.01>

ExtendOrPayRequest<tsrv.014.001.01>

ExtendOrPayResponse <tsrv.015.001.01>

DemandRefusalNotification<tsrv.016.001.01> DemandWithdrawalNotification<tsrv.017.001.01>

 

General

TradeStatusReport <tsrv.018.001.01>

UndertakingStatusReport<tsrv.019.001.01>

 



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LCViews - MT700 or MT760 or ISO 20022 – that’s the question