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.'
(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
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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>