Global Trade Finance, Standard Chartered Bank
The wait is finally over! A new UCP is born.
International trade enters a new phase with the introduction of the UCP600 û the sixth version of the standards since their inception that governs billions of dollars in documentary credits business each year. The unanimous approval of the new version by the ICCÆs Banking Commission on 25 October 2006, marks the culmination of deliberations that spanned over the last three years, involving a painstaking review of over 5000 comments received from the various consulting groups and National Committees on the 15 drafts that were circulated prior to its finalisation. The effective date of 1 July 2007 for implementation of the revised document affords all the impacted parties an eight month window to prepare for the oncoming change.
As trade practitioners across the world prepare to write an epitaph for the UCP500 and consign it to the annals, it would be worth taking a moment to reflect and crystal gaze into the future, reviewing what awaits documentary credit practitioners as they roll the red carpet to welcome the newest member in the ICC family. Is the change for real or is it just another case of the proverbial wine bottle alone undergoing a change?
Over the last 12 years of its existence, the UCP500 has had its own share of criticism due to the high discrepancy rates that were concentrated around a few articles. Empirical data suggests that close to 80 percent of document presentations under credits are discrepant in nature. In a vast majority of cases it is the banks that are usually the most criticised party and labeled as ÆconservativeÆ or ærisk û averseÆ for their one sided interpretation of the wordings in the articles, prompting ICC to issue the ISBP û a document that sought to clarify ICCÆs intent on the articles. Blaming banks for the resulting situation may be the easiest to do though not necessarily the right thing. Especially in situations where some of the discrepancies exist by design on part of the importer, intended to drag out payment periods and stretch cash flows to their limits. Despite such misgivings, it would only be fair to deduce that the UCP500 served the suppliers well during its tenure and credits continued to get paid, albeit with some degree of delay but very rarely denied.
Against this backdrop, the new version of the UCP intends to improve the effectiveness of the documentary credit process by;
- Incorporating practices from the International Standard Banking Practices (ISBP) and past opinions of the Banking Commission.
- Providing new articles relating to examination, documentation and redrafting some other articles in order to make the UCP lean and concise.
- Defining specific terminologies aimed at resolving the confusion and ambiguity that arise out of interpretation of the clauses. In the process yet another attempt has been made to define ænegotiationÆ.
- Reducing the time available to intermediary banks involved in the credit process for scrutiny of documents enabling a faster turnaround.
Some of the significant and noteworthy changes in this direction are :
- Deletion of the terms ôreasonable timeö and ôwithout delayö. Banks are now allowed five banking days to examine documents and assert any discrepancies.
- Including a new article relating to situations when addresses of the applicant and beneficiary must be as they are stated in the credit.
- Providing additional options with regard to the fate of documents following the notice of refusal.
Other articles that have been fine tuned to provide additional clarity include:
- Introducing a new section on definitions of terms used within the articles.
- Authority to discount is now embedded in case of nomination to incur a deferred payment undertaking.
- Requirement to ensure ôconsistencyö of documents is replaced with documents not being in ôconflictö.
- Changes in terminologies relating to Transport documents such as Multimodal transport documents and Marine / Ocean Bill of Lading
In a good number of articles, the existing provisions have been continued without any changes whatsoever. In the process, some of the legacy issues that one had to contend with under UCP500 may continue to preoccupy documentary credit practitioners under the new regime as well.
The question that is now foremost in the minds of banks, exporters, importers and other stakeholders such as transport operators, insurers is û come 1 July 2007, will there be a radical shift in the way banks establish letters of credit for their importer clients? The answer û unlikely. Given that with any change of this magnitude, the process of migrating to the new standard, gaining experience and maturity in understanding of these articles is expected to be achieved over a period of time. Further, the challenge is to ensure consistency in understanding and interpretation of the articles across all parties that facilitate a commercial transaction. Given the comfort level that documentary credit practitioners enjoy with the existing version, the switch is likely to be achieved only over a longer time frame that may extend well into 2008, unless an earlier transition is mandated.
However, in terms of preparedness banks are not leaving anything to chance. Given the plethora of changes and the wide spectrum of their impact, banks have commenced the process in right earnest by conducting impact reviews across internal functions such as Operations, Technology, Legal, Product Management and Training of personnel etc. Trade divisions across banks are gearing up for some challenges during the transition phase such as managing the co-existence of both versions side û by û side with different templates for legal documents, customer communication, systems, training of personnel on ICC opinions arising out of both the versions etc. While most banks have been through similar challenges when the transition to UCP500 happened, in terms of timing the UCP600 comes at a busy season with bankers already having their plates full with Basel II (due for implementation effective January 2008).
Banks will call for a fresh set of indemnification and documentation to be executed by importer customers using bank letters of credit to mitigate them under the new structure. Exporters on their part would be well advised to work with their existing bankerÆs to gain a comprehensive understanding of the changes in the new version and train their document preparation staff on the new requirements. Another area that merits their consideration is assessing the preparedness of other service providers such as Transport Operators, Insurers etc. on the new UCP. A well informed decision arrived at on the basis of a thorough assessment of these factors will hold them in good stead as they finalise contracts subject to the new version of the UCP and help them to avoid many of the pitfalls that are typical of documentary credit business. Leading banks in the Trade finance domain such as Standard Chartered are well geared to advise their customers on navigating their business through the choppy waters that exporters may encounter.
As world trade continues to increase and move away from traditional Letter of credit solutions to Open Account trade and other e-commerce based products, the question that arises is - what influence will the new UCP be able to exert in reviving the growth of Letters of Credit as a preferred payment mechanism and growing its share in the overall trade pie? The launch of the eUCP in 2002, as a supplement to the UCP500 was specifically aimed at catering to the growth of electronic commerce in international trade and the ICC deserves much of the credit for its proactive approach on this front. Over the years though, contrary to expectations the eUCP has been a non û starter of sorts, with only a small fraction of credits being issued subject to the eUCP. The stumbling blocks in the road towards seeing a surge in electronic Letters of Credit have more to do with, among others, resolution of legal issues relating to evidencing than any inaction on part of the ICC. As and when these issues do get addressed and resolved, the UCP600 with its simplified approach will pave the road for achieving this dream.
Debates on the relevance of UCP and Letters of Credit in a changing world order have arisen frequently in the past and will continue to happen in future as well. Raising these issues on this occasion will only be perceived as an attempt on part of the skeptics to steal the thunder from the UCP600. For the moment, it is only appropriate that we hail the UCP600 and for those who wish to mourn the phasing out of UCP500, a piece of advice - hold your horses. UCP500 sure has checked out, but is not leaving us for a while.
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