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Having just returned from the 6th Global Conference on Letters of Credit in Vienna (hosted by ICC Austria), I feel almost compelled to share some take-aways.

The 2 day session I attended was as inspiring as it was intense. Topics were changing with a speed of lighting: one second you hear about internal Algerian regulations on the L/C issuance, the second – you are following on an exciting discussion about risk distribution of trade assets. Such variety as general (with some very few exceptions to my personal taste) a very high level of presenters made it both challenging and inspiring to be a part of it. Speakers were extremely cunning in not letting the audience fall asleep by throwing questions into the auditorium and demanding answers.

An Austrian bank hosting the conference really showed the best of Austrian cuisine; famous pastries were offered in what seems a non-ending flow at each break… Very few could show courage and resist the temptation (you pay back for your weakness at home once the weights start shaking under you….) I think that we should pass a proposal to ICC to host the next conference in some developing country and serve us one banana wrapped in a palm-tree leaf per day, while making us do some community work at breaks. Sorry for digression...

An integral and extremely important part of conferences is of course socializing. I easily found out that being a Russian-born working for a Swedish bank in Norway is just a normal thing in these cosmopolite-sans-frontier days. My acquaintances at the conference included an American working for an Italian bank in Austria, a Turkish citizen working in London for the Austrian bank to name a few. So the more colorful the better - our business of financing international trade only welcomes different backgrounds. Being a Norwegian representative also yielded an unexpected but positive result: a lovely lady from Portugal having studied my badge for quiet some time said: “Norway…mmm.. cod! We love bacalao!" I felt nice to represent a country bringing the world more than much needed but boring oil. Providing our Portuguese friends with not less needed fish to make their favorite dish is a good thing.

On more LC-related issues later… need to burn all sacher cakes by plunging into hard work.

The ICC Banking Commission held its spring meeting 27-28 March 2012 at La Cigale Hotel in Doha, Qatar.

The meeting was subtitled “Reframing the future of trade finance” and was attended by close to 300 people from some 50 countries.

The first day of the meeting focused on discussions on trade and trade finance market/regulatory constraints, including demand, risks, pricing, availability of trade finance, currency exposure and US liquidity issues.

Especially financial regulations and the impact of Basel III on industry were of critical concern to the participants.

We know that Basel III is largely a response to the financial crisis. However, global trade was hardly the reason for the financial crisis 2008. The ICC report “Global Risks – Trade Finance 2011” (October 2011) shows that trade finance is a relatively low-risk asset class. The banking experts recommended that regulation of trade finance should be based on facts and an objective assessment of the trade finance’s low risk, self-liquidating character. The rules set by regulators impose too strict capital requirements to trade finance and some of the unintended consequences mentioned were: Banks to move away from trade finance; Increase in cost of capital/pricing; SME’s in developing countries mostly impacted; Trade assets to gravitate toward non-regulated sectors. For instance, banks may decide to securitize their trade assets – pushing them into higher-risk, unregulated markets – contrary to the purpose of Basel III.

The concern amongst participants was that the implementation of Basel III might choke trade and have adverse impacts on growth.

The second meeting day mainly focused on updates on key ICC projects and the rule-making parts of the Banking Commission.

Five drafted opinions were discussed at the meeting, one of them being a query regarding sanction-related matters and withdrawn at the fall Beijing meeting for further review. Unfortunately, this query once again was held over for further revision. The other four queries addressed alleged discrepancies relating to: copies; goods descriptions; corrections; payment obligation of issuer and impact of amendment; and the consequence of differing on board date and shipping date.

In addition to these interpretational issues resulting in official ICC opinions we also heard about the ongoing BPO (Bank Payment Obligation) project and the drafting of the new ICC URBPO (Uniform Rules for Bank Payment Obligation). Draft 3 of the Uniform Rules for Forfaiting was discussed and the members of the ISBP drafting group presented the main characteristics of the third ISBP draft (International Standard Banking Practice for the Examination of Documents under Documentary Credits) and the key milestones to be accomplished until release of the revised standards.

Some important issues for discussion and matters to be resolved regarding the ISBP revision are: language issues; original documents; mathematical calculations; endorsements of drafts; how to deal with “all risk” coverage; and should the ISBP be the tool to add credibility or interpretation to terminology that should not be used without further clarification of its intent, i.e. shipping company, documents acceptable as presented, stale documents acceptable etc.

The ISBP Drafting Group hope to conclude most of their work by the end of 2012, but this is dependent on an agreement to keep to a revision of the existing ISBP text only. As ICC Banking Commission Senior Technical Advisor Gary Collier commented: “it must be remembered that by 2013 UCP 600 will have been in existence for 6 years. The new ISBP publication needs to be available sooner rather than later”.

The next Banking Commission meeting was announced to be held in Mexico City in November 2012 – hope to see you there.

Many sellers using letters of credit (L/C) as a payment instrument have often faced that presented documents are not L/C compliant. It has been estimated that almost 70% of all L/C documents globally presented are not compliant at their first presentation. As a result issuing banks are not obliged to pay and ultimately it is ony the buyer, that is the applicant, who can accept documents with discrepancies and as such enabling the issuing bank to pay.

Discrepancies, more or less spurious, threaten to undermine the value of the L/C as a secure payment instrument. It takes a high level of expertise to deal with all the parties involved in a L/C scenario - buyers, banks and carriers - who may have differing priorities, requirements and stipulations. Furthermore, each party may have preferences or suggestions on how L/C documents should be prepared, which can leave the seller even more confused.

Some sellers may decide not to accept L/C because they do not have the expertise, the time or the employees necessary to deal with the process. However, this translates into lost business opportunities, which most firms cannot ignore without possible economic consequences. Other sellers, unwilling to let a business opportunity slip by, agree to use L/C, accepting the time consuming task of compliance and negotiation as part of the deal.

Until now, sellers have been faced with these two alternatives: passing up business or attempting to coordinate the document preparation with the various parties, accepting the fact that they are getting further behind in receivables as cash flow turns into a trickle.

Outsourcing, if made available by the banking industry, provides a way out of the document dilemma for sellers. It allows professionals with particular expertise to prepare the documents exactly as per L/C requirements. The use of a third-party, professional documentation preparation service can help to reduce multiple bank fees, expedite documentation processing and accelerate cash flow. The benefits of outsourcing document preparation include:

• Better working capital management and prudent risk management due to higher accuracy and cost savings. Accelerated days sales outstanding, reduced from several weeks, possibly even months, to days, because discrepancies are reduced or removed and time spent on document handling is minimized.
• Offers the sellers to change L/C document processing costs from fixed to variable one, as FTE’s can be released at the seller’s end.
• Pre-checking of L/C to ensure compliance is possible before shipment. Some exporters accept L/C without realizing that some of the conditions may be impossible or not beneficial to comply with.

As a natural conclusion – who else is better in providing the above service than banks handling L/C on daily basis with decades of experience? To give full consideration, I would appreciate if you could share with me your expectations/comments you have on the above topic.

Sven Kööp

The ICC Commission on Banking Technique and Practice held it's fall meeting 22-23 September 2010, at the beautiful Hilton, Lake Buena Vista, Orlando, Florida.

Between the sessions we could immerse ourselves in the pool and enjoy the enchanting, resort-style accomodations. Was the concentrating on the conclusions diverted by the stunningly beautiful environment? The truth is - partly, but as a matter of fact the queries were particularly well scrutinised long before the meeting during many sleepless nights as they were available to us already in April this year. Due to Eyjafjallajökull, the April meeting in Beijing was cancelled, therefore the queries were carried over to September. The real Letter of Credit enthusiasts could even study them during the summer vacation - some did.

This meeting, subtitled "The future of Trade & Finance - challenges of Innovation and the Regulatory Environment" was attended by close to 250 people from some 45 countries.

In addition to the Letter of Credit interpretational issues resulting in official ICC opinions, a full agenda was presented, displaying an appetizing trade finance menu, a.o. breakthrough of supply chain finance, presentations of the task forces' assiduous labour on Anti Money Laundering and Forfeiting.

SWIFT strategies were presented and the ISBP Drafting Group presented its achievement up to date. The use of credit insurances in international trade and how bankers effectively should strategize the post-crisis regulatory environment was another item on the agenda.

The ISO20022 developments for Guarantees and Standbys/LC was presented and BPO as an accepted market practice.

URDG 758 has been successful so far and an online training is already in place, an URDG Master designed to meet the increased educational requirements.

An update of the ongoing ICC-ADB (Asian Development Bank) register on Trade & Finance was provided, the final public report is available on www.iccwbo.org. A press release from ICC on the register was made one week after the actual meeting - with or without palm leaves.

The explosion of noise and colour of the World Cup dominated my visit to South Africa, Namibia and Mozambique, although I was struck by the impact of the tournament across the entire region – not just in the RSA. Everyone I met seemed enlivened and excited by the event, which they saw as something fostering southern African, if not pan-African, confidence and unity.

Yet the three countries share more than just an excitement about a football tournament. All three have similar geographies, and all are travelling along a developmental path with a very similar objective – to use their abundance of natural resources for the encouragement of economic growth. This means that all three have external financing needs, which differ according to their current stage on the developmental path.

South Africa is perhaps the furthest advanced, though it is still a mix of the developed and developing world, with the infrastructure shortfalls keeping it from realizing its full economic potential. The energy sector is critical to the economy (accounting for about 15% of GDP), but the scale of the financial requirement – particularly with respect to electricity generation – is awesome, and one well beyond the financing capacity of the local banks. Local bank sophistication, however, will no doubt be harnessed to create a series of non-recourse project financings for the well-respected utility Eskom, involving international banks and equity investors – or multi-sourced financings with a non-recourse element but with other tranches involving export credit agencies, IFIs and credit insurers.

Export credit agencies and IFIs will also be vital with respect to Namibia’s needs. Namibia is keen to move beyond being purely a mineral economy, to one with more domestic refining or processing capacity for its raw materials, such as diamonds and uranium (admittedly a difficult substance to add value to legally). Such value-adding projects require longer-term financing than those offered by traditional trade finance, which means some credit-bolstering may be required from external agencies.

Traditional trade financings, however, would be very welcome in Mozambique, which is keen to firmly establish itself on the financing ladder by using its raw material exports to secure LC-based or pre-export financings. Despite the growing strength of its trade links – particularly with Brazil, with which it shares a common language and heritage – the country is aware that development will rely on a rapid move up the ladder towards longer-term financings capable of supporting larger-scale processing (rather than raw extraction and exporting) projects.

Of course, the Chinese and Brazilians are also keenly involved in infrastructure and industrial projects in Namibia and Mozambique, which should encourage the involvement of OECD lenders and suppliers. Payments and financial processing counterparties can also take comfort from the fact that both countries have pretty sophisticated banking systems.
Certainly, the region doesn’t want for good banks or good banking practices. South Africa, Namibia and Mozambique are all members of the SADC (Southern African Development Community). This alliance seeks to promote – amongst other things – regional economic integration with the aim to uptier both the workforce and regional exports. What is now needed for this to be possible is technology and finance, which is where the classic structures of international trade financiers can help.

Dominic Broom, Managing Director & Head of Market Development EMEA, BNY Mellon Treasury Services

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.