In May 2003, a task force commissioned by the International Chamber of Commerce (ICC) began work on revising rules governing letters of credit, with a target date of July 1, 2007. The new regulations are expected to eliminate barriers that have increasingly hampered international trade.

As commerce among nations grew in the early 20th Century, conflicting laws governing letters of credit among countries became major barriers to expansion. The ICC in 1933 created the first Uniform Customs and Practice for Documentary Credits (UCP) rules that brought uniformity to letters of credit.

The UCP established the conditions under which the majority of banks operate in documentary commercial credit transactions in more than 160 countries. Subsequent revisions led to UCP 500, completed in 1993.

The Commission on Banking Technique and Practice, authorized by the ICC, consisted of 10 world-renowned professionals, along with a consulting group of 41 global authorities drawn from banking, transport, insurance, and legal sectors in 28 countries. The revision process produced 15 draft proposals. ICC members formally approved UCP 600 in October 2006.

When work on the latest revision began, surveys showed that about 70 percent of documents under letters of credit were rejected on first application because of discrepancies. The task force, therefore, reviewed language and style in UCP 500, with a view toward removing language that could lead to inconsistent application and interpretation.

Issues Tackled

There has been a decline in letters of credit over the past several years. One obvious reason: letters of credit have become more complex and expensive because of added charges, commissions and fees.

Among added costs were bank discrepancy fees. Additionally, there are alternative trade financing arrangements such as factoring, forfaiting and invoice discounting. Forfaiting involves the purchase of an exporter’s trade receivables at a discount by a third party, which subsequently collects payment from the importer.

A court case in England created further hurdles by increasing risks assumed by banks in letter of credit transactions. The ruling led to banks taking steps to protect against fraud, which adversely affected cash flows of some large exporters.

The New UCP

The task force replaced terms that had become ambiguous or otherwise difficult to interpret in UCP 500 with simple and concise language in UCP 600. This step is expected to reduce costly court cases involving ambiguous terms.

The number of articles was reduced from 39 to 29. A new article on “Definition of Terms” and “Interpretations” was added for clarity. Transport document shipment dates and their impact on presentation time were clarified. Easier-to-understand transportation articles were created.

Since all credits issued on or after July 1, 2007 will be governed by the new UCP 600, it is essential that importers, exporters, transport professionals and bankers understand and implement the new provisions.

This article appeared in April 2007. (CM)
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella is a world-recognized author and speaker on global business, emerging risks, and the latest economic trends. He's also founder of both the ManzellaReport.com and Manzella Trade Communications, Inc. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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