Every year, trade transactions exceeding US$2 trillion are conducted under UCP600, totaling some 11% of all import/export transactions.1 The primary goal of the UCP600 is to ease cross-border trade by providing global uniform rules regulating the issuance and usage of letters of credit (“LCs”).
To date, the UCP (“Uniform Customs and Practice for Documentary Credits”) rules are adopted in 175 countries. UCP rules are issued by the International Chamber of Commerce’s (ICC) commission on Banking Technique and Practice. It is important to note that the ICC is a private international organization of industry experts, not a governmental body. The UCP600 is arguably the most widely accepted set of private rules for international trade ever developed.
How is UCP600 different from previous UCP publications?
Since the UCP was first established in 1933, it underwent several revisions, each reflecting the evolution of trade finance practices across banking, insurance, and transport industries. The objective was to create a set of internationally uniform rules to remove confusion caused by individual countries promoting disparate laws and practices governing the use of letters of credit. By guiding banks and other players engaged in global trade, the UCP enables greater trust between multinational actors and drastically increases the reliability, frequency and efficiency of international trade transactions. As of today, the UCP600 is the latest published revision issued on July 1, 2007 and includes 39 Articles.
In contrast to previous UCP publications, UCP600 not only lays out guidelines, but also includes definitions (Article 2) and interpretations (Article 3) on how to apply certain provisions of the code. By providing clear, defined terms and information specifying the role of banks in letters of credit, UCP600 removes ambiguity and provides a more concise and precise set of regulations to govern LCs. As a result, compared to transactions governed by previous versions of the UCP, transactions conducted under UCP600 are more streamlined, less risky and require fewer amendments.
Aiming to adapt the evolving practice of submitting electronic documents under letters of credit, UCP600 introduced the eUCP which has 12 articles. The goal of the eUCP is to ‘accommodate presentation of electronic records alone or in combination with paper documents’.2 However, for a letter of credit to be subject to eUCP, it must explicitly indicate so in the instrument. Letters of credit subject to eUCP are also subject to UCP600 even if this is not explicitly stated in the letter of credit. If there is a conflict, eUCP will prevail in situations where it will produce a different result from UCP.
How is UCP600 beneficial for trade transactions?
1. UCP600 levels the playing field by creating one set of operating rules for all international parties. This makes trade more inclusive because it allows SMEs to participate in international markets and integrate global supply chains. SMEs can now rely on banks and counterparties to follow the UCP600 rather than relying on their network, market position, banking relationships and ability to exercise legal muscle, to hold sway over their trade partners when disputes arise.
2. UCP600 resolves disagreements without court intervention, providing more fair, cost-effective, and efficient global trade transactions. Banks and other LC issuing institutions can perform better as neutral third parties to decide issues that are resolved by the language of UCP600 rather than deferring and referring issues for resolution to courts for fear of incurring liability.
3. UCP600 clearly identifies the roles of parties involved and their responsibilities, reducing risk and increasing transparency and therefore speed for exporters and importers who otherwise would have no recourse beyond suing their trade partners and corresponding banks in courts of foreign jurisdiction.
4. A notable feature of UCP600 is the irrevocable nature of the letter of credit. An irrevocable letter of credit cannot be revoked by the issuing bank or at the request of the letter of credit applicant. It assures the parties involved that the guarantee offered by an LC cannot be rescinded once issued unless all parties mutually agree to cancel it. An LC is irrevocable by default, even if not explicitly stated.
For a letter of credit to adhere to UCP600, it must specify so (unless it states that it is subject to the eUCP in which case, both apply). This ensures that all parties involved understand how their performance under the instrument will be governed. If a transaction requires, certain parts of the UCP600 can be omitted but such exceptions must be specifically and unambiguously written into the LC.
If you would like to find out more about LCs, the UCP600 and how it could benefit your trade transactions, reach out to email@example.com. A comprehensive understanding of UCP600 will help both small and large businesses mitigate risks and conquer new international markets.
To make sure your LCs are issued under UCP600, reach out to us. We issue LCs, SBLCs, BGs, RWAs, and Proof of Funds. Contact us to understand which instrument is best suited for your business needs.
1. Collyer, Gary. Guide to Documentary Credits. The London Institute of Banking & Finance, 2017
2. International Chamber of Commerce. Supplement to the Uniform Customs and Practices for Documentary Credits for Electronic Presentations (eUCP), 2007
International Chamber of Commerce. Uniform Customs and Practices for Documentary Credits, Publication 600 (UCP600), 2007
Jon Slangerup, executive director of the Port of Long Beach, said the drivers’ pickets are informational in nature and are not affecting cargo-handling.
“Let’s be clear, this is not a strike. We do not expect there will be any adverse impact to port terminals,” he said. Longshoremen are moving cargo, and trucks continue to move freely into and out of the terminals, Slangerup said
In 2014, the former chairman of the Federal Reserve, Ben Bernake – the man who was once responsible for setting the United States’ interest rate policy – was summarily rejected by his bank when he tried to refinance his mortgage. The reason: he just changed jobs, which, according to an anachronistic credit metrics, indicated an intolerably heightened credit risk.
The credit analysis did not weigh his future earning potential – he was gainfully employed by a think tank and had just signed a one million dollar book deal. In fact, even the most cursory web search would have revealed that refinancing Ben Bernake’s Washington, DC house is one of the safest bets a local bank could make.
Speculation and Talks in the Trade Market Remain High in Regards to TPA, GSP, and AGOA
With little movement on trade from Congress, several lobbyists are commenting on the likelihood of The Senate Finance Committee marking up a Generalized System of Preferences (GSP) renewal bill and Customs Reauthorization right alongside Trade Promotion Authority (TPA) sometime in April.
Trade Promotion Authority (TPA)
During the American Apparel and Footwear Association¹s summit last week, Senator Orrin Hatch discussed the nation¹s trade agenda with an emphasis on renewing TPA. As Hatch stated ³Without TPA, our trading partners will not put their best offers on the table because they will have no guarantees that the agreement they sign will be the same one Congress considers.² In addition he stated that ³The Obama Administration is currently negotiating some of the most ambitious trade agreements in our nation¹s history. The first is the Trans-Pacific Partnership, or TPP, an Asia-Pacific trade agreement being negotiated between the United States and eleven other countries. And, on the other side of the world, the U.S. is negotiating an agreement with the twenty-eight countries of the European Union.²
Generalized System of Preferences (GSP)
In addition, another trade priority for the Finance Committee agenda is renewing the Generalized System of Preferences (GSP) program which allows certain products from specified developing nations duty-free tariff treatment. Senator Hatch commented that ³Although the GSP program was initially created to assist with economic growth in the developing world, it now assists hundreds of our businesses here in the United States. Across our country, manufacturers and importers benefit by receiving inputs and raw materials at a lower cost. But, unfortunately, these U.S. businesses have faced high tariffs on these imports since the program expired in 2013. Without the GSP program in place, American companies paid over $600 million in tariffs in 2014.² As the non-renewal of GSP extends over time, it will be harder than ever to fully recover any potential financial damages companies faced waiting for a change to take place.
African Growth and Opportunity Act (AGOA)
The African Growth and Opportunity Act (AGOA), which allows sub-Saharan African countries duty-free access into the U.S. market with set regulations, is set to expire at the end of September. Trade with these beneficiary countries has tripled since the agreement enacted in 2000 and the U.S. direct investment in Africa has increased as a result. ³Of course, right now, only a small number of Sub-Saharan African countries are reaping the benefits of AGOA and American exporters continue to face challenges in Sub-Saharan Africa¹s growing markets. We need to do more to ensure the program reaches its full potential. I¹m working with my colleagues on the Finance Committee to craft a reauthorization bill that will improve upon AGOA¹s success, to remove obstacles to trade in Sub-Saharan Africa, and allow both that region and our job creators here at home to benefit from expanded market access,² Sen. Hatch said.
Malaysia Goods and Service Tax (GST)
Effective April 1, 2015, the Malaysian government will be implementing the Goods and Service Tax (GST), a multi-stage consumption tax on goods and services. All goods and services, including imports*, made in Malaysia will be effected by this new tax. To find out more information about how this might affect your business, visit the Official Website for Malaysia Goods and Services Tax.
*Imports excluded from this are specific goods and services categorized under zero rated supply and exempt supply orders as determined by the Minister of Finance and published in the Gazette