Coastline newsletter / 2007 edition

ISSUE 6 Feb2007

The clock is ticking ......... towards July 1.

By Gary Collyer

Incredibly, it is already over 3 months since the ICC Banking Commission voted for the adoption of the final draft of the UCP 600. In another 5 months, the first UCP 600 transactions will have been issued, advised, confirmed and, maybe, even amended or drawn under. But have you planned for the implementation as an organisation and have you considered all the implications?

Three months of intensive ICC seminars held around the world including China, Hong Kong, Thailand, Pakistan, UAE, UK, France (2 ICC HQ events) and Netherlands have demonstrated various approaches that have been, or are being, taken by banks.

For some, the decisions that need to be made as to how to structure their letter of credit operation for July 1 and beyond have been taken out of their control by the relatively small number of staff in that area i.e., the same staff must adapt to handling transactions subject to both UCP 500 and UCP 600.

Others, with larger operations, have the luxury of being able to 'split' their operation into two streams - one that will facilitate amendments and drawings for UCP 500 transactions and one that will commence with the new issuance, advising and confirmation of UCP 600 items and develop into a full offering in the weeks and months that follow July 1st.

In respect of the latter, a number of banks, especially those that operate from a number of processing offices around the world, have actually put in place a project manager to ensure that all aspects of the implementation are covered and managed from a single, consistent, source. For this type of bank, this approach certainly makes sense in order to avoid duplication of effort and the risk of issues not being covered.

Whichever choice is made, there are some pertinent issues that need to be addressed, including:

  • updating of legal agreements between the bank and its client for the issuance of the letter of credit (i.e. counter indemnity or reimbursement agreement);
  • any necessary revision of letter of credit application forms (including those offered within an electronic delivery system);
  • revision of the wording for letter of credit advices to reflect the change to, and application of, UCP 600;
  • updating of general agreements covering financing under trade instruments, which would include financing arrangements under letters of credit (e.g., establishing the basis for any financing and the conditions under which recourse may or may not apply);
  • updating of any letter of credit literature that is made available to clients;
  • ordering of UCP 600 publications including peripherals such as the commentary to UCP 600 and the updated ISBP for staff and clients (the latter publications expected to be available May/June 2007);
  • organising specific client events in order to explain the changes between UCP 500 and 600; and, probably most important,
  • when and how to train the staff within the letter of credit processing unit.

The last bullet point is one that should neither be overlooked nor underestimated. Timing of the training is critical, will vary between organisations as to the degree of urgency and needs to be assessed on a "who", "when" and "how" philosophy.

To explain this in more detail it is best to use an example.

Bank A has a letter of credit processing team of 100 people. For their processing they are currently split by import and export transactions. Within these two streams there are teams that cover the issuance/amendments and settlement under import LCs and advising/confirmation/amendments and settlement under export LCs. The dilemma for Bank A is when do I train the staff? Bank A has the budget for training, but cannot afford to send everyone to an external seminar.

Clearly, with the structure that is in place, it would not be appropriate to fully train all 100 of its staff in anticipation of July 1. Based on the structure, it can be seen that an ideal proposition for timing of the training would be:

Pre July 1st

Import team - all those involved with the issuance and amendment process plus maybe one or two of the document checkers.

Export team - all those involved with the advising, confirmation, amendment process plus one or two of the document checkers.

Post July 1st

The remaining document checkers within the import and export team would be trained and transitioned into the UCP 600 stream of work, from July 1 onwards, as the UCP 500 items decline. Given that the average letter of credit has an expiry of between 3-6 months, the expectation would be that the vast majority of the UCP 500 transactions would be utilised or expire partially or fully unutilised by the end of 2007.

[Note: It should be remembered that all letters of credit issued pre-July 1st will be subject to UCP 500 and will remain so unless amended and such amendment is consented to by all parties according to UCP 600 sub-article 10 (a). The general advice is to leave a UCP 500 letter of credit as being subject to those rules until it is utilised or expires]

For those individuals identified in the "pre July 1st" group, the question is now one of timing, where and how? Seminars are an effective way of gaining an insight into the background information that led to the changes, but Bank A should be sure that the speaker is qualified to give the answers that will be sought (refer to the comments made in the December newsletter). But, as stated above, it is not possible to send everyone to a seminar. Therefore, is it the in-house trainer that attends, learns the fundamentals and then trains the staff or, does the bank bring in an external resource to assist. This decision can only be made by Bank A.

On-line training, such as that provided by Coastline Solutions - in the "UpSkill 600" module - gives an ideal solution for Bank A enabling their staff to train at their own pace and time to suit their schedule. The module encompasses a complete review of all 39 articles of UCP 600, analysis of key issues within the revision and an end of module assessment to measure the level of competency of the individual. Completing the module provides the individual with 8 PDU's towards CDCS re-certification.

This covers the actual processing team but Bank A has more than just these staff involved in letter of credit operations - Relationship Managers, Trade Sales Managers, internal Legal Advisers and Customer Service staff all of whom need to have some idea of the issues under UCP 600 so that they may effectively communicate with clients. Ideally, some or all of these should have gone through a programme or seminar by now but certainly by the end of February when clients will want to start knowing what they should look out for, what they should change and, more importantly, what do the changes in the rules mean to them. These staff will certainly need a broad overview of the rules as opposed to a full review.

With regard to the legal agreements and other documentation, Bank A needs to consider:

  • what actually needs to change? This may involve discussions/input from external legal firms that the bank utilises;
  • what deadline should be imposed for the completion so that the agreements and documents may be sent to customers for review and signing well in advance of July 1st; and
  • how to manage the transition over the weekend of June 29 - July 1st (dependent upon where you are in the world).

[To facilitate a smooth handover and 'business as usual' with regard to transactions subject to UCP 500, some banks have stated that they are contemplating invoking a 'cut-off' date or time. For example, close of June 28 for transactions to be issued subject to UCP 500. This cut-off time, allowing sufficient time to process all outstanding items and to commence with UCP 600 items with effect from July 1st.]

However you choose to act, the decisions need to be made soon and communicated within the bank. Finally, the plan needs to be well written and monitored for the deliverables.

 

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