Coastline newsletter / 2010 edition

ISSUE 34 Sep2010

URDG 758: An interview with Dr. Georges Affaki

By Gary Collyer

New rules and new training

With the recent introduction of the new Uniform Rules for Demand Guarantees, URDG 758, and our development of online training on their application, I took the opportunity to interview Dr. Georges Affaki in relation to the use and adoption of the new rules.

Dr Georges Affaki is Vice-Chair of the ICC Banking Commission, Chair of the URDG 758 Drafting Group and Head of Structured Finance Legal Affairs at BNP Paribas

 

 

 

The following is some of the key points of our discussion...

Gary Collyer: It is just over 3 months since the URDG 758 came into effect. Can you comment on what have been the early reactions or issues, and is there any indication as to who may have had the honour of issuing the first URDG 758 guarantee?

Georges Affaki: Actually, we did not even wait for 1st July 2010 to measure the acceptance of the new URDG 758 in the market. All the members of the ICC Task Force on Guarantees moved immediately after adoption into a coordinated promotional approach that spanned a great number of countries and all the sectors of trade and industry. The National Committees of the ICC have been excellent promoters of the new rules as well, raising awareness amongst their constituencies through seminars of the advent of the rules and how their members can take advantage of them in their demand guarantee practice. I have counted over 50 seminars. I am also informed of countless in-house workshops on URDG 758.

The Central Bank of Iran has issued a circular letter recommending the URDG 758 to its national banks. The Organisation for the Harmonisation of Business Law in Africa has revised its Uniform Secured Transaction Act bringing in a number of the principles that we laid out in the new URDG. Their Act is in effect in 17 countries in Africa. We have reached out to the World Bank and to the International Federation of Consulting Engineers which had adopted the URDG 458 into their model guarantee form. Both are looking into bringing into their model forms the new rules. Feedback is very positive. I am proud of the new guarantee rules that we have offered to the world.

By sunrise of 1st July 2010, Spanish bank La Caixa had issued its first URDG 758 demand guarantee ... only to learn that Austrian bank RZB had actually issued a URDG 758 guarantee several days before with a deferred entry into force to 1st July 2010. Giant trade finance banks Deutsche Bank and BNP Paribas have moved all their new URDG guarantees into the 758 universe. And it's only the beginning.

Gary Collyer: As you are aware, article 10 of URDG 458 referred to the guarantor having a reasonable time within which to examine a demand under a guarantee and to decide whether to pay or refuse it. In answer to a specific request for an opinion, the conclusion to a question on reasonable time in ICC Opinion R621 includes "Article 10's reasonable time would in most cases be significantly less than UCP's maximum seven banking days" [the conclusion written during the lifetime of UCP 500]. Similarly, in opinion R. 624 it is stated that reasonable time for the processing of a demand would be within three banking days of receipt. Given the positions under URDG 458, can you offer some insight into the URDG 758 referring to five business days.

Georges Affaki: Yes. One of the main objectives of the revision was to take away imprecise, case-based standards such as "reasonable time". That was overwhelmingly supported by all the participants to the revision.

We polled a number of major bank guarantee departments to identify the typical duration for the examination of a demand. On average, three business days was a maximum, with a number of ISO-certified banks having committed to one business day. Accordingly, a first draft of the revised rules proposed three business days for the examination. Over the next two subsequent drafts, a strong majority supported lining up the examination period under URDG with that under UCP 600 which, as you know, is five banking days.

The argument in favour of that alignment is that many regional banks and small and medium size companies deal with demand guarantees and letters of credit on the same operation platform by the same staff. There was clearly a merit in unifying the standard for the two instruments. Remember also that with the new URDG 758 comes an obligation to indicate in the rejection notice all the discrepancies before the expiry of the period set in the rules. Failure to do that leads to preclusion. Hence one more resemblance with the UCP and an additional argument to have the same examination period: five business days.

Of course, guarantors incur no liability if they were to either make payment or reject a non-complying demand before the end of the five business day period. It is a safe harbour if you want.

Obviously, new URDG 758 article 20(a) supersedes Opinion R624 which should be considered as lapsed.

Gary Collyer: The URDG 758 publication includes model forms for a guarantee and counter-guarantee that were developed by the Drafting Group. SWIFT are now looking to produce a formatted MT760 possibly for use from Q2 2011. Is the intention that the messages will follow the concept of the model forms and will the Drafting Group be part of the team that will develop these formats?

Georges Affaki: The URDG 758 contain a transition rule in article 1(d): any reference to URDG in a guarantee issued after 1 July 2010 is deemed to be a reference to URDG 758 unless it expressly indicates URDG 458. So a party referring to URDG in field 40C of SWIFT message 760 actually refers to URDG 758.

Nonetheless, we have asked SWIFT to consider adding 758 to the URDG box in field 40c essentially for educational and awareness purpose. I would like to add that a number of users have asked that the very user-friendly model guarantee form proposed in page 34 of the English copy URDG publication 758 be used as the basis of a brand new SWIFT message type, perhaps an MT758. It is too early to say if this will go through and when, but we will make sure that users still have the choice to use any other message type they may want.

Gary Collyer: And finally, the million dollar question! Having seen the rules approved, published and, now in use, is there something that you wish you had covered in the rules but did not? Or, change something that is in the rules where the concept could have been expanded or developed differently?

Georges Affaki: In hindsight, there are always sentences that could have been better formulated for the purpose of clarity. For example, we could have indicated that the rule in article 3(a) also covers the case where two branches of the same entity act as guarantor and advising party for the same guarantee. Nothing in the rules outlaws it, but a specific reference would -- according to feedback I got in a number of seminars -- have reassured some doubting users. I have already taken note for the next revision in 2028!


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