Corporate TreasuryFinancial Supply ChainBank RelationshipsThe New UCP 600: Rules to Better Facilitate International Trade

The New UCP 600: Rules to Better Facilitate International Trade

As trade between nations rapidly increased in the early part of the 20th century, conflicting laws governing letters of credit among countries acted as a major barrier to trade expansion. Then, in 1933, members of the International Chamber of Commerce (ICC) created the first Uniform Customs and Practice for Documentary Credits (UCP), a set of rules that brought uniformity to letters of credit.

Since its inception, the UCP has become the most successful private set of rules for trade ever developed. Now firmly established, the UCP remains an essential component in international trade. It establishes the conditions under which the majority of banks operate in documentary commercial credit transactions in more than 160 countries.

To keep them current with trade and banking changes over the years, there have been five revisions of UCP conventions. The last, UCP 500, was completed in 1993. In May 2003, the International Chamber of Commerce authorized the ICC Commission on Banking Technique and Practice to begin a revision of UCP 500. The new UCP 600 became effective on 1 July 2007. As with previous revisions, the general objective of the UCP 600 is to address important and relevant developments in the banking, transport and insurance industries.

Additionally, the language and style in UCP 500 were reviewed in order to remove wording that could lead to inconsistent application and interpretation. When work on the revision began, global surveys indicated that, because of discrepancies, approximately 70% of documents under letters of credit were being rejected on first presentation.

Negative Effects on Letter of Credit Usage

According to Gary Collyer, technical advisor to the ICC Commission on banking technique and practice, “This obviously had, and continues to have, a negative effect on the letter of credit being seen as a means of payment; and if unchecked, it could have serious implications for maintaining or increasing its market share as a recognised means of settlement in international trade.”

Resolving contentious issues and keeping up with market developments were central goals of updating UCP 500. According to Pradeep Taneja, a member of the ICC Banking Commission and UCP 600 Consulting Group, there has been a decline in letters of credit over the past couple of years. One obvious reason: Letters of credit have become more complex and expensive thanks to added charges, commissions and fees.

Progress Towards UCP 600

The process to revise the UCP began in May 2003. It included 15 drafts by a group of 10 world renowned professionals; a consulting group consisting of 41 global experts drawn from the banking, transport, insurance and legal sectors spanning 26 countries; a review of almost 600 Banking Commission opinions; relevant court cases; and more than 5,000 comments from more than 40 ICC national committees around the globe.

UCP 600 was formally approved by ICC members in October 2006. “Language that was difficult to understand in the UCP 500 has been replaced with simple, precise and concise language in UCP 600,” says Richard M. Thomas, a noted training expert on letters of credit. This is anticipated to reduce costly court cases involving ambiguous terms.

The following are among the UCP 600 changes that clarify, simplify and speed the payment process:

  • Reduces the number of articles from 39 to 29.
  • Eliminates repetitive, redundant and ambiguous language.
  • For clarity, adds a new article on ‘Definition of Terms’ and ‘Interpretations’.
  • Reduces the document examination period from 7 to 5 days.
  • Eliminates numerous discrepancy issues.
  • Adds a new provision on applicant/beneficiary addresses.
  • Clarifies transport document shipment dates and their impact on presentation time.
  • Creates easier-to-understand transportation articles.

Weighing the Costs and Benefits

For some, the implementation of UCP 600 could be difficult and can create uncertainty. However, according to Taneja, once understood and implemented, the “UCP 600 will restore the respect, credibility and rightful place of letters of credit in international commerce”.

The long-term impact is that the new UCP 600 is likely to increase the use of letters of credit and, in turn, better facilitate international trade growth as new global markets and suppliers emerge.

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