Breaking Ground on UCP600

Somewhere between 11-15% of international trade uses letters of credit (LCs),
representing trillions of dollars each year. As such, there has been a need for
consistency in the rules and regulations that govern this form of documentary
credit. The latest in a long line of these standards is Uniform Customs and
Practice No. 600 (UCP600), which went into effect last July. After more than
three years of crafting and compiling feedback, it was the first revision to the
rules governing documentary credits since 1993, which began 60 years prior.
UCP600 is part of the International Chamber of Commerce’s (ICC) ongoing agenda
to help manage regulations governing the use of commercial LCs and to eradicate
some of the redundancies in older statutes as commerce changes.

In the NACM teleconference, "Everything You Wanted to Know About UCP 600, but
Were Afraid to Ask," JPMorgan Chase’s Madeline Sprague, CTP, vice president,
Global Trade and Logistics, walked members through the basics of the latest
regulation.

"Electronic changes in commerce were the driving force behind the revision,"
commented Sprague. "The old UCP500 was very cumbersome and said the same thing
over and over again. UCP600 now provides for a variety of defaults and
conditions. By far and away, UCP600 is going to be the driving regulation and
it’s very easy to make an LC customized to your transaction. The previous
versions were very nit-picky and it drove beneficiaries insane."

Sprague said that it was imperative that members realize that a letter of
credit is fundamentally a specialized payment, and that UCP600 defines a large
portion of that payment as contract law. As such, LCs are not always intuitive
and are basically a conditional payment contract. The credit agreement is also
separate from any other commercial contract with payments made against the LC
only, but must be in sync with other commercial contract terms.

"The devil is in the details in letters of credit, as with any contract,"
said Sprague.

UCP600 is now the primary international regulation governing commercial LCs
although, in the United States, Uniform Commercial Code (UCC) Article 5 also
shares rule over the documents. The international regulation provides which
parties are committed to payment, what the obligations of banks are, which party
has the final say, as well as defines what types of payment commitments there
are and when they go into effect. Unlike UCP500, the new rule provides defaults
and standards for the styling of documents and what those documents must
contain. But it’s not something credit managers are going to conquer
overnight.

"It’s really a version of contract law and you’re not going to learn it
quickly," explained Sprague. "You’re going to need someone to coach you through
it."

She suggested that a good starting point is the ICC website, which provides a
wealth of information on the revision. The NACM Bookstore also carries The Comparison of UCP600 &
UCP500
, published in 2007.

Matthew Carr, NACM staff writer

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