Product Definitions for Trade Finance
BAFT-IFSA Global Trade Industry Council
Product Definitions for Traditional Trade Finance
Section 1: Introduction
Banks have long provided trade finance services - processing information, managing documents, providing financing, and facilitating payments related to trade transactions through various products. With the advent of technology, new variations of trade finance products (specifically new open account products) have evolved but the fundamentals of traditional trade products have remained constant. Given the renewed interest in trade finance products in general, it is an appropriate time to review trade finance products and provide definitions that can serve as a common reference point for banks, their customers, regulators, service providers, and other stakeholders, in order to provide a base clarity as the trade finance marketplace continues to grow and evolve. Traditional trade products are typically short-term (less than one year in tenor), self-liquidating transactions. The most basic of these are documentary in nature, and in most cases these transactions are contingencies that remain off balance sheet. As there is a commercial transaction underlying the trade financing, they tend to be low risk transactions with an easily identifiable use of funds. Rules for traditional trade products are widely accepted and are documented in publications from the International Chamber of Commerce (ICC) including: Uniform Customs & Practice (UCP 600) International Standby Practices (ISP 98) Uniform Rules for Collections (URC 522) Uniform Rules for Bank-to-Bank Reimbursements (URR 725) Uniform Rules for Demand Guarantees (URDG 758) Additionally, there are forms of Trade Finance that are widely accepted, but not necessarily governed by ICC publications as mentioned above. In some instances, a transaction results in an advance of funds or commitment to pay that becomes a balance sheet item for the bank. These transactions will be described as well, with the understanding that the consistent element of these transactions is an underlying commercial trade transaction between buyer and seller. Based on market feedback, BAFT-IFSA will build upon these definitions and will further international standards and documentation to govern Trade Finance transactions among financial institutions and their counterparties.
Section 2: Trade Finance Definitions - Traditional Documentary Products Traditional Trade Finance products have existed in some form for hundreds of years. Generally speaking, banks have served as intermediaries to facilitate the flow of documents (information) and payments related to the flow of goods in international trade or to provide assurance relating to the performance or financial obligations of a person or company to another. Different products provide importers and exporters with varying levels of risk mitigation and/or financing. 1. Collections Collection refers to the handling by banks of documents, in accordance with instructions received, in order to obtain payment and/or acceptance or deliver documents against payment and/or against acceptance or deliver documents on other terms and conditions (Source URC 522). Specifically, (i) A Collection that is payable at Sight is known as Documents against Payment (D/P). The documents are sent to the presenting/drawee bank and delivered to the drawee against payment. (ii) A Usance Collection is known as Documents against Acceptance (D/A). The documents are sent by the principal/drawer to the presenting bank and delivered to the drawee against the buyer's commitment to pay at a future date. Such commitment is usually evidenced by a bill of exchange, issuance of a promissory note, or an undertaking to pay at a future date, which, when accepted by the drawee/buyer for payment at a future date, is known as a trade acceptance. Unlike a letter of credit there is...