Ank Management and Financial Services, 9th Edition:
Traditional Trade Finance Definitions
Product Definitions for Trade Finance
BAFT-IFSA Global Trade Industry Council
February 2012
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
Product Definitions for Trade Finance
BAFT-IFSA Global Trade Industry Council
February 2012
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