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SPONSORED STATEMENT

The Uniform Rules for Forfaiting (URF) mark a breakthrough in the field of funding trade. Silja Calac, Head of Global Trade Risk Management at UniCredit explains how the rules will ease international trade, and reduce – and even prevent – litigation.

WWW.GTREVIEW.COM JULY/AUGUST 2013 | 33

SPONSORED STATEMENT

Issued by the ICC, the URF set out guidelines under which payment claims arising out of trade transactions can be sold on to a third party.

Devising these rules was no easy task, considering how

different jurisdictions across the globe deal with the assignment of claims, how customs and practices vary, and the multitude of underlining transactions and payment instruments that can be financed through this technique.

To ensure the continued development of the rules, a task force was set up, composed of representatives from the ICC and IFA with a spread of expertise – marketing, operational and legal – and geographical location. The task force, which I chair, is an ideal vehicle for continuing the co-operation between the ICC and IFA.

With the development of URF and the creation of the task force, 2013 is set to be the most important year for forfaiting, and we are likely to see a revival of this simple yet broad trade finance instrument.

Forfaiting is much more than just the without-recourse discounting of promissory notes or bills of exchange: trade-related payment claims can also take the form of deferred payment letters of credit. They are the underlying instrument when financing a customer’s working capital needs through supply chain finance – even when setting up bilateral trade finance facilities between banks. All financial institutions are involved in this technique even if they often call it by different names. Forfaiting is a versatile, straightforward and long-established technique to bring liquidity to trade. Therefore, what the UCP (Uniform Customs & Practice for Documentary Credits, ICC publication 600) has achieved for the management of risk in international trade, the URF (ICC publication 800) will hopefully bring to the funded side of trade – not only international trade, but also even domestic receivables financing.

As World Trade Organisation statistics demonstrate, the open account space has taken up an increasingly important role

in today’s fast-moving world. Companies need solutions to finance and mitigate their trade activities that do not involve using their balance sheet.

Additionally, in the trade finance secondary market these rules are crucial. Setting up clear rules increases the liquidity of a market and attracts new investors. Investors like certainty; they want to know what the pitfalls are when acquiring assets. The URF clearly demonstrate the liabilities of

the different parties involved in a forfaiting transaction – starting from the primary acquisition up to trading in the secondary market.

There is general agreement that the first responsibility, and the most important issue, that the task force will have to deal with is raising awareness and educating market players about the URF and, more generally, about forfaiting itself.

There can be little doubt about the benefits of forfaiting as a tool of trade finance enabling users to craft solutions to customers’ needs, which are often dictated by the limitations of doing business in emerging markets.

So, for example, and whether because of legal or historical reasons, the instruments that an importer-obligor

can create or enter into in a particular country may be restricted to local law promissory notes. The expertise required to make such notes bankable is the particular domain of the forfaiter and the URF can be of immense assistance in bridging the gap between obligors, exporters and the market.

Some financial institutions are unaware of the URF and therefore ignore the impacts and benefits to their business. While many banks are already employing forfaiting techniques without even being aware that they are doing so – they may call it letter of credit (LC) discounting, receivables financing or use any one of the various labels that float around the market – it is critical to get those market players to realise that all these without recourse financing products are part of forfaiting, so as to establish a truly global international market for these products.

The URF will be highly beneficial for exporters intending to sell down their claims related to their trade finance transactions. Referring to clear rules in the documentation will save corporates high legal costs, improve certainty and enhance business because each party will know exactly what to expect.

The URF operates, at one level, by sitting on top of the underlying transactions (LCs, negotiable instruments, obligations to pay, etc) being created or traded and provides the contractual framework that is often lacking in transforming these instruments into viable bankable investments. The BPO draft, for example, has recognised that this gap needs to be bridged by the market and that appropriate solutions need to be put in place.

Not only for the primary, but also for the secondary market, there is real profit in using the rules. Clear rules create transparency and give access to new investors.

To ascertain a wide spread international use of the rules, the translation into all major languages in which business is conducted will be essential. The task force will assist all the ICC regional committees which have started to work on translations.

“SETTING UP CLEAR RULES INCREASES THE LIQUIDITY OF A MARKET AND ATTRACTS NEW INVESTORS.” Silja Calac, UniCredit