Wednesday, April 15, 2015

SWIFT – Cool IT company or boring cooperative?

SWIFT is a rather cool name, at least it sounds cool. Before you get excited, let me take you back to earth again: SWIFT stands for “Society for Worldwide Interbank Financial Communication”. Now, the name sounds immediately a bit less cool, no?

On top of this definition, the Belgium company is located 15 km south-east of Brussels, in a village called La Hulpe, near the Forêt de Soignes.

So, how can I get you interested in reading this post? Consider the following:

SWIFT is at the heart of the global financial system. Without SWIFT’s 22 million daily messages, there would simply be no financial system!

What does SWIFT?

Founded in 1973, SWIFT is a Belgium co-operative founded and held by its 10,800 members of the financial services industry. SWIFT ensures that banks can talk to each-other, in total confidentiality and integrity. Most well known are payment messages, which ensure that you can pay someone else by debiting your and crediting his bank account.

Here is how Art. 3 of the company’s Articles of Association describes its activity:

The object of the Company is for the collective benefit of the Shareholders of the Company, the study, creation, utilization and operation of the means necessary for the telecommunication, transmission and routing of private, confidential and proprietary financial messages.”

SWIFT only offers the means for telecommunication to its members. However, it is neither responsible for the content nor does it hold itself any financial assets or manages accounts on behalf of customers.

Now you could be tempted to see SWIFT as a simple telecommunications company that provides a sort of GMAIL account for banks. This would, nonetheless, be a bit too restrictive. SWIFT also sets standard messages for specific financial products such as collections, cash letters, documentary credits, and guarantees.

Additional SWIFT products include business intelligence such as trade finance data as well as compliance services such as KYC, Anti-money Laundering (AML), and sanctions.

SWIFT in figures

22 million messages are currently send through SWIFT each day. Compared to currently 196 billion Email messages send per day, this seems ridiculous. But 22 million is still a huge number – roughly 260 messages per second.

More than 90 % of SWIFT messages relate to payments and securities. Treasury, trade, and system messages only play a minor role.

SWIFT’s main market is Europe, Middle East, and Africa. The Americas are second, followed by Asia Pacific.

Regulation of SWIFT

As the above figures show, without SWIFT, the global financial system would not work. Hence, there is a clear necessity to regulate SWIFT. But how can you regulate such a global financial communications provider which is neither a payment nor a settlement system?

Under an arrangement with the central banks of the G-10 countries, the National Bank of Belgium acts as lead overseer of SWIFT. The main objectives of this oversight are security, operational liability, business continuity, and resilience of the SWIFT infrastructure. SWIFT’s main risk is obviously operational, i.e. the risk that deficiencies in information systems or internal controls, human errors, and management failures cause or exacerbate other types of risk.

In 2012, the regulatory framework has been reviewed and a SWIFT Oversight Forum has been established, through which information sharing on SWIFT oversight activities was expanded to a larger group of central banks. The issues discussed can include all topics related to systemic risk, confidentiality, integrity, availability and company strategy.

Some SWIFT Quotes

Personally, I have mixed feelings about SWIFT. On the one hand, its messages look like souvenirs of the pre-computer age, containing administrative boxes ranging from MT 400 to MT 700. On the other, it is an organization that dealt with real-time messaging services long before we even heard about internet or Email. Not so boring after all…


  • SWIFT Annual Report 2013

Wednesday, April 1, 2015

Documentary Credits – Why they are actually not credits

Oftentimes, the name of a financial instrument gives you a first hint of what it is and how it works. Sometimes, however, you are better off not to think too much about the name. The documentary credit, also called letter of credit, is a good example for the latter.

What is a documentary credit?

A documentary credit helps an importer paying an exporter. It engages the Issuing Bank to pay upon timely presentation of documents. However, a documentary credit is separate from its underlying sale or other contract. In clear, banks are not concerned or bound by such contract.

Even though we talk about a “credit”, there is usually no credit involved at all. Only exceptionally, the parties opt for deferred payment.

By definition, a UCP 600 letter of credit is irrevocable even if the parties are silent in that regard. What’s the point for an exporter to accept a bank’s engagement if the latter is not bound to execute it?

UCP 600 Rules – When and Why?

The International Chamber of Commerce (ICC) has developed common rules for letters of credit. They are called Uniform Customs and Practice for Documentary Credits (UCP). The current version of 2007 is labeled “UCP 600”.

For UCP 600 Rules to be applicable, the parties must refer to them in their letter of credit.

Who does what?

  • The Applicant is the party on whose request the credit is issued. It is, in fine, bound by paying its intermediary banks.
  • The Issuing Bank must honor the credit if the stipulated documents are presented to the Nominated Bank or the Issuing Bank.
  • The Nominated Bank can honor the credit and, thus, replace the Issuing Bank vis-à-vis the Beneficiary. However, the Nominated Bank is not obliged to do so.
  • The Confirming Bank must honor the credit if the stipulated documents have been presented to the Confirming Bank or the Nominated Bank.
  • The Advising Bank advises the credit to the Beneficiary without any undertaking to honor or negotiate. Advising means the Advising Bank has checked the apparent authenticity of the credit or any amendment. An Advising Bank may utilize the services of another bank (the “Second Advising Bank”).
  • The Beneficiary is the party in whose favor a credit is issued.

To amend a documentary credit, Issuing Bank, Confirming Bank, and Beneficiary must agree on such amendment.

How goods become documents

If you are selling potatoes on a market, you hand over the potatoes to your client and, in return, receive the money. If you want to export a whole bunch of potatoes to a distributor abroad, the problem is that you are not face-to-face with your buyer. A bank will pay you here. However, to avoid handing over your potatoes to the bank which then hands them over to the buyer, you will replace the potatoes by documents showing that you have actually delivered them to the buyer.

Banks deal with documents and not with goods, services or performance to which the documents may relate.”

UCP 600 rules provides for different types of documents:

  • Commercial Invoice
  • Transport Document
  • Bill of Lading
  • Non-negotiable Sea Waybill
  • Charter Party Bill of Lading
  • Air Transport Document
  • Road, Rail, or Inland Waterway Transport Documents

How a documentary credit can benefit a third party

If a credit has been expressly designated as “transferable”, the Beneficiary can transfer it in whole or in part to a second beneficiary. However, if the credit has not been structured as “transferable”, the Bank is not obliged to accept another beneficiary.

By definition, a second beneficiary cannot transfer the credit any more.

A documentary credit without (paper) documents?

The ICC has set up specific eUCP rules for electronic letters of credit or mixed electronic and paper letters of credit. These rules namely

  • specify the format of electronic letters of credit;
  • define the date of issuance as the date of sending the letter of credit;
  • explain how to handle corrupted files (basically not handling but re-sending them); and
  • exclude any liability of the bank for the authenticity of the sender.


ICC Publication No. 600 – Uniform Customs and Practice for Documentary Credits, 2007 Revision (UCP 600)