Berlin, November 2002 – I have registered for a seminar in legal rhetoric and communication. When I arrive, I see only a few pitiful people in class. I wonder: “Should I really stay?”
“In the legal business, people don’t communicate, especially write, effectively.”, say the presenters.
Working in-between legal and finance, I know today that they were (and still are) right. Besides, I was right to stay, too.
On my blog, I want to make legal and finance easy. I hope you enjoy reading.
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?
top of this definition, the Belgium company is located 15 km
south-east of Brussels, in a village called La Hulpe, near the Forêt
how can I get you interested in reading this post? Consider the
is at the heart of the global financial system. Without SWIFT’s 22
million daily messages, there would simply be no financial system!
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.
is how Art. 3 of the company’s Articles of Association describes
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
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.
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.
SWIFT products include business intelligence such as trade finance
data as well as compliance services such as KYC, Anti-money
Laundering (AML), and sanctions.
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.
than 90 % of SWIFT messages relate to payments and securities.
Treasury, trade, and system messages only play a minor role.
main market is Europe, Middle East, and Africa. The Americas are
second, followed by Asia Pacific.
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?
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.
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
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…
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.
is a documentary credit?
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
though we talk about a “credit”, there is usually no credit
involved at all. Only exceptionally, the parties opt for deferred
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
600 Rules – When and Why?
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 Rules to be applicable, the parties must refer to them in
their letter of credit.
The Applicant is the party on whose request the
credit is issued. It is, in fine, bound by paying its intermediary
The Issuing Bank must honor the credit if the
stipulated documents are presented to the Nominated Bank or the
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.
amend a documentary credit, Issuing Bank, Confirming Bank, and
Beneficiary must agree on such amendment.
goods become documents
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.
deal with documents and not with goods, services or performance to
which the documents may relate.”
600 rules provides for different types of documents:
Bill of Lading
Non-negotiable Sea Waybill
Charter Party Bill of Lading
Air Transport Document
Road, Rail, or Inland Waterway Transport
a documentary credit can benefit a third party
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
definition, a second beneficiary cannot transfer the credit any more.
documentary credit without (paper) documents?
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
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.
Publication No. 600 – Uniform Customs and Practice for Documentary
Credits, 2007 Revision (UCP 600)