We have often commented on this key subject.
As regular readers will be aware, the ICC Banking Commission opined that any existing problems lie not with the rules themselves, but with their application, i.e., practice ("international standard banking practice") of the rules.
https://www.tradefinance.training/blog/articles/ucp-700-icc-decision/
David Meynell has commented on recent questions that have been raised on the subject of a potential revision within the November-December and January issues of Documentary Credit World. https://shop.iiblp.org/products/documentary-credit-world
Brief extracts are provided below:
UCP should keep pace with technological development
Meynell: The ICC Banking Commission has launched a Working Group addressing Digitalisation of trade finance. One of the work streams covers the e-compatibility of ICC rules - including an update of eUCP to bring it in line with technological developments.
Streamline inefficient practices
Meynell: This will be the focus going forward, i.e. streamlining and providing guidance for practices. The problem lies with practices and not with the UCP 600 rules.
Letter of Credit market share is decreasing
Meynell: Once again, this is not a rules issue - it is a matter of practice.
The letter of credit instrument is not functioning correctly
Meynell: The majority of problems are caused by:
Some rules are complicated and confusing
Meynell: UCP 600 is the sixth revision of the rules since they were first promulgated in 1933. These rules offer:
The UCP remain the most successful set of private rules for trade ever developed.
To revitalize the letter of credit business, the rules must be revised to facilitate and reflect trade as is done today, instead of blocking it.
Meynell: It is practice that must be streamlined to provide facilitation. The rules definitively do not block trade - they facilitate trade and always have done.
Blockchain, for example, may pose a big threat for the letter of credit business.
Meynell: Conversely, it provides, along with all other new technology, a great opportunity for the documentary credit instrument. Utilising Artificial Intelligence (AI), Distributed Ledger Technology (DLT), Digital Cloud-based Databases, Smart Contracts, 3D Printing, Advanced Robotics, Internet of Things (IoT), and leveraging the differences between the physical and digital worlds, the documentary credit can move fluidly into a new era. Once again, it is not by revising rules that this will be achieved. The key is to intensively streamline and change flawed practice, process, and operations.
Clarification of the term ‘negotiation'
Meynell: It is important to note that mere document examination does not constitute ‘negotiation'. A negotiation credit enables a bank to negotiate documents and to subsequently present them under the credit and to receive payment in due course. I do not see how a further change to the definition in the rules would take the industry forward. The issue is in the application of the definition.
‘prepaying, 'purchasing', ‘negotiating, and 'advancing funds', also known as discounting outside the UCP rules
Meynell: Changes to the wording of UCP 600 are unlikely to provide any benefit. It is in the application and practice of UCP 600 that attention should be focused.
There need only be two forms of how credits are to be made available. They are: ‘available by sight payment' and "available by deferred payment".
Meynell: Whilst from a personal perspective I do not disagree, the problem likely to be faced in this regard is that drafts, combined with documentary credits, still have enormous support from certain parts of the world. It should also not be forgotten that, whether or not drafts are required, this is not a UCP issue. Excluding drafts from the UCP would not stop this practice. It is the case that almost every bank's application form, whether in paper form or on-line, will contain a pre-set requirement for the presentation of a draft. Whether a draft is required or not is within the hands of every issuing bank and does not need a change to the UCP to achieve it. Merely deleting drafts from UCP will not stop their usage. Current practice indicates that drafts are an essential aspect of certain banks' processes - especially those in Asia. Guidance as to the actual need for drafts is the appropriate way forward.
Confirmation, this concept does not meet customers' expectations.
Meynell: The author's state, "under the current UCP 600, if the documents are determined to be discrepant, then the confirming bank has at that moment escaped with no obligation to honour, even if the issuing bank has waived the discrepancies and taken up the documents." This is most certainly not a matter of ‘escaping' an obligation. The presentation of discrepant documents to the confirming bank would end its obligation under the credit unless it has stated otherwise, and the fact that the issuing bank accepts a waiver of discrepancies would not further obligate the confirming bank.
Instalment Drawings are Instant Traps
Meynell: The potential to still allow the credit to be valid for future instalments was considered by the UCP 600 drafting group. However, the prevailing view of the majority of ICC National Committees was that by including a specific schedule in the credit, there is a definite requirement for either a drawing to be made or goods to be shipped within a specific period. Failure on the part of the beneficiary to do so could result in a financial or other risk to the applicant. Therefore, there was a need for a penalty if the beneficiary does not comply with the instalment schedule. The penalty also focuses the applicant and beneficiary on what will be the status of the goods not shipped within the instalment i.e., lost or carried forward to the next or a future shipment. The credit would need to be amended accordingly. Removing the penalty leaves a gap as to what happens regarding those goods.
Transferable LC's
Meynell: The fact that there have been less than 30 ICC Opinions issued since 1995 on the subject of transferred credits, the vast majority of which did not relate to a problem with UCP 600 article 38 (Transferable Credits), demonstrates that, overall, this UCP article is relevant and more than adequately reflects existing practice.
Force Majeure
Meynell: The comments that have been made by the authors do not reflect the actual circumstances. Virtually no issues have been raised by ICC National Committees in respect of Article 36 (Force Majeure) since the introduction of UCP 600. This would indicate that the article does, in fact, comply with existing practice.