THE ART OF FORFAITING

ONE
STEP
CLOSER
Uniform Rules for Forfaiting have moved
a step closer following the third meeting
of the Drafting Group in late January.
By RICHARD WILLSHER

F
ollowing a third meeting of the Drafting Group
in London in January, Uniform Rules for
Forfaiting (URF) are a step closer. Dubbed the
UCP of forfaiting, the new rules are likely to affect
everyone involved in the market.
Although a delivery date for a set of global rules
to act as a standard for forfaiting is not cast in stone,
the committee has in mind a broad target date of
autumn 2011. However, Drafting Group Chairman
Don Smith emphasises that, “We are working towards
a quality product, not to a predetermined deadline just
for deadline’s sake.”
The Drafting Group is comprised of ten
members, five each from the International Forfaiting
Association (IFA) and the International Chamber of
Commerce (ICC). The ICC is the body which, among
other things, publishes the Uniform Customs and
Practice (UCP) for Documentary Credits, which has
been the bible for letter of credit (LC) transactions
since it was first conceived in 1933, and which has
been though a series of revisions since then.

8 TFR FEBRUARY 2010

Based on market practice
URF does not have more than three-quarters of a
century of evolution to build upon, but it does have as
its basis three documents produced by the IFA over the
past six years that were firmly grounded in long-term
market practice.
The Introduction to the Primary Forfaiting Market, the
IFA Guidelines [for the secondary forfaiting market],
and the User’s Guide to the IFA Guidelines form the
foundations for the rules, which will be quite different
in style. This is because the Drafting Group has
decided at the outset that they will not be written as an
educational document, nor will they take the form of a
commentary on the previous documents. Moreover, it
is worth bearing in mind that they will be rules, not law,
the same in status as UCP.
The aim is to keep it simple, using language that
will enable words and concepts to be easily translated.
“It comes down to a question of the language of the
business,” says Smith. “This is one of the things we’re
focusing on. As we work through writing the rules we
use the language of the business. We want to ensure
that we are not creating new terminology; that we are
working with things that are acceptable to users in
the business already. And while this is aimed at those
already involved in the business, it will also be of great
assistance to facilitating the future development of
those new to it.”
In addition, the aim of the rules is to be of use
to all market participants. “We are taking an approach
of one set of rules for both primary and secondary
markets. So the secondary market should benefit
from having rules for the primary market. and the
primary market should benefit because it will make
instruments more readily saleable in the secondary
market,” adds Smith.
Disputes
Another of the key benefits the rules can bring is
in the context of disputes. Although they are not
laws and transactions will continue to be subject to
governing law, they can provide direction to regulators
and to courts. “Courts are generally willing to look
at rules of practice, particularly if those rules of
practice have been incorporated into the transaction,”
says Smith. “So if there is a transaction and it says
‘subject to Uniform Rules for Forfaiting’ and there is
a disagreement and this ends up in litigation, I would
expect that courts would look for assistance and
guidance wherever they can find it. And if a transaction
subjects itself to the URF, that they will go to the URF
to see what it has to say.”
Looking ahead to the conduct of the market itself,
it was one of the clear intentions of both The Guidelines
and the primary market documents to provide
guidance to newcomers to the forfaiting market. The
Rules will codify market practice just as UCP has long
done for LCs.
Smith believes that they will help facilitate a degree
of standardisation of transactions that derive from
areas such as the emerging markets of the Far East and
elsewhere and so enable them to be structured and sold
into the secondary market more easily.
He adds: “A good, solid set of rules should also
lead to improved pricing for clients because not every
deal has to be a one-off, start-from-scratch deal. This
provides the facility to bring new products to the
market in a regular, standardised manner, and the
market will know that it is subject to URF and that a
number of points have already been considered by the
primary forfaiter.”
“As we work through writing
the rules, we use the language
of the business. We want to
ensure that we are not creating
new terminology.”
DON SMITH, URF DRAFTING GROUP CHAIRMAN
Certainty
Another key benefit will be certainty. Removing
uncertainties from the way in which transactions
are structured, where risk lies and who is responsible
for it, will promote the adoption of forfaiting by
a wider banking community that is concerned with
risk management. This may, in the long term,
mean that larger transactions can be constructed with
confidence and that turnover in the market
will increase.
This is why URF will be welcomed by forfaiters
and those who make use of the market to provide
or receive medium-term trade credit. And this also
suggests that, therefore, everyone in the market is
likely to be affected by new rules of the type that have
long lent discipline to the large, global LC business
that is a well-tried and tested staple on the trade
finance menu. ‰
Richard Willsher is a financial journalist and trainer,
perhaps best known for the seminars that he
conducts with the IFA. He can be contacted by
emailing rdw@richardwillsher.com
For more information about the International
Forfaiting Association see: www.forfaiters.org or
e-mail info@forfaiters.org
www.tfreview.com 9