ICC Uniform Rules for Forfaiting—ICC Publication no. 800 (“URF 800”)—were officially endorsed by the United Nations Commission on International Trade Law (UNCITRAL) in its 50th plenary session held in Vienna on 14 July 2017.
Forfaiting is a trade financing technique based on without recourse discounting of an instrument representing an exporter’s receivables payable at a future date, such instrument evidencing a payment claim or a debt obligation of an importer or a bank / financial institution pursuant to a letter of credit, standby letter of credit, guarantee, aval, bill of exchange or a promissory note created under an export transaction.
Forfaiting is a flexible discounting technique that can be tailored to the needs of a wide range of counterparties and domestic and international transactions. Its key characteristics are:
• 100% financing without recourse to the seller of the debt
• The payment obligation is often but not always supported by a bank guarantee
• The debt is usually evidenced by a legally enforceable and transferable payment obligation such as a bill of exchange, a promissory note, a letter of credit or note purchase agreement.
• Transaction values can range from 84,610 € to 169.22 € million
• Debt instruments are typically denominated in one of the world’s major currencies, with Euro and US Dollars being most common.
• Finance can be arranged on a fixed or floating interest rate basis
The URF 800 are the first ever global rules for forfaiting—the result of three-and-a-half years of joint effort by ICC and the International Trade and Forfaiting Association (ITFA)—developed after taking into account feedback from major trade finance banks, forfaiting companies and exporters. The aim of URF 800 is to create a standard set of rules that can be applied within the forfaiting markets worldwide. John Danilovich, ICC Secretary General, said: “We are pleased to have the UN once again affirm ICC’s role as a setter of global rules and standards for the financing of trade. Harmonized global rules have a vital role to play in facilitating finance for small businesses looking to trade internationally.” David Bischof, Senior Policy Manager for the ICC Banking Commission, said: “This endorsement will go a long way in encouraging the banking and exporting communities to adopt URF 800 more widely for without recourse financing of international receivables, especially helping small and medium-sized enterprises to access adequate and affordable trade finance at all levels and ultimately growing total exports.” Pradeep Taneja, Group Head of Trade Technical Services with Bank-ABC, Bahrain and Chair of the ICC-Bahrain Trade Finance Forum, presented URF 800 to UNITRAL on behalf of ICC. Mr Taneja said: “The URF 800 endorsement is an important milestone for ICC as it reinforces the ICC mandate of removing legal obstacles to international trade by progressively modernizing trade law. Furthermore, this endorsement is a testament to the success of ICC rules and represents the most powerful effort to harmonise forfaiting rules on an international level”. During the UNCITRAL session, Mr Taneja explained how without recourse financing under forfaiting immensely benefits exporters by eliminating the country, currency, political and transfer risks typically associated with an international trade transaction, thus improving exporters’ cash flow and enhancing their competitive advantage. Delegates at UNCITRAL welcomed the URF 800 praising ICC’s efforts in the area of trade facilitation. In particular, the delegates from Canada and El Salvador expressed their appreciation of ICC’s efforts and strongly supported endorsement of URF 800. In its official report, commending the use of URF 800 in forfaiting transactions, UNCITRAL congratulated ICC on having made a further contribution to the facilitation of international receivable financing and thus international trade. Purchase the ICC Uniform Rules for Forfaiting (URF 800)
Forfaiting means the sale by the seller and the purchase by the buyer of the payment claim on a without recourse basis, in other words, forfaiting is discounting of trade‐related receivables secured with trade finance instruments such as bills of exchange, promissory notes or deferred payment letter of credit. In the U.S, forfaiting is known as "structured trade finance", and every year more than 253.83 € billion of world trade takes place using forfaiting. ICC Uniform Rules for Forfaiting which is called URF 800 is the first set of rules which governs both international and domestic forfaiting transactions. These rules went into effect on January 1, 2013. URF 800 is created by the experts from ICC (International Chamber of Commerce) and IFA (International Forfaiting Association) with a spread of expertise – marketing, operational and legal – and geographical location.
HOW URF 800 CAN BE APPLIED TO FORFAITING TRANSACTIONS?
All ICC rules which are related to international trade require express incorporation into the agreements. For example, UCP 600 rules will apply to the letters of credit when the text of the credit expressly indicates that it is subject to UCP 600. The Uniform Rules for Forfaiting (URF 800) are no exception. URF 800 rules apply to a forfaiting transaction when the parties expressly indicate that their agreement is subject to these rules. They are binding on all parties thereto except so far as modified or excluded by agreement.
SOME IMPORTANT BENEFITS OF ICC FORFAITING RULES
According to Silja Calac, who was the chair of the task force that gathered from both ICC and IFA to create URF rules, 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. She also believes that "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.
BENEFITS OF FORFAITING:
ELIMINATES RISK
ENHANCES COMPETITIVE ADVANTAGES
IMPROVES CASH FLOW
INCREASES SPEED AND SIMPLICITY OF TRANSACTIONS
TYPES OF FORFAITING
In order to illustrate how forfaiting takes place in practice, the following is a typical forfaiting transaction where the buyer and the seller of goods are located in different countries.
1. During the course of negotiations between an exporter and an importer for the supply of goods, the importer asks for credit terms.
2. The exporter approaches a forfaiter and asks for an indication of whether the forfaiter is willing to provide this credit and how much it is likely to cost. At
this stage the forfaiter will need to know:
• The country of the importer
• The importer’s name
• The type of goods
• The value of the goods
• The expected shipment date
• The repayment terms sought by the importer
• Whether the importer’s obligations will be guaranteed by a bank, and if so, who?
3. The forfaiter provides the exporter with an indication of the costs involved. At this stage neither party is committed in any way.
4. When the details of the commercial contract have been agreed, but usually before it has been signed, the exporter asks the forfaiter for a commitment to purchase
the debt obligations (bills of exchange, promissory notes etc) created under the export transaction.
5. The information required for this is the same as for an indication.
6. The forfaiter issues a commitment which is accepted by the exporter and which is binding on both parties. This commitment will contain the following points:
• The details of the underlying commercial transaction.
• The nature of the debt instruments to be purchased by the forfaiter.
• The discount (interest) rate to be applied, together with any other charges
• The documents that the forfaiter will require in order to be satisfied that the debt being purchased is valid and enforceable
• The latest date that the exporter can deliver these documents to the forfeiter
7. The exporter signs the commercial contract with the importer and delivers the goods (2+3).
8. In return, if required, the importer obtains a guarantee from his bank provides the documents that the exporter requires in order to complete the forfaiting.
This exchange of documents is usually handled by a bank, often using a Letter of Credit, in order to minimise the risk to the exporter.
9. The exporter delivers the documents to the forfaiter who checks them and pays for them as agreed in the commitment (6+7).
10. Since this payment is without recourse, the exporter has no further interest in the transaction. It is the forfaiter who collects the future payments due from the importer and it is the forfaiter who runs all the risks of non-payment.
Forfaiting is a trade financing technique based on without recourse discounting of an instrument representing an exporter’s receivables payable at a future date, such instrument evidencing a payment claim or a debt obligation of an importer or a bank / financial institution pursuant to a letter of credit, standby letter of credit, guarantee, aval, bill of exchange or a promissory note created under an export transaction.
Forfaiting is a flexible discounting technique that can be tailored to the needs of a wide range of counterparties and domestic and international transactions. Its key characteristics are:
• 100% financing without recourse to the seller of the debt
• The payment obligation is often but not always supported by a bank guarantee
• The debt is usually evidenced by a legally enforceable and transferable payment obligation such as a bill of exchange, a promissory note, a letter of credit or note purchase agreement.
• Transaction values can range from 84,610 € to 169.22 € million
• Debt instruments are typically denominated in one of the world’s major currencies, with Euro and US Dollars being most common.
• Finance can be arranged on a fixed or floating interest rate basis
The URF 800 are the first ever global rules for forfaiting—the result of three-and-a-half years of joint effort by ICC and the International Trade and Forfaiting Association (ITFA)—developed after taking into account feedback from major trade finance banks, forfaiting companies and exporters. The aim of URF 800 is to create a standard set of rules that can be applied within the forfaiting markets worldwide. John Danilovich, ICC Secretary General, said: “We are pleased to have the UN once again affirm ICC’s role as a setter of global rules and standards for the financing of trade. Harmonized global rules have a vital role to play in facilitating finance for small businesses looking to trade internationally.” David Bischof, Senior Policy Manager for the ICC Banking Commission, said: “This endorsement will go a long way in encouraging the banking and exporting communities to adopt URF 800 more widely for without recourse financing of international receivables, especially helping small and medium-sized enterprises to access adequate and affordable trade finance at all levels and ultimately growing total exports.” Pradeep Taneja, Group Head of Trade Technical Services with Bank-ABC, Bahrain and Chair of the ICC-Bahrain Trade Finance Forum, presented URF 800 to UNITRAL on behalf of ICC. Mr Taneja said: “The URF 800 endorsement is an important milestone for ICC as it reinforces the ICC mandate of removing legal obstacles to international trade by progressively modernizing trade law. Furthermore, this endorsement is a testament to the success of ICC rules and represents the most powerful effort to harmonise forfaiting rules on an international level”. During the UNCITRAL session, Mr Taneja explained how without recourse financing under forfaiting immensely benefits exporters by eliminating the country, currency, political and transfer risks typically associated with an international trade transaction, thus improving exporters’ cash flow and enhancing their competitive advantage. Delegates at UNCITRAL welcomed the URF 800 praising ICC’s efforts in the area of trade facilitation. In particular, the delegates from Canada and El Salvador expressed their appreciation of ICC’s efforts and strongly supported endorsement of URF 800. In its official report, commending the use of URF 800 in forfaiting transactions, UNCITRAL congratulated ICC on having made a further contribution to the facilitation of international receivable financing and thus international trade. Purchase the ICC Uniform Rules for Forfaiting (URF 800)
Forfaiting means the sale by the seller and the purchase by the buyer of the payment claim on a without recourse basis, in other words, forfaiting is discounting of trade‐related receivables secured with trade finance instruments such as bills of exchange, promissory notes or deferred payment letter of credit. In the U.S, forfaiting is known as "structured trade finance", and every year more than 253.83 € billion of world trade takes place using forfaiting. ICC Uniform Rules for Forfaiting which is called URF 800 is the first set of rules which governs both international and domestic forfaiting transactions. These rules went into effect on January 1, 2013. URF 800 is created by the experts from ICC (International Chamber of Commerce) and IFA (International Forfaiting Association) with a spread of expertise – marketing, operational and legal – and geographical location.
HOW URF 800 CAN BE APPLIED TO FORFAITING TRANSACTIONS?
All ICC rules which are related to international trade require express incorporation into the agreements. For example, UCP 600 rules will apply to the letters of credit when the text of the credit expressly indicates that it is subject to UCP 600. The Uniform Rules for Forfaiting (URF 800) are no exception. URF 800 rules apply to a forfaiting transaction when the parties expressly indicate that their agreement is subject to these rules. They are binding on all parties thereto except so far as modified or excluded by agreement.
SOME IMPORTANT BENEFITS OF ICC FORFAITING RULES
According to Silja Calac, who was the chair of the task force that gathered from both ICC and IFA to create URF rules, 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. She also believes that "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.
BENEFITS OF FORFAITING:
ELIMINATES RISK
- Removes country (i.e. political and transfer) and commercial risk.
- Provides financing for 100% of contract value.
- Protects against risks of interest rate increase and exchange rate fluctuation.
ENHANCES COMPETITIVE ADVANTAGES
- Enables sellers of goods to offer credit to their customers, making their products more attractive by offering credit terms and at the same time cash the sales.
- Helps sellers to do business in countries where the risk of non-payment would otherwise be too high against the risk premium to be added with the discounting interest.
IMPROVES CASH FLOW
- Forfaiting enables sellers to receive cash payment while offering credit terms to their customers.
- Removes accounts receivable, bank loans or contingent liabilities from the balance sheet of the seller.
INCREASES SPEED AND SIMPLICITY OF TRANSACTIONS
- Fast, tailor-made financing solutions
- Financing commitments can be issued quickly
- Documentation is typically concise and straightforward
- No restrictions on origin of export
- Relieves seller of administration and collection burden
TYPES OF FORFAITING
In order to illustrate how forfaiting takes place in practice, the following is a typical forfaiting transaction where the buyer and the seller of goods are located in different countries.
1. During the course of negotiations between an exporter and an importer for the supply of goods, the importer asks for credit terms.
2. The exporter approaches a forfaiter and asks for an indication of whether the forfaiter is willing to provide this credit and how much it is likely to cost. At
this stage the forfaiter will need to know:
• The country of the importer
• The importer’s name
• The type of goods
• The value of the goods
• The expected shipment date
• The repayment terms sought by the importer
• Whether the importer’s obligations will be guaranteed by a bank, and if so, who?
3. The forfaiter provides the exporter with an indication of the costs involved. At this stage neither party is committed in any way.
4. When the details of the commercial contract have been agreed, but usually before it has been signed, the exporter asks the forfaiter for a commitment to purchase
the debt obligations (bills of exchange, promissory notes etc) created under the export transaction.
5. The information required for this is the same as for an indication.
6. The forfaiter issues a commitment which is accepted by the exporter and which is binding on both parties. This commitment will contain the following points:
• The details of the underlying commercial transaction.
• The nature of the debt instruments to be purchased by the forfaiter.
• The discount (interest) rate to be applied, together with any other charges
• The documents that the forfaiter will require in order to be satisfied that the debt being purchased is valid and enforceable
• The latest date that the exporter can deliver these documents to the forfeiter
7. The exporter signs the commercial contract with the importer and delivers the goods (2+3).
8. In return, if required, the importer obtains a guarantee from his bank provides the documents that the exporter requires in order to complete the forfaiting.
This exchange of documents is usually handled by a bank, often using a Letter of Credit, in order to minimise the risk to the exporter.
9. The exporter delivers the documents to the forfaiter who checks them and pays for them as agreed in the commitment (6+7).
10. Since this payment is without recourse, the exporter has no further interest in the transaction. It is the forfaiter who collects the future payments due from the importer and it is the forfaiter who runs all the risks of non-payment.