Packing List-IsBP 745

Packing list ISBP 745
by Pallavi Deshpande . July 8, 2014
A packing list or shipping list is a catalog of all the articles

that are included in a package that has been shipped from
one place to another. Packing list is an optional document,
UCPDC 600 has not provided any guiding article for
presentation of a packing list.
Packing list is a document that enlists the contents of the package. It contains an itemized
list of the article/s in shipping package including its weight, quantity and description. It can
also quote the unit price, buyer and seller details. It is only in ISBP 745 Packing list, note or
slip has been included with an indicative guideline with respect to its issuer, content and
basic requirement. Packing list performs more of an administrative function.
Basics
Packing list provides the necessary information about the article/s being shipped to
the carrier, transport agency and regulatory agencies to facilitate necessary handling
and transportation.
Export packing list is far more detailed than the domestic packing list.
Packing list also brings out the nature of the underlying goods such as fragile,
volatile flammable or contains specific chemicals etc.
Packing list is an optional document and as such not mandated under UCP 600 or
other regulation.
Packing list is usually called for under an export consignment of goods containing
varied specification such as semi processed garments and shoes.
When called for under LC, the most elaborate packing is likely to information such as
invoice number and date, consignee, exporter/consignor, buyer, country of origin,
buyers order number and date, final destination, pre-carriage, place of receipt,
vessel/flight, port of loading, port of discharge, marks and number, terms of delivery,
description of goods, remarks, dimension, gross weight, net weight, declaration,
authorized signature and stamp.
Guiding principles (ISBP 745)

1. Packing list presented can be titled as called for in the credit or can bear a similar title, it
can also be untitled as long as it performs the function of providing packaging information.
If the credit calls for a Packing list and a document titled Shipping list is
presented not a discrepancy
If the credit calls for Packing note and an untitled document providing all
the packaging information is presented not a discrepancy
If the credit calls for Packing slip and a document titled Packing slip is
presented which does not contain any packaging detail it is a discrepancy
It is very important to remember that as per ISBP the function
of the packing list is to provide any information as to the
packing of goods.
2. Packing slip should be issued by the entity as called for in the credit or if the credit is
silent it can be issued by any entity.
3. If the credit indicates specific packing requirement but does not call for a specific and
separate document (similar to packing list) and if such a document is presented then its
content must not conflict with the packing requirement stated in the credit
If the credit does not call for a packing list but calls for shipment of 1500
zippers, velcro and magnets each labelled and packed separately in
plastic tins, and packing slip is presented which states that these 3 items
have been packed together in a polythene bag. this is a discrepancy.
Above example indicates that if packing slip is not called for but presented, the packing
details on such a packing slip must not conflict with the credit.
4. If packing list is not issued by the beneficiary, it may state an invoice number, invoice date
and shipment route different than the one indicated on one or more other stipulated
documents.
If the seller has outsourced the packing function to vendor, there is a

likelihood that the vendor issues the packing slip, in such a scenario the
vendor will quote his own invoice/order number and date instead of the
invoice stipulated under the credit. The vendor company will not be aware
of the end transaction and the underlying invoice. This scenario also applies
in agent or broker transaction where the middleman is involved in
manufacturing, assembling or packing.
If credit does not stipulate beneficiary to issue to the packing slip, the one stated in above
example is acceptable.
5. Banks are required to examine total values, total weights, total measurements or total
packages to ensure that totals on the packing list does not conflict with the totals of credit or
other stipulated documents. Banks may or may not verify the each item or sub-total
appearing on the packing list.
Certificate of Origin
Certificate of Origin is an important document to

determine the Customs duty or to avail any preferential
customs duty (GSP) and/or incentive based on the
geographic location.
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Certificate of Origin is a document that certifies the country of origin of the goods.
Though a certificate of origin on the face of it appears to be a document of

very less utility or interest, this document not only certifies the origin of
goods but has a great utility when it comes to participating in the Trade
Block and Free Trade Agreements (FTA) such as North American Free
Trade Agreement (NAFTA), Asean Free Trade Agreement (AFTA),
Generalized System of Preference (GSP) or various such schemes.
Customs duty is usually calculated basis 3 parameters:
the type of goods

the country the goods are being imported into
where they are judged to be originated from (country of origin)
Defining the country of origin can get complicated if raw material or parts are imported from
one or more countries, in which case the country wherein substantial assembling function is
conducted is deemed to be the country of origin. And in such a scenario importer/applicant
may insist for a certificate of origin to make sure that manufacturing and assembling is done
as per the LC/Contract terms.
Contents of a typical certificate of origin can be viewed in the below template.

Basics
1. When a credit calls for a Certificate of origin, a signed document which relates to invoice
and certifies the country of origin of goods is acceptable
2. It should relate to invoice means that
the certificate states the goods description that corresponds (does not conflict) with
the credit.
or
it states the goods description appearing on any other stipulated document (such as
invoice or transport document etc)
such a description can be stated either on the actual certificate or on a document that is
attached to and forming an integral part of the certificate of origin
3. If a credit calls for a certificate of origin in GSP Form A or any such specific form, a
document in that specific form must be presented
GSP stands for Generalized System of Preference. GSP is a scheme wherein

industrial and agricultural products originating from specific developing
countries are given preferential access to the markets of the European
Union. Preferential treatment is also given by levying zero/subsidized
customs duty.
One of the conditions to avail GSP is submission of Certificate of origin in GSP Form A.
Hence ISBP 745 is rigid when it comes to fulfilling the requirement of certificate of origin in a
specific format or type.
4. If the country is origin is indicated on the credit but no certificate of origin is called, the country of origin
(if stated) on any document presented under this credit should not conflict with the country of origin stated
on the credit.
If the credit states the country of origin as Belgium then the country of
origin(if stated) on any on every document presented such as invoice,
certificates, packing list, transport document, insurance document should
be Belgium only.
Issuer
5. If the credit does not provide the details of the issuer of the certificate of origin, any entity
can issue the certificate.
6. If a credit calls for a certificate of origin to be issued by the

beneficiary/manufacturer/exporter, then a document issued by Chamber of Commerce (or a
similar organization) with the details of the beneficiary/manufacturer/exporter quoted on it is
accepted.
7. If a credit states that the certificate of origin is to be issued by the Chamber of

Commerce, it can be issued by similar organizations/entities such as (this is not an all
inclusive list)
Chamber of Industry
Association of Industry
Economic Chamber
Customs Authority
Department of Trade
Consignor/Consignee
8. If the consignor/exporter stated on the certificate of origin is not the same as the
beneficiary then the certificate can quote a different,
Invoice number
Invoice date
Shipment route
9. Consignor/Shipper on the certificate of origin can be different than the one mentioned on
the credit or any other document. But has to be the same in case of point 6 above.
10. Consignee details if stated on the certificate of origin should match with the credit.
11. When a credit calls for a transport document in following format, consignee on the
certificate of origin can be any party mentioned on the credit except the beneficiary.
12. In case of a transferable LC, the first beneficiary can be named as the consignee in the
certificate of origin.
Functions
The main type issued by chambers are Non-Preferential COs, i.e. ordinary Certificate of
Origins which certify that the country of origin of a particular product does not qualify for
any preferential treatment.
Preferential COs refer to COs which enable products to enjoy tariff reduction or
exemption when they are exported to countries extending these privileges: e.g. GSP,
Commonwealth Preference Certificate or FTA, Free Trade Agreements between two or more
countries.
And in almost all the cases it is importers responsibility to submit the

certificate during the clearance of goods at customs to validate the
participation in the scheme.
Preferential CO (GSP Form A) looks like this
Depending on the type and arrangement of the Trade Block, other certificates such as
Certificate of Free Sale or Certificate of Analysis may be required. These certificate may
also be required to be legalized or stamped or notarized.
Certificates of Origin may be needed to comply with Letters of Credit, foreign Customs
requirements or a buyers request.
In most countries, chambers of commerce are the key agent in the delivery of certificates of
origin. However, in some countries, this privilege may also be extended to other bodies such
as ministries or customs authorities.
Beneficiary Certificate
ISBP 745
Beneficiary certificate is a document that provides

beneficiary admittance that the action or the event
stipulated in the credit has been fulfilled.
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Beneficiary Certificate is prepared by the seller and is a document that confirms in writing
that beneficiary has performed a particular action.
Inconsistency issues
When a credit calls for Beneficiary certificate, Certificate of origin, Weight list, Packing
list and such other administrative and compliance related documents, the span of
documentary scrutiny widens. The exporter, doc preparer and checkers therefore have to be
extra vigilant with respect to the consistency across all the documents with respect to the
dates, content, consignor/consignee details, goods description etc.
Any discrepancy arising from inconsistency in the documents can be

avoided beforehand by calling for an amendment.
While UCP 600 does not cover this document, ISBP 745 has introduced guiding procedures
for Beneficiary certificate.
The common clauses used in the credit which calls for a beneficiary certificate to obtain
compliance in writing is as follows:
Beneficiarys letter stating that one complete set of non-negotiable

documents have been sent to the importer directly within 05 (five) days of
shipment by courier, receipt of which must be attached with the
documents.
Beneficiarys declaration certifying that goods have been shipped as per
specification, description, quality and quantity mentioned in the LC/
Proforma invoice.
That the goods in question conform to the specifications of the sales
contract.
That the goods have been shipped on board a particular vessel or aircraft by
certain date.
That certain documents such as bills of lading, inspection certificates etc.
have been sent by airmail or courier to the buyer/importer or their agent.
That the boxes have been marked as IPPC or Fragile ( ie can relate to
shipping marks or packaging)
Basic Features and Guiding Principles

1. The function of beneficiary certificate is to certify actions and documents to the buyer.
2. ISBP 745 does not specify any format for beneficiary certificate, it is supposed to confirm
the action called for in the credit and is usually issued on beneficiary companys letterhead.
3. When a credit calls for a beneficiary certificate, any of the following is acceptable
Signed document and titled same as the credit

Bearing a title reflecting the type of certification that has been requested in the credit
Untitled document but fulfilling the function by containing the data and certification
required by the credit
4. Beneficiary certificate must be signed by or on behalf of the beneficiary
5. Data provided on the beneficiary certificate should not be identical but should not
contradict with the requirement of the credit. The certificate should evidence the fulfillment
and certify in writing the necessary event/requirement prescribed in the credit. The content
on the certificate of origin need not be a replica of the wordings used in the credit but
should clearly indicate that requirement prescribed by the credit has been fulfilled.
6. Unless specifically called for by the credit, beneficiary certificate need not include the
following items:
Goods description
Any other reference to the credit
Any other reference to the stipulated document
As discussed in the beginning of this article, it is critical to apply the principle of overall
consistency between all the documents presented, for instance any inconsistency
between beneficiary certificate and certificate of origin will lead to documentary discrepancy.
If requirement for the beneficiary certificate were to state that 1 set of

original documents are to be sent within 7 days of shipment and a
certificate of origin from the chamber of commerce shows a date of issue 10
days after shipment, a discrepancy will be raised by the doc checker.
Commercial Invoice
(UCP 600 Article 18)
by Pallavi Deshpande . May 7, 2014
All the banks and financial institutions handling LC

transactions know that they are required to deal with
documents and not concerned with the underlying
goods/services/performance, but when you minutely study
the rules around the value and the description to be
provided/not provided on the invoice with examples you
will notice that with these rules a sincere attempt has been
made to maximize the authenticity and genuineness of the
goods/services/performance.
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Invoice on the face of it looks like one of the simplest documents to be scrutinized, however
the rules around the description and the value of the invoice can get complicated if not read
and understood in detail. In simple terms, an invoice is an itemized bill provided by the seller
to the buyer in order to claim the payment. An invoice typically contains the unit price, total
charge and the terms. However UCP 600 and ISBP 745 have stipulated certain conditions
for an invoice to be accepted as a clean document for processing under the said Letter of
Credit. The stipulated rules are enlisted below, any condition specifically mentioned in the
LC terms will usually supersede these generic requirements.
Basics
Need not be signed or dated
When a credit requires an Invoice; Commercial Invoice, Tax invoice, Final invoice,
consular invoice, custom invoice all are acceptable
When a credit requires presentation of a commercial invoice, a document titled
invoice will be acceptable.
Provisional Invoice or Proforma Invoice is not acceptable
Invoice stating issued for tax purposes is acceptable
Address of beneficiary and applicant need not match with the address stated on the
documentary, but the country should match
Address and contact details must match with the LC if stated in Consignee or
Notify party
If the trade term is stated as part of goods description in the LC, it should be
indicated on the invoice, regardless of whether stated on the LC or not, the source
should be indicated on the LC.
CIF Mumbai Incoterms 2010 is the correct way of stating inco term on the
invoice.
Issuer
Must be issued by the beneficiary and drawn on applicant (except under transfer LC)
In case of Transfer LC, can be drawn by the second beneficiary
If the beneficiary name has changed, invoice issued with a new name quoting the old
name indicated in the LC as formerly known as or the like is acceptable.
Beneficiary name on the invoice appearing as Sweets INC ( formerly
known as Delicious INC) is acceptable where LC states beneficiary name
as Delicious INC.
Invoice can very well be issued by a third party (party other than the beneficiary)
provided LC states that third party documents are acceptable
Description of Goods/Services/Performance
Goods description must correspond with the LC
Description of goods may be stated in a number of areas on invoice which when
collated together represent a description of goods corresponding to that in the LC.
Hush Puppies Womens shoes Slip-On Moccasins as mentioned on the
credit is acceptable on invoice even if it is stated in 3 different sections of
the invoice as Hush Puppies Shoes For Women Slip-On Moccasins
Additional description of the goods is acceptable provided that it does not provide an
altogether different nature, classification or category of goods, services or performance
Hush Puppies Womens shoes Slip-On Moccasins as mentioned on the
credit will be considered as a discrepancy if it is stated as Hush Puppies
Shoes Women plane buck shoes on the invoice.
Quantity and weight should not conflict with the LC
Quantity can vary +/- 5% but should not change the amount
Description stated on the invoice should match with the transport document
Must not indicate additional merchandise even if stated to be free of cost or sample
Hush Puppies sunny sandals (Free Samples) Quantity 50 Nos. will count
as a discrepancy if included on the invoice meant for Hush Puppies
Womens shoes Slip-On Moccasins
Value of the invoice

Invoice should always indicate, value of goods/services, currency same as the LC,
unit price and discount, if any
Hush Puppies Mall Walker Oxford Quantity = 50 Nos; Unit Price :
$116.00; Total Discount : $500.00 is acceptable
Can show a deduction towards advance or discount not indicated on the credit
If partial shipment is prohibited, an invoice comprising of 95% of the LC value can be
considered as full and final (5% less)
Can be of an amount in excess of the LC value but should not be honored or
negotiated in excess of the LC
Must not show over shipment
Multimodal Transport
document (UCP 600
Article 19)
It is interesting to note that the article 19 applies even

when the credit does not call for a Multimodal transport
document explicitly. If the the port of loading or the port
of discharge required by the credit is not a port but is an
inland place, it is evident to all parties that more than one
mode of transport will be utilized and hence UCP Article
19.
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A multimodal transport document is a bill of lading covering two or more modes of transport,
such as shipping by rail and sea or rail and road or sea and road etc.
Article 19 of UCP 600 applies to cases where the credit calls for a
Multimodal or Combined transport documents and sometimes even to
cases where the credit does not explicitly call for a transport document
covering more than one mode of shipment or transport.
We are likely to have 4 scenarios wherein the LC may not specifically call for a Multimodal
transport document but more than 1 mode of transport will have be used to complete the
end to end delivery of the shipment. And Article 19 automatically comes into the picture.
Port of Loading is mentioned in the credit is not a port

Similarly Port of discharge mentioned in the credit is not a port
Both ie Port of loading as well as the inland Place of receipt is stated, however place
of receipt is not a port
Port of discharge as well as the Place of of Final destination is stated, but place of
final destination is not a port
Basics
1) Need not be titled as a Multimodal or Combined transport document even if it is
named that way in the credit
2) Is a negotiable document/document of title
3) Statement in the credit such as Freight Forwarders Multimodal Transport Documents

are not acceptable or House Multimodal Transport documents are not acceptable are to
be ignored unless further specific details are elaborated in the credit
4) Should not bear the indication that it is subject to Charter party or should not be a
charter party B/L
5) Cost incurred as a result of delay cannot be included as freight. Costs should be as

per the related trade term only. If the credit states that costs additional to freight are not
acceptable, the transport document should not conflict with credit as well as the trade term
with respect to costs.
Clean and Original

6) Deletion or absence of the word clean does not make the transport document
discrepant unless there are conflicting statements with respect to the defectiveness of the
goods appearing on it.
7) Same applies to packaging. Only if a statement indicating an occurrence of a

defective condition of the goods or packaging is explicitly present on the transport document
it will be considered as a discrepancy.
8) 1st original, 2nd original, 3rd original, duplicate, triplicate, original = Original and should
be presented in full set
9) Should indicate the number of originals issued and must be presented in full set. Even if
one container is covered by more than one set of the multimodal documents, full set for all
such transport document should be submitted
Trans-shipment and Partial shipment

10) Can state Transshipment may/will take place even if credit prohibits as in case of a
multimodal transportation, transshipment is inevitable.
11) Multiple sets of transport document containing the same means of i) conveyance, ii)
journey and ii) destination is not a partial shipment, but a single shipment wherein more
than one set of transport documents have been issued. If there is mismatch in any of the
above 3 points, it qualifies as a partial shipment.
12) Cannot explicitly indicate that only one mode of transport has been utilized but can be
silent
13) If the credit states that the first means of conveyance is by sea, the on board stamp
should evidence the same
14) Last mode of shipment in the entire journey is not by sea then it is a Non-negotiable
transport document
Dates and Stamps

15) Stamp or On Board notation is present then the date mentioned therein will be
considered as the date of shipment else the date of issuance of the transport document is
the date of shipment
16) If multiple sets of transport documents are presented, earliest date will be considered
for the presentation period
17) None of the dates on the multiple sets should exceed the last date of
shipment/receipt/dispatch/taking in charge as required by the credit
Signatures
18) Multimodal/Combined Transport operators (MTO/CTO) cannot sign the transport
document in either of their capacities, while they may operate as transport operators they
must sign as Master, Carrier or their Agent
19) Multimodal transport operator = Contractual carrier, Combined Transport Operator
20) Actual Carrier = Carrier
21) Corrections of the original set needs to be authenticated.
22) Signature can be of a different Agent however the naming convention and the
identification should be in compliance with the requirement (as described in the above
chart)
23) Non-negotiable copies do not require any authentication of corrections/changes made.
24) When a credit indicates Freight Forwarders Multimodal Transport Document is

acceptable or House Multimodal Transport Document is acceptable or words of similar
effect, a multimodal transport document may be signed by the issuing entity without it being
necessary to indicate the capacity in which it has been signed or the name of the carrier as
both these types of transport documents are issued by the Agent directly.
Places and Ports
25) Cannot state the geographical area only (Any European Port or Any African Port or
USA) as the port, place of receipt, delivery or final destination.
26) Name and the address of the delivery agent can be of the different place than the place
of final destination or the port of discharge
27) Can state intended vessel, port of loading, port of discharge, provided that actual
vessel and ports are stated somewhere on the transport document
28) If the journey does not involve final port by sea to the country of import, the multimodal
transport document will not be classified as a negotiable document capable of transferring
title by delivery or by delivery and endorsement as the case may be
29) Name of the country even if stated on the credit under place of receipt, dispatch, taking
in charge, port of loading or airport of departure need not be mentioned on the transport
document
30) Place of dispatch, taken in charge, Shipment, and place of final destination should be
as per the documentary credit
Parties and Issuer

31) Notify party/Consigned to party/to the order of
32) If Applicant or the Issuing bank, address and contact details need not be mentioned
33) If the address and contact details for Applicant are mentioned on the transport
document as consigned to party or the notify party, full details have to match with the credit
34) If the credit is silent about the notify party, any party can be the notify party but if
applicant is the notify party once again full details including the address and the contact
number have to match\
35) There can be more than one notify parties
36) Dispatched, Taken in charge, Shipped on board can be preprinted or

stamp/notation means the same
37) If credit calls for goods to be consigned to the order of; the transport document
should show the same and not show as consigned straight to that named party and vice
versa
38) If issued as To Order or To the order of shipper endorsement by/on behalf of the
shipper is required
39) In case the Multimodal transport document is not issued as Bill of lading, goods will
be delivered to the named consignee
40) A multimodal transport document may be issued by any entity other than a carrier or
master (captain), provided it meets the requirements of UCP 600 article 19.
Bank Payment
Obligation (BPO)
by Pallavi Deshpande . November 18, 2013
BPO is ICCs response to new market needs to help deal

with increasing cost pressures and changing risk dynamics
arising as a result of widespread liberalization in emerging
markets.
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Documentary letter of credit is considered to be the most reliable and secured instrument to
conduct trade as Open account and Collections model do not offer bank assurance. ICC
Global Trade and Finance Survey 2013 indicate that exports have slackened in many
developing countries. SMEs make up 80%-90% of businesses in most regions and
experience a trade finance gap on account of their lack of collateral, credit history and
technical expertise. Execution of a documentary letter of credit transaction can get complex
and it is observed that at least 70%-75% of Letter of credit (LC) transactions are found to be
discrepant thereby defeating the inherent characteristic of LC i.e. banks undertaking to pay.
Moreover SME sector tends to have medium to low value transactions which makes LC
issuance (issuance, confirmation and discrepancy fees) an expensive affair for them, also
this sector lacks the necessary technical skill to execute an LC transaction successfully.
Both these factors put together make an LC transaction less lucrative for this sector. Open
account transactions constitute 75%-80% of world trade, open account transactions are
subject to party and payment risk.
In the light of above challenges, International Chamber of Commerce (ICC) in June 2013
launched an innovative instrument to facilitate international trade in the present supply chain
standards known as Bank Payment Obligation (BPO). And the governing regulation is
known as Uniform Rules for Bank Payment Obligation (URBPO) which came into force in
July 2013.
As of June 2013, 53 financial institutions, including 15 of the top 20 trade
banks, have adopted the BPO. 30 corporate across various industries are
already live or in the process of implementing the BPO instrument.
Bank Payment Obligation
A bank payment obligation is an irrevocable conditional obligation from one bank to pay
another bank. A process that may be subject to the presentation and matching of compliant
data derived from documents such as the purchase order, invoice, and related transport,
insurance and certification documents.
One of the key features of the BPO is that it supports inter-operations

between participating banks, because it makes use of a standard set of ISO
20022 messages.
This inter-operations enables banks to collaborate with one another to extend reach across
global markets, in order to provide a comprehensive range of supply chain services to
corporate customers. The matching of data using ISO 20022 messages reflects events that
have taken place in the physical supply chain, which create trigger points for the provision of
financial supply chain services for example, a proposition for pre-shipment finance based
upon a confirmed purchase order, or a proposition of post-shipment finance based upon an
approved invoice. The BPO may be used as collateral in each case.
BPO provides the benefits of a letter of credit (LC) in an automated environment and
enables banks to offer flexible risk mitigation and financing services across the supply chain
to their corporate customers.
Now let us understand the process flow of a basic BPO transaction.
Example of a pre-agreed matching engine is SWIFTs Trade Services Utility (TSU). The
criteria required for a successful data match is set up within the TSU or other data matching
engine using purchase order data. This is known as the baseline. The bank that issues a
BPO is known as the obligor bank and the sellers bank who receives the payment is known
as the beneficiary bank.
BPO combines the best of both worlds i.e. documentary credit as well as open account and
offers several benefits to all the parties.
Benefits for Importers Benefits for Exporters Benefits for Banks
Safer than prepayment Zero subjectivity in terms of scrutiny Low risk
Facilitates financing Assurance of payment against compiant data Commission and fee
Secures supply chain Flexible pre or post shipment finance New business oppor
Customized payment structure Customized payment structure Automated solution
Payment against specific terms Elimination of foriegn exchange risk Lower operating cos
Ability to include quality control in the Reduced complexity and cost in Meets the market
data documentation requirement
BPO is a relatively new solution on the market and requires a marketing effort to increase
the transaction volume. It requires a new infrastructure in the bank. BPO transaction is a
paperless transaction and does not provide the title documents in the custody of the bank
hence banks need to exercise vigilance while granting BPO baselines to corporate
customers.
Insurance Document
Part I
by Pallavi Deshpande . August 11, 2014
Exporter may suffer a huge loss if the goods are damaged

or lost in transit, insurance coverage protects the exporter
from financial loss.
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Cargo insurance or Shipping insurance is a service that reimburses the sender if the parcel
or the shipment is lost or damaged in transit. Insurance provided for air shipment is known
as Cargo insurance whereas for sea shipment is known as Marine insurance, these terms
are interchangeably used in common parlance.
Insurance cover not only protects the exporter from financial and legal risk
but also offers a similar protection to the intermediaries such as freight
forwarders, shipping company, clearing agents and custom authorities.
In order to extend post shipment finance, the lending institution usually asks for an
insurance cover. It covers the financial risk to a large extent in the event of any damage to
the goods. Hence the insurance document should cover the risks required by the credit.
Cargo insurance should not confused with Trade Credit insurance.

Cargo insurance covers the underlying shipment whereas trade credit insurance is an
insurance policy and a risk management product offered by the banks and insurance
companies to cover account receivables. In this article we shall be discussing the pre-
requisites of a CLEAN cargo insurance document under LC. We will discuss Trade Credit
Insurance in our subsequent articles.
Article 28 of Uniform Custom Practices (UCP 600) is prescribed for

Insurance policy, Insurance certificate and Declaration under Open cover.
Contents
Certificate Number: A unique number that is be assigned to the cargo insurance
certificate.
Shipment Date: Departure date of international or domestic shipment of
commercial cargo, household goods, vehicles, boats, machinery, commodities,
merchandise, etc.
Assured: Name of the beneficiary of insurance and address.
Insurer: Name of the cargo insurance policy insurer or the underwriter.
Shipping Details: Name of the shipping company (ocean carrier, airline, trucking
co.), vessel name, voyage / flight number.
Insured Value: Normal rule is to insure for CIF + 10%. Total cost of the cargo, freight
shipping charges, insurance premium and add 10%. This amount should cover the
REPLACEMENT COST plus any unforeseen expenses.
Place of Origin: City, state / region, country, port of departure.
Final Destination: City, state / region, country, port of destination.
Description of Goods: Item being shipped, number of packages / pallets, weight,
marks, VIN / ID numbers.
Average Terms & Conditions: Special terms for cargo shipment. Cargo Insurance
Policy deductible or franchise
Conditions: Warranties and conditions according to American Institute Cargo
Clauses.
Additional Notes: more details on international or domestic shipment; letter of credit
information, etc.
Consignee: if the receiver of the cargo is different from the Assured.
Claims Agent: company at the country of destination to be notified in case of cargo
damages or losses.
Claims Procedures: steps to file the cargo insurance claim and list of required
supporting documents.
Basics
1. Insurance policy can be submitted in place of Insurance certificate or Declaration under
Open cover.
2. Institute of London Cargo Clause (A) 1/1/82 = Thefts, Pilferage, Non-delivery, Short-
delivery = TNPD = All Risks.
3. All Risks = Institute Cargo Clauses (A) = Institute Cargo Clauses (Air) used in case of
air shipment.
3. Cover notes are not be acceptable.
5. All originals must be presented and must contain the signature.
6. Insurance document must be in the same currency as the documentary credit.
7. If documentary credit states All-risks then insurance document stating All-risks and
excluding some risks is acceptable.
8. If the documentary credit calls for an Insurance document covering Usual or Customary
risks, insurance document will be accepted without regard to any risk being excluded.
Insurance document is a negotiable document. As per ISBP banks are not required to
examine the general terms and conditions in an insurance document. However it is critical to
read the insurance document in great detail in order to establish its validity and
cover. Exporters, Importer and the doc checkers should take a note that ENDORSEMENT
of an insurance document determines the ability and validity of the document and the claim.
ICC has set up a special commission on Financial Services and Insurance to

highlight the most effective techniques employed by companies to reduce
their vulnerability to financial shocks.
Insurance cover plays a very important role in cross border trade. Adhering to these best
practices also contributes to global financial stability.
Conditions pertaining to the endorsement, date, signature, value and claims have been
discussed in the next article http://tradesamaritan.com/world-trade/documents/insurance-
document-part-ii
Insurance Document
Part II
by Pallavi Deshpande . August 11, 2014
There are many shipping horror stories, for instance

consignment comprising of rare stones disappeared,
shipment containing glass sheet found to be broken into a
thousand pieces at destination or a dent on an imported
car.
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Shipping insurance is the oldest form of insurance. Marine cargo insurance can be traced
back to the Phoenicians, the earliest known ocean traders. For a long distance shipment is
prone to more dangers and needs extra protection and cover. Besides covering the shipper
for the cost of the goods (financial loss), insurance also covers the legal liability of the
exporter and intermediaries such as shipping company, clearing, freight and handling
agents as goods may have been damaged because of reasons beyond their control.
We have discussed the basics and contents of an insurance document in our earlier article.
Now let us delve further into balance characteristics of a CLEAN cargo/marine insurance
document under credit.
Endorsement
1. Unless specifically called for by the credit, the insurance document should not evidence
that the claims are payable to the order/favor of the beneficiary or any other party other than
the issuing bank or applicant. And if it states so then;
such an insurance document should be blank endorsed or endorsed in the favor of

either the issuing bank or;
applicant by the beneficiary or the other party in whose order/favor it was originally
issued.
2. As partly explained in point # 1, insurance document issued to the bearer or to the order
of shipper/beneficiary must be endorsed so that the right to receive payment under it passes
upon or prior to the release of the document.
3. In practice for usance import bills under LC, the issuing banks retain the original
insurance document with themselves so that in case of default by the importer on the
maturity date the issuing bank will have claim on the goods. In such cases, the insurance
document is released to the importer only under special circumstances identified under
banks policy.
4. If the credit calls for an insurance document issued to the order of a named party, then
the document not stating the words to the order of is acceptable provided;
the name of the required party is appearing in the insured party or claims payable to
column and;
assignment of claim by endorsement should not be prohibited under such an
insurance document.
5. The issuing bank should note that the credit cannot call for a insurance document with a
blank to bearer or to order. The name of the insured party is mandatory.
Issuer and Signature

6. Signature of Insurance Company or Underwriter or their agent or proxy is acceptable,
broker may sign in the capacity of agent or proxy.
7. Insurance document issued on brokers stationery is acceptable if it is signed as depicted
in the above chart. If signed by the agent or proxy, the insurance company or the
Underwriter on whose behalf it is signed must be indicated;
in the signature column or;

somewhere on the face of the document.
8. When an insurance document is issued directly by the insurer, the insurance
document need not indicate that it is an insurance company or underwriter.
9. If documentary states that cover notes are acceptable then insurance document issued
by the Broker or his Intermediary is acceptable
10. Insurance companies often use a trading name such as AIG (American International
Group) or CNA (Loews Corporation). If the signature field on an insurance document shows
its trading name, then the name of the insurance company must be identified somewhere on
the face of the document.
11. When the credit calls for a counter signature of the insurer, insured party or any third
party, it must be counter signed accordingly.
Dates
12. If the date of issuance of Insurance document is greater than the date of shipment then
the effective date must be before or on the date of shipment.
13. If no effective or issuance date is stated on the insurance document, the countersigning
date will be considered as the effective date of insurance coverage.
14. If the insurance document is issued on the date later than the shipment date, then it
should clearly indicate that the insurance coverage is effective from the date of shipment.
15. Expiry date of the insurance document should be greater than/ equal to last date of
shipment.
16. Expiry date if stated on the insurance document should be for loading on board and not
for lodging of claims.
Value and Claims

17. As stated in point # 17, insurance document should not indicate any last or end date for
submitting claims.
18. Insurance document may indicate that the cover is subject to a franchise or excess
(deductible).
19. If the credit asks for insurance to provide for claims payable irrespective of percentage,
in such cases it is not mandatory to quote the exact words irrespective of percentage on
the insurance document but it should not evidence any reference to deductions by way of
Franchise or Excess (deductible), as franchise and excess tend to reduce the claim value.
20. Insurance document must evidence that claims are payable in the place as shown in the
documentary credit.
21. In case of multiple insurers, each insurer will bear his liability severally, ie without any
regards to the other policies affected.
22. If one insurance document is presented and it has more than one insurer, then the
insurance document should clearly state;
the name of the insurer and;

the percentage of cover provided by each insurer.
23. In case of above, one agent, proxy or insurer can sign on behalf of all insurers or co-
insurers.
24. If the percentage of coverage is not indicated (credit is silent) then at least;
110% of CIF/CIP value of goods or;

amount honored or;
amount negotiated; whichever is greater is required.
25. There is no ceiling on the maximum percentage of insurance coverage.
26. For large value shipments there could be multiple insurance companies (insurers)
involved, if multiple insurance documents are submitted;
then each document must indicate the value and;

that the each insurer will bear its responsibility severally without any dependency on
the any other insurance document affected for that particular shipment.
27. The total across all insurance documents presented must be equal to or greater than the
insured amount required by the credit.
28. Calculation of Insurance cover must be based on Full Gross Value of the goods without
considering any adjustments/deductions such as discount, future date payment and pre-
payment.
29. If an insurance document indicates that the premium is unpaid and that the it is stated
on the same insurance document that the validity of the document depends on the payment
the premium, such an insurance document will be considered discrepant.
30. There is no requirement for insurance coverage to be calculated to more than two
decimal places.
While the shipper is usually responsible to obtain the cover, the importer or the issuing bank
must be in a position to submit the claim/receive the payment. Banks usually mandate
submission of insurance document in order to extend post shipment finance.
Insurance companies work in close association with ICC to draft legal

insurance contracts. In some countries big size insurance companies
functioning as financial institutions even issue documentary credits.
Insurance companies and Governmental agencies offer a variety of insurance covers
ranging from an open cover which covers series of shipment to a single voyage policy.
Further such insurance policies cover single, multiple or all risks such as war risk,
catastrophic, theft etc. The cost of the insurance depends upon the distance, route, value
and the nature of the consignment. Insurance increases the cost of goods but at the same
time minimizes the financial and legal loss.
Revolving Credit
If the importer wants to import a specified material from

the overseas seller for a specified period at regular
intervals, revolving type of credits are useful.
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We have already discussed in our previous article that an import Letter of credit (LC) is an
unconditional payment undertaking given to a seller (beneficiary) by the buyers (applicant)
bank (issuing bank), that the bank will pay the seller provided the seller presents documents
that comply with the terms and conditions of the letter of credit.
And we have also briefly touched upon the types of documentary credits. In order to
manage trade needs of a growing and demanding business it is important to understand the
classification in depth.
We shall be devoting todays article to a very unique type of LC ie a Revolving LC. In

simple terms a revolving letter of credit is a single letter of credit which can be used several
times over a long period of time.
If the buyer and seller are exchanging the same commodity regularly and
are planning to do for a considerable period of time, they may choose to
issue a revolving documentary credit instead of issuing a new credit over
and over.
In a Revolving Credit the amount of drawing is re-instated and made available to the
beneficiary again unto the agreed period of time on notification of payment by the applicant
or merely on submission of documents. The maximum value and period unto that the Credit
can be revolved is specified in the Revolving Credit. The re-instatement or the
replenishment clause and the maximum amount of utilization under the credit are
incorporated in Revolving credit
Types of Revolving LCs

1) Revolving by Time Vs Revolving by Value
In revolving by value, a fixed amount is available which is replenished when exhausted
whereas in revolving by time an amount is available in fixed installments over a period
usually a year.
2) Cumulative Vs Non-cumulative
In the cumulative type of revolving LC, the sum/value of the LC which is un-utilized in a
period is carried over to be utilized in the next period; whereas in the non-cumulative type, it
is not carried over. If the LC is silent it is best to consider it to be non-cumulative or seek
issuing bank clarification.
3) Revolving by Amendment Vs Auto-revolving

If the LC states that it is auto-revolving the next installment sum is automatically replenished
once the earlier one is paid off whereas in case of revolving by amendment, issuing bank
needs to issue and transmit an amendment to the beneficiary bank for each and every
installment as it arises.
Since these type of LCs do not have any standard format, it is necessary to
describe in additional condition the exact revolving clause, the aggregate
amount, if automatically or under amendment. If the LC is silent, it is best
for the beneficiary bank to obtain clarification from the issuing bank.
Example of a Revolving LC transactions:

1. Importer ABC Corp from Germany wants to import raw material from exporter SBC Inc in
Japan for a period of 1 year at a regular intervals. Every month ABC Corp will be importing
the material worth $250,000 and the total value of the import under this contract is
$3,000,000. The parties agree to open a revolving credit as instead of opening a regular
documentary credit for each transaction every month, one set of credit opened at the
commencement of the contract remains valid till one year. Importer saves time and the
cost for opening documentary credit for 12 times. Under this arrangement importer is able to
receive continuous supply of raw materials for the contracted period of one year.
2. An oil exporter from UAE, Oil King Inc has signed a contract to supply oil to an importer in
China, Petronit Inc. The following is the delivery schedule: 1st month 6000 MT; 2nd month
12000 MT; 3-14 months 12000 MT. The agreed payment terms call for Irrevocable,
Transferable, Auto-revolving DLC 100% At Sight. Depending on the parties agree, the LC
can be replenished either by amendment or automatic, it will state the shipment schedule
and the value of each installment which will depend on the rate. And considering the nature
of the goods issuing bank will ideally permit the installment shipment to be lower than
prescribed in the LC which arises the question whether it is cumulative or non-cumulative.
The re-instatement clause and the maximum amount of utilization under

the credit are incorporated in the Revolving credit. It is the responsibility of
the applicant and issuing bank to ensure that the revolving clause is worded
precisely and clearly.
Example of a Revolving LC clause

1. Drafts drawn under this Letter of credit must mention the Letter of credit number XXX
issued on date XXXX in the amount of total face value of $3,100,000 in the installments with
first draw down amount of $ 100,000 upon shipment and thereafter $250,000 every 30 days,
therefore a total of 12 equal installments of $250,000 until the maturity date being xxxx.
or
2. Drafts drawn under this Letter of credit must mention the Letter of credit number XXX
issued on date XXXX in the amount of total face value of $3,000,000 in 12 installments of
$250,000 each, first installment payable 30 days after the date of shipment and every 30
days thereafter, therefore a total of 12 equal installments of $250,000 each until the maturity
date being xxxx.
Please note that huge difference in the above stated two clauses.
The first example has a draw down amount of $100,000 and 12

installments of $250,000 each whereas in the second example the LC does
not ask for any draw down amount but 12 installments of $250,000 each.
Revolving LC transaction can seem to be complicated however if handled efficiently a single revolving
letter of credit can cover several transactions between the same buyer and seller.
Currency Trading
Introduction to
Derivative instruments
Part I
Foreign exchange trading market happens to be one of the

largest financial markets in the world. On an average,
foreign exchange worth $5.3 trillion is traded every day.
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Increasing globalization is leading to an increase in exchange of goods and services
(current account) as well as increase in investment related (capital account) transactions
between economies. Such an exchange of goods, services and investments between
economies is facilitated by exchange of price in different currencies depending upon the
countries involved in the transactions. For current account transactions (exchange of goods
and services), the exporters usually prefer payment in the currency of their resident country
but if that currency is not freely convertible, for example Renminbi or Indian Rupee, the
transaction is settled in any other freely convertible currency such as a US Dollar, Great
Britain Pound, Japanese Yen or Euro.
With developing countries ever expanding their activities, the volumes of currency trading in
the world market are always on an upward trend. Currency market depends on several
factors and economies. For instance, one pip (smallest amount of change in the price say
0.0001) worth of change in the major currencies such as the US Dollar, Euro, Japanese Yen
and Great Britain Pound leads to rippling effect on the foreign exchange market. Financial
investors such as Hedge funds and Institutional investors also play a big role in impacting
the market.
There are five financial (derivative) products commonly used to
buy/sell/trade in foreign exchange.
Let us discuss these derivative instruments from the currency market perspective as to how
do these five products function in a foreign exchange or a currency transaction. In the real
world, most of the derivative instruments are simply used for speculation and hedging and
the right may not even get exercised. It all depends upon the information available, market
movement, view of the investor and the current prices. We shall be discussing these
derivative instruments with examples, these examples may at times look theoretical
compared to the real world as the currency and information sharing platforms are entirely
computerized with high speed, volatility and communication. But please note that these
examples will be useful to understand the underlying instrument and the fundamentals in
detail.
Spot
Spot transaction involves an exchange of two currencies. Delivery or settlement in a spot
transaction occurs within two business days of the trade date. Spot transactions are single
outright transactions involving exchange of currencies in pairs, for example USD/JPY or
EUR/USD or USD/INR. The transaction is settled at a rate agreed on the date of the
contract with a cash settlement. Such a settlement takes place within two business days.
Example of a Spot transaction

Mr. Abe a U.S. citizen buys a rupee bond issued in India, he needs to exchange U.S$ for
the Indian Rupee to pay for it. So he engages with City Bank California for a spot
transaction, the bank debits Mr. Abes account for equivalent US$ at the spot rate and
remits the INR amount to India on his behalf.
Forward
Forward contract is an over-the-counter instrument which allows the parties to exchange a
specified amount of different currencies at a pre-determined future date at a pre-determined
exchange rate set the time of entering the contract. The exchange rate to be used to settle
the transaction on the future date is decided on the date the contract is entered into.
Companies usually enter into the forward contracts to prevent their profits from getting
wiped off on account of an adverse currency movement. Companies hedge more than 40%
of their currency exposure with forwards. Company if paying or receiving in foreign currency
on any future date can simply lock the exchange rate with the help of a forward contract.
Exporters can prevent the loss arising from devaluation and importers can prevent the loss
arising from re-valuation or appreciation. Forward rates of the currencies depend on the
prevailing interest rates in their respective home country and the foreign currency country.
Example of a Forward transaction

Xing Foods Limited is an exporter of bananas; the company has exported $1000.00 worth
bananas to an importer in Bangladesh. Terms are 60 days net and an invoice for $1000 has
been raised on the importer which has been accepted for payment. Xing Foods anticipates
a downward movement in US$ and enters into a forward contract with its bank at the rate of
130.00. On the due date
If the US$ to Sri Lankan Rupee is 128.00, Xing Food will gain 2 points over the spot rate
which will be banks loss.
If the US$ to Sri Lankan Rupee is 133.00, Xing Food will lose 2 points over the spot rate
which will be banks profit.
Interest rate parity explained

Forward rate premium introduces a concept known as Interest rate parity. It relates interest
rate differentials between home country and foreign country to the forward
premium/discount on the foreign currency. The size of the forward premium or discount on
the foreign currency should be equal to the interest rate differential between the countries of
concern. If nominal interest rates are higher in country X than country Y, the forward rate for
country Ys currency should be at a premium sufficient to prevent arbitrage. If domestic
interest rates are lower than foreign interest rates, foreign currency must trade at a forward
discount to offset any benefit of higher interest rates in foreign country to prevent arbitrage.
If a foreign currency does not trade at a forward discount or if the forward discount is not
large enough to offset the interest rate advantage of foreign country, arbitrage opportunity
exists for domestic investors. Domestic investors can benefit by investing in the foreign
market. Hence investors get squared off for giving up or gaining interest depending on the
currencies involved.
In case of a Euro and US$, the forward rate to buy USD against Euro will be at a discount
against the spot rate. This is because of the interest rates prevailing in Europe and U.S., in
this case Europes rate of interest is higher say 5% than U.S say 2%. The investor is
sacrificing investing in Europe at a higher interest rate which is compensated by a discount
in the forward rate. So forward points adjustment will equalize this interest rate differential
and compensate the investor for giving up the interest bearing currency.
Spot and Forward transactions are relatively simple and straightforward, both the products
are over-the-counter products. In Part II we shall be discussing balance three derivative
products namely; Futures, Options and Swaps.
Currency Trading
Introduction to
Derivative instruments
Part II
In todays global markets a good understanding of how

foreign exchange can affect your business and investment
decisions is crucial. Derivative products facilitate hedging
of currency volatility risk and opportunity to make
speculative profits. In this part we shall discuss Futures,
Option and Swaps with examples.
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In Part I, we discussed along with examples the two most commonly used currency trading
products; Spot and Forward. Now let us discuss Futures, Option and Swaps with examples.
Futures
Chicago Mercantile Exchange introduced currency futures in the year 1972 immediately
after the gold standard was abandoned by the U.S President Richard Nixon. Currency
futures contract is an agreement between two parties made through an organized
exchange. Investors typically use a futures contract to hedge the currency risk and traders
use them to make speculative profits. Futures contract have to abide rules and regulations
laid down by the futures exchange and the regulating bodies. The contract is for a specific
amount of a specific currency to be bought or sold at a specific future time determined by
the exchange. Inter-day losses and gains are posted each day during the life of the futures
contract. This process is known as marking to market. The difference between todays
futures price and yesterdays futures price is the inter-day or intermediate loss or gains.
Futures contracts can be traded on any day or on the range of dates even before the expiry.
Every futures exchange as a clearing house that takes care of the transaction once the
trade is completed. Parties entering into a futures contract are required to deposit margins
with the exchange to demonstrate their ability and capacity to pay and fulfill their contractual
obligation.
Option
Currency option is a popular foreign exchange instrument used in the financial markets. It is
a contract that grants the holder of the option the right, but not the obligation to buy or sell a
currency at as a specified exchange rate during the specified period of time. Call option is
the right to buy the currency and a Put option is the right to sell the currency. It is important
to remember that the holder of an option be it Call or Put has the right to exercise it but is
not obliged to do so. The seller or the writer of the option is liable to take the delivery if the
buyer decides to exercise the option he holds. The buyer of the option pays a premium to
buy a call option from the seller of the option. It is also important to note that the holder of
the option is bearing almost no risk as if the market price of the said currency is more
favorable compared to the option price, he will lose the premium/cost he paid to buy an
option, however if the market price of the currency is adverse compared to the option price,
the holder of the option will exercise the option and the seller of the option will incur to the
tune of the difference between the option price and the market price.
American style This type of option can be exercised at any point up until
expiration.
European style This type of option can be exercised only at the time of
expiration.
Example of an Option transaction

Mr. Xavier M sells the below option to Miss Lin Fin Tau:
Face amount US$ 50,000.00; option type Yen Put (buy US$ for Yen), tenor 30 days, strike
price 101.00, cost JPY 500.00 and it is a European style option.
Miss Lin Fin Tau has bought this put option from Mr. Xavier as she assumes that the Yen will
fall not only below US$101.00 and but also below the spot rate 100.00. She will still be able
to buy US$ 50,000.00 at 101.00 and make an excellent profit. Let us look at some scenarios
now:-
If USD/JPY market or the spot price on the 30th day is 99.00; this means that Yen has
strengthened against the US$, Miss Lin Fin Tau will not exercise the put option and buy US$
at the spot price of 99.00 which is 2.00 points higher than her option price. Mr. Xavier gains
a profit of JPY 500.00 which is the cost (premium) of the option he sold, which is the same
as the amount lost by Miss Lin Fin Tau in this entire transaction.
If USD/JPY spot price on the 30th day is 102.00 this means that Yen has weakened against
US$; Miss Lin Fin Tau on the 30th day will surely exercise the put option and buy US$
50,000.00 at an option price of 101.00 which is now 1.00 point higher or stronger than the
spot price of 102.00. So the net profit of Miss Lin Fin Yuan is:
50000 X (102 101) 500.00 (premium paid for the un-exercised option) = JPY 45,000.00.
This is the amount lost by Mr Xavier.
Swap
A foreign exchange swap is an over-the-counter and a short term derivative instrument. In
foreign exchange swap, one currency is swapped against another for a short period of time,
and then the same is swapped back, this creates an exchange and re-exchange. A
transaction under foreign exchange swap has two separate legs settling on two different
value dates. The transaction however is recorded as a single transaction. In principle a
foreign exchange swap is a combination of a spot and a future transaction as it has one deal
rate for the near date and another deal rate at the far date. The far date deal is to reverse
the near date deal. The tenor of a foreign exchange swap varies between a few weeks to
three months and hence this is a short term derivative. Foreign exchange swaps are most
suited to companies who have an excess of one convertible currency and need another
convertible currency. The interest rates in the countries of the two currencies decide the cost
of the swap.
Example of a Swap transaction

Bell Company based in Europe has Euro 100000 in the bank and has a short term funding
requirement USD 75000 for a joint venture it is establishing with a U.S. based company
Bliss Inc. Bell Company does not wish to take any foreign exchange risk and wishes to
hedge the transaction entirely. So Bell Company decides to enter into a foreign exchange
swap with Welcome Bank in Europe. So Bell Company will enter into a foreign exchange
swap with the Welcome bank in Europe. The foreign exchange swap is recorded as one
transaction but has two underlying exchanges or deals. Bell Company will sign up two
contracts spot and forward at the same time to be executed on different dates.
Deal 1: Bell Company to sell the Euro 100000 it has to the bank at 0.75 spot rate on the
near date
Deal 2: Bell Company to exchange the USD back with the bank on the far date at the
forward rate of 0.7455 (forward points of -0.0045 are adjusted as explained earlier in the
forwards section). Heres what happens:
On the near date; Bell Company gives the Welcome bank Euro 100000 and Welcome bank
remits USD 75000 to Bliss Inc. in the U.S on Bell Companys behalf.
On the far date; Bell Company will pay USD 74,550 (Euro 100000 x 0.7455) to Welcome
bank and the bank will credit Bell Companys account with Euro 100000.
Foreign exchange swap is an excellent and most flexible derivative instrument available
over-the-counter. It is widely used for purposes like hedging, funding, speculations and also
for regulating the markets. This derivative instrument is commonly by the regulating bodies
of the economies to manage their monetary policy, for instance, governing and regulating
authorities can restrict and inject the circulation of the desired currencies in the markets by
entering into foreign exchange swap transactions with the banks.
Currency trading is becoming increasing popular as the investors who are disappointed with
bonds and securities are usually keen to try their luck in the currency market. It will be seen
that currency trading is not only done for hedging the currency risk but also to gain a
speculative profit. 60% 65% of the currency transactions are speculation driven.
References:
Bloomberg
Foreign Exchange, An introduction to the core concepts by Mark Mobius

International Trade
Payments (SWIFT)
by Pallavi Deshpande . September 6, 2014
The volume of world trade payments is gigantic and the

volume of SWIFT messages reached an all time high of 5
billion messages in 2013.
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Technology has gripped the planet and there is a continual and rapid progress in every
industry. From barter exchange to electronic payment, world trade has evolved and has
grown in leaps and bounds.
As per the data published by Department of Economic and Social Affairs, Statistics Division,
United Nations, trade merchandise volumes have sky rocketed.
Trade volume has leaped a 285% from 2000 to 2013.

This volume spike is obviously supported by scaleable as well as a robust financial
telecommunication systems. Online and electronic payment industry (domestic and
international) is reaching a new high every month.
Coming back to trade payments, all our readers are aware that trade payments can be
made through several mediums such as a cash, check, draft, credit/debit card, wire, SWIFT
etc; in this article we will focus on electronic trade payments
SWIFT
Prior to introduction of SWIFT (Society for Worldwide Inter-Bank Financial
Telecommunication), banks and Financial institutions were commonly using TELEX to
communicate and exchange financial transactions. Telex had severe drawbacks such as low
speed, insecurity and free formats which made it difficult for the users to understand the
entire content of the message as well as it was time consuming to type every message.
SWIFT as a society was formed when seven major international banks met in 1974 to
discuss the limitations of Telex .
Gradually by 1990 TELEX messaging system was entirely replaced with SWIFT messages.
Headquartered in Belgium, SWIFT now has more than 10000 members worldwide (more
than 200 countries) handles more than 15 million messages daily. Any financial institution
who holds a banking license can become a member of SWIFT by paying a joining fee and
service charge for each message sent.
In order to understand the architecture of SWIFT let us familiarize ourselves with a few
terminologies.
SWIFT does not facilitate funds transfer; but it sends instructions, which must be eventually
settled by correspondent accounts that the institutions have with each other. Each financial
institution, to exchange banking transactions, must have a banking relationship (commonly
known as Corr bank) by either being a bank or affiliating itself with one (or more) so as to
enjoy those particular business features.
SWIFT is extremely popular as it offers standardized, encrypted and

validated financial messaging service across the world.
SWIFT Addresses
SWIFT addresses indicate the final destination of the message and also assists in
identifying various parties within the individual message. The term SWIFT address is a
subset of Business Identifier Codes (BIC), in other words one does not have to be a user of
the SWIFT network to have a BIC and these can therefore be used over other networks
such as Telex. Sender and the receiver of messages identify each other by their SWIFT
addresses.
System Control Processors

System Control Processors control the worldwide network of SWIFT. These processors
perform following functions
Session Management
Software and database distribution
Monitoring all SWIFT hardware and software
Failure diagnostics and recovery
Dynamic allocation of system resources
There 4 such processors which are located at Operating Centres, 2 each in the US and
Netherlands. There are Processors in each center in order to back up and archive the data.
Slice Processors
Slice Processors are also located at the processing in the US and Netherlands. These
processors are responsible for
Routing and safe storage of messages & history

Safe-store Acknowledgements to Regional Processors
Generation of reports
Delivery and non delivery messages
Processing retrievals and system messages
Archiving, billing and statistics
Regional Processors
Regional Processors are located in the same country as the user and are the entry and exit
point to SWIFT. They support Leased line, Router, Dial up or Public Data Network
connection. The most common method is primary leased line with dial-up backup. Regional
Processors provide sequence number checking and message validation, temporary safe-
storage, generation of Positive and Negative Acknowledgements (ACK) and verification of
check sums.
Computer based Terminals

A Computer Based Terminal (CBT) is also referred to as SWIFT interface is always located
at each user site. These terminals support the connectivity to the local regional processor
(explained above) and facilitate both manual entry of messages. It serves as a bridge
between originating applications and the user. This interface can be acquired directly from
SWIFT or their vendors. Needless to say that the market share is dominated by SWIFT.
At a macro level SWIFT architecture will look like this

Micro-level Process flow
As stated above, access to the network is via the CBT and Smart Card technology is used
to access secure functions. Many functions require dual user and password input. Initially a
User will LOGIN to the GPA service (General Purpose Application; facilitates messages
between the user and SWIFT only) and receive a GPA Acknowledgement. The User then
SELECTS the application or service that they wish to use, for example FIN (Financial
Application; facilitates messages between users). The user can then send FIN messages to
other users and the Regional Processor will either send back a Positive (ACK) or Negative
(NAK) acknowledgement for each message after having safe-stored it. The session then
remains open for sending and receiving messages until the User QUITS or LOGS-OUT.
World Currency Volume traded by SWIFT

Heres a snap shot of top 10 currencies traded through SWIFT messages, this includes
Payments, Cheques, FI transfers, Treasury, Collections, Documentary credit, Guarantees,
Cash Management and Securities.
As you can see, this Pie chart is a no brainer, US Dollar holds the #1
position way exceeding the cumulative total of #2 to #10.
US dollar is followed by Renminbi (RMB). Until recently EURO was on #2, then China
caught up and the #2 position was taken over by RMB.
Japanese Yen is # 4 and rest in the line are Saudi Riyal (SAR), United Arabs Emirates
Dihram (AED), Swiss Franc (CHF), British Pound Sterling (GBP), Pakistani Rupee (PKR)
and Indonesian Rupiah (IDR) are more or less at par with each other ranging from #5 to
#10.
Upon attaining an all time high of 5 billion financial messages, in January 2014 as an
incentive and rebate, SWIFT announced a 10% pay back to all its members and returned
approximately $33 million to its members worldwide. And is aiming to achieve economies of
scale by 2015 in order to reduce the pricing by 50%.
For further reading on SWIFT read our article on SWIFT Message Type 7xx. Also we will be
covering Wire Transfers in our next article and finally we will compare the pros and cons of
SWIFT Vs Wire transfers.
SWIFT MT7xx:
Documentary Credits
and Guarantees
SWIFT or Society for Worldwide Inter-bank Financial

Telecommunication is a global provider of financial secure
messages. It provides a network to allow both financial
and non-financial institutions to exchange financial
transactions in a secured manner.
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SWIFT has assigned different Message type series for various categories of financial
transactions such as Treasury, Securities, Foreign Exchange, Checks etc.
The below table enlists all the Message Types in category 7 which is meant
for Documentary Credit and Guarantee related financial transactions,
advices and communication.
This table should be kept handy by banking/FI processors and corporate handling
documentary credit and guarantee related transactions.
SWIFT MT1xx and
MT2xx : Payments
SWIFT Message Type (MT) 1xx and Message Type (MT)

2xx are used for payment related messages.
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MT1xx: Customer Payments & Cheques
MT2xx: Financial Institution Transfers
MT103 and MT 202 are commonly used for Trade Import payments.
For further reading on SWIFT and MT please visit International Trade Payments
(SWIFT) & MT7xx.
MT103 Single
Customer Credit
Transfer
MT103 is also used in the form on MT103+ and

MT103REMIT which facilitates straight through
processing.
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We have already discussed in our earlier article SWIFT MT1xx & MT2xx that these specific
message types starting with 1 and 2 are standardized and assigned for Customer and
Financial institution related payments. SWIFT MT103 is an improvised version of the original
MT100 customer credit transfer message.
MT103 is used to make a single payment. It has a large number of options that are to
describe exactly how the payment should be made.
Let us study a few examples of MT103 facilitating foreign currency trade payments between
the exporter and importer located in 2 countries. Through our example we will examine the
architecture of trade payments between with 2 banks having a single account relationship, 2
banks having multiple account relationship and 2 banks having no relationship thereby using
an intermediary bank to facilitate the actual payment.Please remember that MT103 like
other SWIFT messages is a mere communication of financial transaction. SWIFT offers a
secured, encrypted and standardized medium of financial transaction communication.
MT103 provides the instructions of the underlying financial payment to the

receiver of the transfer, the actual entries/transactions are carried out
separately and are outside the purview of SWIFT.
Payment Reference: Your bank payment reference must be indicated in all MT103 and it
should be correct. This reference number enables the payee/beneficiary to apply the
payment.
BEN/OUR/SHA: This field indicates as to who is being the transfer charges. The OUR
instructions mean that the sender will bear the charges. SHA means means sender only
pay sender banks outgoing transfer charge. Receiver receives the payment minus the
correspondent bank charges. BEN (beneficiary) means sender does not pay any charge.
Beneficiary receives the payment minus all transfer charges.
MT103 Single Customer Credit Transfer with

Direct Account Relationship
Circles G.m.b.H. orders UBS, Zrich, to pay Euro 1,558.47 to ABN Amro Bank, Amsterdam,
for the account of W.E. Jose.
In the above example no reimbursement party will be indicated as the home currency as
well as the transaction currency is Euro (no conversion involved) and both the bank have an
account relationship. The direct account relationship, in the currency of the transfer,
between the Sender and the Receiver will be used.
UBS Zurich will debit the account of Circle G.m.b.H and credit the account of ABN Amro
Bank held with them for Euro 1558.47 whereas ABN Amro bank will debit the account of
UBS by Euro 1558.47 and credit W.E.Jose. These 2 banks have only one account in Euro
currency held with each other hence no serviced/settlement account needs to be specified.
Final beneficiary is W.E.Jose whose account is held with ABN Amro Bank.
MT103 Single Customer Credit Transfer specifying

account for reimbursement
Transaction: Circles G.m.b.H. orders UBS, Zrich, to pay Euro 1,558.47 to ABN Amro
Bank, Amsterdam, for the account of W.E. Jose.
However by this time, these 2 banks have more than one Euro account relationship, hence
UBS, Zrich will have to specify the particular account number that needs to be used for
reimbursement and settlement. The flow of the transaction will be the same as the above
example, the only addition is the mention of reimbursement account in the SWIFT message.
In field 53b of MT103 the account number (say 456 75 1598) of the Senders
account (UBS Zurich), serviced by the Receiver(ABN Amro Bank), which is
to be used for reimbursement in the transfer will be specified.
This way ABN Amro bank will know as to which particular Euro account of UBS held with
them needs to be debited to settle the transaction.
MT103 Single Customer Credit Transfer with

ordering and account-with institution.
Circles G.m.b.H. orders UBS, Zrich, to pay USD 2000.00 to OCBC Bank, Singapore for the
account of W.E. Jose.
Please note 2 changes in this example; currency is USD and UBS, Zurich does not a hold a
USD account directly with any bank (assumption held for the sake of this example).
Since UBS, Zurich does not have a direct account relationship with OCBC Bank and does
not hold a USD account it requests Goldman Sachs bank AG, Zurich to handle the
transaction. UBS, Zurich routes all its USD transaction through its correspondent bank
Goldman Sachs AG, Zurich as it has a Dollar account with Citibank New York.
Now both the banks ie Goldman Sach Bank AG and OCBC Bank SG have a USD currency
account with Citibank, New York. Hence the transaction can be successfully routed through
Citibank New York for settlement in USD.
Note that in order to settle this particular transaction there will be 2 MT103
messages sent
First MT103: will be sent by Goldman Sachs AG, Zurich to Citibank, New York for
$2000.00 instructing Citibank to debit their USD account for $2000.00 and credit OCBC
Bank Singapore for $2000.00.
Second MT103: will be sent by Citibank New York to OCBC Bank, Singapore instructing
them to debit their USD account for $2000.00 and credit the beneficiary W.E.Jose.
MT202 is the next most popular message type, it facilitates transfers between Financial
Institutions. We will conduct a similar discussion around MT202 in our forthcoming article.
Bill of Lading (UCP 600
Article 20)
Research indicates that trade and exchange of goods and

commodities via sea can be traced back to the Stone Age.
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Sailing has been a major contributor to the development of civilization. The first boat was
built during the Stone age which resembled a Canoe. Canoe was used for transportation of
goods and material as well as for fishing. Maritime history IE study of human activity at sea
is treated as an academic subject in itself. Maritime history is intriguing and requires tons of
articles, however the scope of this article is limited to understanding the Bill of Lading along
with its governing guidelines. In this article ICC guidelines governing the Bill of Lading (B/L)
have been divided into 40 rules which have been further explained with examples.
Sea Shipments constitute more than 80% of World Trade and as per the
review of Maritime transport conducted by UNCTAD (United Nations
Conference on Trade and development, the volumes are increasing every
year. Commodities such as grains and oil because of the size, quantity and
the distances to be covered are exclusively shipped via sea.
Bill of Lading (B/L) is a transport document that exclusively covers the shipment of goods
via sea route. Bill of Lading may be called House B/L, Master B/L, Ocean B/L, Order B/L,
Straight B/L, Claused B/L, Multimodal B/L, Clean B/L etc. In some cases it is just a naming
convention whereas in some cases the B/L has some distinct features. We will discuss the
nomenclature of each type in our forthcoming article, in this article we will discuss the
fundamentals of an ordinary or commonly used Bill of Lading.
Bill of Lading is a document of title issued in 3 original copies where it serves as a receipt to
the consignor and also functions as evidence of contract between the consignor and the
carrier. It is a sensitive document as it provides the right or access to the underlying goods.
B/L is negotiable and the title to the goods can be transferred by

endorsement.
Trans-shipment is unloading and reloading of goods from one vessel to another during the
carriage of those goods from the port of loading to the port of discharge stated on the credit.
Partial Shipment is shipment of goods on more than one vessel even if each vessel leaves
on the same day for destination.
Demurrage is defined as a charge or a fee levied by the port authorities on a vessel of the
goods for some infringement of regulations. Example delay in berthing or not removing the
goods in time.
Basics
1) Issuing bank generally requires a Bill of lading to be issued as to the Banks order or to
the order of shipper and to be endorsed in blank, so that the buyer cannot get hold of the
goods unless the issuing bank endorses the B/L in the favor of the consignee.
2) A bill of lading can be issued by any party other than carrier or master provided it meets
all the conditions stipulated in Article 20 of UCP.
3) The carrier is entitled to effect the delivery of goods to the holder of one original Bill of
Lading and is not concerned with the whereabouts of the other 2 Bill of Ladings of the full
set.
4) B/L is always issued in 3 originals and it should indicate the number of originals that have
been issued. This is necessary to ensure that a full set has been presented. Any one
original is good enough to release the shipment.
5) First/Second/Third original = Original/Duplicate/Triplicate
6) A Bill of Lading need not be named as Marine bill of lading, Ocean bill of lading or
similar even if credit refers to this particular document with any of these names.
7) Terms and conditions of the carriage must be stated or should make reference to another
source containing the terms and conditions of the carriage
8) If the credit stipulates that Freight Forwarders Bill of Lading or House Bill of Lading is
not acceptable then the credit should also state context such as title, format, content or
signing to which this condition relates. If the context is not elaborated in the credit, this
condition will be ignored and the Bill of Lading presented will be examined against Article 20
of UCP 600.
9) Credit usually calls for a CLEAN B/L or requires the word CLEAN to appear on the B/L,
the B/L need not indicate the word Clean or similar to Clean but must not explicitly
evidence that the condition of goods or package is defective. Even the word Clean seems
to have been deleted on the B/L does not make it discrepant.
10) B/L is a negotiable document and entitles the bearer to the underlying goods, hence all
the corrections on the B/L must be authenticated. In case of an authentication made by an
agent, authenticating agent can be different than the agent who has signed the B/L provided
they belong to the same Carrier or the Master. Corrections on Non-negotiable copies of the
B/L need not be authenticated.
11) The inco-terms on the B/L should coincide with the inco-terms on the credit,
12) Goods description indicated on the B/L must not conflict with the credit
Again clauses similar to packaging MAY not be sufficient do not make the
B/L discrepant but clauses such as 8 out 26 boxes are damaged and the
seal is broken indicates that the goods are damaged and the B/L is now
discrepant.
Parties
13) Bill of Lading should not state that it is subject to a Charter party. We will be covering
Charter Party B/L as a separate topic.
14) If credit requires the goods to be consigned to a named party then the B/L indicating
words similar to to the order of the named party will be discrepant. And vice versa.
15) Notify party details stated in the B/L must match with the credit.
16) If the goods are to be consigned to the applicant or the issuing bank, B/L need not state
their address and contact details.
17) If the notify party is the applicant and contact details and address of an applicant is
stated on the B/L under notify party, then it should not conflict with that on the credit.
Partial Shipment and Trans-Shipment

18) If the credit disallows partial shipment then more than one set of B/L is acceptable
provided they indicate that the goods have been shipped on the same vessel, same journey
and are destined for the same port of discharge. In this case, latest of all date of shipment
will be used to calculate the presentation period and the maturity date as may be required.
19) When partial shipment is allowed by the credit and more than one set of B/L is
presented, the earliest date of shipment will be used to calculate the presentation period.
20) Credit dis-allows trans-shipment, bill of lading indicating that transshipment will take
place is accepted provided the cargo is shipped in trailer, container, Lash barge and the
entire carriage is covered by one shipment.
21) An indication that goods will or may be transshipped is acceptable provided that the
entire carriage is covered by one and the same air transport document
Signatures, Date & Stamps

22) If the Master/Captain is signs the Bill of Lading, the Master/Captain should be identified
but his name need be stated.
23) When an Agent is signs the B/L on behalf of the Master/Captain, Agent should be
named and identified as an Agent for the Master (Captain).
24) When an Agent signs the B/L on behalf of the carrier, the agent needs to be named,
indicate as it is signing as an Agent for the named Carrier.
25) If the Carrier is identified as Carrier somewhere else on the B/L, then Agent may sign
as per the above rule but without identifying the Carrier.
26) Carrier should always be identified, if the Bill of Lading is signed by a named branch of
the carrier, the signature will be considered to be that of the carrier.
27) In case of Pre-printed Shipped on board stamp, Date of issuance = Date of shipment
28) On Board notation or stamp, Date of such notation/stamp = Date of shipment
29) In case of Intended vessel, On Board notation with actual vessel is required
30) If LC calls for any transport document without stating that Freight Forwarders transport
document is acceptable then the Freight Forwarders transport document is acceptable
provided it is signed as Carrier or Agent on behalf of the Carrier.
31) If LC says Freight Forwarders or House Bill of Lading is acceptable then the document
is acceptable if the Carrier, Agent is not identified and if the Freight Forwarder signs in his
own capacity.
32) Shipped in apparent good order = Laden on Board = Clean on Board = Shipped on
Board
Ports
33) Port of discharge on the credit and the B/L must match
34) If the port of discharge required by the LC is stated as the Place of Final destination on
the B/L, then it should also bear a notation that the port of discharge is stated as the Place
of Final destination.
If the credit requires shipment to be effected to Louisiana, but Louisiana is

shown as the place of destination instead of the port of discharge, this
should be evidenced by a notation like port of discharge Louisiana
35) In case of Intended port of loading, On Board notation + date of shipment + port of
loading as stated in the LC is required.
36) The above rule also applies for port of discharge as per credit is appearing as the
place of final destination, vessel name is not required.
37) B/L should state the port of loading and the port of discharge as mentioned in the credit
(LC) however it need not state the country even if it is stated in the credit.
38) If the credit requires that the port of loading or port of discharge can be any port in the
indicated geographical area, the B/L should state the ACTUAL port located in that
geographical area
The credit states that port of loading can be any port in the U.S, the B/L
that states that port of loading is Houston is acceptable and the one stating
any port in the U.S is discrepant.
39) The above rule applies to cases where the credit provides an option of 2 or more ports,
the B/L should indicate the name of the particular port
The credit states port of discharge can be Houston or Louisiana or New

York, the B/L should state that one port which the shipment was
discharged say New York, B/L stating all the 3 names as port of discharge
will be construed to be discrepant.
40) If B/L indicates that shipment has taken place from more than one port, then each port
should bear a dated on board notation.
Bill of Lading is a receipt issued by the carrier to the shipper for the underlying shipment to a
particular buyer, The Bill of Lading is sent to the buyer (via issuing bank in case of under LC
transactions) by the shipper upon payment for the goods. The delivery of the goods is made
to the buyer (presenter of the B/L) against the original B/L.
Efforts are being made to substitute a paper based B/L with an electronic B/L. Electronic B/L
will facilitate paper less trade as transport document is always presented in paper .
Electronic B/L will crunch the processing time and costs. As of today 63 countries are
exploring the option of using electronic B/Ls. Bill of Lading is a commercial contract and a
document of title, hence is also subject to commercial law and regulations prevailing in the
associated countries. The impediment in wider circulation of an electric B/L is that the court
of law has certain reservations and discomfort in most countries when it comes to non-
paper based document. This has led to some amount of uncertainty to the event of
electronic B/L replacing the volume of paper based B/L. Secondly there are anywhere
between 5-50 parties involved in a cross border transaction hence exchange of documents
is conventionally considered to be a fool proof route as the the document delivery can be
insured.
Basel I
by Pallavi Deshpande . January 4, 2016
Basel, a city of Switzerland is the headquarters of Bureau

of International Settlement (BIS). BIS encourages
movement among central banks with a common goal.
These goals intend to bring in financial stability and
common standards of banking regulation.
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From 1965 to 1981 United States witnessed about 8 banks failure on account of excessive
lending. More and more banks were standing at the brink of bankruptcy. In order to address
this situation, Central banks of 10 countries joined hands to formulate the Basel Committee
on Bank Supervision (BCBS). And after several rounds of deliberation, in 1988 this
committee published what is known as Basel I which in 1992 was enforced as law by 10
countries. There are currently 27 nations in the committee known as Basel Committee on
Bank Supervision (BCBS).
Capital adequacy of the bank has always been the biggest concern in terms of retaining
solvency.
At this point it is important to understand the difference between solvency

and liquidity.
A bank is considered to be solvent if its assets exceed its liabilities whereas the banks
liquidity depends upon how quick can the bank convert its assets into cash. A bank could
be solvent IE have an asset value higher than its liabilities but lack liquidity, the failure of
Bear Sterns was the result of its illiquid and bad quality assets.
The primary function of Basel I is to define the minimum capital
requirements for the banks.
Basel I defines banks capital in 2 tiers
Tier 1 to include stock and reserves.
Trier 2 to include other capital such as gains on investment and long term debt (> 5
years).
The capital requirement is based on the credit risk and accordingly a risk weight assigned to
the asset. Assets of the bank were classified and grouped into 4 categories of credit risk
weights, 0, 20, 50 and 100. And the minimum regulatory capital requirement under Basel I
has been set at flat 8%.
Risk Weight Asset Type
0% Cash, Bullion/Gold, Home country Treasury Debt
20% Securities
50% Municipal bonds, Residential Mortgages
100% Other claims such as Corporate Debt, Equities, Plant and Equipment, Real Estate
The regulatory capital requirement as per Basel I will be calculated as

below:
Risk Weighted Assets (RWA) = Balance Sheet exposure (asset value) X Risk
weight (assigned)
Regulatory Capital requirement = 8% X RWA
Or
Regulatory Capital/ Risk weighted assets =/ > 8%
Let us look at some examples to understand the requirement:

Money Bank lends USD 100 M to Shoe Corporate for 1 year.
Capital requirement for Money Bank = USD 100 M X 100% X 8% = USD 8 M
Money Bank lends USD 100 M to Penny Bank for 1 year
Capital requirement for Money Bank = USD 100 M X 20% X 8% = USD 1.6 M
Banks are also required to assign risk weight and retain minimum capital for off balance
sheet assets such as Letter of credits, Bonds, Guarantees, Standby letter of credit and
Bankers acceptance.
There are some drawbacks of Basel I such as fixation on credit risk and market risk which is
not representative of economic risk, one-size-fits-all approach and that it over looks the
liquidity aspect. Moreover assigning weights to the assets is more of a subjective
exercise. Basel I regulation did attempt to minimize the insolvency related risk in the banking
industry by introducing Capital Adequacy ratio (CAR) that must be held as a percentage of
risk weighted assets. It created an internationally recognized standard which contributed to
the financial stability through leveling and was also relatively simple to adopt.
Since its implementation in 1988, Basel I was eventually adopted by over 100 countries, the
success rate depends on the regulatory bodies hence varies from country to country. Basel
I is a valuable milestone in the industry of finance and banking which then paved the way for
subsequent reforms such as Basel II and Basel III. In the forthcoming articles of this series
we will be looking at Basel II and Basel III so stay tuned..
Air Transport document
(UCP 600 Article 23)
Air Cargo transport constitutes only a meager 1% of the

total world trade volume but 30% of the total world trade
value, this is because air transport is targeted and more
suitable for high value or time sensitive products.
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Air transport is the most reliable, efficient and speedy medium of transport. 60% of the air
cargo is shipped via passenger planes, balance 40% is transported via exclusive cargo
planes.
Airway bill is a transport document issued by an international airline for the

consignment/goods and also evidences the contract of carriage. Contents of a typical
airway bill are shippers name and address, consignees name and address, an 11 digit no,
3 letter origin airport code,3 letter destination airport code, declared shipment value for
customs, number of pieces, gross weight, a description of the goods and any special
instructions. (Inflammable or perishable or fragile) It also contains the conditions of contract.
International Air Transport Association (IATA) is the trade association of airlines. As per the
latest publication of IATA, the region-wise freight market looks like below
Now lets us understand in detail the requirements stipulated by UCP 600 and ISBP 745 for
the inspection of Airway bills under credits.
Basics
1) Air transport document is a transport document covering dispatch from airport to
airport
2) Can be however named need not be named as air way bill even the credit names it
that way
3) Is a straight consigned/Non-negotiable document, it is not document of title hence is

non-negotiable
4) Must indicate that goods have been accepted for carriage
5) Must be an original for shipper or consignor even if LC stipulates full set
6) Contains terms and conditions of carriage or make reference to another source

containing the same
7) Contents of terms and conditions will not be examined by the Banks/Financial

institutions
8) Will be considered as discrepant only if it explicitly confirms the occurence of the

defective state of the goods or packaging
9) The word Clean need not be mentioned even if it required by the credit. And even if
the word Clean appears to have been deleted, does not confirm any discrepancy
Packaging may not be sufficient for the journey not a discrepancy

Packaging is not sufficient for the journey is a discrepancy
10) Is also known as an Air Consignment note
11) Date of dispatch = Date of shipment; else date of issuance = Date of dispatch
Costs and Trade term

12) Trade term should not be a replica but must not conflict with the trade term required by
the credit.
13) Words of the similar effect are acceptable
14) If credit states costs additional to freight are not acceptable, incidental costs arising out
of the delay in unloading the goods do not constitute a discrepancy.
Airports
15) Airport of departure and arrival should be as per documentary credit
16) Must indicate the airport of departure and destination, the country name even if stated
in the credit need not be mentioned on the airway bill
17) Same applies to the geographical areas however the actual airports within the specified
geographical area have to been indicated on the air way bill.
18) Airports of departure and destination can mentioned in their IATA codes for example
LAX instead of Los Angeles is not a discrepancy
Signatures
19) Can be signed by the Carrier or its Agent (Carrier identified)
20) Corrections of the original set must be to be authenticated. Signatures can be of a

different Agent but the naming convention and the identification should be in compliance
with the requirement
21) Copies do not require any authentication of corrections/changes made

22) Basic signature requirements are the same as that for a multimodal transport document
and can be viewed at http://tradesamaritan.com/world-trade/documents/multimodal-
transport-document-art-19
Parties
23) If specified in the credit, there are can be more than one notify parties
24) If Applicant is appearing on the notify party or consigned to column, the name and the
address should be the same as that of the credit
25) If the goods are consigned to the applicant or the issuing bank, their addresses need
not be mentioned in the Consigned to column
26) Control over goods Banks must insist upon holding Consignors copy which will
prevent the shipper from exercising its right to change the destination or Consignee of the
goods
27) Banks may also insist upon being named as the Consignee of the goods
28) Delivery of goods is made to the named Consignee against proper identification or
against a Delivery Order
29) Air transport document must indicate the name of the carrier. Carrier should be
identified by full name and not the IATA code, Carrier LH is a discrepancy, it should be
mentioned as Lufthansa
IATA code is acceptable for ports but not for the carrier. For example BA
instead of British Airways is a discrepancy but SFO instead of San Francisco
is not a discrepancy
30) Airway bill should not be issued as to order or to order of a named party because it is
not a document of title
31) If mentioned as blank to order in the consigned to column, it means that it is consigned
to the issuing bank or the applicant
Issuer
32) House airway bill is acceptable provided forwarding agent issuing it is appears to be
named as the carrier, or agent of a named carrier
33) An airway bill is not to be rejected only because it indicates a House Airway bill or
Master Airway bill unless the documentary credit does not allow house airway bill
34) If LC is calling for Airway bill and House airway bill/ Forwarders Airway bill is submitted
then it should be signed as per Article 23 (this article) ie Carrier or Agent (carrier identified)
but if LC states that House airway bill/Freight Forwarders airway bill is acceptable then it
should not be in accordance with the article ie the Freight Forwarder can sign in his capacity
and Carrier need not be identified
35) A stipulation in a credit that Freight Forwarders air waybill is not acceptable or House
air waybill is not acceptable or words of similar effect will be ignored unless further
specification is provided.
Trans-shipment & partial shipment

36) Multiple sets of airway bill alone do not constitute partial shipment if the goods are
stated to be on the same flight and destination
Dispatch on more than one aircraft will be considered as a partial shipment

but dispatch on the same aircraft with more than one set/original airway
bills will not be considered as a partial shipment
37) Partial shipment not allowed
If multiple sets of airway bills are presented the latest of the shipment dates date will
be considered for the calculation of the presentation period and all shipment dates
should fall on or before the last date of shipment stated in the credit
38) Partial shipment is allowed
If multiple sets of airway bill are presented, the earliest of the shipment dates will be
considered for the calculation of the presentation period.
39) Regardless of partial shipment allowed or not, all the shipment dates should fall on or
before the last date of shipment stated in the credit.
40) If documentary credit states that Transshipment is prohibited then the entire shipment
should be covered under single airway bill
The Sub Prime Balloon
Sub prime crisis continues to feature in numerous books,

journals and blogs almost every single day. Out of all the
brilliant reads available on this subject, for further reading
we would certainly recommend reading Michael Lewiss
mesmerizing narration and description of this gigantic
event.
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Sub prime crisis deserves a place in every Trade and Finance blog in the universe so Trade
Samaritan is paying its due respect.
If we study the crisis under microscope we will observe that there are multiple vicious cycles
responsible for increasing the breath and depth of the crisis. Let us study each phenomenon
that occurred in 2007-2008 financial crisis step by step. In this article we will focus more on
the root causes and the occurrence of the phenomenon and not than the after effect.
Sub prime loans

At the bottom of the balloon lie a big fat pile of sub prime loans. In simple words, sub prime
loan is a type of loan that is offered at a rate above prime to individuals who do not qualify
for prime rate loans. The basic features of this type of a loan are:
Higher interest rates

Poor quality collateral
Borrowers have weakened credit history
Reduced repayment capacity if weighed on a debt-income ratio
Less favorable terms to compensate for the higher risk being borne by the
lender
Needless to mention that such loans have a higher risk of default as compared to prime
borrowers. Sub prime lending in the U.S peaked from 2004 to
2006.
Mortgage lenders went over board with sub prime lending as these loans
were disbursed with a higher rate of interest.
On the other hand, the borrowers jumped in for the loan offer without taking into
consideration the affordability. There are mind boggling instances, for example childs day
care maid earning wages on an hourly basis had acquired a lavish house as compared to
her employer.
Securitization (Mortgage Backed Securities)

Now that sub prime mortgage product was spreading like a fire in forest, lenders started to
securitize their loan portfolios.
Under securitization, mortgages are combined into one large pool, the
issuer can divide the large pool into smaller pieces based on each individual
mortgages inherent risk of default and then sell those smaller pieces to
investors.
Now the lending institution acts like a middleman, and the investor/buyer of the security is
actually financing the home buyer. And the interest and the principal payments are re-
directed to the investors. Investors were more than willing to invest in MBS (mortgage
backed securities) as the rate of interest they were supposed to earn was more than
ordinary investments. The credit rating agencies blessed most of the mortgage backed
securities with AAA rating. This increasing demand was like fuel to fire and the sub prime
loan volume skyrocketed.
Housing bubble
This is most interesting of all phases, this is where the bubble was formed. By 2006 housing
market was flourishing. The demand for mortgage as well for mortgage backed securities
kept on going up. Credit rating agencies continued to rate the securities positively as the
defaults hadnt kicked in. The rising demand for houses drove the prices up and whenever
the borrowers had a difficulty in paying the installments, they could easily draw another loan
on the same house as the price of their house had risen. So they were using debt to pay
debt which is fundamentally incorrect and bound to hurt at some point. On the other hand,
lending institutions were facing huge demand for mortgage backed securities and they
were focused more on quantity than quality. Most of the lending companies went on a
lending spree, the lending standards were lax.
Actual crisis and vicious circles

Sub prime mortgages, housing demand and mortgage backed securities shot up however
the basic household income remained static. And it happened, housing prices reached a
point so high that the only way left was way down, in the mean time borrowers started
defaulting on their loan installments back to back. One default led to the other, chain
reaction led to huge losses and the fall of lenders and investors. These defaults and
foreclosures increased the number of houses available in the market. Prices started to fall
drastically as the supply was way more than the demand.
There were two prominent chain reactions going on in the markets at that
time.
Declining housing prices triggered the first one whereas the foreclosures triggered the
second one.
The diagram explains the vicious circles of foreclosures and bank instability.
Cycle 1: Voluntary and involuntary foreclosures increased the supply of homes, which
lowered the home prices further creating a negative equity. Negative equity happens when
the market value of the house goes below the mortgage value of the same house. In this
case the gap was very high as the prices had sky rocketed in the earlier phase and
borrowers had refinanced in order to get money which was diverted for payment of the
original mortgage and consumer spending.
Cycle 2: Foreclosures reduced the cash flow of the banks and the value of Mortgage
Backed Securities. Banks and Financial institutions started to incur huge losses and their
lending capacity decreased. This led to economic slow down and unemployment further
increasing the foreclosures.
Again at a macro level, cycle of deterioration looked something like this.
It was reported in August 2007 that the number of residential mortgage foreclosures jumped
9 percent from June to July 2007, surging a whopping 93 percent over July 2006. By March
2007, the U.S., sub prime mortgage industry had collapsed. More than 25 sub prime
lenders had declared bankruptcy, announced significant losses or put themselves up for
sale.
The sub prime meltdown affecting the United States went global when stock markets around
the world plummeted on Jan. 21, 2008. U.S. markets were closed for Martin Luther King Jr.
Day, but all the worlds other major economies experienced a sell-off. Stock prices fell more
than 7 percent in Germany and India, 5.5 percent in Britain, 5.1 percent in China and 3.9
percent in Japan.
Finally, several economists and analysts have studied the sub prime crisis in detail thereby
coming up with hundreds of theories, there are multiple causes such as lax lending policies,
insufficient collateral, certain Government and Federal regulatory policies, securitization,
incorrect credit rating, banks, mortgage brokers and underwriters acting as middlemen only
thereby least interested in the magnitude of risk involved and unwise borrowing. The
adverse impact was not limited to the real estate industry, S&P 500 index dropped by 52%
and stocks across 13 different industries plummeted. People and companies went
broke, Lehman Brothers and Bear Stearns were declared as defunct. This meltdown was
compared with the meltdown that occurred during WWI and WWII.

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What are the basics of a packing list?

What are the basics of a packing list?

What are the guiding principles for packing lists according to ISBP 745?

What are the guiding principles for packing lists according to ISBP 745?

Packing list ISBP 745

by Pallavi Deshpande . July 8, 2014

A packing list or shipping list is a catalog of all the articles

Guiding principles (ISBP 745)

If the seller has outsourced the packing function to vendor, there is a

Certificate of Origin is an important document to

Though a certificate of origin on the face of it appears to be a document of

the type of goods

Contents of a typical certificate of origin can be viewed in the below template.

2. It should relate to invoice means that

GSP stands for Generalized System of Preference. GSP is a scheme wherein

6. If a credit calls for a certificate of origin to be issued by the

7. If a credit states that the certificate of origin is to be issued by the Chamber of

And in almost all the cases it is importers responsibility to submit the

Beneficiary certificate is a document that provides

Any discrepancy arising from inconsistency in the documents can be

Beneficiarys letter stating that one complete set of non-negotiable

Basic Features and Guiding Principles

Signed document and titled same as the credit

If requirement for the beneficiary certificate were to state that 1 set of

All the banks and financial institutions handling LC

Value of the invoice

It is interesting to note that the article 19 applies even

Port of Loading is mentioned in the credit is not a port

2) Is a negotiable document/document of title

3) Statement in the credit such as Freight Forwarders Multimodal Transport Documents

5) Cost incurred as a result of delay cannot be included as freight. Costs should be as

Clean and Original

7) Same applies to packaging. Only if a statement indicating an occurrence of a

Trans-shipment and Partial shipment

Dates and Stamps

19) Multimodal transport operator = Contractual carrier, Combined Transport Operator

20) Actual Carrier = Carrier

21) Corrections of the original set needs to be authenticated.

23) Non-negotiable copies do not require any authentication of corrections/changes made.

24) When a credit indicates Freight Forwarders Multimodal Transport Document is

Parties and Issuer

35) There can be more than one notify parties

36) Dispatched, Taken in charge, Shipped on board can be preprinted or

BPO is ICCs response to new market needs to help deal

Bank Payment Obligation

One of the key features of the BPO is that it supports inter-operations

Now let us understand the process flow of a basic BPO transaction.

Benefits for Importers Benefits for Exporters Benefits for Banks

Safer than prepayment Zero subjectivity in terms of scrutiny Low risk

Customized payment structure Customized payment structure Automated solution

Exporter may suffer a huge loss if the goods are damaged

Cargo insurance should not confused with Trade Credit insurance.

Article 28 of Uniform Custom Practices (UCP 600) is prescribed for

3. Cover notes are not be acceptable.

5. All originals must be presented and must contain the signature.

6. Insurance document must be in the same currency as the documentary credit.

ICC has set up a special commission on Financial Services and Insurance to

There are many shipping horror stories, for instance

such an insurance document should be blank endorsed or endorsed in the favor of