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Obama banking legislation could affect L/Cs

Plans announced by the administration of US President Barack Obama to remove speculative commodity trading units from US banks could affect the letter of credit market. Commodity traders reckon that competition for L/Cs will broaden as more independent traders are established.

Independent commodity traders currently feel at a competitive disadvantage compared with banks in some markets. Unlike bank commodity trading units with easy access to substantial funds, new traders will have to go to the market to find L/Cs and other instruments to finance commodity trades.

If Obama's plans to force banks out of speculative activities come to fruition, all commodity traders will have to compete for capital and insurance as well. Analysts expect the plans will take more than a year to enact and that eventual legislation may not be as tough on banks as anticipated.

Meanwhile, Senator Chris Dodd of Connecticut, Chair of the Senate Banking Committee, recently introduced his own bill, one provision of which would restrict banks from running their own investment portfolios or hedge funds, an administration proposal known as the "Volcker Rule" that Dodd initially had rejected. The Washington Post reports that the bill also would regulate the massive trade in derivatives, increasing the proportion of such trades that are publicly reported. The bill is being revised as of this writing.

Iranian Bank Mellat fights in British courts

A privately owned Iranian bank accused of providing financial services to companies involved in Iran's nuclear and ballistic missile programmes has won a landmark victory in a British High Court. Bank Mellat is fighting to overturn an order by the British government prohibiting all financial companies doing business with it, including a substantial amount of L/C business written by one of its affiliates.

The bank is seeking to have the order made by the government set aside on a number of grounds, including the right to challenge the order and to receive sufficient information about the allegations being made against it to ensure a fair hearing. The High Court in London essentially decided a fair hearing should go ahead under the European Convention on Human Rights. In this way the bank would be treated in the same way as an individual terror suspect challenging a control order.

Bank Mellat owns 60 per cent of Persia International Bank (PIB), through which it conducts most of its UK business. A substantial amount of its business is L/C issuance, valued at around EUR 1.98 billion in 2008 and EUR 970 million in the first half of 2009.

Bangladesh L/Cs surge

Bangladesh has reported a massive surge in L/C openings. According to a Bangladesh Bank (BB) statement, the country's banks opened L/Cs in the second half of 2009 worth 18 per cent more than in the second half of 2008. The bank says that L/Cs worth US$13.19 billion were opened between July and December last year compared with US$11.17 billion in the same period in the previous year. The massive surge in the value of L/Cs in the second period was mainly due to a big leap in food imports according to a BB statement. Analysts see the increase in L/C openings as a positive sign for the economy.

More Philippines banks to offer L/Cs

Cooperative banks in the Philippines have been authorized to open more branches and offer more services, including L/Cs. The authorization was issued by the central bank, Bangko Sentral ng Pilipinas (BSP), under new rules issued in 2008 that already paved the way to allow the country's rural and thrift banks to conduct L/C business. The Deputy Governor of the BSP explained that cooperative banks may now open L/Cs and accept savings and time deposits so long as they meet capital adequacy requirements. Banks contemplating offering the new services will have to obtain BSP approval to accept demand deposits, operate foreign currency deposit units and engage in trusts and other banking activities.