by Sean Edwards

It's some time since readers of DCInsight were informed of the project between ICC and the International Forfaiting Association (IFA) to produce a set of rules for the forfaiting market. That project, after considerable effort from all involved, is now close to a successful conclusion and is expected to be launched in the first quarter of 2012. A consultative panel from the ICC has provided valuable comments with additional and equally helpful comments from ICC national committees.

The rules - to be known as the Uniform Rules for Forfaiting (URF) - mark an important development for ICC as well as the IFA, as they concern not just a single product, such as letters of credit or demand guarantees, but a whole industry. The URF will "sit on top" of the underlying transactions (letters of credit, negotiable instruments, obligations to pay, etc.) being created or traded and, by doing so, will create value and marketability. In short, the URF is about providing finance and not simply a payment mechanism. In the current climate, finding the most efficient way to fund trade is a duty none of us can shirk, and the URF is an important contribution to the tool kit of trade finance bankers.


Forfaiting, traditionally defined as the non-recourse discounting of trade-related payment instruments, principally promissory notes, bills of exchange and letters of credit, originated in the immediate post-World War II period to help finance reconstruction in Europe. More recently, forfaiters have cast their net more widely and have been active in developing new markets in emerging countries and creating innovative structures.

The URF is designed with one eye on developing those markets and builds on the Market Practice Guidelines (a guide and model master agreement for the secondary market) and the Guide to the Primary Market by establishing a set of rules for both markets. The URF deals with the needs of the two markets by employing mirror provisions for the two markets amended only where necessary to take account of structural or commercial differences. A number of common provisions are then introduced. The result is, hopefully, clarity and transparency for both markets.


Although the final version of the URF has not yet been agreed, the major themes have been fixed and largely agreed, so it is not premature to discuss the most important concepts dealt with in the document.

The first, and a subject familiar to letter of credit specialists, is the question of what constitutes satisfactory documentation. In the URF, the rules in this regard are more general and permissive than those in the UCP and for good reason. Because the URF is concerned with marketability, the provisions on satisfactory documentation generally intervene at the point after the instrument has been created. So, for example, a letter of credit that is being forfaited would have had to satisfy the UCP in order to be forfaitable, but would also have to pass through the URF tests to become marketable. Therefore, the focus in the URF is on authenticity, legality and enforceability of the relevant instruments.

In the primary market, these factors are the basic starting point, whereas for the secondary market they are, subject to individually agreed requirements, final and exhaustive. This reflects a basic feature of the forfaiting market in that originators of transactions, or Primary Forfaiters as they are known, bear increased responsibility for the deals they introduce into the market and must therefore be in apposition in order to ask sellers of paper, whether exporters or importers, to provide whatever documentation the Primary Forfaiter feels is necessary to on-sell the transaction into the market. In the secondary market, by contrast, documentation is already available and can and should be assessed by more objective criteria, thereby speeding up dealing time and enhancing liquidity.


A central issue has revolved around recourse and the "true sale" question. Traditionally, forfaiting operates without recourse to the seller, and this principle is expressly spelt out in Article 3 of the URF. At the same time, there has also been an expectation that, at the very least, Primary Forfaiters would bear responsibility for frauds and defects in documentation that they should have spotted. The URF has tried to steer a middle course through this area by providing:

- for all parties in both primary and secondary markets to be liable if certain basic breaches occur, e.g., a lack of authority of either buyer or seller to sign transaction documentation;

- for recourse to all sellers where the seller was aware of third party rights affecting a transaction, where it fails to transfer all rights and where it does not own the claim being sold;

- for the commercial party who creates the claim, typically the exporter or importer, to be responsible, in addition to the preceding circumstances, where it has breached its obligations under the commercial transaction underpinning the claim;

- for Primary Forfaiters to be liable in circumstances where, essentially, they have failed to use reasonable efforts to ensure the claim being sold is authentic, legal and enforceable.

"True sale"

Whilst details of these provisions are still in flux, they touch also on a critical technical issue: that of achieving a "true sale". This is an accounting issue that is treated somewhat differently under International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP). It is clear that an element of recourse to a seller can upset this analysis.

Under IFRS, the essence of achieving a true sale relies on the seller transmitting all risks and rewards to the buyer. However, a distinction must be made between guaranteeing payment by the underlying obligor to a buyer and guaranteeing the existence of a claim that may not be paid for commercial reasons, e.g., insolvency of the obligor.

Nevertheless, fine distinctions can appear, and it is the job of the drafting party to ensure that the analysis falls on the right side of the line.

Future developments

The URF will be accompanied by model form agreements for the primary and secondary markets. These, especially for the primary market, will be important in assuring that the benefits of using the URF are understood. The primary market is commercially much more diffuse and fractured than the secondary, essentially inter-bank, market, and it is here that the URF can have the greatest economic impact. Documentation is just the start.

A nearly final drafting session took place at the IFA Annual conference in Vienna at the beginning of September and further discussions followed in Beijing at the ICC Banking Commission meeting. There is no doubt that the URF has an important vocation in developing a market capable of contributing greatly to the financing of world trade.

Sean Edwards is Head of Legal, Sumitomo Mitsui Banking Corporation Europe Limited and Deputy Chairman of the International Forfaiting Association. His e-mail is