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New ISO 2022 SWIFT messages for L/Cs, guarantees and standbys

New standardized international messages have been approved under the ISO standards for financial services messaging, giving SWIFT the green light to use 20 new message definitions to support demand guarantees and standby letters of credit (see the Insight interview in this issue). The new definitions respond to industry calls to change SWIFT Category 7 messages for these instruments, which have remained largely unchanged for around thirty years. The new set of ISO 20022 messages aim to ensure coverage of the full end-to-end flows (applicant-bank-bank-beneficiary) of demand guarantees and standby L/Cs. According to an ISO statement, the messages are more structured and granular, aim to improve straight through processing and allow that process to be monitored and managed in a more effective and efficient manner. Messages include support for business functions such as application, issuance, confirmation, advising, amendment, counter-undertaking, demand processing and termination. The demand guarantees and standby L/Cs message definitions standardize the message flows and message structures used for information communication among the parties dealing with these instruments.

China and hidden L/Cs

Hidden letters of credit may be contributing to what some analysts say is a looming debt crisis for China as borrowings soar at an alarming rate. Ratings agency Fitch, appears to be leading the way in flagging China's surging indebtedness, cutting the nation's long-term local-currency rating. Conservative estimates put China's debt to GDP ratio at 160 per cent, but according to Fitch, it is more like 200 per cent. The agency says that L/Cs, along with financing by non-bank institutions and offshore loans by foreign banks, push the debt to GDP ratio up a substantial 40 per cent. It believes the ratio provides a crucial warning that has already signalled other financial crises in Asia. It also indicates that the scale of the crisis in China could be much greater than in previous economic meltdowns.

Strong growth in Moscow L/C business

Credit Bank of Moscow (CBM) has reported strong first quarter growth in the amount of L/Cs and bank guarantee business it has written. The bank also reported strong overall growth, with net income amounting to 1.7 billion Russian rubles (RUB1.7 billion - US$56.1 million) in the first quarter of 2013, up by 43.7 per cent compared with the same period last year. The bank's fee and commission income soared by 57.1 per cent in the first three months of this year compared with the first quarter of 2012. Of this increase, 19.8 per cent was attributable to L/Cs and bank guarantees, the value of which increased by 35.4 per cent or RUB1.2 billion. The volume of trade and structured finance transactions seen by CBM in the reporting period was US$170 million, which is 32.2 per cent more than in the first quarter of 2012.

Iraq's central bank opens new L/Cs

The Central Bank of Iraq (CBI) is opening letters of credit with Iraqi banks as part of its efforts to stem the decline of the Iraqi currency against the US dollar. Measures to encourage the proper use of L/Cs are also a priority for the CBI in its efforts to crack down on currency speculation that is damaging the Iraqi economy. The CBI has revealed that during May it opened L/Cs with Rafidain Bank and Rasheed Bank, which are respectively Iraq's largest and second-largest banks. The terms of the L/Cs have not been disclosed, but they have replaced what one central bank official described as trade credits previously provided by the CBI, which enabled Iraq's banks to obtain foreign currency. The CBI has been concerned that support it has provided for the purpose of obtaining foreign currency to facilitate trade between Iraq and international counterparties has instead been used for speculative purposes. Such speculation has driven the value of the Iraqi dinar down, bankers say. In this respect, analysts say the L/C terms may require banks to use CBI support only for the purpose of obtaining currency for genuine international transactions.