The International Trade and Forfaiting Association (ITFA) has released an in-depth guide to structured letters of credit (L/Cs).

These instruments provide substantial funding to trade in emerging markets according to IFTA, which concedes that they have often attracted controversy and argues that this is a result of a lack of understanding of what structured L/Cs are and what they are seeking to achieve. The guide, which ITFA says is an industry first, aims to provide clarity, whilst also pointing out the risks involved in structured L/C usage.

Enhanced understanding

Based on input from market participants, including banks, commodity traders and lawyers, the guide seeks to enhance understanding of structured L/Cs and the issues surrounding their use in the market. It looks at the history and development of structured L/Cs, identifies typical characteristics and compares them with traditional documentary credits.

Purpose and participants

The guide examines the commercial purposes of structured L/Cs, their role in the market and issues specific to the transaction participants, including traders, issuing banks and the confirming/discounting banks. It also looks into legal issues as well as anti-money laundering and risk issues.

The publication was produced by an ITFA working group, which included representatives from Absa, Commerzbank, Lloyds Bank, Penningtons Manches Cooper, Sullivan & Worcester and Wagner International.

The Guide to Structured Letters of Credit is available to ITFA members on the association's web site.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.