What is the UCP 600?

Many lenders are subject to regulation, which has the aim of facilitating trade, mitigating risks and standardising rules. The UCP 600 is the body of rules which apply when institutions issue Letters of Credit, applying in most jurisdictions around the world.

Many lenders are subject to regulation, which has the aim of facilitating trade, mitigating risks and standardising rules.

The UCP 600 (“Uniform Customs & Practice for Documentary Credits”) is the official publication which is issued by the ICC (International Chamber of Commerce), the latest 2007 version is here. It is a body of rules on the issuance and use of a letter of credit and applies to 175 countries and constitutes some $1tn USD per year. The aim has been to standardise a set of rules aimed to benefit all parties during a trade finance transaction – for that reason, it is designed by industry experts rather than through legislation. The UCP was created in 1933 and has been revised by the ICC up to the point of the UCP600. The UCP600 came into force on 1 July 2007.

The UCP 600 are voluntarily incorporated into contracts and have to be specifically outlined to apply. They also allow flexibility for the international parties involved.

An accompaniment to the UCP 600 is the International Standard Banking Practice for the Examination of Documents under Documentary Credits (ISBP), ICC Publication 745. It assists with understanding whether a document complies with the terms of letters of credit.

Credits that are issued and governed by UCP 600 will be interpreted in line with the entire set of 39 articles contained in UCP 600. However, exceptions to the rules can be made by express modification or exclusion.

The UCP 600 are the most successful rules ever developed in relation to trade and most letters of credit are subject to them. At the recent ICC UK Winter Trade Finance Conference, there was a special programme which addressed the UCP 600, which looked at recent developments in industry practice and ICC policy, as well as a review of the latest Banking Commission Opinions.

Will the UCP 600 be revised?

At Trade Finance Global, many people ask whether the UCP 600 will be revised. The UCP 600 is a set of rules developed by the International Chamber of Commerce on the issuance and governance of Letters of Credit, which account for a significant proportion of global trade finance transactions.

The UCP 600 has taken over 3 years to develop.

When looking at the UCP 600, it is important to look at the market environment and general notes about the current guidelines. It is general consensus that UCP 600 will not be revised any time soon. Some of the reasons for this and general notes about the UCP are outlined below:

  • there was a 14 year gap between UCP 500 and UCP 600;
  • UCP 600 is doing relatively well and works most of the time, there have been a low number of disputes, usually centred around some ambiguous wording that could not be agreed when the UCP 600 was drafted;

The big question is, if it were to be revised,

  • who would draft it and who in the market has the expertise to do so;
  • revision would take time and be at a high cost;
  • there is a lot of regulatory uncertainty in the market and policy would need to be drafted before any advancement of the documents;
  • it is unknown what will happen to various sanctions that are operating in the market;
  • the ISBP is used to clarify points and there are further opinions that do the same; and
  • the system will never be perfect as there will always need to be compromise – it covers over 150 trading countries and needs to reflect the commercial and legal realities.

NEXT >> Problems with Letters of Credit

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