International Forfaiting Association

Market Practice Committee

attention Mr Ragnar Granelli

Chairman

Zurich, 18th January 2002

IFA

Market Practice Guidelines and Recommendations

Dear Ragnar

On December 11, 2001 the below VEFI members discussed the new revision of the Guidelines and Recommendations:

Atlantic Forfaitierungs AG

Banco Mercantil (Schweiz) AG

Credit Suisse First Boston

Skandifinanz AG

SFC Swiss Forfaiting Company

UBS AG

WestLB, Zurich Representative Office

and we are pleased to provide you finally with the following comments and suggestions:

PART 2 - Code of Conduct

1. Compliance with Law

We would recommend to state: Compliance with Law and Regulations

2. Disputes

We would like to ask the Committee to reconsider in a future amendment whether this paragraph could become stronger by stating the IFA Members shall or at least are strongly recommended to refer disputes relating to Market Practice to the Market Practice Committee of the IFA (right now, there are too many „may“s. Of course, counterparties may do everything they want in case they agree, but this is a general rule and does not need to be mentioned here...). One could even think of encouraging or committing IFA members to always use IFA mediation before submitting it to arbitration or an official court. By using mediation, nobody is waiving any rights at all and on top of that mediation saves costs (primarily hefty lawyers fees).

Further, we would recommend to define Market Practice Committee. Due to fact that it has a key position it would be good to know something about its constitution, competences, etc.

3. Know Your Customer / Due Diligence

It can never be ensured by a Primary Forfaiter that the underlying trade transaction is genuine. He is not involved in the underlying trade transaction at all. How should he all of a sudden become responsible for its genuiness? We, therefore, strongly recommend to delete underlying trade transaction. The only case in which it might have to bare a certain responsibility is in case of negligence in due diligence („Fahrlässigkeit“ or even only „Grobfahrlässigkeit“).

Why should it not be possible to sell a transaction „tel quel“ without having to guarantee the genuineness, e.g. in case when a buyer knows an exotic niche market and its participants (incl. exporter or importer) much better than the seller?

We would suggest to stipulate only: .... consistent with current banking regulatory requirements and delete the word forfaiting as we cannot think of a country having forfaiting regulatory requirements but banking regulatory requirements and laws and add regulations to the title of paragraph 1. above.

We would recommend to define "Due Diligence" and "genuine trade transactions".

PART 3 - STANDARD TERMS AND CONDITIONS FOR TRANSACTIONS

2. CONTRACT POINT

The time line in this paragraph is not correct. The „Agreed Terms“ are only evidenced in the Confirmation (see definition of Agreed Terms) which is normally issued after the oral agreement. Therefore, you cannot say later (in the Agreed Terms in the Confirmation) that a contract has not been concluded upon oral agreement. How should it work that a binding contract comes into effect upon oral agreement if the Agreed Terms may specify otherwise at a later stage?

3. CONFIRMATION

Should it not either read ..... the Buyer shall sign or execute as a Counterparty.... or ......execute a Counterpart.......?

4. CONDITIONALITY

       Again, we have a logical problem when reading the paragraph. Graphically, the paragraph says the following:

It would, however, be more appropriate to say the following:

In addition, it might be worth checking in the respective applicable laws whether the seller has a right of late delivery (Nachlieferung) or improvement (Nachbesserung).

"Whether or not paid under reserve" does not make sence and should be deleted. Why should a counterparty be able to ask for refund if payment was made without reserve to him. This is not the idea of a "without recourse" transaction. In addition we would like to ask you to delete the last sentence of this paragraph 4.

5. RESPONSIBILITIES OF THE COUNTERPARTIES

We strongly recommend to extend the time limit from 5 to 10 business days. The seller will most likely release documents upon receipt of the executed Counterpart which can take 2 business days according to paragraph 3. It is rather difficult to provide the Documentation to the buyer within the then remaining 3 business days.

6. TRANSACTION DOCUMENTATION

What does the first section of this paragraph exactly want? Should it make clear that a transaction can only be cancelled by the seller for reason of not having received satisfactory documentation (including the right to require further documents due to changes in local laws preventing the full transfer of the title) until the Availability Date which - effectively - is a seller's only possibility to step away from a transaction and which - in our opinion - should be clearly stipulated?

In the last section of this paragraph the agreed Availability Date is automatically extended by 10 business days. However, in our opinion, if documentation has not been received by the availability date, the deal has not been fulfilled, i.e. there is no performance by the seller. He does not have an automatic right of extension of another 10 days. The parties can agree on another 10 days but this would clearly be a new agreement.

8. SETTLEMENT AMOUNT CALCULATION

a) We would like a description in CALCULATION METHODS / FORMULAE how a calculation of „interpolation on a linear basis“ is done.

c) Buyer and seller can agree on anything. It would be more appropriate for these guidelines to mention how it is usually done.

9. COMPENSATION FOR BREAKFUNDING

We strongly recommend to delete the last sentence of this paragraph "The certificate of the buyer ..... of the costs incurred." This is not good enough as a proof.

12. PRINCIPAL/AGENCY STATUS

Conflict with definitions: Agent/Intermediary are assumed to be a Principal without stating otherwise. They, therefore need to state whether they „act as a Principal or not“ in the deal.

The sentence "A Principal may, however, specify in the completion of... " does - in our opinion - not add any value and could be deleted.

13. WITHOUT RECOURSE

If you reduce lit. i by descriptive items it reads: „the Seller shall have no obligation to repurchase ... except (in case of) the non-performance by any Obligor...“. In other words, the Seller would guarantee the performance/payment of the obligor which cannot be the idea of this paragraph.

14. REPRESENTATIONS AND UNDERTAKINGS

We had a long discussion whether it is possible to warrant that a payment claim is authentic and feel that it is rather difficult to comply with this request. We would be interested to know what a seller has to do in order to be able to confirm something like the authenticity of the payment claim. Does it mean that he has to verify all the necessary signatures and authenticity of SWIFT and telex messages? The seller is only responsible for having done his due-diligence properly but does not guarantee the genuineness.

A colleague of ours usually used the example of a dollar bill: If I give you a dollar bill, do I guarantee/warrant that it is a genuine dollar bill? No, I don’t. I just did the due diligence that it is one and you do the same.

15. GOVERNING LAW AND JURISDICTION

Although, we certainly acknowledge that English law is the world's most flexible law, however, it does not know an aval in the form as other laws do like Swiss law. We would ask to mention laws of England or Switzerland, and that the parties submit to the non-exclusive jurisdiction of the English or Swiss courts.

17. PAYMENTS

without any set-off: Big, international institutions (e.g. Credit Suisse) state in their General Terms and Conditions (Allg. Geschäftsbedingungen) that they reserve the right of set-off. Which is prevailing, these regulations or the individual Terms and Conditions?

PART 5

WITHOUT RECOURSE FINANCING CONFIRMATION

We would like to amend the first sentence as follows: "We are pleased to confirm our sale and your purchase, on a non recourse basis to ourselves and the previous holders, of ......

Under discounting terms we would recommend to state „Days of Grace“ as „Grace Days“ is not listed in the Definitions. Shouldn’t the issue of business days vs. calendar days be mentioned in the definitions instead of in the deal confirmation?

Is it necessary to mention "if partial delivery, final availability date ...." The date declared as Availability Date in a forfaiting agreement is always the final date (see comments above) no matter whether there are partial deliveries under a transaction.

PART 1

Definitions

Our suggestion would be to limit definitions to those expressions which are forfaiting specific and no official definitions already exist. Legal definitions can be looked up in the respective statutes/laws and court decisions and are always subject to change by the legislative/judiciary. For expressions like Agent, Aval, Bill of Exchange, Broker, Business Day, Guarantee, Guarantor, Letter of Credit, Option etc. one could refer to already existing literatur, such as Barron’s „Dictionary of Finance and Investment Terms“ or similar books.

Some definitions are just incorrect:

Primary Obligor under a draft is not the issuer.

Stand-By Letter of Credit is governed by the rules of ISP 98 or UCP 500.

We would recommend to define Disclaimer of Liability.

Agent/Intermediary assumed to be principal which is certainly not the rule...

Without Recourse should probably read Without Recourse Endorsement.

Etc.

Some less known terms are not mentioned/properly defined, e.g.

Geneva Convention (please use at least full name and date)

Bona Fide Holder is also known as Holder in Due Course

Book Receivable

We hope that we are still able to add some value to Market Practice Guidelines and Recommendations. Please do not hesitate to contact either Martin Grob or Barbara Bosl of WestLB, Zurich should you have any questions to the above comments.

Best regards

Barbara Bosl Jörg Hübner