What is UCP 600?
We are quoting the definition from TradeFinanceGlobal.com as the definition is exhaustive:
“The Uniform Customs & Practice for Documentary Credits (UCP 600) is a set of rules agreed by the International Chamber of Commerce, which apply to financial institutions which issue Letters of Credit – financial instruments helping companies finance trade. Many banks and lenders are subject to this regulation, which aims to standardize international trade, reduce the risks of trading goods and services, and govern trade.”
Now, this UCP 600 (Uniform Customs & Practice for Documentary Credits) is considered as the official publication that has been issued by ICC or the International Chamber of Commerce. It consists of 39 articles using several Letters of Credit. These apply to 175 countries around the globe and contribute around $1 Trillion USD of trade every year.
Before discussing more on UCP 600, let’s first understand the reason behind this.
What’s the reason behind the UCP 600?
Firstly, the UCP 600 replaced its earlier version UCP 500 on the 1st July 2007. This change brings a revolution as it determines a set of rules that can benefit all the involved parties during a financial exchange. UCP 600 was mainly developed by the industry experts and later mandated by the Banking Commission. Therefore, the active members of banking create and modify these instead of the legislative council. Naturally, it aims more to benefit the involved participants. The first UCP came to the forefront back in 1933 and then it got revised by the ICC. The result is the evolution of the UCP 600.
The UCP 600 regulations are in the contracts and define the contracts of trade finance properly. This is helpful to keep all the participants tied in one rule. However, the terms and conditions are not rigid. It takes the international financial ecosystem into account from 175 countries all around the globe. It is flexible and changes as per the countries’ financial rules.
ISBP (the International Standard Banking Practice)
ISBP (the International Standard Banking Practice) is the counterpart to the UCP 600. This is mainly to examine the documents under the Documentary Credits of ICC Publication 745. It also applies to understand if the documents comply with the norms of the Letters of Credit.
Credits are first passed and later UCP 600 overviews it. Then these are interpreted along with the complete set of 39 articles included in UCP 600. Nevertheless, industry experts make exceptions to these regulations quite often. Modification, inclusion and exclusion of the terms are quite common here. After all, the aim of UCP 600 is to benefit all the parties in the financial transaction.
So far UCP 600 is the most successful regulation ever developed in trading and finance. In fact, most of the Letters of Credit are subject to these rules. In the latest ICC Winter Trade Finance Conference in the UK, UCP 600 has been duly credited. The event managers arranged for a special program to welcome the UCP 600. This discussed the latest array of developments in industry practices as well as ICC policy. It also reviews the practices in the contemporary Banking Commission.
Key elements of the UCP 600
UCP 600 consists of the following crucial elements:
- Defining the most used terms in international trade – These include applicants, presentation, banking days, honouring of payments, etc.
- Outlining how international trade documents or the Letters of Credit should be signed and approved by all involved parties
- Determining the difference between services, documents, and goods and services – It talks about which parties should deal with these.
- Outlining the clearly negotiable and non-negotiable parts of any Letter of Credit
- Defining how to make payments and operate credits
- Discussing how the banks can interpret the confirmation of services and goods – through teletransmission
- Mentioning how to transport the goods, available modes of transport – It also discusses who should bear the responsibility of transportation.
- Interpreting the norms of dealing with discrepancies and waivers – it also talks about how to give out notices at regular intervals
- Arranging for the approval of original documents and electronic copies
- Proper billing
- Outlining the norms of insurance and preparing for covering the cost of goods
- Mentioning how to deal with the loss of shipping items or documents during transit
One of the major questions is about UCP 600 as evoked in International Chamber of Commerce (ICC) is the following:
What about the revision of the UCP 600?
Basically, the UCP 600 is an accumulation of several rules. ICC or International Chamber of Commerce is in charge of creating this. The Letters of Credit further govern and ensure the proposals.
It took 3 years to develop the UCP 600. One of the main benefits of it is its flexibility. It takes the current financial environment and general guidelines of each country into account. ICC approves of bringing any modification, inclusion and exclusion in the rules. The banking people govern the rules and not merely a legislative body. So if required, they can always bring a change in the set of rules. However, all of them need to be on the same page.
Remember that there were around 14 years of gaps between the evolution of the UCP 500 and 600. If required, even UCP 600 can change. Nevertheless, it requires high-end expertise, costs, a healthy financial environment between the involved countries to bring a change. We cannot expect an overnight shift. Especially, when the UCP 600 is doing so well in contemporary times, the governing bodies have little intention to change it anytime soon.
If you are interested in learning more about the UCP Rules & Regulations, we have UCP and ICC consultants on our team. To Learn more about what we offer visit our expertise page!