A little light reading

With summer already here, Richard Willsher examines the key reading that will help forfaiters make the most of their holidays.

If forfaiting becomes a better understood and more widely used financing technique, it may well be because two short documents produced by the International Forfaiting Association (IFA) have served to make it more accessible.

The Introduction to the Primary Forfaiting Market published in December 2008 and the IFA Guidelines [for the secondary forfaiting market], which is five-years-old this month, together amount to a bible of best practice in forfaiting. Although they may eventually be superseded by what has been termed a ‘UCP for the forfaiting market’, if current discussions with the International Chamber of Commerce take their intended course, that could be some years away. For now, the two IFA documents cover the main practical issues and concerns involved in forfaiting.

Primary school
Prepared by the IFA’s Market Practice Committee and law firm Denton Wilde Sapte, the first of these documents is not a rulebook.

It says it is “…intended to act only as guidance… in relation to the origination of forfaiting transactions whether undertaken by members of the International Forfaiting Association or other market participants on a worldwide basis…” It is also aimed at forfaiters who may originate transactions to hold as well as those who intend to sell them down.

The Introduction… divides the process of making new forfaiting deals into three phases: ‘the due diligence phase’, ‘the pre-contract phase’ and the conclusion of a transaction.

Given the current state of the financial markets, the care and circumspection that the document advises forfaiters should take is right on the button. If a template were needed for convincing a credit committee that the appropriate degree of risk analysis has been carried out on a new piece of business then this is a good start.

Similarly where issues of transaction documentation are concerned this introduction gives firm guidance. In fact, roughly one-third of its 25 pages are devoted to how to properly document transactions between the originator and a client, and in terms of evidencing ‘payments claims’ to be discounted, the paperwork to support those claims and the underlying transactions that give rise to them.

So the Introduction really is what it says on its cover, but the timing of its publication was particularly crucial. “There was a lot of demand [for such an introduction] from banks in the newer forfaiting regions such as the Middle East and North Africa who wanted to get into forfaiting but didn’t know a lot about it,” says SMBC Legal Counsel Sean Edwards, who also sits on the IFA’s Market Practice Committee.

“They were saying to the IFA that they were interested in joining it and investing in forfaiting assets, but they needed guidance as to how the market worked. At that stage, we wanted to produce something to help them, but we felt it should be non-binding because in due course we might be producing a more prescriptive UCP-type of document in collaboration with the ICC,” he says.

Secondary guide
And so the introduction was born, but the secondary market Guidelines had by then already been in existence for several years. Although market practice had evolved over a long period this document was conceived in order to, “…define the commonly accepted standards for the buying and selling of transactions in the secondary forfaiting market (including sales by primary forfaiters into such market)…”

Again, these are guidelines, not hard and fast rules. Nonetheless they codify how terms may be agreed between parties wishing to trade paper between themselves. It sets out how orally agreed terms can be documented and time-frames within which offer and acceptance can be finalised.

It suggests a procedure for settlement and documentation including payments under reserve.

In particular, this document contains five appendices which provide:

1. Definitions of terms in use in the secondary market;

2. A code of conduct covering ethical and professional

behaviour, due diligence and dispute resolution;

3. Calculation methods and formulae;

4. A model form for confirming trades; and,

5. Appendix five addresses the particular issue arising from German market practice where transaction sellers guarantee the existence, legality and enforceability of payment claims, which is not the case in other jurisdictions.

Five years on, the Guidelines are now an integral part of forfaiting market operations. They have made a significant difference, says Edwards. “Although people tend not to use the Guidelines as a master agreement, which was how we conceived them, often preferring to stick to their own documentation, they are using them as a point of reference.

We have seen, for example, sub-participation agreements that incorporate wording referring to terms set out in the Guidelines. We have also seen them being used as a means to resolve disputes. This has led to fewer disputes and, where there have been disputes that have come to our attention, the Guidelines have helped to resolve them more efficiently.”

Moreover, in times like these, the two documents together have become particularly relevant. Waltraud Raderschall, Senior Product Manager at Commerzbank AG – Dresdner Kleinwort, a brand of Commerzbank AG, who sits on the IFA’s Market Practice Committee as well as on the IFA Board says: “Market acceptance of both documents is increasing, especially now. Practically every market player, bank and exporter alike, have reverted to the traditional instruments, which in turn provide the basis for traditional supplier-credit forfaiting. The documents provide detailed information and guidance on what best practice should be and what is expected by other market participants. At the end of the day, people will come to realise that to follow-up on the guidance offered in both documents is in their own best interest, whether they intend to sell a deal in the secondary market or not.”

The Introduction and the Guidelines are therefore required reading for anyone involved in today’s forfaiting market. Together, they shine a light into the workings of what some may regard as an esoteric market and that, in the end, is beneficial for all stakeholders – especially in bringing in new participants who can more easily see the benefits it has to offer them.

For more information about the International Forfaiting Association see: www.forfaiters.org or e-mail info@forfaiters.org