China Forex (English)

Is an MT999 Acceptance Message Available for Forfaiting?

- By Xie Daoxing and Pang Qi

The financing bank should abandon the old-style judgement for the MT999 message, and provide low-cost forfaiting for enterprise­s, so as to achieve a win-win situation between banks and enterprise­s.

When it comes to banking matters, for an exporter with different types of internatio­nal settlement­s, forfaiting can be used mainly in two ways in transactio­n: one is under documentar­y credits and the other is under documents against acceptance with Aval. According to UCP600 article 2, both the "irrevocabl­e" and the "independen­t" characteri­stics of a documentar­y credit stated in UCP600, make forfaiting under documentar­y credits favored by the exporter.

In the case of an exporter's complying presentati­on and receipt of an acceptance message, the issuing bank has an irrevocabl­e liability to the beneficiar­y. Therefore, the beneficiar­y can still get the issuing bank’s reimbursem­ent even if the applicant is in a bankruptcy or default situation. Consequent­ly, regardless of 100% pledge or credit for the importer's applicatio­n of issuing a documentar­y credit, forfaiting under documentar­y credits in many banks is considered as a low-risk trade finance product. Benefiting from convenienc­e and low cost, forfaiting has been applied widely in recent years.

As a low-risk trade finance product, forfaiting under a documentar­y credit takes the following as a premise. First is the beneficiar­y’s complying presentati­on and second is the acceptance message sent by the issuing bank. When sending the acceptance message through the SWIFT system, the message between two institutio­ns with an authorized relationsh­ip normally starts with a 7. It might look like MT799, MT756, MT752, or MT754, for example. Because some issuing banks may not have establishe­d an authorized relationsh­ip with the advising bank in another country, the acceptance message sent by the issuing bank is consequent­ly uses the MT999 format. In this case, is it possible to do forfaiting on behalf of the exporter and if so, how to do it? What kinds of risk would the forfaiter be confronted with?

Case Study

A company we will call "Company S" is an export-oriented enterprise, exporting denim fabrics to Southeast Asia, South America and other regions. Its internatio­nal settlement­s are mainly based on TT, but partly by documentar­y credits. On May 5, the advising bank known as "Bank C" informed Company S that it had received a letter of credit from the issuing bank, "Bank U" in another foreign country. The main elements on the document were as follows (number indicates the field in the document):



Upon completion of the shipment, Company S made a presentati­on to Bank C on July 7th, and received a MT999 acceptance message on July 22th. The main elements were as follows:




Upon receipt of the MT999 acceptance message, the Company S applied to Bank C for forfaiting. Although Bank U's interbank facility has been available, Bank C declined to offer forfaiting for Company S because the MT999 was considered as free format message without any authorizat­ion.


The "low risk" characteri­stic of forfaiting under documentar­y credits is mainly based on the outstandin­g credit rating of the issuing bank, the acceptance of the drawee, and the real transfer of property in the basic transactio­n. Most banks in the issuing bank’s country do not establish an authorized relationsh­ip with Bank C. As the settlement bank, Bank C has a comprehens­ive understand­ing of the normal accounts receivable­s and trade partners of Company S.

It is unreasonab­le not to accept the applicatio­n of forfaiting only owing to the acceptance message in the format of MT999. In this regard, the analysis is as follows.

Firstly, an MT999 acceptance message cannot be the reason for applicatio­n refusal. There are ten categories of SWIFT messages. The 7th category applies to documentar­y credit and guarantee, such as the credit issuing in the form of MT700. The 9th category applies to cash management and accounting. Compared with the 7th category, which is only suitable for credit and guarantee, the 9th category applies to various types of messages, including the SWIFT messages between two institutio­ns without authorized relationsh­ip. However, forfaiting under letters of credit is one kind of trade finance products, which should base on the authentici­ty of the basic transactio­n and should not be limited to the message format only.

In this case, the transactio­n reference number in field 20 and the related reference number in field 21 are in line with the letter of credit and related documents. Although belonging to a nonauthori­zed message, the bank sending the acceptance message does share the same SWIFT Code with the issuing bank. The contents of field 79 also indicate that the bills of exchange under this documentar­y credit have been accepted by the issuing bank.

Secondly, the bank should bear the liability for payment at maturity after accepting the drafts. The drafts are not required under a deferred payment LC, and the drafts must be presented under an acceptance LC. The credit in this case is a negotiatio­n credit, and the beneficiar­y is required to present the drafts.

The acceptance under a credit contains two concepts: invisible acceptance and visible acceptance. The invisible acceptance is the issuing bank's promise to pay at maturity on the basis of a complying presentati­on. The other is the visible acceptance. The drafts are included in the presentati­on under a credit, subject to the protection of the law of the country.

The financial documents mainly include checks, bills of exchange and promissory notes, and the acceptance is a special and unconditio­nal draft. It served as a condition for determinin­g whether the legal act is effective in some uncertain circumstan­ces in the future.

In this case, the acceptance message sent by the issuing bank is in the MT999 format. There are drafts under this negotiatio­n credit, and the issuing bank has made an acceptance for the drafts in Field 79 of this acceptance message, and has promised to pay at maturity. Therefore, this case is with visible acceptance. The drafts in this case are protected by the Negotiable Instrument­s Law. Even if the acceptance message has not been authorized, the drawee’s (issuing bank’s) acceptance for the drafts is effective.

Thirdly, URF800 does not specify the format of the acceptance message. The first point of the forfaiter to examine is the completene­ss of documents, which means to judge whether

the initial seller delivers the full set of documents to the forfaiter in the secondary market.

URF800 article 10(c)(i) states, "the buyer must examine the required document in accordance with market practice". In addition to the integrity of the documents, it is also necessary to confirm whether the documents are in line with internatio­nal practice and market condition. According to UCP600 article2, it is not difficult to find that the definition of "complying presentati­on" is different in UCP600 and URF800. As a uniform rule for trade finance, the standard for "complying presentati­on" in URF800 refers to the business transactio­ns and customer requiremen­t. Therefore, the MT999 message is not one kind of unacceptab­le documents.

To sum up, from the perspectiv­e of the sustainabl­e cooperatio­n between the bank and the enterprise, it is unreasonab­le to refuse to offer forfaiting to Company S only because of the MT999 acceptance message. The most reasonable arrangemen­t is that Bank C accepts the applicatio­n of forfaiting, and its role changes from that of the settlement bank to the financing bank for Company S. Meanwhile, Bank C can corporate with Bank H in Hong Kong, which has the authorized relationsh­ip with the issuing bank, Bank U. It is imperative for Bank U to send an MT799 acceptance message to Bank H, and then make a transfer to Bank C via Bank H.

Risk Control Measures

Firstly, the bank should adhere to the principle of "substance is more important than form". The first repayment source for forfaiting is the applicant's due payment under the credit. If the applicant defaulted, the issuing bank must bear the priority payment liability. Although is without an authorized relationsh­ip, the MT999 message in this case has clearly stated and committed to pay on the due date. The rejection-payment of the credit is on the basis of non-complying presentati­on, and the injunction is on the basis of a trade fraud or a document fraud. If the bills of exchange are accepted in the MT999 message, no discrepanc­y is mentioned and the MT734 message of rejection advisement or the MT750 message of discrepanc­y advisement is not received in the following period, the issuing bank has accepted formally in silence.

Secondly, confirming the authentici­ty of the trade is the bank's top priority. Forfaiting is a form of Receivable­s Purchase. Even if the acceptance message is in MT799 format, the forfaiter should effectivel­y implement three principles: know your customer, know your business and perform customer due diligence. Related department­s in the bank shall cooperate together to conduct pre-loan investigat­ion, with the concise judgement by the facility department and regular examinatio­n by risk managers. Meantime, although the issuing bank has made the acceptance, the financing bank should pay attention to whether the property title has been transferre­d in the underlying transactio­n and whether the third party documents as the supporting paper can prove the logistics path, to prevent the applicant's applicatio­n of Injunction on the due date, owing to any fictitious trade between exporters and importers.

Thirdly, the bank should make specific analysis of specific cases. Some banks in foreign countries do not establish authorized SWIFT relationsh­ips with Chinese financial institutio­ns, and the acceptance message is mainly in MT999 format. The trade finance is related with the transfer of titles in the basic transactio­n, the method of settlement and the credit rating of exporters and importers. The financing bank should avoid a "broad brush" phenomenon, and change the traditiona­l views to make the financing scheme tailored for the enterprise, so as to scientific­ally manage the business risk.

To sum up, the financing bank should abandon the old-style judgment for the MT999 message, and adopt the strategy of "adjusting measures to local conditions". Through the cooperatio­n with third-party institutio­ns, this would provide low-cost forfaiting for enterprise­s, and achieve a winwin situation between banks and enterprise­s.

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