Read 24314 1. Chap. 1-3 text version

Finance of International Trade

Ninth edition 2000

Information for Australian exporters and importers

Written by Technical Officers of Global International Trade & Business Finance, National Australia Bank Limited Copyright 1975

TAILORED FINANCIAL SOLUTIONS

Finance of Export Trade

First edition: Second edition: Third edition: Fourth edition: Fifth edition: Sixth edition: First edition: Second edition: Third edition: Fourth edition: Fifth edition: Sixth edition: Seventh edition: Eighth edition: Ninth edition:

1963 1964 1966 1968 1972 1973 1975 1976 1977 1979 1984 1990 1994 1996 2000

Finance of International Trade

National Library of Australia card number and ISBN 0 909873 534

Preface to Ninth Edition

Finance of International Trade is now in its ninth edition since its first publication in 1975. During this time, banking techniques have been subject to continual change to meet new regulatory and marketing conditions. This edition has been updated to include the latest developments in electronic banking and remains one of the most comprehensive on international trade. Since introduction of the original book in 1963, "the National" has continually received widespread acclaim from overseas banks, international traders, educational bodies and lawyers. We are confident that this publication will be of assistance to those who have an interest in understanding international trade payments, finance, foreign exchange and support services provided for exporters and importers. The aim of this publication is to help readers acquire a sound understanding of relevant theoretical and practical concepts, coupled with an ability to apply the principles in a given practical situation. The masculine pronoun "he" has been used in this publication to encompass both genders and to avoid the awkwardness of the constant repetition of "he and/or she".

TAILORED FINANCIAL SOLUTIONS

The National Australia Bank is an international financial services group providing a comprehensive and integrated range of financial services across four continents and 15 countries. Over the past 14 years, the National has grown from its large base in Australia through acquisition of regional banks in the UK, the Republic of Ireland, New Zealand and the US, as well as a significant mortgage servicing company in the US. In Australia, the National is one of the three largest companies listed on the Australian Stock Exchange, it has the largest banking market share and a rapidly growing financial services capability. History The company was established in the Australian state of Victoria in 1858 as the National Bank of Australasia. After its early growth in the urban and rural areas of Victoria, supplemented through the absorption of a number of regional banks, the National Bank of Australasia merged with the Commercial Banking Company of Sydney in 1981 to form what is now National Australia Bank.

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Introduction

This book endeavours to provide assistance in that area of knowledge which is the province of banks. It sets out, in the main, procedures that concern those who act as principals in export and import transactions. That is, parties who ship goods from Australia and claim payment from buyers, and parties who deal direct with and make payments to overseas suppliers. The emphasis in the book is on short-term finance for transactions: this entails settlement within 180 days from shipment. Finance in excess of this period falls into the medium-term and long-term categories, and the standard procedures discussed in this book may or may not be applicable. In all cases it is essential that traders requiring such finance discuss their needs with a financial institution before entering into any firm commitments. Finance of International Trade is divided into three books and an appendix: Book 1 ­ General This deals with the basic documents and general procedures used in both export and import trade, as well as such matters as rates of exchange and forward contracts and forms the foundation for reading Book 2 and Book 3. Book 2 ­ Exports Deals exclusively with exports. Book 3 ­ Imports Deals exclusively with imports. Appendix

A checking method to verify correctness of shipping documents against s a documentary credit, which applies to both exports and imports. International Chamber of Commerce (ICC) rules for Documentary Credits (UCP 500) and Collections (URC 522) can be obtained from www.iccbooks.com or by requesting a hardcopy of this complete book, Finance of International Trade which includes these rules, from your local National Business Banking Centre.

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Contents

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Preface to Ninth Edition Introduction Currency Abbreviations Book 1 - General Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Bills of Exchange Rates of Exchange Forward Exchange Contracts Shipping Documents Documentary Credits Documentary Collections Remittances Foreign Currency Accounts/Deposits Alternative Methods of Financing Electronic Commerce Book 2 - Exports Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Pre-Shipment Finance Risks and Post-Shipment Finance Methods of Payment Pricing Medium and Long-Term Finance Incentives Credit Insurance Overseas Governmental Regulations Countertrade and Offsets Book 3 - Imports Chapter 20 Chapter 21 Chapter 22 Risks and Post-Shipment Finance Methods of Payment Medium and Long-Term Finance Appendix Appendix Checking of Documents under Credit

3 4 6 7 9 14 23 35 50 70 74 77 79 83 87 89 91 96 106 120 123 124 132 134 139 141 147 155 157 159

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Index To read this book . . . All readers should study Book 1 and Appendix and, depending on the viewpoint as an exporter or importer, Book 2 or Book 3.

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5.

Currency Abbreviations

Country Australia Austria Bahrain Bangladesh Belgium Brunei Darussalam Canada China Cyprus Czech Republic Denmark Fiji Finland France French Polynesia Germany Greece Hong Kong India Indonesia Iran (Islamic Republic of) Ireland Italy Japan Jordan Kenya Korea, Republic of Kuwait Malaysia Malta Netherlands New Zealand Norway Oman Pakistan Papua New Guinea Philippines Portugal Samoa Saudi Arabia Singapore Solomon Islands South Africa Spain Sri Lanka Sweden Switzerland Tanzania, United Republic of Thailand United Arab Emirates United Kingdom United States of America Vanuatu

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Currency Australian Dollar Euro/Schilling Bahraini Dinar Taka Euro/Belgian Franc Brunei Dollar Canadian Dollar Yuan Renminbi Cyprus Pound Czech Koruna Danish Krone Fiji Dollar Euro/Markka Euro/French Franc CFP Franc Euro/Deutsche Mark Drachma Hong Kong Dollar Indian Rupee Rupiah Iranian Rial Euro/Irish Pound Euro/Italian Lira Yen Jordanian Dinar Kenyan Shilling Korean Won Kuwaiti Dinar Malaysian Ringgit Maltese Lira Euro/Netherlands Guilder New Zealand Dollar Norwegian Krone Rial Omani Pakistan Rupee Kina Philippine Peso Euro/Portuguese Escudo Tala Saudi Arabian Riyal Singapore Dollar Solomon Islands Dollar Rand Euro/Spanish Peseta Sri Lanka Rupee Swedish Kronor Swiss Franc Tanzania Shilling Baht UAE Dirham Pound Sterling US Dollar Vatu

ISO Code AUD EUR/ATS BHD BDT EUR/BEF BND CAD CNY CYP CZK DKK FJD EUR/FIM EUR/FRF XPF EUR/DEM GRD HKD INR IDR IRR EUR/IEP EUR/ITL JPY JOD KES KRW KWD MYR MTL EUR/NLG NZD NOK OMR PKR PGK PHP EUR/PTE WST SAR SGD SBD ZAR EUR/ESP LKR SEK CHF TZS THB AED GBP USD VUV

Book 1 ­ General

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Chapter 1

Bills of Exchange s Liability of Parties s Protest Rates of Exchange s Euro s Buying Rates of Exchange Telegraphic, Airmail, On demand and Term s Selling Rates of Exchange s Value Dates for Large Transactions s Exchange Risk s Options Forward Exchange Contracts s Types of Forward Exchange Contracts Fixed/Optional Term Contracts s Forward Rates of Exchange s Examples of Rate Calculations s Deliveries s Extensions s Cancellations s Applications s Factors to be considered when entering into a Contract s Between two Foreign Currencies s Variable Forward Foreign Exchange Contract Shipping Documents s Bills of Exchange (documentary) s Invoices s Insurance Document s Bills of Lading s Air Transport Document s Post Receipt s Courier Receipt s Other Documents s Shipping Terms and Abbreviations s Incoterms

9 10 13 14 15 16 19 20 20 21 23 24 24 25 27 28 28 30 30 31 33 35 36 36 37 39 45 45 46 46 46 46

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Documentary Credits s Types of Documentary Credits s Silent Confirmation s Availability of Funds s Parties in Documentary Credits Advising/Paying/Negotiating/Accepting Banks s Alternative Grouping of Documentary Credits Payment, Deferred Payment, Acceptance, Negotiation s Uniform Rules for Bank to Bank Reimbursements under Documentary Credits s Details included in Application for Documentary Credits s Documents in relation to Documentary Credits s Specialised Credits and Arrangements Red Clause, Transferable, Back-to-Back, Stand-by s International Guarantees s Types of Guarantees in International Trade Documentary Collections s Parties in Documentary Collections s Method of Collecting Bills s Presentation on Arrival of Goods s Avalisation ­ (Bankers Endorsement) Remittances s International Cheque s Telegraphic Transfers s Personal Cheques s Real Time Gross Settlements (RTGS) s International Money Laundering s Sanctioned Countries Foreign Currency Accounts/Deposits s Foreign Currency Accounts s Foreign Currency Term Deposits (including overnight deposits) Alternative Methods of Financing s Confirming Houses s Factoring s Export Factors s Accounts Receivable Financing s Invoice Discounting Electronic Commerce s Electronic Data Interchange (EDI) s Internet s Internet Banking s Online Services ­ Linked to the Bank via modem s SWIFT ­ Society for Worldwide Interbank Financial Telecommunication

8. Book 1

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59 59 60 64 66 68 70 72 72 73 73 74 74 75 75 75 76 76 77 77 78 79 79 79 80 80 81 83 83 83 84 84 86

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10

1

Bills of Exchange

This chapter gives an elementary survey of important points concerning bills of exchange based on the Australian Bills of Exchange Act 1909. The laws governing bills of exchange are not uniform for all countries but this has not prevented the bill of exchange from becoming a major instrument in methods of payment between exporters and importers. The drawing of a bill of exchange (frequently referred to as a `draft') is the method most commonly used by exporters as a means of obtaining payment from buyers for goods shipped. Documentary credits issued for buyers by banks usually require bills of exchange to be drawn, and frequently bills of exchange are drawn by the seller in terms of his commercial contract of sale with the buyer. If a bill of exchange is accompanied by the shipping documents relating to the goods for which payment is sought, it is termed a documentary bill.1 A clean bill is one which has no accompanying documents, and while it is a valid means by which one party can claim payment from another, it is the exception rather than the rule in Australian export/import trade. Normally transport documents are made out at least in duplicate, and bills of exchange are drawn in duplicate so that one can be attached to each set of documents, which are then usually despatched to the importer's bankers by separate mails/courier. Once one copy of the bill of exchange has been paid, the other is void. A bill of exchange gaining legal status under a country's bill of exchange act facilitates the payment for goods, and on default, recovery action. It is much easier to take action against a defaulting buyer on the basis that the bill can contain evidence of the buyer's obligation, as opposed to taking legal action under a contract of sale. The Australian Bills of Exchange Act 1909 defines a bill of exchange as: `An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer'. As used in the definition the term `person' includes a body of persons whether incorporated or not.

1. The words `bill' or `draft' are common abbreviations for `bill of exchange'.

9. Chapter 1

Bills of exchange (see examples on next page) may be drawn `on demand' (alternatively the words `at sight' may be used) or if the seller is giving terms to the buyer, bills may be drawn payable at a determinable future time (for instance `30 days after sight',2 `on 30 June 20yy' or `60 days after date'). This period is known as the tenor or usance of the bill of exchange, and is determined by agreement between the buyer and seller. There are three original parties to every bill. ­ The drawer: the person who draws the bill (the exporter or party to whom the amount is due). ­ The drawee: the person to whom the bill is addressed (the importer or party who is required to pay the amount). ­ The payee: the person to whom the sum for which the bill is drawn is to be paid (in export/import trade this is frequently the drawer's bank, but the drawer may insert his own name as payee). Liability of Parties The Australian Bills of Exchange Act 1909 sets out the liability of the various parties in the use of bills of exchange in Australia. The drawer undertakes responsibility in drawing a bill of exchange. The Act referred to above, in Section 60 specifies that the drawer `engages that on due presentment it shall be accepted and paid according to its tenor, and that if it is dishonoured he will compensate the holder or any endorser who is compelled to pay it, provided that the requisite proceedings on dishonour are duly taken'. The drawee is not liable on a bill of exchange until he has accepted it. The customary form of acceptance is: `Accepted (date) payable at (name of drawee's bank/branch) for (name of company accepting and their Australian Business Number) (signature)'. Where a bill is drawn `at sight' or `on demand' the holder presents it for payment immediately after acceptance by the drawee: alternatively, the drawee may prefer to issue a cheque in payment in lieu of accepting the bill. Where a bill is payable at a period after sight, presentment for acceptance is necessary to fix the maturity date of the bill.

2. Where a bill is drawn payable at 30 days after sight, the bill must be presented to the drawee for acceptance (see under Liability of Parties) and the 30 day period commences from the date of the drawee's acceptance.

10. Chapter 1

Bills of Exchange A typical bill of exchange drawn by an Australian exporter on an overseas buyer (not under documentary credit). Note When a bill of exchange is drawn in terms of a documentary credit, brief details of the credit should be noted on the bill e.g. `Drawn under Westburg Bank Ltd., Hamburg, Germany, irrevocable letter of credit No. 8516/2817 dated 14th March 20yy.'

(1) Payee After endorsing an `order' bill of exchange, the payee becomes the endorser. (2) Drawee (Importer) After accepting a bill of exchange, the drawee becomes the acceptor. (3) Drawer (Exporter)

A typical bill of exchange drawn by an overseas supplier on an Australian importer (not under documentary credit). Note After acceptance by the drawee (now the acceptor) the bill of exchange is presented for payment on maturity at the place payable. In this example the due date (maturity) is the 22nd July 20yy and is payable at National Australia Bank Limited, Blackburn.

11. Chapter 1

In accepting a term bill of exchange, the drawee (at this stage known as the acceptor) legally binds himself to pay the bill in accordance with his acceptance. If the drawee fails to accept the bill, it is said to be dishonoured by non-acceptance and if after acceptance, the bill is not paid on the due date, it is dishonoured by non-payment. The payee is not liable on a bill unless he has endorsed it. Where bills are payable to order, the payee must endorse the bill of exchange when transferring it to another party, and if the transfer is made to the order of that party the transferee after adding his endorsement becomes a party to the bill subject to at least the same rights and responsibilities as the original endorser. If the bill is not paid by the drawee then any endorser is liable to the holder of the bill, or any subsequent endorser who is compelled to pay it, provided that the requisite proceedings on dishonour are carried out. Any endorser paying the bill has recourse against prior endorsers (if any) and, as indicated previously, against the drawer of the bill for repayment, always subject to the requisite proceedings on dishonour, as set out in the Australian Bills of Exchange Act, being carried out. The proceedings on dishonour in Australia require, inter alia, that parties wishing to claim repayment from prior parties, must ensure, for their claim to be valid, that notice of dishonour is delivered to those parties within a reasonable time after being advised of the dishonour. Where bills drawn on parties in overseas countries are dishonoured by drawees, the proceedings on dishonour are determined by the law of the overseas country concerned. Under the provisions of the Australian Bills of Exchange Act, the drawer, or any endorser, may negate the liability referred to above by, adding to his signature the words `without recourse'. From the practical point of view, the drawer is only able to do this when the terms of a documentary credit issued in his favour authorise him to draw a bill of exchange `without recourse'. In other cases, the party with whom he negotiates a bill (usually his banker) looks to him to pay the bill if it should be dishonoured, and obviously would not be prepared to negotiate unless recourse was retained on him. Similarly, an endorser who transfers a bill of exchange to another party for value would generally find that the transferee wishes to retain recourse on him, and therefore a `without recourse' endorsement could not be used.

12. Chapter 1

Protest A protest is a formal certificate given by a notary at the place of dishonour confirming that a bill has been dishonoured by non-acceptance or nonpayment. It is usually under seal and subject to a fee, and frequently stamp duty. In many overseas countries protesting a bill is costly.3 It is the drawer's prerogative to give instructions to his bank whether or not a dishonoured bill is to be protested. While the legal effect of protesting a dishonoured bill of exchange may vary between countries, in general where legal action is contemplated in the event of dishonour of a bill, it is in the drawer's interest to have a dishonoured bill protested, and essential in those countries where the courts will not recognise a non-protested bill as evidence of default. In some countries, where lists of protested bills are published, the possibility of a protest may be an inducement to acceptors to pay bills on the due date. In other countries where legal processes are uncertain, or even corrupt, protest fees and legal expenses may be incurred without result. Where sight bills are dishonoured and the drawer still has control of the goods, he may find it less costly to endeavour to find an alternative buyer and attempt to cut his loss.

3. In Australia, Britain and some other countries, a less costly procedure known as `noting' is permitted. This is usually a minute made on the bill or on a slip attached to the bill by a notary, but it is not under seal. Before legal action can be taken protesting is necessary, however, this can be done at any time after noting.

13. Chapter 1

2

Rates of Exchange

Contracts of sale between buyers and sellers for the supply of goods should specify the particular currency in which payment is to be made. While there is an increasing use of Australian currency for such payments, for the major part of Australia's export and import trade, exporters still receive foreign currency in payment for their exports, and importers are required to make payment in foreign currency for the goods they import. Therefore, exporters and importers need to understand the principles of foreign currencies and the operation of rates of exchange. A rate of exchange is the price of one currency in terms of another. It is the means by which banks are able to trade foreign currencies in exchange for Australian dollars. The buying and selling of currencies by the bank can be compared with a merchant trading in commodities, with the rate of exchange or price being the quantity of a particular item the merchant will buy/sell for a fixed amount. The banks quote prices at which they will buy foreign currency and prices at which they will sell. These prices are based on prices quoted in the major wholesale foreign exchange markets and constantly change through the day depending upon market forces. When an exporter sells goods for payment by a buyer in a foreign currency, the foreign currency amount, either drawn for by means of a bill of exchange or remitted to Australia by the buyer, can be sold by the exporter to a bank. Conversely, an importer who requires an amount of foreign currency to make payment of a bill of exchange drawn on him by an overseas supplier, or an amount of foreign currency to be paid in some other manner to the supplier, can purchase the foreign currency from a bank. Rates of exchange generally quoted in Australia show the amount of units of each foreign currency which is the equivalent of one unit of Australian currency. e.g. United States Dollars Swiss Francs English Pounds Euro 0.5722 = A$1 0.9665 = A$1 0.3852 = A$1 0.6161 = A$1

However, this method of quotation is not uniform, particularly in the wholesale markets and traders should always be aware of the reverse method of quotation, e.g. units of Australian dollars to one unit of foreign currency.

14. Chapter 2

Euro 1 January 1999 saw the beginning of a new currency the "EURO". The EURO has substituted the national currency unit of those European Union Members states participating in European Economic and Monetary Union. During the transitional period running from 1 January 1999 to 31 December 2001, persons are free to use either the euro or the national currency unit. Any currency conversions from EMU-participating countries' national currencies to the euro will be conducted using fixed exchange rates. These conversion rates are set by the European Central Bank. As from 1 January 2002, the national currency unit will cease to exist and the euro will be the only legal currency in the EMU-Participating States, all payments must be made in euro. The following table shows the countries which were confirmed at a meeting of the European Commission as countries participating in EMU. The second part of the table lists those which have deferred their decisions to participate. Members of the European Union (EU) Initial Members of EMU Italy Luxembourg Netherlands Portugal Spain "Out at the Start" Denmark Greece* Sweden United Kingdom

Austria Belgium Finland France Germany Ireland

*Greece will become a member of EMU commencing 1 January 2001. Time table for Introduction of the Euro 1 January 1999 Start of transition period. Introduction of euro 31 December 2001 End of transition period 1 January 2002 Date for introduction of euro notes/coins. (E-Day). 30 June 2002 Latest date for end of dual currency period - national currencies of EMU members withdrawn. The National Australia Bank Ltd is already prepared for the euro, and is able to process all euro payments and receipts. National Australia Bank Ltd is ready to offer euro deposits and loans. In addition to spot and forward foreign exchange in euro, options and other derivatives products are also available. International Business Specialists and Risk Management Service(s) managers are available to answer any questions you may have on EMU, the euro and our products, services and facilities. Further information on EMU as events unfold will also be available on the National Australia Bank website: www.national.com.au.

15. Chapter 2

It should be noted that the currencies of individual overseas countries are unique, even though they may be called by the same names, e.g. US dollars, New Zealand dollars, Hong Kong dollars, or French francs, Swiss francs, Belgian francs. An example of a daily exchange rate sheet issued is shown on next page. Rates of exchange quoted by banks are always from the bank's point of view, i.e. buying rates are those at which the bank will buy and selling rates are those at which the bank will sell. Although an exporter may be selling the foreign currency proceeds of his exports to a bank, the buying rate is the rate applicable to the transaction, since the bank is buying the foreign currency from the exporter. Similarly, importers buy foreign currency from banks to meet their overseas payments, but since the bank is selling the foreign currency, the applicable rate of exchange is the selling rate. Rates of exchange applicable to transactions fall into two categories: ­ Spot buying rates and spot selling rates of exchange; and ­ Forward buying rates and forward selling rates of exchange.1 Buying Rates of Exchange In calculating buying rates of exchange, banks give consideration to any lapse of time between the date of purchasing the foreign currency from a customer in Australia (at which date the customer is paid the equivalent Australian currency amount), and the date on which the foreign currency concerned is paid into an account held by the Australian bank with an overseas bank.2 For instance, when an Australian bank buys a bill of exchange or cheque drawn on a party in an overseas country, the bank is buying not the actual currency but the right to receive the currency stated in the overseas country. The actual currency comes into the possession of the Australian bank only after the bill or cheque reaches that country, is presented and paid, and the amount credited to an account maintained in that foreign currency by the Australian bank. Buying rates of exchange are divided into two groups: ­ Telegraphic transfer rates; and ­ Airmail rates. Airmail rates are in turn divided into on demand (or sight) rates and term (or usance) rates.

1. Refer Chapter 3 ­ Forward Exchange Contracts. 2. The Australian bank's working balance of each currency is held in an account, in a bank, in the country of that currency. For example, an Australian bank's working balance of US dollars would be held in an account with a bank (or its own overseas branch) in the USA.

16. Chapter 2

Rates of Exchange Foreign exchange rate sheets are issued daily for the information of customers, and are available on the National Australia Bank website: www.national.com.au

DAILY EXCHANGE RATE NATIONAL AUSTRALIA BANK - TREASURY EXCHANGE RATES (Daily Update) Indication Retail Exchange Rates as at: 29/05/20YY - 10:22 The indication retail exchange rates in this update are for information purposes only and are not to be used for financial transactions. Exchange rates for firm transactions and further information regarding exchange rates are available on request. Note: All rates are subject to change without notice Some country's cash is not bought and sold by the National. * Exchange rates are quoted as currency units = one Australian dollar.

CURRENCY NAME AUSTRIAN SCHILLINGS BAHRAIN DINARS BELGIAN FRANC CANADIAN DOLLARS CFP FRANCS CYPRUS POUNDS DANISH KRONER ENGLISH POUNDS EURO FINNISH MARKKA FRENCH FRANCS GERMAN D'MARKS GREEK DRACHMA HONG KONG DOLLARS INDIAN RUPEES IRISH POUNDS ITALIAN LIRA JAPANESE YEN KENYAN SHILLING KUWAITI DINARS MALTESE LIRA NETHERLANDS GUILDER NEW ZEALAND DOLLARS NORWEGIAN KRONE P.N.G. KINA PAKISTANI RUPEES PHILIPPINE PESOS PORTUGESE ESCUDOS SAUDI ARABIAN RIYALS SINGAPORE DOLLARS SOLOMON IS. DOLLARS SPANISH PESETAS SRI LANKA RUPEES STH AFRICAN RAND SWEDISH KRONA SWISS FRANCS THAI BAHTS UAE DIRHAMS UNITED STATES DOLLAR WESTERN SAMOA TALA T/T BUY 8.5110 0.2163 24.8890 0.8638 73.6100 0.3522 4.5792 0.3852 0.6161 3.6563 4.0335 1.2056 206.9700 4.4798 25.5910 0.4878 1192.000 61.3300 43.7100 0.1726 0.2458 1.3588 1.2477 5.1080 1.5465 33.9290 24.7280 123.6900 2.1565 0.9966 2.8753 102.5400 43.7100 4.1060 5.1569 0.9665 22.8300 2.1105 0.5722 1.9074 T/T SELL A/MAIL BUY 8.2900 0.2109 24.2950 0.8445 69.3600 0.3411 4.4795 0.3779 0.6028 3.5800 3.9539 1.1792 201.8400 4.3876 23.6860 0.4743 1165.0000 59.9200 38.3490 0.1635 0.2384 1.3282 1.2152 5.0009 1.2595 24.8140 22.5580 120.7300 2.1092 0.9717 2.4520 100.2200 38.9130 3.9815 5.0488 0.9445 21.2610 2.0584 0.5668 1.6194 8.5710 0.2182 25.0930 0.8693 74.1800 0.3566 4.6199 0.3874 0.6182 3.6918 4.0648 1.2134 210.8500 4.5104 25.8450 0.4911 1204.0000 61.5800 44.8500 0.1745 0.2479 1.3687 1.2540 5.1555 1.5538 34.2030 25.0400 125.6600 2.1730 1.0010 2.9056 103.7100 44.1400 4.1514 5.1943 0.9723 23.0190 2.1252 0.5749 1.9175 NOTE BUY 9.3630 N/A * 26.1340 0.9070 N/A * N/A * 4.8082 0.3929 N/A * 3.8392 4.2352 1.2659 238.0200 4.7038 N/A * 0.5122 1312.0000 67.4700 N/A * N/A * N/A * 1.4268 1.3101 5.3634 N/A * N/A * N/A * N/A * N/A * 1.0465 N/A * 112.800 N/A * 4.9272 5.4148 1.0149 25.1130 N/A * 0.5837 N/A * NOTE SELL 8.1240 N/A * 23.8090 0.8276 N/A * N/A * 4.3899 0.3741 N/A * 3.5084 3.8748 1.1556 197.8000 4.2998 N/A * 0.4648 1141.0000 59.3200 N/A * N/A * N/A * 1.3016 1.1908 4.9008 N/A * N/A * N/A * N/A * N/A * 0.9522 N/A * 98.2100 N/A * 3.9018 4.9478 0.9256 20.8350 N/A * 0.5611 N/A

*To convert currency amounts to Australian dollars, divide by rate shown. To convert Australian dollar amounts to currency, multiply by rate shown.

These rates of exchange would be current at time of issue only and therefore can only be regarded as `indication' or `information' rates.

17. Chapter 2

Telegraphic Transfer Buying Rates (T/T)3

The telegraphic transfer rate is applied where an Australian bank expects to receive foreign currency in its account with an overseas bank on or before the date it pays the Australian dollar equivalent to the beneficiary of the funds, e.g. an overseas bank may SWIFT/telex advise crediting an amount to the overseas account of the Australian bank, or the latter may claim the foreign currency from an overseas bank by SWIFT/telex advice. As same day value is expected no interest charge is included in telegraphic transfer rates of exchange.4 Banks apply a separate commission charge if they are responsible for handling any documents related to transactions subject to these rates.

Airmail Buying Rates

Airmail buying rates apply to bills of exchange in foreign currency which the Australian bank has to despatch, after purchase, by airmail to the country where the bill is payable. The bill must then be presented to the drawee and paid by him before the foreign currency amount is credited to the account of the Australian bank in the overseas country. As there is a time lapse for the airmail transit and presentation period, an interest charge for this period is included in the rate of exchange. For on demand (or sight) bills, interest5 is included in the rate of exchange for the estimated airmail transit time. For the majority of transactions there is an increasing trend for banks to purchase bills of exchange at the T/T rate and collect the applicable interest and commission charge when the actual transit time is ascertained. When the bills of exchange are drawn at other than on demand (e.g. 30 days' sight, etc.), the Australian bank has to wait correspondingly longer after the bill reaches the overseas country (and is accepted by the drawee) before payment is received. Interest6 is included in the rate of exchange for this additional period as well as for the estimated transit time, so the total interest charged in term rates is higher than that for on demand rates. Once again the rate of interest applied is the interest rate for the relevant currency. These rates are called `30 days' sight airmail buying rate', etc. In addition, a commission charge is calculated in all airmail buying rates of exchange and not charged separately, as is done for T/T transactions.

On demand (or sight) Rates

Term (or usance) Rates

3. Selection of the type of exchange rate (i.e. whether T/T or airmail) to be applied to a transaction will often be determined by reference to the type of transaction (e.g. for an inward telegraphic remittance, a T/T rate is normally applicable). 4. Where telegraphic claims are not settled by the overseas bank on the date of claim, interest will be charged separately by the Australian bank for the period between payout in Australia and receipt of funds overseas. 5. The rate of interest applied for the airmail transit time is based on the current overdraft rate in the overseas centre, while the rate of interest applicable after expiration of the transit time for the term of any bill (e.g. 60 days' sight, etc.) is based on the discount rate in the overseas country concerned. 6. Interest/charges added to a buying rate of exchange make the rate numerically higher, which is less favourable to an exporter. Conversely, an amount added to a selling rate, also making the rate numerically higher, is a favourable movement to an importer. Care should be exercised with rises or falls in exchange rates to ensure the movement is not misinterpreted.

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Calculation of Airmail Buying Rates of Exchange

The starting point is the telegraphic transfer buying rate of exchange quoted by a bank, which can be regarded as the bank's best buying rate for the currency concerned, since no allowance is made in the rate for interest and commission charges. These rates are the same as those shown on the specimen rate sheet in this chapter.

On-demand or (sight)7 Rates

To calculate a US dollar on demand (or sight) airmail buying rate of exchange:

Telegraphic transfer buying rate of exchange. Adjust to include commission charge. Adjust to include interest (at overdraft rate in the overseas centre) for airmail transit time. This gives the on demand (or sight) airmail buying rate USD 0.5722 = 1AUD 0.0011+ 0.0016 + USD 0.5749 = 1AUD

Term (or usance) Rates 7

To calculate term airmail buying rates (e.g. 60 days' sight) the rate includes all the adjustments made in calculating a sight airmail buying rate as shown above, plus interest for the term of the bill:

On demand airmail buying rate of exchange Adjust to include interest (at discount rate for 60 day bills in the overseas centre) for term of bill (60 days) This gives the 60 days' sight airmail buying rate USD 0.5749 = 1AUD 0.0066+ USD 0.5815 = 1AUD

Special Buying Rates

Some currencies, in particular US dollars, are often used by exporters for shipments to third countries, and for such transactions where bills of exchange are payable in those countries, banks quote special rates of exchange in which the interest charge is greater since the airmail transit time is longer. Transit interest in these cases must allow for the time taken from date of purchase until the bill reaches the overseas centre, to be paid, and for the foreign currency proceeds to reach the country of the currency concerned. These rates are available from banks on application.7 Selling Rates of Exchange As explained earlier in this chapter, these rates are the prices at which banks will sell foreign currencies to customers to meet their obligations to make payments overseas. As a bank receives Australian dollars immediately from the customer in exchange for the foreign currency, at no time is the bank out of funds. Consequently, only one selling rate of exchange is quoted for telegraphic transfers or on demand airmail transactions, i.e. irrespective of processing instructions for the transaction.

7. There is a growing trend in Australia to collect interest and commission after the bill is paid, i.e. rear-end, when the actual transit number of days is known.

19. Chapter 2

Remittance of payments through banks is made either by SWIFT/telex (telegraphic transfers) or by airmail (international cheque).8 The bank must place funds in their foreign currency account with the paying bank to meet the relative payments. Value Dates for Large Transactions Exchange rates for larger transactions for payment/receipt within two days, attract different rates of exchange depending upon the precise value date. The value date of a transaction is the date on which the beneficiary of the remittance receives9 the actual funds. Transactions can be quoted for: ­ Value `today' ­ transactions are for settlement same day. ­ Value `tomorrow' ­ transactions (called `TOM') are for settlement in one business day. ­ Value `spot' ­ transactions are for settlement in two business days. (However, there are exceptions, e.g. Canada where spot is for settlement in one business day.) For smaller transactions, banks are normally prepared to be more flexible in their approach to value dates10 by quoting the same exchange rate for each type of value transaction. Exchange Risk When selling or buying goods for a price expressed in a foreign currency, an exporter or importer can determine the price equivalent in Australian dollars at the time of entering into the commercial contract. While it is possible to ascertain the current Australian currency value, the settlement of trade usually involves some delay between the time of entering the commercial contract and the actual payment for the goods involved. Therefore, the Australian currency value might change before the actual settlement between seller and buyer is made. This possibility of exchange rate movement is commonly referred to as foreign `currency risk' or `exchange risk'. Foreign exchange risk is a matter of particular importance to anyone involved in any form of international business which involves payment or settlement in a foreign currency.

8. International cheques are also referred to as bank drafts, for further explanation on remittances see Chapter 7. 9. The main foreign exchange markets in Australia's time zone are Singapore, Hong Kong and Tokyo. Later the same day European markets open and later still the Americas trade. Consequently, it should be noted that outward payment transactions can be handled in all centres the same day that instructions are issued in Australia. In the reverse all instructions issued in Europe/Americas can only be received the next day in Australia. 10. Rates of exchange quoted for smaller transactions normally have a wider `spread' which would absorb any interest differential which is applicable. This is due to the international practice where currency is generally settled on a two day basis. Therefore, if for example, an importer required foreign funds to be paid value today the bank would be `short' that currency for two days and `long' in Australian dollars, i.e. there is an interest rate differential. For larger transactions this differential is taken into account in the rate quoted by the bank.

20. Chapter 2

Traders should always be aware of economic conditions since exporters, who price their goods in a currency which rises in value before an exchange rate is fixed, will receive increased returns (in terms of their local currency). In such cases, the overseas buyers, if the price is in a third currency, may need to pay more for their goods. However, these buyers will have the same facilities in their countries to cover their exchange risk. It can therefore be seen that an exchange risk can be of advantage or disadvantage and needs to be managed or, if a trader is satisfied with the current exchange, the trader should take action to fix the rate of exchange. The facilities available for covering these exposures are discussed in the following chapters: ­ ­ Chapter 3 ­ Forward Exchange Contracts. Chapter 8 ­ Foreign Currency Accounts/Deposits.

Another product which can be used to limit/manage exchange risk inherent in foreign exchange transactions is a currency option.

OPTIONS

Introduction A currency option gives the holder the right to buy (or sell) a fixed amount of currency on a fixed date at a specified rate, at the holder's discretion. Basically, option markets give companies the capacity to set an exchange rate at which the company can settle if it wishes. If the market rate turns out to be more advantageous than the option rate, the company does not have to exercise the option. In this sense, an options contract is a one-sided forward contract or it may be viewed as a kind of insurance policy which is only used if needed. Option Terminology There are two parties to an option contract, a purchaser and a seller. The purchaser pays a consideration to the seller and receives the right under the option contract. The purchaser is known as the buyer or taker of the option. The seller is known as the writer of the option. An option which carries the right to buy an asset is known as a call option. An option which carries the right to sell an asset is known as a put option. The consideration paid in return for an option granted is known as the option premium. The price specified in an option contract is known as the strike price or exercise price. The period of time specified in an option contract is ended by an expiry date or an exercise date. Options which can be exercised at any time before the expiry date are called American Options. Options which can only be exercised on the expiry date are called European Options. An option is in the money if the market price of the underlying asset is above the strike price in the case of a call option (or below the strike price in the case of a put option).

21. Chapter 2

An option is out of the money if the market price of the underlying asset is below the strike price in the case of a call option (or above the strike price in the case of a put option). An option is at-the-money if the current strike price is the same as the prevailing market price. Advantages of currency options · Where cash flow is hedged by a forward contract, the company achieves protection against adverse movements - the downside risk is eliminated. Unfortunately, this method also eliminates any upside potential that otherwise would have accrued to the company if exchange rates had moved in its favour. By contrast, a principal advantage of an option is that it provides protection against the downside risk in the same way as a forward contract, but since there is no obligation to exercise the option, the upside potential is retained. The option buyer knows at the outset what his "worst case" will be, having paid the premium no further expense is incurred. When the main objective is to limit the downside risk, this is a powerful advantage. Since there is no obligation to exercise an option, options are ideal for hedging contingent cash flows (which may or may not materialise) such as in tenders.

·

·

22. Chapter 2

3

Forward Exchange Contracts

A forward exchange contract is a contract between a bank and a customer under which the bank agrees to buy from or sell to the customer a fixed amount in foreign currency on a fixed future date, or during a period expiring on a fixed future date, at the rate of exchange quoted in the contract. The customer undertakes to deliver to the bank, or receive from the bank, the foreign currency in terms of the contract. Thus, there is always a purchase (or sale) of one currency against the sale (or purchase) of another currency (called the counter currency). Banks can provide forward exchange contracts in most foreign currencies, for the protection of exporters and importers who are subject to exchange risks in the course of their transactions. Forward exchange contracts may be entered into to cover customers exchange risk between a foreign currency and Australian dollars or between two foreign currencies. Such contracts may be entered into at any time and can be used to cover both trade or non-trade transactions. As with rates of exchange, forward exchange contracts are described as buying or selling from the bank's point of view. An exporter may enter into a forward buying contract whereby the bank contracts to buy foreign currency to be delivered to it by the exporter at a future date. Conversely, under a forward selling contract with an importer, the bank contracts to sell foreign currency at a future date to be used at that time to meet the importer's foreign currency commitment. As soon as an exporter is committed to a transaction in which payment is to be received in a foreign currency, the possibility arises that the rate of exchange will alter by the time payment is converted to Australian currency. His price calculations will have been based on the rate of exchange current at the time of quoting the price, and the financial result of the transaction can be affected if there is an alteration in that rate of exchange before payment is received. Similarly, an importer may place an order overseas for goods with payment to be made to the supplier in foreign currency. The importer knows the selling rate of exchange for the currency concerned when he places the order, and can therefore calculate the cost of the goods in Australian currency at that time. However, payment to the overseas supplier is seldom made at the time of placing the order, and since the rate of exchange may alter before the importer has to make payment, the goods may cost more, or less, than expected.

23. Chapter 3

Types of Forward Exchange Contracts Forward exchange contracts, both buying and selling, may be either fixed or optional term contracts. Fixed Term Contracts In a fixed term contract the customer specifies the date on which delivery of the foreign currency is to take place. If the customer wishes to arrange an earlier delivery it can only be on the basis of a marginal1 adjustment to the forward contract rate. Optional term contracts are entered into for a specified period, and the customer states the period within which delivery is to be made (normally for periods not more than one month), e.g. a contract may be entered into for a six month period with the customer having the option of arranging delivery of the foreign currency at any time during the sixth month. In each case there is a firm contract to effect delivery by both the bank and the customer. An optional delivery contract does not give a customer an option of not completing the forward exchange contract. Forward Rates of Exchange Forward exchange rates are calculated by applying a `forward margin' to the appropriate current telegraphic transfer (T/T)2 rate at the time the contract is entered into by the bank. This margin may either be a `premium', `discount' or `par'.3 The terms `premium' and `discount' describe the relationship of the forward rates for a foreign currency at any time to the T/T rate of exchange. When the forward margin is at a premium it means that on the day a forward exchange contract is entered into the forward rate is more favourable than the T/T rate to the seller of the foreign currency and less favourable to the buyer. (Hence, an exporter in selling currency to the bank would receive a higher amount of Australian currency and an importer in buying currency from the bank would have to pay a greater amount of Australian currency, compared with a transaction at the T/T rate for the day.)

Optional Term Contracts

1. While in normal trading conditions adjustment for pre-deliveries or extensions (see later heading) are somewhat marginal, it is probable in times of extreme market pressure of one currency being dealt (i.e. where interest rates may rise exorbitantly) the adjustment can be significant. 2. All forward exchange contracts use the T/T rate of exchange as a base since forward exchange does not cover interest or commission factors. 3. Premiums are always deducted from the relative T/T rate of exchange (whether buying or selling) while discounts are always added to the T/T rate of exchange. A margin at par does not alter the rate. A premium or discount reflects the interest differential between the interest rates in the countries concerned. For example; a forward exchange contract between US dollars and Australian dollars will attract a premium or discount depending upon whether interest rates in USA are higher or lower than Australia.

24. Chapter 3

When the forward margin is at a discount the forward rate is less favourable to the seller of the foreign currency and more favourable to the buyer, i.e. the exporter would receive less Australian currency and an importer would have to pay a lesser amount of Australian currency compared with a transaction at the T/T rate of the day. An exporter by entering into a forward exchange buying contract with a bank at the time he completes the contract of sale with the buyer or at any time thereafter, is able to fix the basic rate of exchange at which the bank will in due course buy the foreign currency from him. Future movements in the daily rate of exchange will not affect the contract rate. However, it will be marginally adjusted if the exporter wishes to make delivery earlier than provided for in the forward exchange contract.4 An importer by entering into a forward exchange selling contract with a bank at the time of contracting to buy goods from an overseas supplier (or anytime thereafter), is able to fix the basic rate of exchange at which the bank will sell the foreign currency to him in due course. While this rate will not vary, despite future movements in the daily rate of exchange, it may be subject to marginal adjustments if the customer requires delivery earlier than provided for in the forward exchange contract.4 Examples of Rate Calculations The following are examples of the calculation of forward rates for forward exchange contracts, both buying and selling. The exchange rates used are those appearing in the specimen Exchange Rate Sheet in the previous chapter. (i) Fixed Term Contracts Buying Contracts Fixed Term (for exporters) Exporters and importers who are receiving foreign currency, or have commitments in foreign currency due on definite dates are able to use fixed term contracts. On May 29 an exporter applies to his bank for a three month fixed date forward exchange buying contract in English currency. The forward exchange contract will expire on August 29 and the exporter is required to make delivery on that date. The bank calculates the forward rate as follows:

T/T buying rate of exchange for GBP on May 29. Add forward buying margin for three months (discount). Forward rate for a three month fixed term contract. GBP 0.3852 = 1AUD 0.0004(+) GBP 0.3856 = 1AUD

4. This is termed a `pre-delivery' ­ see also footnote 1.

25. Chapter 3

In this example the forward buying margin is a discount, therefore the forward rate calculated is less favourable to the exporter than the then current T/T buying rate of exchange. If the forward buying margin had been a premium the forward rate would have been more favourable to the exporter. Irrespective of whether the forward buying margin is a premium or a discount it is applied for the full period of a fixed term contract. Selling Contracts Fixed Term (for importers) On May 29 an importer applies to his bank for a four month fixed date forward exchange selling contract in English pounds. The forward exchange contract will expire on September 29 and the importer is required to make delivery on that date. The forward rate is calculated by the bank as follows:

T/T selling rate of exchange GBP on May 29. Deduct forward selling margin for four months (premium). Forward rate for a four month fixed term contract. GBP 0.3779 = 1AUD 0.0003(­) GBP 0.3776 = 1AUD

In the above example the forward selling margin is a premium, therefore the forward rate calculated is less favourable to the importer than the then current T/T selling rate of exchange. Irrespective of whether the forward selling margin is a premium or a discount it is applied for the full period of a fixed term contract. (ii) Optional Term Contracts Buying Contracts with Optional Term (for exporters) Where the date of delivery under a forward exchange contract is not certain, exporters and importers may take advantage of the extended period for delivery available under optional term contracts. On May 29 an exporter applies to his bank for a two month forward exchange buying contract in US currency with optional delivery at any time within the second month. The forward exchange contract will expire on July 29 and optional delivery period is from June 30 to July 29 (inclusive). The bank calculates the forward rate as follows:

T/T buying rate of exchange for USD on May 29. Add forward buying margin for two months (discount). Forward rate for a two month contract with optional delivery in the second month. USD 0.5722 = 1AUD 0.0011(+) USD 0.5733 = 1AUD

The margin applicable to an optional term contract is calculated by applying the margin for the fixed portion of the contract (i.e. up to the date of commencement of the option period) plus any cost to cover delivery during the option period. In the example it will be noted that the forward buying margin is applied for two months (If the forward buying margin had been at a premium, a margin for one month would have been applied.)

26. Chapter 3

Selling Contracts with Optional Term (for importers)

On May 29 an importer applies to his bank for a five month forward exchange selling contract in Japanese currency, with delivery at any time within the fifth month. The forward exchange contract will expire on October 29 and delivery can be arranged at any time from September 28 to October 29 (inclusive). The bank calculates the forward rate as follows:

T/T selling rate of exchange for JPY on May 29. Deduct forward selling margin for five months (premium). Forward rate for a five month contract with optional delivery in the fifth month. JPY 59.92 = 1AUD 1.66(­) JPY 58.26 = 1AUD

The margin applicable to an optional term contract is calculated by applying the margin for the fixed portion of the contract (i.e. up to the date of commencement of the option period) plus any cost to cover delivery during the option period. In optional delivery forward exchange selling contracts the forward selling margin, when at a discount, would be applied for only four months in this example. Since the forward selling margin is at a premium, the margin is applied for the full period of the contract since a premium is a cost. Deliveries A forward exchange contract in foreign currency to Australian dollars imposes a responsibility5 on the exporter to deliver foreign currency to the bank against payment in Australian dollars, or on the importer to deliver Australian dollars to the bank against payment by the bank of foreign currency. (For currency to currency contracts, delivery will be against the currency specified. See heading Between two Foreign Currencies later in this chapter.) It is the customer's responsibility to instruct the bank when a transaction is to be applied as a delivery under a forward contract.

5. This responsibility imposes a credit risk on the bank writing the forward exchange contract (that the exporter/importer will in fact deliver under the contract), and therefore the customer may be required to enter into prior formal arrangements with the bank to write forward exchange contracts up to a certain limit outstanding at any one time.

27. Chapter 3

Extensions Due to a number of reasons, including delays in manufacture and shipping, alteration in payment terms and alteration to the underlying commercial transaction, delivery on due date of the forward contract may not be possible. In most cases, facilities exist for the expiry date of a maturing forward contract to be extended,6 but this can not be assumed. Where an extension is approved by the bank the forward contract rate of exchange is adjusted by the current relevant margin for the additional term of cover.7 Forward contract extensions, if approved, can be arranged on a `fixed' or `optional' basis in the same manner as for new contracts.The alternative to this procedure is to close out the maturing contract and take out a new contract ­ see footnote 6. Cancellations A contract may be cancelled (`closed out') at any time. This is particularly pertinent where the underlying commercial arrangements have been terminated and there are no other transactions to which deliveries could be applied. Consideration should be immediately given to close-out the forward exchange contract since the trader is now exposed to an exchange risk dating from the original date the forward exchange contract was taken out. This could be quite substantial. To explain, in entering into a forward contract with a customer, the bank would normally match the risk by entering into a counter risk in its own name. The bank cannot renege on its counter risk ­ it must perform. This will involve the bank in a spot purchase or sale, at rates current on day of cancellation, in order that it can deliver its contract. The difference between the two settlements (i.e. of the original contract and the spot counter purchase/sale) will be a cost or benefit incurred by the bank and this is passed on to the customer.

6. While in Australia an `extension' to a forward an exchange contract is commonly referred to, the international practice (and the actual effect of the `extension' rate adjustments applied) is to `close out' the old contract (see next heading Cancellations) and enter into a new contract. The practical difference between the two methods is that; ­ with the `extension' procedure, there is simply an alteration to the contract rate whereas, ­ with the `close out' procedure, there is a settlement of the old contract (i.e. a receipt or payment of Australian dollars). The amount of this benefit/loss, however, is only temporary and will be paid/recouped on settlement of the new contract. Therefore, over the entire term of the contracts, the level of cover is not affected, but to maintain this cover it may be necessary to commit cash at the time of close out. 7. Depending upon whether the forward margin is at a premium or discount the contract rate will be adjusted marginally (but see footnote 1) at a benefit or cost to the customer (provided always that a benefit is only applicable for the `fixed' period of an extension) ­ see also footnote 1.

28. Chapter 3

Application for Forward Exchange Contract ­ Bank to Buy The form is completed by the customer and handed to the bank. The period of a forward exchange contract is a decision for the customer. In this example they have elected to arrange a two month contract with optional delivery to be made at any time during the last month.

Bank use only

Branch Melbour ne

Account Control Manager signature

FEC number 38194

FEC rate 0.5733

150-826 (9/98)

29. Chapter 3

Applications Applications to enter into forward exchange contracts can be made in various ways, ie, electronically, in writing, over the phone, but are generally covered by a `Master Agreement' with the bank confirming agreed methods and terms and conditions to apply. All applications must be accepted by the bank and acknowledged before the forward exchange contract comes into effect and is binding on all parties to the contract. It is normal for applications to show both the `buy' and the counter or `sell' currencies. Applications for forward exchange contracts are accepted by banks subject to their usual assessment of the applicant's reliability and creditworthiness. The risk inherent (to the bank) is that the customer may not be able to settle the transaction on maturity date and that there will be a substantial cost in cancelling the contract. Factors to be considered when entering into a Contract It may be said that it is no part of the business of an exporter or importer to speculate on fluctuations in exchange rates, and that it is only normal business prudence to cover exchange risks as they occur. However, from the practical viewpoint it is not always easy to decide whether or not to take out a forward exchange contract for a transaction. When a forward rate is at a substantial discount, an exporter may find that if the cost is loaded into the price of his goods he may lose the sale, or if he bears it himself his profit will be substantially reduced. When a forward rate is at a substantial premium, an importer may find that the additional cost, if included in the price at which he sells the goods, will make them noncompetitive in the market, while he faces a reduction in profit if he carries the cost himself. So the decision must generally be made whether to do the business at a reduced profit with the protection of a forward exchange contract, or not do the business at all, since the risk of loss through exchange fluctuations, without a forward exchange contract, might be too great. The decision should be much easier for exporters when a forward rate is at a premium, and for importers when at a discount. In both cases increased returns can be obtained (compared with transactions at the then current rate). Where the cost of covering forward is not excessive, normal business prudence would suggest that exchange risks should be covered. However, exchange rate management techniques for experienced operators do not always favour covering. If an exporter or importer has a number of small transactions spread over a period, he may be prepared to accept the risk of an exchange loss on any one of them arising from a movement in the exchange rate, particularly if the exchange rate concerned is relatively stable.

30. Chapter 3

Exporters and importers should consider these factors: ­ Will taking out a forward exchange contract increase or reduce the Australian currency equivalent of the foreign currency amount compared with a transaction at the current rate? If a cost is involved, can it be passed on? If a benefit is gained is it worthwhile using it to price goods more competitively? ­ If a forward exchange contract is not taken out, and the rate of exchange moves unfavourably against the exporter or importer, would the likely loss on any transaction severely damage his financial resources? ­ How stable is the rate of exchange for the currency concerned? If the rate of exchange is `floating', over what range has it varied? What is the economic situation of the country of the currency being dealt? ­ What is the economic situation in Australia? Is there a possibility of an appreciation or depreciation of the Australian dollar? Banks are seldom willing to offer firm opinions on the future of exchange rates, but are able to assist by providing information on: ­ The history of the rate; ­ Current reports on the currency being dealt in; and ­ Current forward exchange rates for the main foreign currencies used in international trade. Close liaison with their banks will greatly assist exporters and importers in their consideration of measures available to manage exchange risk. Between two Foreign Currencies Australian traders may buy or sell one foreign currency for forward delivery against another foreign currency. It allows traders8 with a firm commitment to pay or receive foreign currency resulting from a trade or other transaction, the option of altering the denomination of their commitment to a different foreign currency, without the necessity of renegotiating the underlying commercial arrangement. For example, a customer buying goods from Japan at a price in Yen, wishing to change the denomination of his currency exchange risk to US dollars, is able to obtain a forward contract Yen to US dollars. At maturity of the contract the bank will sell the customer the amount of US dollars required at the then current Australian/US selling rate and use the US dollars so obtained to pay for delivery of Yen under the US/Yen contract to settle the import payment.

8. This facility is also available to vary the currency denomination of non-deliverable transactions, e.g. equity investments and balance sheet exposures.

31. Chapter 3

The following are instances where the facility may be used: ­ To switch an exchange risk to another currency without renegotiating an existing contract of sale. ­ Switching currency of receivables into currency of payables to negate exchange risk. ­ Switching from a strong currency into a weak currency.9 ­ To vary the currency denomination of risks of non-deliverable transactions such as equity investments or balance sheet exposures. Contracts between two foreign currencies may be arranged for fixed terms or on an optional basis. The information regarding rates of exchange, deliveries, extensions, cancellations and applications for these contracts are the same as for contracts between a foreign currency and Australian currency (see earlier comments in this chapter). Example of Rate Calculation and Settlement An importer with a commitment to pay Yen50 million due in 90 days wishes to alter (switch) the denomination of his Yen exchange risk to US dollars (i.e. the importer considers Yen will possibly strengthen against him while the US dollar will weaken in his favour).9 ­ Day 1 The bank calculates the forward rate as follows:

Market rate (say) 90 day forward selling margin (i.e. `market' margin) Forward contract rate JPY 105.47 = 1USD 2.77 (­) premium JPY 102.70 = 1USD

This has effectively `switched' the importers exchange risk denomination i.e. From Yen 50 million (@ JPY 102.70 = 1USD) to USD 486,854.92

­ Day 90 (Maturity) (a) Financial transaction ­ assuming the then current `spot' selling rate is USD 0.5668 = 1AUD.

i.e. The bank sells the customer USD 486,854.92 @ 0.5668 and the importer pays AUD 858,953.63 in settlement.

(b) Contract settlement. The customer applies the US dollars obtained in (a) above in settlement of Yen to US dollar forward exchange contract.

i.e. For USD 486,854.92 the customer receives Yen 50 million

The Yen is then applied to settle the import payment due.

9. Often the cost of premium/discount can negate the advantage of a switch and this factor must be carefully considered.

32. Chapter 3

Variable Forward Foreign Exchange Contract

The Variable Forward, Variable Forward (Plus) and the Variable Forward (Range) Foreign Exchange Contract provide importers and exporters with forward foreign exchange protection, plus the potential to take advantage of favourable exchange rate movements. Advantages · Customers are protected against adverse foreign exchange rate movements with the potential to take advantage of favourable foreign exchange rate movements. · These option based products are structured so that the customer incurs no up front premium cost. · Customers are free to transact at a rate which is more favourable than the current exchange rate if certain conditions are met. Disadvantages · The nominated transaction rate will always be less favourable than the prevailing forward exchange rate at the time the contract is established. · Customers must transact at a rate which is less favourable than the current exchange rate if certain conditions are met. Availability · Minimum amount of AUD 100,000.00 per contract. · Maximum term of 2 years. · Variable Forward is available in AUD against most major currencies. Other currency pairings may be available upon request. · Customers may cancel, pre-deliver or extend the contracts at any time, however, this will involve an economic cost or benefit to the customer. Variable Forward (Plus) The Variable Forward (Plus) provides the customer with forward foreign exchange protection, while allowing the customer the potential to benefit from unlimited favourable foreign exchange rates movements. The transaction rate represents the "worst case" level of exchange rate protection, and the trigger rate represents the level which the exchange rate must breach before the customer can participate in unlimited favourable exchange rate movements. If the trigger rate is not breached during the life of the contract, the customer must transact the Variable Forward (Plus) at the nominated transaction rate established when entering the contract. Variable Forward The Variable Forward provides the customer with forward foreign exchange protection, while allowing the customer the potential to benefit from limited favourable foreign exchange rate movements. The transaction rate and trigger rate are determined when entering into the contract. The transaction rate represents the "worst case" level of exchange rate protection, and the trigger represents the level to which the customer may participate in limited favourable exchange rate movement.

33. Chapter 3

Variable Forward Foreign Exchange Contract

Example Details Current Exchange Rate Transaction Rate Trigger Rate Expiry Date Up front cost If the current exchange rate is above the transaction rate and has not traded at the trigger level. If the current exchange rate is above the transaction rate and has traded at the trigger rate. If the current exchange rate is below the transaction rate and has not traded at the trigger level. If the current exchange rate is below the transaction rate and has traded at the trigger level Variable Forward (Range) The Variable Forward (Range) provides the customer with forward foreign exchange protection, while allowing the customer to benefit from limited favourable foreign exchange rate movements. The protection rate and advantage rate are determined when entering the contract. The protection rate represents the "worst case" level of exchange rate protection, and the advantage rate represents the level to which the customer may participate in limited favourable exchange rate movements. If the exchange rate at the expiry date is between the protection rate and the advantage rate, customers may transact at the current exchange rate. At expiry date, if the current exchange rate is less favourable than the protection rate, customers must use the protection rate. At expiry date, if the current exchange rate is more favourable than the advantage rate, customers must use the advantage rate.

34. Chapter 3

Importer AUD/USD 0.5668 AUD/USD 0.5600 AUD/USD 0.5900 3 Months Nil On Expiry Date Customer is free to take advantage of the current exchange rate.

Exporter AUD/USD 0.5722 AUD/USD 0.5750 AUD/USD 0.5450 3 Months Nil Customer must sell USD at the transaction rate.

Customer must buy USD at the transaction rate.

Customer must sell USD at the transaction rate.

Customer must buy USD at the transaction rate.

Customer is free to take advantage of the current exchange rate.

Customer must buy USD at the transaction rate.

Customer must sell USD at the transaction rate.

4

Shipping Documents

Three documents are essential in overseas trade: ­ Invoice. ­ Insurance. ­ Bill of lading, or other document evidencing transport of goods. Depending on the type of goods and the country to which goods are shipped, other documents may also be required, such as: Specifications, Weight Lists and Certificates, Certificates of Quality and Health, Conditioning House and similar certificates. Certified and Consular Invoices, Certificates of Origin and other governmental control documents may also be specified by the regulations of the country concerned. Where a documentary credit (see Chapter 5) is established by a buyer in favour of an exporter, the credit should specify all the documents the buyer requires, in addition to shipping documents, to meet customs or other governmental requirements in his country. Where the exporter is drawing a documentary bill on the buyer to obtain payment for exports, or is sending the goods on consignment, care must be taken that all necessary documents are provided for the buyer's or consignee's use. If a document required by the governmental regulations in the country of import is not provided, the exporter may find that the goods cannot be landed, or if landed they may have to be stored until the document is despatched, causing expense and inconvenience. The exporter should request the buyer to specify the documents required, but the matter is so important that the exporter, unless he employs a shipping agent to attend to such requirements, should also verify the information. Australian exporters can obtain information covering documentary requirements for exports to other countries from the Australian Trade Commission (AUSTRADE). Australian importers can obtain information from the Australian Customs Service or from a customs agent on the documents required to meet Australian customs and other governmental requirements. This information should be provided to suppliers, and if payment is by means of a documentary credit these documents must also be specified in the credit.

35. Chapter 4

Documents relating to drawings made under a documentary credit must conform exactly to the terms and conditions of the credit ­ refer to Appendix for detailed checking procedure. Where the method of payment is not by documentary credit all documents should conform to the details of the transaction as set out in the commercial invoice. Bills of Exchange (documentary) Bills of Exchange (documentary) drawn by an exporter for payment of goods shipped should be domiciled and dated, e.g. for a bill drawn by an exporter in Melbourne ­ `Melbourne, 1st June 20yy'. If the bill is drawn in terms of a documentary credit it must be drawn on the party specified in the credit, however, if the Credit provides for negotiation in terms of article 9(a)(iv) of UCP, the bill cannot be drawn on the applicant of the Credit. If the bill is not under a documentary credit, it should be drawn on the buyer and his address clearly stated. Bills of Exchange used for export/import transactions should be drawn in duplicate, enabling a copy to accompany both original and duplicate documents. These are generally forwarded separately, so that if one set fails to reach its destination the transaction can be completed using the other set. Invoices Invoices can be considered under the categories of commercial invoices and special invoices in various forms necessitated by import controls and customs regulations of the country of the importer. The latter are referred to later in this chapter. A commercial invoice is a statement of a transaction prepared by the seller and addressed to the buyer. In the export/import trade it should be possible by reading the invoice to ascertain complete information about a transaction. The commercial invoice would ideally detail: ­ ­ ­ ­ ­ ­ ­ ­ Names and addresses of the seller and buyer. Order or contract numbers. Description, quantity (and sometimes quality) of goods. Value of goods (per unit and total) and the price basis, e.g. CIF (port of destination), FOB (port of shipment), etc. Shipping marks on packages. Details of shipment (including, if by sea, name of vessel, sailing date and ports of shipment and destination, or if by other modes of transport, equivalent details). Details of weight and/or measurement of each package. Method by which payment is being claimed, e.g. `by sight draft' or, if the shipment is being drawn for under a documentary credit, brief details of the credit should be quoted.

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­ Whether freight prepaid (for CIF and CFR shipments) or payable at destination (for FOB shipments). ­ Insurance ­ the amount insured for CIF shipments, or the amount declared under buyer's floating policy or open cover (for CFR and FOB shipments) if the buyer has required this to be done.1 The contents of each package should be indicated in the commercial invoice if not covered by a separate specification sheet or packing slip. All invoices must be correct, and include all details required by the buyer. Although a buyer's instructions may seem exacting to the supplier, they are frequently necessary to enable him to comply with regulations in his country applying to import licences, customs duties and exchange controls. Typical examples of special invoices are: (a) Invoice Combined with Certificate of Origin and Value. Australian exporters will find this form required by countries with which Australia has preferential trade agreements. They are made out and signed by the exporter. (b) Consular Invoice. In the exporting country the Consulate of the importing country provides a specially printed invoice which is completed by the exporter and presented to the Consul for stamping and signature. (c) Legalised Invoice. The exporter's usual commercial invoice duly validated by the Consul of the country of destination or by some other authorised party. (d) Commercial Invoice certified by a Chamber of Commerce or Chamber of Manufactures. These may require subsequent legalisation by a Consul or other authorised party as in (c) above. Where an invoice relates to a drawing under a documentary credit the description of the goods must be exactly as stated in the credit. Sellers often use trade terms familiar to them in lieu of those used in the credit. This practice should be avoided, even when the same meaning is inferred by the seller's terminology. Legally, banks are assumed not to have knowledge of special trade practices and will not accept documents presented under documentary credits as good tender unless the invoice description of goods agrees exactly with the description in the credit. Insurance Document Marine insurance can be used to insure goods during transport by various means of conveyance across oceans and seas, on rivers over land or in the air, and may also be extended to cover the goods during periods in storage before and after transport.

1. Where a buyer purchasing on FOB terms from an exporter, arranges for the latter to pay the freight and/or insurance and to invoice and claim for the charges from the buyer, the charges should be detailed separately on the invoice.

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Open cover is probably the best form of effecting insurance in modern commerce. Marine open cover operates on a time basis, providing cover for all the assured's shipments during a specified period. The premium rates are usually fixed subject to annual review and an insurer cannot, in good faith, refuse to accept a shipment within the scope of the cover at the cover rates and conditions. The assured then, can rest secure in the knowledge that he has guaranteed cover at fixed rates. With open cover, shipments are automatically covered even if declared late or after loss has occurred. The open cover incorporates a valuation formula to cover cases where a loss may occur before the importer or exporter has made his declaration of the particular shipment (e.g. cost, insurance, freight, plus 10 per cent). The cover also incorporates a limit of the amount that the underwriter is willing to insure on any one vessel. Declarations under the cover are made after each shipment or periodically as agreed with the underwriter. Insurance policies can be obtained for individual shipments but any oversight means that the shipment goes uninsured. An insurance policy is acceptable as a substitute document for an insurance certificate or a declaration under an open cover. Insurance certificates for separate shipments are commonly issued in lieu of individual policies. If, however, a documentary credit specifies an insurance policy is required, a lesser document such as an insurance certificate or cover note is not good tender. Cover notes are notices from a broker or insurance company to the party insuring goods that certain insurance has been arranged. These are provisional advices pending the issue of policies or insurance certificates. British and Australian law in a CIF contract for the supply of goods provides that unless the buyer agrees otherwise in the contract of sale, an insurance policy must be provided by the seller, not an insurance certificate or cover note. In the USA, however, provision of an insurance certificate is permissible. When goods are sold on a CIF basis the risks to be covered by insurance should be agreed between the buyer and the seller in the contract of sale. If this is not done the insurance cover customary in the particular trade should be provided. If a documentary credit is established by the buyer, the credit must specifically state the risks to be covered in the insurance document. Banks are governed by the fundamental precept of documentary credit business that documents must comply, on their face, with the terms of the credit.

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The insurance amount in a valued policy2 should at least equal the invoice value, but is normally higher since the buyer will wish to add a percentage to the invoice value to cover anticipated profits, and if he has to bear freight, insurance and other charges, to cover those as well. The insurance document presented under the terms of a documentary credit should be for the insurance amount specified in the credit. If the amount of insurance is not specified then the amount covered must be not less than the CIF or CIP (freight or carriage and insurance paid to named place of destination) value of the goods, plus 10 per cent.3 If this value cannot be determined from the documents on their face, banks will accept as the minimum amount, 110% of the amount for which payment, acceptance or negotiation is requested under the credit, or 110% of the gross amount shown on the relative commercial invoice, whichever is the greater. The insurance amounts should be expressed in the same currency as in the invoice, letter of credit and contract of sale. The subject of marine insurance is complex and the information given above is brief. The need for exporters and importers to discuss their marine insurance requirements with their insurance company, underwriter, or broker cannot be emphasised too strongly. Bills of Lading A bill of lading is a receipt issued by a shipping company, or its authorised agents, for goods shipped on board a named vessel, or for goods received for shipment. It is also a memorandum of the contract of affreightment, setting out the terms and conditions under which the shipping company carries the goods. In addition it is a document of title to the goods described therein. Correct completion is therefore of the utmost importance. Any alteration to a bill of lading must be initialled by the shipping company or its authorised agents. Bills of lading are issued in sets of one or more stamped and signed original negotiable copies, as required by the shipper. Each copy shows the number of signed original bills of lading in the set. Since a bill of lading is a document of title the complete set must be obtained by the shipper. Shippers may also obtain non-negotiable copies of bills of lading for their records. These are unsigned and do not comprise part of the valid set of bills of lading. The description of goods in the bill of lading must agree with the description stated in the relative invoice, although it need not be so detailed ­ it can be given in general terms. No additional descriptive terms should appear in the bill of lading. It is essential that the marks, numbers, etc. on the bill of lading be the same as those on the invoice.

2. A valued policy is one which specifies the agreed value of the subject matter insured. In an unvalued policy the value of the subject matter insured is not specified but, subject to the limit of the sum insured, leaves the insurable value to be ascertained in the event of a claim. 3. Refer to Uniform Customs and Practice for Documentary Credits, Article 34f(ii).

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Whenever freight is payable by the shipper the bill of lading must be marked `freight prepaid' or `freight paid' or words of similar effect, or a receipted freight account must be obtained from the shipping company for attachment to the bill of lading. On board or Shipped Marine Bills of Lading Article 23 of UCP deals with "marine/ocean bills of lading". It states that where a "bill of lading covering a port-to-port shipment" is called for, the document must, inter alia, `indicate that the goods have been loaded on board, or shipped on a named vessel'. Australian importers who wish to ensure goods ordered by them have been loaded on board a vessel for transport to port of destination before payment is made or claimed by the supplier in a port to port shipment, are advised to use the term `full set of on board marine bills of lading' in specifying documentation required. In some countries, in particular the USA, the term `on board', when suppliers are inland, may legally mean placing the goods on board whatever means of inland transport (rail truck, lake or river steamer) is used to convey the goods to the seaport for loading in the vessel. The term `full set of on board marine bills of lading' would protect against this situation. However, where a multimodal transport operator document is acceptable this type of bill of lading should be called for. In such cases the bill of lading will normally specify `Intended Vessel', `Intended Port of Shipment' &/or `Intended Port of Discharge'. These bills of lading indicate that goods have been received into custody by the shipping company for shipment by a named vessel or by a later vessel. They are issued before the goods are loaded on board, and therefore do not evidence shipment. Received or Accepted for Shipment Bills of Lading Short Form Bills of Lading A received for shipment bill of lading can be converted into an on board bill of lading by means of a notation on the bill of lading which indicates that the goods have been loaded on board or shipped on a named vessel. See Article 23(a)(ii) of UCP for further details of the required notations. Such bills of lading have the attributes of a normal bill of lading except that all the terms and conditions of the contract of affreightment are not detailed therein. Banks will accept short form bills of lading as good tender under documentary letters of credit unless they are specifically disallowed in the credit terms.

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Clean and Claused Transport Documents

A clean transport document as described by Article 32(a) of UCP: `...is one which bears no clause or notation which expressly declares a defective condition of the goods and/or the packaging'. If clauses or notations such as `two cases broken and repaired', `cases leaking and stained' appear on the bill of lading it is said to be unclean. Such bills of lading are not acceptable tender under a documentary credit unless the credit expressly stipulates the clauses or notations which may be accepted. If an exporter is aware that the packaging of certain goods will attract a clause or notation on the bill of lading by the shipping company, he should arrange with the buyer for the documentary credit to be issued permitting tender of such a claused bill of lading. For example, in the shipment of oils and fats, the bill of lading is always claused `secondhand casks', `secondhand drums', or similar terms. A bill of lading is regarded as `unclean' irrespective of whether the defective condition of the goods or packing is noted by a clause placed on the bill of lading by the shipping company, or is included in the description of the goods. Bills of lading may also bear clauses other than those relating to a defective condition of the goods or packaging. Such claused bills of lading, even though `clean' in that the condition of the goods or packaging is not qualified, may not be acceptable tender under a documentary credit which does not provide for such other clausing, for the reason that such a qualification on the bill of lading would not have been a consideration of the buyer when applying for the credit to be issued. These bills of lading are said to be `claused'.

Stale Bills of Lading

This is a banking term to describe a bill of lading presented after the vessel has sailed and the goods have arrived at port of destination before the bill of lading could reach the buyer. The buyer could be involved in expenses or loss if unable to clear the goods because the bill of lading has not arrived. Article 43(a) of UCP states that letters of credit should; `...stipulate a specified period of time after the date of shipment during which presentation must be made in compliance with the terms and conditions of the Credit. If no such period of time is stipulated, banks will not accept documents presented to them later than 21 days after the date of shipment. In any event, documents must be presented not later than the expiry date of the Credit'. This in effect enables the importer to specify whether or not he will accept stale bills of lading.

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Charter Party Bills of Lading

A shipper or group of shippers may lease a ship from the shipowners for one or more voyages or for a period of time. The terms and conditions of the lease are set out in a document called a Charter Party. If the lessee utilises the ship, or part of it, to carry goods for other shippers, the bills of lading issued to those shippers may state that they are issued subject to the terms of the Charter Party, and therefore the bill of lading does not contain all the essential terms of the contract of affreightment. This position may be unsatisfactory to subsequent holders of the bill of lading who give value on transfer of the bill of lading to them. A Charter Party Bill of Lading is not acceptable under a documentary credit unless otherwise stipulated ­ refer UCP Articles 23 and 25. If the Credit requires presentation of the charter party contract, banks have no responsibility to examine the charter party contract.

LASH Bills of Lading

These bills of lading cover shipment of goods which are shipped stored in lighters (barges) of approximately 500 tonnes each. Goods are loaded into these lighters either at the wharf or elsewhere by the consignor and the barge is then loaded onto the carrying vessel for transport to port of destination where the reverse procedure takes place. The term `LASH' is derived from the phrase `Lighters Aboard Ship'. The relative contract of carriage will extend to the loading of the goods into and out of the barge/lighter, which for the purpose of the bill of lading is included with the ship. This method of shipment is mainly used to and from some ports in the USA. ­ Refer UCP Articles 23(d)(i) and 24(d)(i).

Multimodal Transport Document

These are used with container shipping services. For shipments in containers, shipping companies adopt the concept of a door-to-door service, from exporter's premises to importer's premises, with variations providing for a service from depot4 (in exporting country) to depot (in importing country) or, for full container loads (packed by exporter and unpacked by importer), from terminal5 (in exporting country) to terminal (in importing country). Multimodal transport operator documents in normal form are `received for shipment' bills and available to shippers as soon as the goods are received by the shipping company. The majority of documentary credits still require tender of `on board' bills of lading, hence it is necessary to arrange for the shipping company to place an `on board' endorsement on the bill of lading. This cannot be obtained until after the vessel carrying the goods has sailed. However, the trend is for importers to accept multimodal transport operator documents. Refer UCP Article 26.

4. Depots (or `CFS' ­ container station) are places set up by container shipping companies separate from the terminals, at which goods are received for shipment (for packing into containers) and delivered to consignees (after unpacking from containers). Depots therefore deal largely with exporters and importers whose consignments comprise less than a full container load (LCL). 5. Terminals (or `CY' container yard) are places at ports where container vessels load and unload containers. Exporters may deliver containers to terminals with full container load (FCL) packed by themselves and importers receiving full container loads may take delivery of containers at terminals.

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In shipments by conventional ships, the shipper is normally responsible for delivery of the goods to the wharf with payment of associated charges, and the consignee is responsible for taking delivery at the wharf, usually with the responsibility of paying relative charges. The position with container shipments (there may be minor variations in different services) is that the shipping company is responsible for charges associated with placing goods on board the vessel from the place at which they receive the goods, which may be at the exporter's address, the depot, or, for FCLs, at the terminal. Similarly, when goods are unloaded the shipping company is responsible for charges relative to delivery of the goods to the importer, and the place of delivery may be the importer's address, the depot, or for FCLs, the terminal. Hence, in addition to sea freight and wharf charges, land transport charges may be involved. The general practice is for the shipping companies to pass the charges on to the exporter or importer, as applicable, by dividing the charges into three parts; basic sea freight, charges in exporter's country, and charges in importer's country. The bill of lading is issued accordingly and will indicate which charges have been paid, and which are to be collected. A conventional bill of lading can be issued either `freight paid' or `freight collect', but in a multimodal transport operator document `paid' or `collect' must be applied to each component making up the total charges, since some may be paid and others have to be collected. Transport Documents Issued by Freight Forwarders These bills of lading are different from those already discussed. They are not issued by shipping companies but by forwarding agents who contract to transport goods from one country to another. The forwarding agents receive the goods from the supplier (frequently consolidating them into one shipment with goods from other suppliers) and arrange transport in their (the forwarding agents') name. The forwarding agents receive a bill of lading from the shipping company and in turn issue to each individual supplier their own bill of lading (sometimes termed `house bills of lading') which provides that the goods will be made available by the forwarder's agent in the country of import against presentation to the agent of the house bill of lading. There is no direct contract between suppliers or buyers and the shipping company, and the rights and liabilities of the suppliers and buyers depend on the provisions of the forwarding agent's bill of lading which may vary considerably between forwarding agents. The decision whether to use the services of forwarding agents in the manner set out above, and the suitability of the forwarding agents' bills of lading, is one that rests with the exporter and importer concerned. However, the matter also concerns the importer's bank if the importer wishes to have a documentary credit issued providing for the tender of a forwarding agent's bill of lading and the bank is relying on the goods as part security backing for the documentary credit: the standing of the forwarding agent, his willingness and capability to accept the normal liabilities, undertaken by parties concerned in the carriage of goods by sea, then assumes importance.

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Unless a buyer arranging for a documentary credit to be issued covering goods to be imported specifically provides that a forwarding agent's bill of lading is acceptable, banks will only accept such a bill of lading as satisfactory tender under the credit, if it complies with the requirements of UCP Article 30. Australian exporters may ship goods through forwarding agents and receive a forwarding agent's bill of lading evidencing the shipment. In circumstances where the exporter is not receiving payment by means of a documentary credit (providing for tendering of a forwarding agent's bill of lading) but intends to draw a documentary bill of exchange on the buyer which he wishes his bank to purchase from him immediately after shipment (see Chapter 13), he should ascertain in advance whether the bill of lading is acceptable to the bank. If the bank is relying on the goods as part security backing for the transaction, it will be concerned with the standing of the forwarding agent and his willingness or otherwise to accept the normal liabilities undertaken by parties concerned in the carriage of goods by sea. Lost or Missing Bills of Lading Shipments may sometimes arrive in the port of destination before the arrival of the relative bills of lading as a result of the documents being lost or delayed in transit. Shipping companies will customarily release such goods to consignees, without production of an original bill of lading, if the consignee gives them an indemnity against any loss or harm which the shipping company could incur if the goods were delivered to a party not entitled to receive them. It is normal practice for the shipping company to require a bank to join in such indemnities. Banks will co-sign such indemnities for customers by arrangement. A fee is charged periodically by banks for this facility during the life of the indemnity, which normally runs for six years, unless an original copy of the bill of lading comes into the possession of the consignee and is presented to the shipping company to obtain release of the indemnity. Where traders can provide conclusive evidence that payment has been received by the rightful party, banks tend not to charge a continuing fee, and will delete the liability in their customer's name. However, recourse is still retained on their customer for the statutory period (normally six years). Non-Negotiable Sea Waybills There has been an increasing commercial trend towards the use of nonnegotiable sea waybills in European, Scandinavian, North American and Trans Tasman trade areas. A sea waybill issued to the shipper is an acknowledgement by a shipping company that they have received the goods detailed for shipment to the named consignee at the address given. The sea waybill is not a negotiable bill of lading or a document of title, since delivery of the goods is made to a nominated consignee upon proof of identity. This means that sea waybills cannot be used in the same way as a bill of lading in protecting the shipper's interest (refer to Chapter 13 for discussion on methods of payment as applicable to air transport/sea waybills and in particular footnote 11).

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Air Transport Document An air transport document issued to the shipper is an acknowledgement by an airline company that they have received the goods detailed for despatch by air to the named consignee at the address given. Details of goods include number of packages, method of packing, nature and quantity of goods, marks and numbers, dimensions or volume and gross weight. The carrier has an obligation to notify the consignee of the arrival of the goods by issuing a delivery order, which is his authority to collect the goods. An air transport document is not a document of title to the goods. The consignee does not need to possess a copy of the receipt issued to the shipper to obtain the goods, since the airline company does not require surrender of the air transport document against delivery of the goods. This means that an air transport document cannot be used in the same way as a bill of lading in protecting the shipper's interests (refer to Chapter 13 for discussion on methods of payment as applicable to air transport documents and in particular footnote 11). A further complication arises from a regulation of the International Air Transport Association on documentation for air shipments which reads: `Shipments of cargo by air must be accompanied by the necessary documents as required by the exporting or importing country. Failure to provide these may involve delay and, in some cases, fines or other penalty to the consignee. If shipments for international transportation are delivered to the airport of departure without these documents, they will be held at shipper's risk until documents are received'. The documents referred to above are those necessary to enable clearance of the goods through Customs. These vary between countries and comprise such documents as commercial invoices (in various numbers of copies) with Consular legalisation in some cases, Consular invoices, certificates of origin, etc. The purpose of the regulation is to ensure that the documents are available to the consignee as soon as the goods arrive, so that prompt clearance can be made. UCP Article 27 deals with air transport documents. Post Receipt A post receipt is a post office acknowledgment of receiving a parcel for despatch by post to the addressee named. The receiving post office has an obligation to notify the addressee, who can then take delivery. A post receipt is not a document of title to the goods. The addressee does not need to present the receipt issued to the shipper in order to obtain delivery of the parcel from the receiving post office, so a post receipt cannot be used in the same way as a bill of lading in protecting the interests of the shipper (refer to Chapter 13 for discussion on methods of payment as applicable to post receipts and in particular footnote 11).

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Courier Receipt A courier receipt is confirmation that a parcel has been received by the courier whose responsibility is to deliver the parcel to the addressee. UCP Article 29 deals with couriers and post receipts. Other Documents Some ancillary documents relating to the shipment of goods must be provided by particular authorities or organisations, and care should be taken to provide such documents in the form usual in the trade. Where such a document is required to support a drawing under a documentary credit, the provisions of the credit as regards the form of the document and the party by whom the document is to be signed must be strictly adhered to. In this regard Article 21 of UCP states: `When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented'. Exporters should be cognisant of the fact that where a transport document other than a document of title (e.g. bill of lading) is required under a credit, control of goods is lost once these leave the exporters' possession. Shipping Terms and Abbreviations Buyers and sellers must fully understand their responsibilities in contracts of sale that embody trade terms not customary in local trade. Trade terms are primarily used to define responsibility in the delivery of the goods sold and to show the price basis. When goods are sold, a number of other costs, in addition to the cost of the goods themselves, must be paid by the buyer or seller or shared between them. In international trade the carriage of goods from seller to buyer is likely to be more complicated than delivery in domestic trade. The following briefly describes some of the responsibilities and duties of the two parties for terms and abbreviations frequently encountered in international trade. The International Chamber of Commerce publication No. 620 "ICC Guide to Incoterms 2000" is recommended for a comprehensive analysis of the subject.6 Incoterms The purpose of Incoterms is to provide a set of standardised terms which means exactly the same to both parties and which will be interpreted in exactly the same way by courts in every country. Incoterms are not incorporated into national or international law, but they can be binding on both buyer and seller, provided the sales contract specifies that a particular Incoterm will apply.

6. The abbreviations used in this book are those which came into force in January 2000.

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EXW

­ Ex Works (Named place) This term means maximum involvement by the buyer in arrangements for the conveyance of the consignment to the specified destination. The exporter merely makes the goods available by an agreed date at his factory or warehouse. The seller minimises his obligations whilst the buyer obtains the goods at the lowest possible price. The principal obligations of the seller include: to supply the goods in accord with the contract of sale, to make available the goods to the buyer at the customary delivery point, or as specified in the contract of sale, to provide at his expense the necessary packing to enable the buyer to convey the goods on the specified transport, to give prompt notice to the buyer when the goods will be available for collection, to bear all the risks and expense of the goods until they have been placed at the disposal of the buyer. The responsibilities of the buyer are more extensive. These include: taking delivery of the cargo and to pay for the goods in accord with the contract of sale, funding any preshipment expense, bearing all the cost and risk of the goods from the time they have been placed at his disposal by the seller, funding any customs duties and taxes arising through exportation and importation, funding all costs in obtaining the documents required for the purpose of importation and exportation and for passing through the countries in transit.

FCA

­ Free Carrier (Named place) The seller is responsible for the goods being delivered into the charge of the carrier named by the buyer at the named place, arranging export clearance and providing the buyer with an invoice and proof of delivery. A carrier is any person who, in a contract of carriage, undertakes to perform or to procure the performance of carriage by rail, road, sea, air, inland waterway or by a combination of such modes. The buyer must give the seller in time the necessary instructions for despatch and take responsibility of the goods from the time when they have been delivered into the custody of the named carrier. The risk of loss or damage to the goods as well as any cost increases, is transferred from the seller to the buyer when the goods are delivered to the named carrier at the named place. This term is primarily for the combined transport operation such as container or roll on/roll off operation involving a road trailer and sea ferry. This term may be used for any mode of transport. ­ Free Alongside Ship (Named port of shipment) The seller must deliver goods alongside the ship, on the quay or in lighters, at the port of shipment named by the buyer. The seller must at his own expense provide evidence of delivery of the goods alongside the ship, and is responsible for any export licence or other governmental authorisations, costs and risks necessary for the export of the goods. The buyer must advise the seller of the name, loading berth and delivery dates of the vessel. This term should only be used for sea or inland waterway transport.

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FAS

FOB

­ Free On Board (Named port of shipment) Where sale of goods has been made on a FOB basis it is the seller's duty to deliver the goods on board the vessel named by the buyer and notify the buyer, without delay, that this is done. The seller must obtain any export licence or other governmental authorisations, bear all costs and risks of the goods until the goods have passed the ship's rail at the named port of shipment. The buyer must at his expense, charter a vessel or reserve the necessary space on board a vessel and give the seller due notice of the name, loading berth of and delivery dates to the vessel. The risk of loss of or damage to the goods is transferred from the seller to the buyer when the goods pass the ship's rail at the named port of shipment. This term should only be used for sea or inland waterway transport. When the ship's rail serves no practical purpose as in the case of roll-on/roll-off or container traffic, the FCA term should be used. ­ Cost and Freight (Named port of destination) The seller must contract for carriage of the goods and pay the costs and freight to bring the goods to the destination. He must deliver the goods on board the vessel and provide the buyer with an invoice and clean on board bill of lading. The seller must also obtain any export licence or other governmental authorisation necessary, and pay export taxes and loading costs. The buyer must accept delivery of the goods at the agreed port of destination and pay cost of unloading, etc. unless costs were included in the freight charges. Cost of the necessary insurance is for the buyer's account. The risk of loss or damage to the goods, as well as any cost increases, is transferred from the seller to the buyer when the goods pass the ship's rail at the port of shipment. This term should only be used for sea or inland waterway transport. When the ship's rail serves no practical purpose as in the case of roll-on/roll-off or container traffic, the CPT term should be used. ­ Cost, Insurance and Freight (Named port of destination) This term is similar to CFR but with the addition that the seller, at his own expense, must insure the goods against the risk of loss of or damage to the goods during the carriage and provide the buyer with the policy. This term should only be used for sea or inland waterway transport. When the ship's rail serves no practical purpose as in the case of roll-on/roll-off or container traffic, the CIP term should be used. ­ Carriage Paid To (Named place of destination) ­ Carriage and Insurance Paid To (Named place of destination) These terms are similar to CFR and CIF but better cover the requirements of multimodal transport such as container or roll-on roll-off traffic by trailers and ferries. Risk of loss is transferred from the seller to the buyer when the goods are delivered into the custody of the carrier at the named place (and not at the ship's rail).

CFR

CIF

CPT CIP

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Variations

Often, buyers and sellers agree to alter some of the conditions of a particular term. For example, with a FOB shipment the seller agrees to arrange and pay freight and insurance and the buyer agrees to the additional charges being invoiced. It should be understood that these changes do not convert a FOB contract to a CIF contract. Therefore, in such cases where the importer is requested to establish a letter of credit, a suitable clause should be included as a special instruction in the credit: e.g. `Cost of freight and insurance may be included as an addition to the FOB invoice amount and drawn for within the amount of the credit' or `Cost of freight and insurance may be included as an addition to the FOB invoice amount and drawn for in excess of the amount of the credit'. In these circumstances the credit should also call for bills of lading indicating `Freight Prepaid' and an insurance policy or certificate. This then clearly establishes that the contract remains as FOB with amendments.

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5

Documentary Credits

The majority of banks in most countries of the world have adopted the `Uniform Customs and Practice for Documentary Credits'. Banks in Australia have operated in accordance with UCP (as it is commonly abbreviated) since 1963 and have adopted the 1993 revision. UCP is a code to standardise conditions under which bankers are prepared to issue documentary credits, and the interpretation of documentary credit practice. Credits subject to the code include a clause to that effect. Everyone concerned with documentary credits and the preparation of related documents should be familiar with the provisions of UCP. Where a contract for the sale of goods provides for payment to be made by a banker's letter of credit, it is the buyer's duty (applicant) to arrange with his bankers (issuing bank) for a documentary credit to be issued in favour of the seller (beneficiary) in the currency specified (as indicated by the price). A documentary credit may be described as an advice issued by a bank authorising the payment of money to a named party, the beneficiary, against delivery by the beneficiary of specified documents (usually accompanied by a bill of exchange for the amount to be paid) evidencing the shipment of described goods. The advice sets out the strict terms and conditions that must be fulfilled. The details of the documentary credit are advised to the beneficiary who, after the goods have been shipped, draws a bill of exchange for the value of the shipment, attaches the bill of lading and any other specified documents required and presents the bill of exchange to a bank normally in his country of residence for negotiation or payment. Alternatively, if the credit does not require the drawing of a bill of exchange, the beneficiary presents the specified documents to a bank for payment. A documentary credit issued by a creditworthy bank, constitutes an undertaking of payment to the seller on condition that he presents the correct documents and does so independently of the underlying contract of sale. The issuing bank's creditworthiness is substituted for that of the buyer's, and this security for the seller is normally the fundamental purpose of a letter of credit. The necessity for the seller to trust the buyer is removed ­ the seller is sure of payment and the buyer is sure of receiving documents. It is for these reasons that banks will only agree to issue such instruments for creditworthy applicants and after security considerations.

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However, the seller still has the responsibility of assessing the level of reliance he places upon the issuing bank and the political stability of the country concerned. From the viewpoint of the buyer, while the seller must produce conforming documents with the letter of credit, the buyer will be still reliant upon the standing of the supplier and their ability to manufacture/ship goods in terms of the quality required. Letters of credit can also be used by importers to provide financing. This could enable an importer to match his payment terms to anticipated receipt of proceeds of the goods imported and on-sold in the domestic market (thus assisting cash flow). These factors and others are fully covered in Chapters 12 and 13 for exporters and Chapters 20 and 21 for importers. Types of Documentary Credits Irrevocable Credit (a) Article 9(a) and (d)(i) of UCP inter alia states: `An irrevocable Credit constitutes a definite undertaking of the Issuing Bank, provided that the stipulated documents are presented to the Nominated Bank or to the Issuing Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment ­ to pay at sight; (ii) if the Credit provides for deferred payment ­ to pay on the maturity date(s) determinable in accordance with the stipulations of the Credit; (iii) if the Credit provides for acceptance: (a) by the Issuing Bank ­ to accept Draft(s) drawn by the Beneficiary on the Issuing Bank and pay them at maturity, or (b) by another drawee bank ­ to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Issuing Bank in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; (iv) if the Credit provides for negotiation ­ to pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s)'. (d) (i) Except as otherwise provided by article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary.' Once an irrevocable credit has been advised to him, the beneficiary is assured that it cannot be withdrawn or the terms altered in any way, unless he agrees. Such credits contain an express undertaking by the issuing bank, or one implied by the use of the word `irrevocable' that all drawings will be duly honoured provided all the terms of the credit have been complied with. These credits have a high standing in the commercial world when issued by reputable banks, and are the type usually required in commercial transactions.

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Irrevocable and Confirmed Credit (b)

The meaning of `confirmation' of an irrevocable credit is set out inter alia in Article 9(b) and (d) of UCP as follows: `A confirmation of an irrevocable Credit by another bank (the "Confirming Bank") upon the authorisation or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with: (i) if the Credit provides for sight payment ­ to pay at sight; (ii) if the Credit provides for deferred payment ­ to pay on the maturity date(s) determinable in accordance with the stipulations of the credit; (iii) if the Credit provides for acceptance: (a) by the Confirming Bank ­ to accept Draft(s) drawn by the Beneficiary on the Confirming Bank and pay them at maturity, or (b) by another drawee bank ­ to accept and pay at maturity Draft(s) drawn by the Beneficiary on the Confirming Bank, in the event the drawee bank stipulated in the Credit does not accept Draft(s) drawn on it, or to pay Draft(s) accepted but not paid by such drawee bank at maturity; (iv) if the Credit provides for negotiation ­ to negotiate without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit. A Credit should not be issued available by Draft(s) on the Applicant. If the Credit nevertheless calls for Draft(s) on the Applicant, banks will consider such Draft(s) as an additional document(s)'. (d) (i) Except as otherwise provided by Article 48, an irrevocable Credit can neither be amended nor cancelled without the agreement of the Issuing Bank, the Confirming Bank, if any, and the Beneficiary. (ii) The Issuing Bank shall be irrevocably bound by an amendment(s) issued by it from the time of the issuance of such amendment(s). A Confirming Bank may extend its confirmation to an amendment and shall be irrevocably bound as of the time of its advice of the amendment. A Confirming Bank may, however, choose to advise an amendment to the Beneficiary without extending its confirmation and if so, must inform the Issuing Bank and the Beneficiary without delay. (iii) The terms of the original Credit (or a Credit incorporating previously accepted amendment(s)) will remain in force for the Beneficiary until the Beneficiary communicates his acceptance of the amendment to the bank that advised such amendment. The Beneficiary should give notification of acceptance or rejection of amendment(s). If the Beneficiary fails to give such notification, the tender of documents to the Nominated Bank or Issuing Bank, that conform to the Credit and to not yet accepted amendment(s), will be deemed to be notification of acceptance by the Beneficiary of such amendment(s) and as of that moment the Credit will be amended. (iv) Partial acceptance of amendments contained in one and the same advice of amendment is not allowed and consequently will not be given any effect.'

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Confirmation is therefore an additional undertaking in an irrevocable credit given by a bank other than the issuing bank (usually by the advising bank), and the beneficiary has the assurance that, except with his consent, it cannot be cancelled or the terms altered. The undertaking may be detailed in the credit advice by the confirming bank, but otherwise the use of the words `This credit is confirmed by us' or similar is sufficient to imply the undertaking specified above, as is the use of the word `irrevocable' sufficient to imply the undertaking of the issuing bank. An irrevocable credit confirmed by another bank constitutes an undertaking of payment by two banks. It has a higher standing than an irrevocable credit, but it is more costly since the confirming bank makes a charge for adding its confirmation. When the issuing bank is a well-known, first-class bank of high standing, located in a country with a stable political and economic climate, confirmation has little practical value. However, if the issuing bank is little known and of small resources, or if the country of issue has political or economic problems, the beneficiary understandably may seek to have the credit confirmed by a bank in his own country, the reputation and standing of which he can better assess. The instruction to an advising bank to confirm a credit must be given by the issuing bank, which will be responsible for the confirmation fee unless it instructs that the fee is to be charged to the beneficiary. If a beneficiary, on receipt of the credit bearing no provision for confirmation, wishes to have it confirmed, the advising bank should be requested to refer back to the issuing bank for their permission to do so. Although advising banks requested by issuing banks to add their confirmation to a credit seldom refuse, they may do so in circumstances where satisfactory arrangements cannot be made with the issuing bank to cover the liability which the confirming bank will incur by confirming the credit. Some issuing banks describe their irrevocable letters of credit as confirmed irrevocable letters of credit: in such cases the word `confirmed' has no meaning additional to that conveyed by the use of the word `irrevocable'. Silent Confirmation Silent confirmations fall outside the current provisions of the Uniform Customs and Practice (UCP), and subsequently all rights are not the same as with a standard confirmed letter of credit. "Australian banks may offer a silent confirmation of a credit. This is a bilateral arrangement between the bank and the letter of credit beneficiary which is outside the issuing bank's credit mandate and UCP, and separate agreements between parties may apply." A silent confirmation is an undertaking given by a bank (at the request of the beneficiary, without the request or authorisation of the issuing bank) to add its undertaking to a letter of credit to pay according to the terms of the credit, providing all documents are presented in order. Accordingly, these transactions are only available for specific customers that meet the bank's stringent criteria.

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The following criteria may be a critical factor in assessing a silent confirmation request from the beneficiary. ­ Experienced traders ­ Credit assessment of the Issuing Bank ­ Customer relationship with the Bank ­ Control of goods through Bills of lading ­ Possible contract repudiation due to the type of commodity being exported ­ Export insurance cover is a pre-requisite for some countries Silent confirmations are assessed at the sole discretion of the Bank requested to add its silent confirmation. Revocable Credit (a) (b) Article 8(a) and (b) of UCP states: `A revocable Credit may be amended or cancelled by the Issuing Bank at any moment and without prior notice to the Beneficiary. However, the Issuing Bank must: (i) reimburse another bank with which a revocable Credit has been made available for sight payment, acceptance or negotiation ­ for any payment, acceptance or negotiation made by such bank ­ prior to receipt by it of notice of amendment or cancellation, against documents which appear on their face to be in compliance with the terms and conditions of the Credit. (ii) reimburse another bank with which a revocable Credit has been made available for deferred payment, if such a bank has, prior to receipt by it of notice of amendment or cancellation, taken up documents which appear on their face to be in compliance with the terms and conditions of the Credit'. So a revocable credit may be cancelled or the terms altered at any time without the consent of the beneficiary. Revocable credits therefore afford the beneficiary no protection unless a drawing has been made prior to receipt by the advising bank of notice of cancellation or alteration: issuing banks, as stated in Article 8 of UCP, will regard such drawings as valid, and payment should be made if they are in terms of the credit. Availability of Funds Credits will specify whether or not drafts are required to be drawn and, if required, will specify the term and the party on which they are to be drawn. This will indicate to the exporter when he can expect to receive payment. Under the terms of article 9(A)(iv) of UCP, drafts drawn under a documentary letter of credit may not be drawn on the applicant. For Sight or Cash Against Documents Credits For Deferred Payment Credits In most instances the credit amount is available immediately the documents (and, if required, the draft) are presented. The credit amount is not immediately available when the documents are presented but is delayed until the time specified in the credit (drafts are not drawn). However, the exporter, if he requires funds, may be able to arrange a separate advance against the lodgement of documents under the deferred payment credit. When the drawing is paid the advance is then liquidated.

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For Term Credits

A term (usance) draft is required to be drawn and usually by discounting the draft funds can be made available to the exporter at any time prior to maturity of the draft. Parties in Documentary Credits For a fuller understanding of documentary credits, consideration must be given to the definition and various terms used in the Uniform Customs and Practice for Documentary Credits. The definition of a documentary credit, as described in Article 2 of UCP is as follows: `For the purposes of these Articles, the expressions "Documentary Credit(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)"), mean any arrangement, however named or described, whereby a bank (the "Issuing Bank") acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf, (i) is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or (ii) authorises another bank to effect such payment, or to accept and pay such bills of exchange (Draft(s)), or (iii) authorises another bank to negotiate against stipulated document(s) provided that the terms and conditions of the Credit are complied with. For the purposes of these Articles, branches of a bank in different countries are considered another bank.' The terms applicant (buyer), beneficiary (seller) and issuing bank need no further explanation, but an understanding of the following terms is necessary.

Advising Bank

The issuing bank may forward advice of the credit by mail direct to the beneficiary1, but, more commonly, where the beneficiary resides in another country, the issuing bank will mail the advice to a bank in that country for authentication2 and delivery to the beneficiary. The second bank is termed the advising bank. Where a credit has to be issued by SWIFT/telex it is necessary for the issuing bank to use an advising bank, since arrangements are in operation between the banks for the advising bank to authenticate the SWIFT/telex message. The advising bank may advise the details of the credit to the beneficiary on its own credit advice form but stating that it is the issuing bank's credit or, more commonly will indicate on the original SWIFT/telex message that it has been authenticated and forward this to the beneficiary. Unless an advising bank has added its confirmation to a credit, it undertakes no obligation to the beneficiary to negotiate drawings in due course nor to be responsible for payment of any drawings.

1. Where a letter of credit is advised directly to the beneficiary, the beneficiary should seek assistance from his bankers to establish its authenticity. 2. Refer Article 7 of UCP.

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The issuing bank may instruct that negotiations under a credit must be made only by the advising bank, in which case the credit is termed a `restricted credit'. Paying Bank Where a credit provides for bills of exchange, the paying bank is the bank on which such bills of exchange are drawn. This may be the issuing bank, or another bank (either in the country of the beneficiary, or in a large financial centre such as London or New York). Where a credit provides for payment against presentation of specified documents, without a bill of exchange being drawn, the bank authorised to make payment against the documents is the paying bank. A drawing under a credit as far as the exporter is concerned is not finalised until paid by the paying bank. At this stage, in the absence of fraud, there is no recourse to the beneficiary. Negotiating Bank Where the paying bank is not located in the country of the beneficiary it is usual to find that credits permit a bank or banks in the beneficiary's country to negotiate drawings under the credit and disburse the amount of the drawings to the beneficiary. The negotiating bank must present the relative bill of exchange to the paying bank, and until that bank pays the bill the drawing is not finalised. The negotiating bank retains recourse on the beneficiary and will claim repayment of the amount disbursed to him if the paying bank does not pay the drawing, except in the following circumstances: ­ Where the negotiating bank has confirmed the credit. ­ Where, in accordance with the provisions of the credit, the beneficiary has drawn the bill of exchange `without recourse'. Thus, while the advising, paying and negotiating banks relative to a documentary credit may be different banks, the advising bank may also be the paying bank or negotiating bank, depending on the provisions of the credit. The issuing bank is frequently the paying bank. Accepting Bank Chapter 1 explains that the drawee of a bill of exchange is not liable on the bill until he has accepted it (by writing his acceptance on the bill and signing it). The word `accept' appearing in the UCP definition of a documentary credit (see previously) is used in this sense, and refers to the acceptance by the drawee bank (i.e. on whom bill is drawn) of a term bill of exchange drawn in accordance with the requirements of a credit. Once accepted by the drawee bank, the beneficiary of the credit has the added protection of that bank's acceptance on the draft (i.e. in addition to the issuing bank's undertaking in the documentary credit).

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Cycle of a Typical Sight Documentary Credit Transaction

Importer

(Buyer) (Applicant for documentary credit)

8

The issuing bank (now the paying bank in most cases) examines the documents and delivers them to the importer and receives payment. The importer is then able to use the shipping documents to obtain the goods.

Application Prepared

The importer (applicant for the credit) requests his bank (the issuing bank) to issue a documentary credit in favour of the exporter (beneficiary).

Paying Bank

1

The buyer and seller conclude a sales contract providing for payment by documentary credit.

2 7 Issuing Bank

The issuing bank issues a documentary credit and advises it to the beneficiary through an advising bank. The negotiating/confirming bank checks the documents against the credit and disposes of them as instructed in the credit. They then claim reimbursement (in some cases this may be from the issuing bank or often a reimbursing bank).

7a

A reimbursing bank is often used when a third currency is involved (e.g. imports from Japan with payment in US dollars).

Contract of sale 1 3

Negotiating Bank

Reimbursing Bank

6

The exporter prepares documents, has them signed by the appropriate parties and then delivers them to the negotiating bank. (This may be the advising bank, confirming bank or another bank.)

Advising Bank

The advising bank authenticates the advice and advises the exporter the terms and conditions of the credit. When requested by the issuing bank the credit may be confirmed by the advising bank (then known as the confirming bank).

Documents Prepared

4

5

The exporter prepares the goods in terms of the sales contract and makes the shipment.

Goods Prepared

Exporter

(Seller) (Beneficiary of documentary credit)

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Alternative Grouping of Documentary Credits While the preceding headings of `Parties in Documentary Credits' describes the banks involved in their various roles, each credit can be classified under one of the following: ­ Payment Type Credit ­ Deferred Payment Type Credit ­ Acceptance Type Credit ­ Negotiation Type Credit Payment Type Credit A payment type documentary credit provides for the beneficiary to receive immediate payment in exchange for documents in terms of the credit on a without recourse basis. For example, it can provide for payment by a bank in the beneficiary's country to the beneficiary without drafts being drawn. Once the bank pays the beneficiary under such a credit, it does so without recourse. Another example would be, where drafts are drawn on a bank in beneficiary's country and beneficiary presents draft and documents direct to that bank for payment. Once the bank pays the drawing it is without recourse. Deferred Payment Type Credit This type of credit defers payment to the beneficiary on the date(s) determinable in accordance with the stipulations of the credit. Drafts would not be drawn under this type of credit, however, the bank nominated (normally in beneficiary's country) once documents in terms of the credit are presented, will advise the beneficiary, in accordance with the instructions in the credit, the deferred payment date. Unless such bank has confirmed the credit, it does not undertake to make payment on the deferred date but merely fixes the date and advises the beneficiary (and issuing bank) accordingly. Acceptance Type Credit This type of credit provides for the beneficiary to draw a term (usance) draft. If the draft is drawn on a bank, it is described as a bankers acceptance type credit. If drawn on another bank other than issuing bank once the draft has been accepted it then constitutes an undertaking of payment by the accepting bank. Negotiation Type Credit Under this type of credit, a draft must be drawn on the party named in the credit. If this is other than the negotiating bank then this credit can be described as a negotiation type credit. That is, the bank negotiating the drawing has recourse on the beneficiary (drawer of the draft) until it is paid always provided the negotiating bank has not confirmed the credit or drafts are drawn without recourse to the drawer in terms of the credit.

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Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits, ICC Publication No. 525, (commonly referred to as URR 525) applies to all Bank-to-Bank Reimbursements and are binding on all parties where the Reimbursement Authority specifically states it is subject to these rules. These Rules document the current practice in Bank-to-Bank Reimbursements and is written so that every party to a Bank-to-Bank Reimbursement fully understands how to conduct its business and what to expect from others they are dealing with. URR 525 is intended where a credit is issued subject to UCP 500, to supplement UCP Article 19 in order to address the specific transactions related to a Bank-to-Bank Reimbursement. Details included in Application for Documentary Credits An application for a documentary credit (see page 63) usually requires the following particulars: (a) (b) (c) (d) (e) (f) (g) (h) Type of credit to be issued will be irrevocable. On whose behalf the credit is issued (the applicant/buyer). The date up to which the credit is valid (the expiry date). Name and Address of Beneficiary (the seller). Beneficiary's Bankers (including address). The amount (including the currency). Whether part shipments and/or transhipment are permitted. Ports of shipment and destination of goods (sometimes countries only are specified). (i) Where the beneficiary is required to draw a bill of exchange (normally referred to as a `draft' in documentary credits): · the term of the draft (i.e. on demand, 30 days after sight, etc. in accordance with terms of payment).3 (j) Latest shipment date. (k) Brief details of goods. (l) Price and terms of shipment, e.g. CIF (port of destination). (m) Documents required. (n) Any other conditions applicable to the credit. (o) The specified period after date of issuance of bills of lading or other document evidencing transport during which documents must be presented for payment, acceptance or negotiation. (p) Who pays charges/interest. (q) Statement that the credit is subject to the provisions of the Uniform Customs and Practice for Documentary Credits. (1993 revision).

3. Often letters of credit are used, by arrangement between the buyer and his banker, to provide the buyer with extended payment terms. In these cases, while the contract of sale will state `cash against documents' terms (i.e. a sight credit should be issued), the credit may require a usance draft to be drawn. In such circumstances, the exporter, on receipt of the credit, should ensure it provides for payment on a sight basis. Inclusion of the following, or similar clause would suffice: `Interest for the usance period, acceptance commission and stamp duty, if any, are for buyer's account in excess of the credit amount'.

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Documents in relation to Documentary Credits In a documentary credit transaction: `...all parties concerned deal with documents, and not with goods...'.4 The issuing bank specifies the documents to be presented by the beneficiary, and provided such documents are presented and, on their face, conform to the credit requirements, the negotiating and/or paying bank will accept them. It would be impracticable for banks to undertake the responsibility of ensuring the actual goods are those described in the documents, or that they are what the buyer has ordered. The buyer's remedy for unsatisfactory goods is to take action under his contract of sale with the seller. A paying bank (see previous definition) is strictly bound by the terms of the credit to make payment only if the documents are in order. Once the paying bank has acknowledged that the documents are correct and payment has been made, there is no recourse by that bank to the beneficiary except in the case of fraud. A negotiating bank (see previous definition) which negotiates a bill of exchange with documents attached that have been drawn under a documentary credit by the beneficiary, is also required to check the documents with reasonable care5 to ascertain that they comply with the terms of the credit. If payment is refused when the drawing is presented to the paying bank, the negotiating bank has recourse to the beneficiary for the amount disbursed on negotiation, except where the negotiating bank has originally confirmed the credit or has negotiated the bill of exchange `without recourse' to drawer in terms of the credit. These exceptions expose negotiating banks to a liability in excess of that normally incurred by a negotiating bank, so a charge is made for confirmation and, in Australia, banks also make a charge for negotiating `without recourse' drawings. It follows that the beneficiary suffers most if drawings do not comply with the terms of a credit. If the documents are not in order, the beneficiary effectively loses the protection afforded him by the credit. A negotiating bank will refuse to negotiate the drawing, or may negotiate only if the beneficiary gives a suitable indemnity safeguarding the bank against any loss it might suffer through not following the instructions of the issuing bank. As stated above the negotiating bank (except in the case of confirmation or `without recourse' drawings) automatically has recourse on the beneficiary if the drawing is not paid, but it will be recognised that an acknowledgement, in the form of an indemnity by the beneficiary that the documents are incorrect ensures that he clearly understands his position.

4. Refer to Article 4 of UCP. 5. Refer to Article 13 of UCP.

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A paying bank (other than the issuing bank) situated in the country of the beneficiary will similarly refuse to pay drawings not in order except against suitable indemnity, and in such a case will advise the issuing bank that it has negotiated the drawing with recourse to the beneficiary. If the issuing bank cannot obtain ratification of the irregular drawing from the buyer (applicant) then the paying bank will claim repayment from the beneficiary under the indemnity. An indemnity by the beneficiary does not give the drawing any greater assurance of payment. The effect is the same as if the beneficiary had ignored the credit and negotiated a `documents on payment' or `documents on acceptance' bill with his bank (see Chapter 6). He has lost the protection of the credit, which can be serious if the buyer is looking for an excuse to avoid taking the goods. The issuing bank will not pay or authorise payment of the drawing without reference to the buyer if documents are irregular, as the buyer can refuse to ratify it. If he refuses, the seller is left with goods to be disposed of in an overseas port, and a liability under his indemnity to refund the amount of the drawing to the negotiating/confirming bank. When the bank to which the beneficiary initially presents the drawing discovers discrepancies in documents, and it is not possible to correct them, there may be time before the credit expires for the bank concerned to SWIFT/telex the issuing bank for permission to negotiate/pay the documents as presented. If this permission is given (and it would require consent from the buyer) the documents are regarded as being in order. Beneficiaries should therefore take steps to ensure they can always comply exactly with the terms of a credit. This should be determined immediately once the advice of the credit is received and not left until the documents are ready for negotiation. If the terms of a credit are carefully analysed when it is received and they are not in accordance with the terms of the contract of sale, or some are impossible to fulfil, it is possible for the beneficiary to seek amendment of the credit terms by communicating direct with the buyer, or with the issuing bank through the advising bank. The main points6 to be checked on receipt of a documentary credit are: (a) Are the terms of payment in the credit in conformity with seller's contract with the buyer? (b) Are seller's name and address shown correctly? (c) Is the amount of the credit sufficient to cover all costs permitted by the terms of the credit?

6. One risk factor which should be considered is where the terms of the credit provide, by their operation, for the buyer to take possession of the goods without making payment. (Refer to Chapter 13 for Air Shipments, Sea Waybills and Post Receipt.) However, other terms of credit could provide for this. For example, where it provides for one set of negotiable documents to be forwarded direct to applicant.

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(d) Do the latest shipping date and the latest date for presentation of documents allow sufficient time to process the order, ship it, and present the documents to the bank for negotiation/payment? (e) Are the documents obtainable in the form required? (f) Does the description of the merchandise or commodity conform with the seller's agreement with the buyer? (g) Is the provision for insurance in accordance with the terms of sale? (h) Is the place of shipment and destination as agreed? (i) If the credit is in Australian currency and provides for drafts to be drawn on an overseas bank, is the seller likely to be liable for interest charges which he has not provided for in making the sale of goods? (j) Generally, are there any provisions in the credit which are unacceptable to the seller? e.g. if the credit has an expiry date in an overseas centre, there may be problems in ensuring that documents reach that centre prior to expiry of the credit. Exporters should note that since most documentary credits are issued subject to the provisions of UCP, unless the buyer has ensured the issuing bank words the credit to exactly cover the requirements of the contract of sale, some provisions of UCP could permit actions by the exporter at variance with the contract of sale. This relates particularly to those articles of UCP which apply `unless credit stipulates otherwise' or similar: for example Article 39 (quantity) and Article 40 (partial shipment). To avoid the buyer claiming the contract of sale has not been adhered to, with resultant difficulties, exporters should be careful not to take advantage of provisions of UCP which result in departure from the requirements of the contract of sale while still enabling a drawing to be made in terms of the credit. A check list in the Appendix sets out the methods of checking documents to ensure that they conform to the terms of a credit.

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Application for Import Documentary Credit Specimen of an application by an importer for a documentary credit covering a shipment of goods from Hong Kong to Melbourne, with payment 30 days after sight in United States currency.

National use only Letter of credit number

National use only

Customer number From ­ Outlet Interest rate basis and margin for term refinance drawings Code ­

Customer code

State ­ Branch Account number

Authorised by ­ Manager

167-089 (1/99)

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Specialised Credits and Arrangements There are a number of differing types of credits and arrangements each of which perform a specialised function. Red Clause Credits A red clause credit would normally be an irrevocable credit containing a special clause (in olden times printed in red) authorising the advising bank on receipt of the credit to make an advance to the beneficiary of the total amount of the credit or some percentage of it. Hence the advising bank grants a loan to the beneficiary which the issuing bank guarantees. It results from an arrangement between the buyer and seller that the former will assist the seller in obtaining pre-shipment finance to enable the goods covered by the credit to be purchased and shipment made. The buyer arranges the issue of a red clause credit by his bank. However, it should be noted that the advising bank is under no obligation to make the advance to the beneficiary until it has agreed to do so. It is usual for the advance to be in the exporter's local currency for convenience but it can be in any other currency as stipulated by the issuing bank. After the goods have been shipped the beneficiary makes a drawing under the credit and the proceeds are applied to repaying the red clause advance plus interest. Generally, red clause advances are made to the beneficiary by the advising bank without any conditions attached, but sometimes the advances are authorised on a secured red clause basis. This procedure may authorise the advance against an undertaking by the beneficiary to buy the goods covered by the credit, and/or to hand to the bank the storage warrants proving that the goods have been stored as specified in the credit, or the advance may not be authorised until such storage warrants are produced. Provision may also be made for production of evidence of fire insurance cover over the goods. The storage warrants are later released in trust to the beneficiary to enable shipment to be made. If for any reason the red clause advance is not repaid by the seller of the goods, the buyer's bank, which issued the credit, becomes liable for the amount and normally interest to the bank which made the advance. The issuing bank would then claim from the buyer. Transferable Credits An irrevocable credit which states that it is also `transferable' gives the beneficiary the right to request for the credit to be made available in whole or in part to one or more other parties (second beneficiaries). A bank called on to effect payment or acceptance under the credit, or any bank entitled to negotiate, can receive and carry out the beneficiary's instructions to make the transfer(s). Where a documentary credit is issued in transferable form it is not necessary for the original beneficiary to arrange a `line of credit' with his bank covering the amount to be transferred; the transfer is based on the authorisation contained in the original credit and is transferred without engagement on the

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part of the transferring bank, providing that the bank has agreed to effect the transfer. Transferable credits can therefore be of assistance to sellers with limited resources, since they provide a means by which payment can be guaranteed (by documentary credit) to parties from whom the seller is purchasing goods to fill an order from a buyer. Several factors may be curtailed or reduced in the transferred portion of the credit. These are the unit prices stated, the amount, the shipment and expiry dates and the latest date for presentation of documents. Where insurance cover is required the percentage of cover may be increased to provide the amount of cover stipulated in the original credit. The name of the original beneficiary of the credit can also be substituted for that of the applicant in the transferred portion. The transferee or second beneficiary becomes responsible for the shipment of the goods and production of shipping documents in terms of the credit. When the second beneficiary presents his documents for negotiation, they are sent to the bank that has effected the transfer. They in turn will notify the seller (original beneficiary) who will then substitute his own invoice for that of the second beneficiary and show the price as stipulated in the original credit. When these documents are negotiated the second beneficiary is paid what is due to him and the original beneficiary is paid the difference between his invoice and the amount paid to the second beneficiary.7 Complications can arise for an importer who uses a `transferable credit' to make a credit available to his overseas supplier, when it is necessary for the original manufacturer's invoice to be presented to Customs Department. In this case special procedures need to be arranged to avoid the ultimate buyer ascertaining the importer's cost price and original supplier's name. Because of this and other complexities, it is strongly recommended that the matter of `transferable credits' be discussed with the bank before entering into such a method of finance. A detailed explanation of transferable credits is given in Article 48 of the Uniform Customs and Practice for Documentary Credits. Back-to-Back Credits This form of `financing' may be utilised in circumstances where a seller of goods receives an irrevocable credit in his favour arranged by the buyer and where the seller has to purchase the goods from another party to fill the order. Where the seller's resources are limited or fully utilised and it is difficult to arrange a letter of credit in payment to the initial supplier, it may be possible for the seller to arrange for his bank to issue an irrevocable credit in favour of

7. Transferable credits can be used in alternative ways. For example, an importer may arrange for his bank to issue a transferable credit in favour of his buying agent in another country. The agent (first beneficiary) can arrange for transfer of the credit (and without substitution of invoices when the drawing is made), without alteration to the terms, to the supplier who will be shipping the goods. Once the goods have been shipped the supplier draws under the credit as if it were issued in his favour. The importer pays the agent's commission separately.

65. Chapter 5

the supplier, using the original credit as a backing for the second credit (called a counter-credit). The counter-credit is based on the original credit and calls for documents, which can be used in turn by the seller to make the drawing under the original credit, the exception being that the seller substitutes his own invoices for those of the supplier (which would show a lesser price for the goods). The initial supplier (beneficiary of the counter-credit) must first ship the goods to produce the relative documents. It should not be assumed that banks readily agree to the issuing of countercredits. The original credit is only a quasi-security for the counter-credit since there is no automatic provision (unlike transferable credits) which enables the bank issuing the counter-credit to use the documents received from that credit to claim under the original credit, if for any reason the seller is unable, legally or physically, to do so. Complexities can arise, particularly in documentation, in back-to-back credits, and customers considering this method of financing should discuss the matter with their bank. Stand-by Credits The traditional documentary trade credit is issued to provide the seller with an undertaking of payment when performance has occurred by submitting documents in accordance with the terms and conditions of the credit. However, the stand-by credit is an undertaking which is only activated in the case of non-performance of another pre-arranged activity. These credits can be used in lieu of performance guarantees in construction contracts, as an undertaking for loan repayments or as an undertaking to a seller as a back-up to some other pre-arranged method of finance. The beneficiary can usually draw under the credit on the basis of providing a certificate or statement that a specific agreement has not been complied with. Given that the specified documentation is presented, the bank called upon will be required to pay, regardless as to whether or not the applicant of the credit considers he has performed. These credits are provided for in Uniform Customs and Practice for Documentary Credits (refer Articles 1 and 2), and International Standby Practices ISP98, which can be obtained from ICC.

International Guarantees

Definition International guarantees may be defined as an irrevocable undertaking by a bank to pay a sum of money in the event of non performance of a contract by a third party. The guarantee is a separate obligation independent of the principal debt or the contractual relationship between the beneficiary and the principal. Under the terms of the guarantee, the bank has to pay on first demand provided that the conditions contained in the guarantee are fulfilled. Guarantees are as a rule subject to the laws of the country of the issuing bank.

66. Chapter 5

Issue of a guarantee Guarantees are issued in two ways: · Directly by the issuing bank (guarantor) to the beneficiary. or · Indirectly, the issuing bank instructs and requests a correspondent bank abroad to issue a bank guarantee in favour of the beneficiary. The local regulations and customs in the beneficiary's country determine which of the two procedures apply in a specific case. The main differences between the two procedures are as follows: In the case of a direct bank guarantee, formulations and conditions may be used which are better suited to specific and individual requirements. On the other hand, the indirect bank guarantee is issued by a bank in the beneficiary's country and generally has a standard formulation charging the issuing bank with liability to pay unconditionally and upon first demand. Securities are hardly suitable for use in international business. This is mainly attributable to the fact that recipients insist on receiving clearly defined and internationally enforceable guarantees. As a result there is a demand for guarantees which provide for an unconditional payment on first demand without allowing any possibility of raising objections and in many cases even without stipulating formal conditions for utilisation. Such terms are easily obtained in markets where the buyer has a stronger bargaining power than the seller. Although misappropriation seldom occurs, it would be desirable to make the terms of utilisation, as in the case of a documentary credit, subject to the presentation of documentary proof. This document issued by a neutral third party, would attest the non performance of the contract. Australian exporters may insure against the risk of improper claims (unfair calling) with Export Credit Insurance. "On Demand" and Conditional Guarantees "On Demand" Guarantees These guarantees sometimes known as unconditional guarantees can be called at the sole discretion of the beneficiary. The bank must pay if called upon to do so, even in the circumstances where it may be clear to the beneficiary that the claim is wholly unjustified. If the bank has to pay under the guarantee, it will debit the customer's account under the authority of the counterindemnity. The principal will then be left with the unenviable task of claiming reimbursement in the courts of the beneficiary's country. It must be stressed that banks never come involved in contractual disputes. If payment is called for which conforms to the terms of the guarantee, the bank must pay.

67. Chapter 5

Conditional Guarantees Conditional Guarantees can be divided into two types: 1) conditional guarantees requiring documentary evidence 2) conditional guarantees which do not require documentary evidence Conditional guarantees requiring documentary evidence give maximum protection to the principal. Payment can only be called for by the beneficiary against production of a specified document, such as a certificate issued by an independent arbitrator. On the other hand, conditional guarantees which do not require documentary evidence are little better than on demand guarantees from the principal's point of view. Such guarantees often specify that payment must be made in the event of default or failure on the part of the principal to perform his obligations under the abovementioned contract.

Types of Guarantees in International Trade

Bid Bond (tender guarantees) This guarantee is required in connection to public tenders. Where a company participates in such a tender, it must submit a bid bond together with its offer. Bid bonds therefore secure payment of the guaranteed amount (1) in the event of withdrawal of the offer before its expiry date, (2) if the contract, after being awarded, is not accepted by the tenderer, (3) if the bid bond, after the contract has been awarded, is not replaced by a performance bond. Each tenderer has to post such a bond as a condition of being permitted to bid for the contract. Performance Bond (guarantees) Performance bonds are issued when the contract has been awarded, and underwrite the contractor's obligations to complete the project correctly. Under a performance bond, the bank undertakes at the request of the contractor to pay the beneficiary the guaranteed amount in the event the contractor has not met or insufficiently fulfilled his contractual delivery obligations. Advance payment (repayment) bonds (guarantees) The terms of payment for major export orders generally stipulate that the buyer pays an instalment for the purchase of raw materials and for the cost of production. However, such a downpayment will only be agreed to by him after receipt of a so-called advance payment guarantee which ensures repayment of the advance by the seller in the event of non-performance of his contractual obligations.

68. Chapter 5

Retention money bonds (guarantees) Project agreements provide for stage payments to be made as work progresses. In addition, contracts customarily provide for the employer to retain a certain percentage from each stage payment. Maintenance bonds (guarantees) The contractor is obliged to remedy defects and carry out repairs during a maintenance period following completion. This obligation is secured by a maintenance bond. Stand-by Letter of Credit An alternative to an international guarantee is a stand-by letter of credit issued by a bank in favour of another party, promising to pay a given amount against specified documents, usually a formal default claim. From a trader's point of view, a stand-by letter of credit is better than a guarantee because it is subject to UCP and ISP98 rules instead of complex legalities. In addition, a stand-by letter of credit will always have a definite expiry date.

69. Chapter 5

6

Documentary Collections

Documentary collections can provide the exporter and the importer with a compromise between open account trading (or payment in advance for the settlement of transactions) and documentary credits. The supplier of goods will often be prepared to make an export sale without the protection of a documentary credit, however, rather than being entirely dependent on the integrity of the importer and shipping the goods on open account, the supplier may wish that the importer can only obtain possession of the documents of title (e.g. bills of lading) after he has paid for the goods, or has accepted a bill of exchange for payment at a later date. The documentary collection can offer the exporter a degree of security in the transaction which is not inherent in an open account method provided all the documents of title are handled by a bank. The bank will have control over the goods through the title documents and can arrange, for one of its overseas correspondents, to release such title only against payment. The Australian banks, in common with banks in many other countries, have adopted the International Chamber of Commerce rules as set out in Publication No. 522 ­ Uniform Rules for Collections (1995 revision) commonly known as `Uniform Rules for Collections' or `URC'. These rules set out the procedures to be followed by all parties concerned, including the liabilities and responsibilities of banks and customers involved with collection transactions. They endeavour to eliminate difficulties (created by differences in banking phraseology and procedures) in various countries by setting out standard practices which banks can apply. Exporters may, by specific written instructions to their bank, for individual bills and subject to the agreement of the bank, vary any standard procedure to suit their own requirements. The URC rules recognise local conditions by stating that the rules are binding on all parties `...unless contrary to the provisions of a national, state or local law and/or regulation which cannot be departed from'. For example, in some countries payment is made in local currency regardless of the currency stated on the draft and then funds are held, in trust, at the exchange risk of the exporter pending the availability of foreign currency reserves.

70. Chapter 6

Lodgment Authority A lodgment authority ensures that an exporter's instructions are given in a clear and concise manner thus avoiding omissions or any misunderstanding by the bank or its overseas correspondent in the interpretation of the customer's wishes.

National use only National reference number

National use only Customer number

71. Chapter 6

Parties in Documentary Collections When payment is to be made by documentary collection the parties to the operation are: The principal (usually the drawer) ­ the exporter who prepares the collection documents and delivers them to his bank with collection instructions. The remitting bank ­ normally the exporter's bank which forwards the documents together with the exporter's instructions to the collecting bank. The collecting bank ­ is any bank (other than the remitting bank) involved in the processing of the collection and would normally be the remitting bank's correspondent in the importer's country. The presenting bank ­ normally the importer's bank which presents the collection to the drawee (importer) and collects the payment, or obtains the acceptance, from the drawee. The collecting and presenting bank are often the same bank. The drawee ­ the importer to whom the documents are presented for payment or acceptance. Banks usually require exporters to complete an instruction form for each documentary bill lodged for collection or purchase. See previous page for a specimen. These must be complete and precise as instructions will be passed on to the overseas collecting bank to enable the collection to be processed to the satisfaction of the exporter. Method of Collecting Bills As soon as shipment is made, the exporter draws a sight or term bill on the overseas buyer, attaches the shipping documents (usually in duplicate), and hands these to his bank (remitting bank) together with instructions as to the manner in which the collection is to be handled. The exporter's bank forwards the bill and documents to the collecting bank (a instructions passed to it by the exporter. If the exporter draws a `sight' or an `on demand' bill the instructions would be for documents to be released only against payment (D/P). In the case of a term bill, the instructions would usually be for documents to be released against acceptance of the bill (D/A)1 with subsequent presentment for payment on the due date. The collecting bank should keep the remitting bank regularly informed on the status of the bill. However, collecting banks in some countries can be quite lax in their status advices and often it is the remitting bank which is required to initiate these enquiries. When paid, the collecting bank would advise the remitting bank, who would apply the proceeds as instructed by the exporter.

72. Chapter 6

Presentation on Arrival of Goods An exporter may find that the buyer is not prepared to pay, or accept, a documentary bill drawn on him until the relative goods arrive. In some countries it is common usage for payment or acceptance of bills to be deferred until arrival of the goods. The term used in the heading, or more briefly `PAG', is applied to this practice. It is also described as `payment on arrival of carrying vessel'. Banks despatch export documentary bills by airmail or courier as previously described, but pass on the exporter's instructions to the correspondent bank in the importing country that presentation of the bill to the drawee is to be delayed until arrival of the relative goods, or that there is the option of requesting such delayed presentation if the drawee so wishes. In the case of excessive delays in the voyage of the carrying vessel, or circumstances in which the vessel might never arrive at its destination, it is customary for the correspondent bank also to be instructed that, on expiration of a specified period after receipt of the bill, the bill is to be presented to the drawee for payment/acceptance even though the goods may not have arrived, e.g. `Present on arrival of goods but not later than...days after receipt of bill'. Avalisation ­ (Bankers Endorsement) From the point of view of inward collections, avalisation can be defined as "the addition of the presenting bank's name to a bill of exchange with the intention of guaranteeing payment at maturity". While the practice of avalisation is not recognised in the Australian Bills of Exchange Act 1909, nevertheless when an Australian bank avalises a bill of exchange, that bank in practice guarantees payment. Avalisation involves a contingent liability, and a bank will consider the granting of such a facility to a customer in the same way as it considers any lending facility. In other words, the bank will consider the creditworthiness of its customer. If the bank avalises a bill of exchange, it will require the customer to complete an authority whereby the bank is irrevocably authorised to debit the customer's account upon presentation of the bill at maturity.

1. Although it is more common to release documents against acceptance when a term bill of exchange is drawn, occasionally the presenting bank is instructed to release documents only against payment (D/P). This creates obvious difficulties where the importer requires documents on acceptance to enable clearance of the goods with subsequent sale proceeds being applied to meet the bill at maturity. However, if the presenting bank does not insist on payment and releases documents on acceptance, contrary to the exporter's instructions, that bank will become liable for the full value of the shipment if the importer does not pay the bill on due date. Therefore, a bank will only release documents against payment, or against their responsibility, which would no doubt involve the importer in arranging a `line of credit' with his banker. If this is not possible and the importer is unable to pay, the bill would be dishonoured on presentation. The alternatives then for the exporter are to amend his instructions to release documents on acceptance or find another buyer. As this situation is often unsuitable to all parties, exporters should carefully consider the possible difficulties before shipping on these terms.

73. Chapter 6

7

Remittances

A remittance is a method of transferring funds internationally. Generally, documents are not required to be released in exchange for funds as it is usual for any related shipping documents to be forwarded direct by the exporter to the importer. Such a transfer is said to be a clean1 remittance. The simplest and least expensive method of remittance can be effected by international cheque (bank draft) or telegraphic transfer. These are most commonly used in export and import trade. In addition, traders' personal cheques can be used to make payments. However, there are difficulties which can be encountered in using this method and these are discussed later in this chapter. The currency of the remittance should always be as specified in the contract of sale as it could be possible that one of the parties has the transaction covered by a forward exchange contract and the remittance will represent a delivery under that contract. It must be noted that in some countries, conversion of foreign currency to local currency will automatically be undertaken by domestic banks and therefore, unless special precautions are taken, funds may not be received in the currency required by the beneficiary. International Cheque (Bank Draft) Where this method is used, the relative currency is sold to the importer by his bank in the form of an international cheque (on-demand bank draft). The bank will sign the cheque and issue it payable at the counters of one of their overseas banking correspondents, normally one with whom they conduct an account in the currency of the cheque. The cheque is handed to the importer who will forward it to the exporter. The exporter will deposit the cheque to his account if it is issued in his local currency. In cases where the cheque is issued in a foreign currency the exporter would normally request his bank to purchase2 the cheque, and credit his account with the local currency equivalent. Alternatively, he could arrange for the item to be collected before conversion to local currency, or it could be credited to the exporter's foreign currency account (see Chapter 8).

1. Where a remittance is only to be paid against stipulated documents, the remittance is said to be 'documentary' and such transactions are treated similarly to transactions under documentary credit with charges applicable to documentary credits applying. 2. See Chapter 2 ­ Rates of Exchange for explanation as to whether T/T or on demand airmail buying rate of exchange would be applicable to the transaction.

74. Chapter 7

Telegraphic Transfers In this method of transferring funds, if a foreign currency is involved, the currency is sold to the importer by his bank. Irrespective of the currency involved a payment instruction advice is subsequently despatched to the bank's overseas correspondent3 branch by teletransmission (i.e. by SWIFT4 or telex). Upon receipt, the bank's overseas correspondent branch would normally credit beneficiary's account (if account at their branch) or issue their local bank cheque and mail it to the beneficiary at the named address provided the transaction was in their local currency. Where the transaction is in a foreign currency, the bank concerned would need to contact the beneficiary and seek his instructions for payment (i.e. whether to convert the item to local currency or credit a nominated account in that currency). Where the exporter's banking account number and banker are known, this information should be stipulated in the telegraphic transfer application. This will expedite payment. Personal Cheques Cheques are payable at the point where the account is conducted. Therefore, if used to pay for imports, the exporter needs to lodge these with his banker (for purchase or collection) who, in turn, to obtain payment, must on forward them to the place where they are payable (for credit of that bank's account in that currency). Depending upon the manner of clearance this can involve the exporter in bank charges which could otherwise be avoided through the use of a bank draft, which is payable in the country concerned, or a telegraphic transfer. Real Time Gross Settlements (RTGS) The introduction of RTGS in many countries has reduced the impact of a bank failing to settle its debts (this is known as settlement risk). Further, if a bank was unable to honour its commitment this could in turn cause other banks to fail (this is known as systemic risk). Apart from reducing settlement and systemic risk, RTGS allows for true intra-day finality of payment for banks. Payments made under RTGS are irrevocable in respect to the bank making the payment. If a bank subsequently becomes insolvent, previously settled payments made by that bank could not be made void by its liquidator. However, existing insolvency law will still apply at the customer level. An RTGS system enables large-volume payments between financial institutions in that country to be settled immediately (real time), with each payment settled individually (in gross amounts) as it arises and each payment irrevocable, that is, funds cannot be dishonoured. RTGS operates in Australia.

3. A bank's overseas correspondent is a bank overseas with whom the Australian bank has standing arrangements to aid in the conduct of their mutual business. 4. SWIFT (Society for Worldwide Interbank Financial Telecommunication) is an automated communication system used mainly by the international banking community. However, not all banks and/or countries are members of SWIFT, and in such cases messages are despatched by telex.

75. Chapter 7

The Bank for International Settlements (BIS) defines an RTGS system as: ... a gross settlement system in which both processing and final settlement of funds transfer instructions can take place continuously (that is, in real time). As it is a gross settlement system, transfers are settled individually, that is, without netting debits against credits. As it is a real-time settlement system, the system effects final settlement continuously rather than periodically at pre-specified times provided that a sending bank has sufficient covering balance or credit. Moreover, this settlement process is based on the real-time transfer of central bank money. An RTGS system can thus be characterised as a funds transfer that is able to provide continuous intraday finality for individual transfers. International Money Laundering International money laundering entails the transformation of proceeds from criminal activities such as drug trafficking, organised crime operations, tax evasion and insider trading, into a form that makes the funds appear legitimate. Because of the often huge sums involved, this process usually entails transactions at financial institutions. However, they leave a ready paper trail which makes it very difficult to conceal the identities of payer and payee. The simplest method of money laundering consists of a transfer from a domestic bank to a foreign financial institution. However, the transfer of funds in this manner leaves a paper trail which may lead to detection. International telegraphic transfers to and from Australia are monitored by AUSTRAC (Australian Transactions Reports and Analysis Centre). The source of such transaction information are banks and financial institutions, AUSTRAC subsequently feeds this information to the Australian Tax Office and prescribed law enforcement bodies. In order to stop laundered money at the point of entry into the banking system, the Bank for International Settlements (BIS) has issued a Statement of Principles requiring banks to "make reasonable efforts to determine the true identity of all customers". The Australian Government implemented these principles in its Cash Transaction Reports Act 1988, renamed in 1992 the Financial Transactions Reports Act 1988. According to this Act, cash dealers (banks, non-banks, dealers in securities, futures, bullion, casinos, TABs etc) are required to report suspect cash transactions over AUD 10,000 (over AUD 5,000 for cross border cash movements). Banks automatically report all such transactions. Sanctioned Countries The United Nations can issue advice to the world's banking community regarding political and/or economic sanctions against countries. Countries under their own charters can apply sanctions. The Reserve Bank of Australia and the United States of America Treasury Department have entered into various sanctions, ie, placed restrictions to the transfer of funds, or payments to some countries. Exporters and importers are advised to contact their local banks/financial institutions where they have any concerns regarding restrictions/sanctions against the country with whom they are dealing.

76. Chapter 7

8

Foreign Currency Accounts/Deposits

Banks normally offer the following type of facilities, in all the major currencies: ­ Foreign currency accounts (both creditor and debtor). ­ Foreign currency term deposits (including overnight deposits). Foreign Currency Accounts Traders may conduct foreign currency accounts with banks in Australia (onshore), or with overseas branches of Australian banks (off-shore), or with other overseas banks. However, some bank restrictions apply in Australia for individuals requiring to open foreign currency accounts. Purpose Foreign currency accounts would be used for the following purposes: ­ As a medium to cover exchange risk exposures. ­ To obtain finance at rates of interest for the currency concerned. ­ To hold foreign currency receipts on an interest bearing basis to meet future payments in the same currency. ­ To hold foreign currency receipts in anticipation of favourable rates. ­ To pay small recurring transactions by cheque.1 ­ To enable operation on and access to the account outside of Australian banking hours.1 ­ To purchase funds to take advantage of an apparent favourable rate of exchange to meet future payments. ­ To fund or receive interest on a floating rate basis (as against fixed rates for other term funding). The covering of exchange risk exposure through the operation of a foreign currency account is of particular interest to both exporters and importers. Exporters may find it convenient to overdraw an account in their export currency (e.g. US dollars) and convert the funds immediately to Australian dollars to obtain pre or post-shipment finance. The proceeds of the export, when received, would repay the borrowing. This enables the exporter to eliminate his exchange risk and at the same time take advantage of the overseas interest rate for the currency concerned. Importers may wish to purchase foreign currency immediately and lodge it in a foreign currency account. In due course, the funds would be utilised to pay for goods imported in that currency, thereby eliminating his exchange risk, and subject to the amount involved, may earn interest at the rate for the currency concerned.

1. For these purposes, an account conducted off-shore is more appropriate.

77. Chapter 8

Where a trader is both exporting and importing in the same currency, the account could be used to hold export proceeds against which imports would be paid for. This could eliminate or reduce the exchange risk on the transactions and the need to constantly convert foreign currency to Australian currency and vice versa. At the same time, if balances were large enough, interest may be paid on the balance at the rate for the currency concerned. Banks can provide further information for maintaining and operating foreign currency accounts. Foreign Currency Term Deposits (including overnight deposits) This facility enables bank customers to lodge foreign currency on deposit for a fixed term at interest rates prevailing for that currency. Interest rate is fixed for period of deposit. These deposits normally have a restriction on the minimum amount required. Foreign currency term deposits are only repayable to the depositor. They are not `negotiable' to other parties by the depositor and the proceeds are not available until maturity. For large (wholesale) deposits, amounts can be taken on an overnight basis.

78. Chapter 8

9

Alternative Methods of Financing

Confirming Houses Confirming houses are financial institutions providing an additional avenue of finance for the small to medium business sector or supplementing facilities provided by prime lenders such as banks and merchant banks. This finance is usually in the form of cash or, for imports, letter of credit establishment facilities. Confirming houses are principally engaged in financing the movement of goods (be it export/import related) and provide up to 180 days finance on a transaction by transaction basis within a pre-arranged facility. Confirming houses are basically secondary providers of trade finance. They charge a fee in addition to interest costs and out of pocket expenses. In all, these costs will usually make usage of a confirmer's line of credit more expensive than that of a bank. It is not uncommon for confirming/trade finance to be confused with factoring. The main difference is: ­ Confirming provides a customer with front-end financing either by way of letters of credit or cash. ­ Factoring provides a customer with rear-end financing by purchasing its debtors. Factoring Factoring is the purchase of a company's receivables. It is a continuous arrangement between the company (vendor) and the factor (the purchaser) which ensures that as soon as a company makes a sale, the proceeds are immediately available in cash. The purchase of the receivables can be either with or without recourse to the company, in the latter case the factor carries the risk that the receivable will not be collected. As far as factoring arrangement, the factor assumes responsibility for the company's credit controls, debtors book keeping and collection function. The factor does not however intervene in the sales policy of the company. Factoring differs from accounts receivable financing in that: 1. It is a purchase of a receivable, not an advance of money, 2. It is an ongoing arrangement, where often accounts receivable financing is a short seasonal loan, and 3. The factor assumes responsibility for the control and administration of the accounts receivable, and in some cases also assumes the risk on noncollection.

79. Chapter 9

There are two types of factoring - with recourse and without recourse (also known as non-recourse). Under a non-recourse factoring agreement, receivables are purchased outright when the goods are despatched from the warehouse to customers, with no recourse for bad debts. As the terms implies, with recourse means the factor can turn to its client for reimbursement if it cannot obtain payment from the client's customer. By accepting the recourse clause of the agreement the client is entitled to a cheaper rate from the factor, but can still enjoy other benefits of factoring. Export Factors Export Factors are companies who make advances to the seller in return for an assignment of the latter's foreign trade debts. In most cases the factor advances up to 80% of approved debts. The balance is paid when the factor recovers the debt from the foreign buyer. Typically the export factor has a branch overseas or engages the services of another factor in the country in which the buyer is located. The seller assigns the debt to the export factor who then arranges for the import factor (the factor located in the buyer's country) to collect the debt. One of the benefits of export factoring is the additional services that can be offered and which stem mainly from the close links between the export factor and the import factor. Usually export factoring is done on the basis that, in the event of a bad debt, it is the factor that bears the loss. This is known as non-recourse factoring. However if there is a dispute between the exporter and the importer regarding the debt, it will fall outside the terms of the non-recourse factoring agreement. Political and exchange risks are not covered by export factoring. Accounts Receivable Financing Accounts receivable financing involves lending against the security of a company's receivables. Funds are generally advanced up to a maximum of 70% of the outstanding eligible receivables. Receivables are considered ineligible by the lender if they have been outstanding beyond a given number of days (usually 90 days), or if any doubts exists as to their value. The company retains responsibility for managing and collecting its receivables and continues to bear the cost of any bad debts. Accounts receivable financing is commonly used to meet short term funding requirements, but in some cases it is provided as an ongoing working capital facility.

80. Chapter 9

Invoice Discounting Invoice Discounting offers an invoice purchasing facility providing working capital by virtue of the financier purchasing and discounting the trade debtors of incorporated businesses. In essence Invoice Discounting offers a stable long-term source of short-term finance linked to a company's receivables rather than to the value of its fixed assets or the strength of its balance sheet. Invoice Discounting effectively accelerates a company's cash flow cycle by providing almost immediate funding against receivables which are then collected under normal trade terms, eg. 30 to 90 days (refer to flow chart on page 82 for comparison). Invoice Discounting is an alternative to overdraft or other working capital funding. The main difference between Invoice Discounting and a standard overdraft facility is that the level of funding available under Invoice Discounting is controlled by the amount of trade debtors purchased, within a facility limit. With Invoice Discounting therefore, the availability of funds is dependent on sales achieved and is thus responsive to any seasonality and/or growth in the customer's business. Steps involved in Invoice Discounting: · · · · · Customer sends copies of invoices to the Financier. Financier processes the invoices and will usually advance up to 80% of the gross value. The customer continues to collect debts in the normal way and remits the proceeds to the Financier. The facility is "confidential" and the debtor is unaware that the invoices have been sold, provided there is no default. The customer retains responsibility for sales ledger administration.

The National Australia Bank Ltd offers Invoice Discounting facilities to its business customers, subject to them meeting established criteria.

81. Chapter 9

82. Chapter 9

Normal Cash Flow cycle Stock Debtors 60 to 90 days Collections

Cash

Cash Flow into Business

Under the normal cash flow cycle assuming no working capital funding. The customer will be unable to fund his operations until his debtors have been collected.

Cash Flow cycle using Debtor Finance 60 to 90 days Debtors

Cash

Stock

Collections

Debtor Finance Cash to Debtor Finance

Cash from Debtor Finance

With Debtor Finance the customer can usually receive up to 80% of the approved accounts receivables balance within a couple of days. This eliminates the possible 60 to 90 day waiting period and allows the customer to accelerate cash flow from sales.

10

Electronic Commerce

Advances in computer technology and electronic delivery of business and financial services are providing exporters and importers with the ability to transact business and interface with banks from the comfort of their office. This focus on technology will continue to gather momentum as banks and financial institutions stretch to meet customer service demands as we move ever closer towards the paperless office. Electronic Data Interchange (EDI) Because of the increase in world trade, the amount of paperwork generated has slowed up the relevant processes and has added substantially to costs both in terms of financial and human resources. Consequently, interest in EDI has grown considerably. EDI in the business world is the exchange of electronically generated trade related data, whether commercial or financial, between computers of various parties. Such parties not only include buyers and sellers but also such organisations as freight forwarders, shipping companies, banks and credit insurers. EDI is facilitated by using agreed messages standards. These include EDIFACT (EDI for Administration, Commerce and Transport) and TRADCOMS (Trading Data Communication Standard). Internet The Internet is a global communications system which links together a wide variety of computer networks throughout the world. For exporters and importers, the Internet has two beneficial services: electronic mail (also known as e-mail) and the World Wide Web (WWW). E-mail allows parties to send electronic equivalents of letters or memoranda to one another via a computer. Linked to this, complete computer files can be sent via e-mail. The WWW provides traders with an `electronic shop window' for their goods which can be regularly updated. Traders can have their own web page which can display both graphics and text and can include all relevant information about their goods and services including prices, delivery costs, payment terms and contact points.

83. Chapter 10

Internet Banking The National also provides access to information for businesses and individuals via the Internet. At the National site you can browse information about the Group as well as details of specific products and services, including further details related to international trade. You can also use the National Internet site to address specific questions to the Bank's team of relationship managers and product specialists, to assist you in making informed decisions regarding the financial future of your business. The National's Internet site can be found at http://www.national.com.au National Internet Banking enables you to do virtually all your transactional banking from your own PC and can offer the following online functions: · Pay bills, including your credit card bill. · Transfer funds between your accounts or to anyone at any bank in Australia. · Check your account balances, and last 100 days of transactions. · Order cheque books and statements. · Apply for selected personal loans, Home Loan, credit card or term deposit. · Buy and sell shares through National Online Trading. Online Services ­ Linked to the Bank via modem Online services are usually Windows® based PC electronic banking services. The software allows customers to conduct many of their banking operations from their office, linking their PC to the bank via a modem. The National has developed two forms of online services: National Online Business A basic, low cost, pre-packaged product consisting of three core services designed to meet the general needs of the small and medium mass business markets. Although prepackaged, customers may choose to apply for any combination of the three services. A fully modular system offering a range of services which can be purchased individually and packaged to provide an integrated electronic banking solution, tailored to meet the customer's specific need.

National Online Corporate

84. Chapter 10

National Online Business services: · · · Account Reporting Funds Transfer Direct (Credit) Payments

National Online Corporate services: · · · · · · · Account Reporting Custodian Services Direct Payments (both credit and debit) Financial File Transfer Funds Transfer · Domestic · International Market Information International Trade

National Online Corporate - International Trade provides a range of solutions for exporters and importers to manage international trade transactions. · Export Letters of Credit: Transmissions between the National's International Service Centres and customers to advise full details of their Export Letters of Credit (and amendments, when received). Customers can create and print Lodgment Authorities and Drafts. · Export Collections: Customers can arrange collection of documentary export payments quickly and efficiently. Once collection details have been input, an export collection reference number is immediately allocated, saving the customer time and effort. Customer can also prepare Bank Lodgment Authorities and Drafts. · Direct Collection Facility: Customers can, by special arrangement, electronically request the Bank to purchase their export collections and credit their account on the same day documents are dispatched overseas. · Import Letters of Credit: Customers can create and lodge Import Letters of Credit applications and amendments. Customers can also copy templates so when creating new applications, all the customer needs to do is change number within one hour of receipt by the National, providing it is lodged before 4.00 pm Monday to Thursday, or 5.00 pm Friday. If received within these times, customer's approved Letter of Credit applications and amendments will be despatched same day and a copy of the Letter of Credit or amendment sent to the customer's electronic mailbox same day. Import Collections: Customers are advised via their electronic mailbox when the National receives any Import Collections. Forward Exchange Contracts: Customers can review their outstanding Forward Exchange Contract data.

· ·

Customers are able to build customised databases of overseas trade buyers/suppliers.

85. Chapter 10

Customers can access daily reports of all outstanding trade transactions providing comprehensive management information. Another National Online Corporate module is the International Funds Transfer service. This service provides a secure means to electronically transfer funds from your Australian Dollar or National Foreign Currency Account to trade partners almost anywhere in the world, from the convenience of your office. SWIFT ­ Society for Worldwide Interbank Financial Telecommunication SWIFT is a bank-owned cooperative supplying secure message services and interface software to over 6700 financial institutions in 189 countries. SWIFT is the service of choice for financial communications and its global network carried more than 1058 million messages in 1999. Users include banks, brokers, investment managers, securities deposit and clearing organisations and stock exchanges. SWIFT is a joint owner (with the Through Transport Club) of the Bolero initiative whose goal is to provide a secure facility to exchange international trade documentation in electronic form and transfer title of ownership of goods (eg. utilising digital signatures to sign electronic bills of lading) supported by authentication and audit trails.

86. Chapter 10

Book 2 ­ Exports

___________________________________________________________________________

Chapter 11 12

Pre-Shipment Finance Risks and Post-Shipment Finance s Risks in Export Transactions Transport/Credit/Exchange/Transfer Risks s Post-Shipment Finance s Export Price Methods of Payment s Clean Remittance in Prepayment for Goods s Documentary Credits Australian Currency, Foreign Currencies s Documentary Sight Bill of Exchange ­ Documents against Payment (D/P) s Documentary Term Bill of Exchange ­ Documents against Acceptance (D/A) s Clean Remittance After Buyer Receives the Goods s Air Shipments s Sea Waybills s Courier and Post Receipts Pricing

s s

89 91 91 93 95 96 96 97 100 100 102 103 104 105 106 107 113 120 120 120 121 121 122 123 123 124 124 124 125

___________________________________________________________________________

___________________________________________________________________________

13

___________________________________________________________________________

14

Prices in Foreign Currency Prices in Australian Currency

___________________________________________________________________________

15

Medium and Long-Term Finance s Medium-Term Finance ­ 180 days to 5 years After Shipment s Long-Term Finance ­ in Excess of 5 years After Shipment s Supplier Credit ­ Provision of Medium and Long-Term Finance ­ Risks in Medium and Long-Term Finance s Buyer Credit ­ Provision of Long-Term Finance Incentives s Export Market Development Grants Credit Insurance s Export Finance and Insurance Corporation (EFIC) s The Role of Export Credit Agencies and EFIC s Method of Payment Risk

___________________________________________________________________________

16 17

___________________________________________________________________________

87. Book 2

___________________________________________________________________________

17

Credit Insurance (cont.) s Managing Payment Risks s 1. Managing Payment Risk with Export Payment Protection (also known as Export Credit Insurance) s 2. Managing Overseas Investment Risk s 3. Competitive Finance for Overseas Buyers s General Information Overseas Governmental Regulations Countertrade and Offsets s Reasons for Countertrade s Offsets s Advantages and Disadvantages of Countertrade

126 127 128 129 131 132 134 134 136 137

___________________________________________________________________________

18 19

___________________________________________________________________________

88. Book 2

11

Pre-Shipment Finance

Pre-shipment finance for exporters is the finance required to bring an export transaction to the point of shipment ­ either to manufacture, process, or purchase merchandise and commodities for shipment overseas. Working Capital or Local Suppliers' Credit In some instances, the exporter's position may be sufficiently liquid for the funds to be provided from working capital, or local suppliers of the export goods may extend credit. In many other instances, the exporter will look to a bank to provide finance. Banks may advance Australian dollars to exporters on overdraft specifically for pre-shipment finance or by way of a commercial bill facility. Funds may also be made available through trade finance in foreign currency or Australian dollars. Trade finance is generally limited to 180 days (inclusive of any payment terms). This can be ideal for pre-shipment finance for exports since the proceeds of the exports can repay the advance provided of course both loan and proceeds are denominated in the same currency. In this method a bank lends2 the foreign currency amount to the exporter against a `line of credit' at a fixed rate of interest. The proceeds of the loan are made available to the exporter in Australian dollars. When shipment is effected and paid for by the overseas buyer the proceeds are used to repay the foreign currency loan plus interest, and any excess of the proceeds received over the amount borrowed is refunded to the exporter in Australian dollars or the currency credited to his foreign currency account. Therefore, unless settlement funds are available from the buyer at the time of shipment by direct telegraphic transfer or by a documentary credit with telegraphic transfer reimbursement, the bank's advance can be made to cover both the pre-shipment and the postshipment periods. When an exporter borrows in a foreign currency and provided the currency is the same as that to be settled by the buyer, the exchange risk is effectively eliminated when the advance is drawn. In this situation the exporter may also benefit from a reduction in his funding costs if the foreign currency interest rates are lower than those applying should he fund in his domestic currency. This saving in interest costs could add greater profit margins to the deal or where a longer lead time is involved may be passed onto the buyer in reduced pricing thus securing a deal through a more competitive quotation. If the exporter elects to take out forward exchange cover to Australian dollars, the period of cover should only be until the expected date of the foreign currency drawdown.

1. For a further discussion on this facility refer to Chapter 20 ­ Risks and Post-Shipment Finance. 2. The exporter may also overdraw a foreign currency account with his bank. To do this he must have a line of credit approved. Often this method is more flexible for exporters as the period of finance is not fixed and fluctuating interest rates apply. Refer to Chapter 8.

Overdraft or Commercial Bills1 Trade Finance

89. Chapter 11

It is impossible to list the specific terms for all cases in which banks are prepared to grant pre-shipment finance, but the following points are relevant: ­ ­ ­ ­ General financial position of the exporter. Exporter's experience in the trade. Period for which finance is required. Method of payment by the overseas buyer (e.g. irrevocable documentary credit). ­ Whether firm orders are held for exports and general standing of the buyer. ­ Type of goods being handled (e.g. general commodities, specialty lines, perishable goods, etc.). ­ Whether export insurance cover is held by the exporter and whether it runs from the date of contract of sale over which the goods are being manufactured or produced (as against the date of shipment). All these factors may not apply in any one case, and in others there may be factors not listed above. However, because of the economic importance of exporting, banks always give careful consideration to applications for preshipment finance. Red Clause, Transferable or Back-to-Back Credits Assignment of Proceeds In a few instances an exporter may be able to use red clause credits, transferable credits, or back-to-back credits to facilitate the obtaining of preshipment finance. See Chapter 5 for an explanation of these types of credits. A beneficiary can elect with the agreement of the ultimate supplier to instruct the advising bank to `assign' a portion of the proceeds under a credit to the supplier upon presentation of documents in terms of the credit (refer Article 49 of UCP). The bank would write to the nominated supplier advising that they hold (normally irrevocable) instructions. However, this obligation to pay is conditional upon the beneficiary submitting the documents required within the terms and conditions of the letter of credit. The actual supplier of the goods must have confidence in the beneficiary's ability to meet the terms and conditions of the letter of credit since without this the bank has no obligations to comply with payment under its separate letter of assignment of proceeds. However, presuming the supplier is required to ship the goods and supply a bill of lading, the supplier could attend settlement of the drawing under the credit and only surrender it in exchange for his proportion of the proceeds.

90. Chapter 11

12

Risks and Post-Shipment Finance

The method to be used in paying for exports is reached by agreement between the exporter and the importer. The relative bargaining strengths of each will obviously affect the final outcome. The most important factors influencing the attitudes of the two parties may be stated as follows: ­ Safety of transaction from the exporter's point of view especially with regard to credit, exchange and transfer risks. ­ If the exporter is prepared to extend credit to the importer, and whether the former's financial resources are adequate to carry the extended finance. For this the exporter will require sufficient working capital, or be able to obtain financial assistance from a bank or some other source. Finance used in this manner is known as post-shipment finance. ­ The importer's views which are likely to be influenced by competing suppliers' terms, trade practice, the cost in interest (if applicable) and bank charges. Where interest rates are lower in the importer's country than those associated with extended payment terms from the exporter ­ the latter may need to take this factor into consideration when quoting. Therefore, an exporter needs to analyse any proposed method of payment to ascertain how these factors apply. (These are analysed in Chapter 13.) Risks in Export Transactions Transport Risk This section covers a general explanation of the points to be considered when analysing each method of payment. It should be noted that the transport risk (the risk of loss of, or damage to, the goods while in transit between seller and buyer) is not specifically commented on in this text. The risk, whatever the means of transport, can be covered by normal marine insurance. The risk of insolvency, default, fraud or unwillingness to accept the goods on the part of the buyer is termed the credit risk. Payment for goods by `clean' remittance from the buyer before shipment (see Chapter 13) overcomes the risk but this method of payment is seldom used. All other methods of payment embody some risk. Exporters therefore, and much more so than sellers in the domestic market, must be sure that buyers are reliable parties.

Credit Risk

91. Chapter 12

Even when credit terms are not being granted to the buyer, enquiries should be made concerning his financial standing and business reputation. Reports from overseas banks on the financial strength and business reputation of firms and individuals are obtainable through banks. Also Austrade is able to obtain viability and status reports on overseas parties for exporters (see also Chapter 17 ­ Credit Insurance). Other sources for reports would be references given by the buyer, and commercial enquiry firms, particularly those with wide overseas representation, and who specialise in providing commercial reports. The following points should be kept in mind when seeking a report on an overseas party: ­ When a specific sum is mentioned for a transaction the enquiry should indicate whether the amount is for one transaction ­ or for a number of transactions spread over a period. A buyer may be good for an amount spread over a period, but may not be good for that sum in a single transaction. ­ If an amount is mentioned it should not be exaggerated as this may eliminate a buyer who would otherwise be satisfactory. ­ The terms of payment which the exporter is considering granting should be mentioned (e.g. a sight bill with documents on payment or a bill of specified usance with documents on acceptance, etc.). ­ Information on buyers should always be regularly updated to ensure a current reference is held. The issue of a satisfactory documentary credit in payment for the goods does not entirely eliminate the possibility that an untrustworthy buyer may, at a time when prices are falling, seek to avoid payment by questioning minor discrepancies in documents, causing expense, delays in payment and even non-payment to the exporter. Many of these risks can be covered by facilities provided by export credit insurers such as the `Export Finance and Insurance Corporation', which also has a comprehensive file of status reports on overseas parties available to exporters using its facilities. Exchange Risk Refer Chapter 2 under heading Exchange Risk. Quoting prices and receiving payment in Australian currency eliminates the exchange risk for the exporter (see exception in Chapter 6 ­ Documentary Collections at foot of first page). But it also means that the exchange risk ­ (importer's local currency to Australian currency) ­ must then be borne by the importer. Therefore, to encourage sales, exporters often find it necessary to quote and receive payment in a foreign currency. The exchange risk thus incurred can be covered: ­ By entering into a forward exchange contract. ­ By offsetting export receivables against import payables (if possible). ­ Where pre or post-shipment finance is provided by trade finance, in the currency of the contract of sale, by applying the export receipts in repayment of the loan.

92. Chapter 12

Firm quotation. It is important to note that an exporter is incurring an exchange risk at the time he provides a firm quotation to his buyer. This is contingent until acceptance by the buyer. In such cases the exporter is faced with the very real problem of deciding whether or not to cover against this risk at the outset, as it is possible that the sale will not eventuate. In an effort to negate the chances of a loss through establishing unnecessary cover and its subsequent cancellation (see Chapter 3), it may be possible to include a condition in the offer that the price is firm provided the offer currency does not fluctuate in relation to Australian dollars by more than a certain percentage. Transfer Risk Where a contract of sale provides for payment in a foreign currency, a transfer risk exists when exchange or trade controls are introduced in the buyer's country, which prevent payment in a currency other than the buyer's domestic currency. However, in countries having exchange control, it is generally the case that approval to issue a documentary credit means that transfer of funds will be approved when required. Weakness in the economy of a buyer's country, a country's low level of external reserves and balance of payments problems, all point to the possibility that transfer difficulties may occur. Exporters should take careful note of such matters and ask their bank to obtain information if conditions in a buyer's country seem to be deteriorating. Protection can be obtained by insuring with one of the export credit insurers. This risk is obviously eliminated where it is possible to arrange a clean remittance by the buyer prior to shipment. Post-Shipment Finance The provision of finance up to the point of shipment for goods to be exported has been discussed in Chapter 11 ­ Pre-Shipment Finance. If the buyer pays for goods with the order (or at some time before shipment ­ which happens only exceptionally) the exporter does not require finance after shipment of the goods. In other methods of payment, where a period elapses after the goods have been shipped and before payment is made by the buyer, or by an overseas bank under a documentary credit issued on application by the buyer, the exporter or some party must provide finance for that period. This finance is known as post-shipment finance and is usually provided by the exporter's bank, or from his own resources. If the exporter's bank provides finance, any of the following methods may apply: ­ The bank purchasing or alternatively advancing against a documentary bill of exchange which is drawn on the buyer by the exporter.

93. Chapter 12

­ Negotiating a drawing under a documentary credit issued by an overseas bank in favour of the exporter covering the shipment. ­ Utilising trade finance facility.1 ­ Providing a bank overdraft or commercial bill.1 If the exporter provides finance from his own resources the exporter can send for collection a documentary bill of exchange drawn on the buyer through his bank. Alternatively the exporter can arrange for the buyer to remit payment after the goods have been received. The exporter does not receive payment until the bill is paid and proceeds remitted back to the bank or, if no bill is drawn, until remittance in payment is received in Australia. In this latter case, an Australian bank may be indirectly providing post-shipment finance, provided the exporter is borrowing from the bank. A major consideration in post-shipment finance is the fact that interest charges arise. The bank providing post-shipment finance, by negotiating a sight or term drawing under a documentary credit, or by purchasing or advancing against a documentary bill, or by way of trade finance, or discounting a bill, will charge interest. The exporter must pay or otherwise provide for this interest. Thus, it is usual for the exporter to charge interest to the buyer for the credit terms extended and generally this is provided for in the price of the goods exported. Bank commission charges are a second consideration. These are charges made by Australian and overseas banks for handling transactions. Once again the bank looks to the exporter to pay, or otherwise provide for these charges. The contract of sale should clearly state whether commission charges by overseas banks are the responsibility of the buyer or the seller. If the seller is liable such commission charges should be included in the price of the goods. In quoting prices, therefore, the basic export price should be increased to allow for bank interest and commission.

1. Refer Chapter 20 ­ Risks and Post-Shipment Finance, heading Financing for further explanation of these methods of financing.

94. Chapter 12

Export Price As a general guide, the price for goods exported should include the following: 1. All costs and charges incurred by the exporter in producing or acquiring the goods (including pre-shipment finance costs). 2. Any other charges for which the exporter is responsible under the contract of sale (e.g. insurance and freight charges for goods sold on CIF or CIP terms). 3. The exporter's profit margin. 4. Cost (if applicable) of forward exchange contract. 5. Interest to cover any post-shipment period. 6. Local and overseas bank commission charges for which the exporter is responsible. Through costing procedures an exporter can ascertain the ex-factory or exstore price in Australian currency for his goods. From this he can calculate the export price (CIF, FOB, etc. ­ in Australian currency) which he would require if paid by the buyer before shipment. This would include the first three items listed above and can be regarded as the `basic export price'. Where payment is to be made by the buyer in Australian currency, special clauses may be included in the bill (see Chapter 13) drawn on the buyer provided he is willing to pay the Australian bank's interest and commission charges. If not, then an `all in' price can be calculated inclusive of interest and commission. When payment is to be made by the buyer in a foreign currency the basic price in Australian currency (referred to above) can be used to calculate the amount in foreign currency. Having regard to the terms of sale, knowing the Australian dollar amount required and the exchange rate at which the bank will buy the foreign currency (refer Chapter 2), a simple calculation, based on these figures provides the price in that currency. Application of a rate of exchange (e.g. airmail buying rate, 30 days term airmail buying rate, etc.) other than the telegraphic transfer buying rate automatically provides a price that charges the buyer with the Australian bank's interest and commission. In addition, it is important to note that where an Australian bank is providing post-shipment finance, it may result in a liability being recorded against the exporter which reduces the facilities he has available from the bank for use in his business. Examples showing the principles involved in calculating prices are detailed in Chapter 14.

95. Chapter 12

13

Methods of Payment

The five basic methods of collecting payment1 for exports are set out below. Minor variations from these methods may be encountered and are listed from least to most risk from an exporter's view. 1. Clean remittance from buyer in prepayment for goods. 2. Documentary credit. 3. Documentary sight bill of exchange ­ Documents against payment (D/P). 4. Documentary term bill of exchange ­ Documents against acceptance (D/A). 5. Clean remittance from buyer after he receives the goods. These methods are analysed below under headings given in the previous chapter namely: ­ The risks involved, i.e. credit, exchange and transfer. (The methods of mitigating these risks are discussed in Chapter 12. Risks that are coverable by normal marine insurance2 are not specially commented upon in the following analyses.) ­ Post-shipment finance (whether finance is required after shipment from the exporter or from an Australian bank). ­ Interest and bank commission charges. For air shipments, sea waybills, courier and post receipts, while all five of the basic methods of collecting payment apply, certain modifications are required - refer to headings later in this chapter - Air Shipments, Sea Waybills, Courier and Post Receipts. 1. Clean Remittance in Prepayment for Goods From the exporter's point of view the simplest method of payment is remittance (by SWIFT, telegraphic transfer or mail) through a bank on acceptance of the order, or even at some time prior to shipment of the goods. In most cases the buyer is not likely to favour this method, except perhaps when the buyer is an overseas affiliate of the exporter, or when the buyer urgently requires the goods and the exporter is in a position to dictate the terms of sale.

1. There are no Australian Exchange Control requirements in relation to export proceeds. 2. Where an exporter is selling on CFR or FOB terms the insurance cover is the responsibility of the buyer. However, the exporter may retain an interest in the goods if he has not received payment at the time of shipment. In these circumstances he may face a loss if the buyer refuses payment, or if the buyer refuses to accept the documents or the goods, or when the goods are lost or damaged. Exporters should counter such risks by discussing them with their insurance company, underwriter or broker and ascertaining from these sources, the availability of insurance cover on a seller's interest contingency basis.

96. Chapter 13

Credit Risk

When payment is made before the goods are shipped there is no credit risk if cash is received with the order. However, where payment is not received with the order, and the exporter is manufacturing the goods to the particular specifications of the buyer, the buyer may cancel the order before payment is made. If the exporter has quoted in a foreign currency then an exchange risk exists from the date of contract of sale until payment is received from the buyer. Once payment has been received there is no transfer risk. When payment is received from the buyer before goods are shipped, postshipment finance is not required by the exporter, or from his bank. Interest is not applicable and normally only a nominal commission is charged by Australian banks for payment of clean remittances of this nature. The exporter is not responsible for any overseas bank commission charges. 2. Documentary Credits With other methods of payment such as bills of exchange or payment after the buyer receives the goods, the exporter takes the risk that the buyer may be unwilling or unable to pay. In some cases the buyer may be unable to pay because of political or economic factors beyond his control. If he is not prepared to accept these risks, the exporter may request the buyer to arrange for a documentary credit to be established in the exporter's favour. Documentary credits are considered in detail in Chapter 5, where it is stated that payment to the exporter by way of a creditworthy overseas bank's irrevocable credit (or the irrevocable credit of any overseas bank confirmed by an Australian bank) is a most satisfactory method from the exporter's point of view. Exporters may experience difficulty with buyers who are tardy in arranging for documentary credits to be issued. In such cases the exporter is faced with the decision whether to ship the goods without adequate protection. The exporter's position will be clearer if the contract of sale includes a latest date by which the exporter must receive the credit.

Exchange Risk Transfer Risk Post-Shipment Finance Interest and Bank Commission

Credit Risk

In a transaction involving the use of a banker's irrevocable documentary credit, the strength of the issuing bank replaces that of the buyer and with credits issued by banks of good standing in a country with a stable political and economic climate the credit risk is negligible. The same situation applies to irrevocable credits issued by any overseas bank which are confirmed by an Australian bank. As indicated in Chapter 5, revocable credits issued subject to UCP can only be relied upon after a drawing has been made and this reliance is qualified by the strength of the issuing bank.

97. Chapter 13

Where usance credits provide for drafts to be drawn on an accepting bank, that bank's standing after acceptance is added to the transaction. Also see later headings in this chapter ­ Air Shipments, Sea Waybills, Courier and Post Receipts, for special comments as regards credit risk if this mode of transport is used. Exchange Risk If the exporter has agreed to accept payment from the buyer in a foreign currency, a primary exchange risk exists. This extends from the date of the contract of sale until the exporter receives Australian currency (resulting from the purchase of the foreign currency by an Australian bank in terms of a documentary credit). A contingent exchange risk is also incurred on drawings negotiated under documentary credits on which the Australian negotiating bank retains recourse to the beneficiary. If such a drawing is not paid by the paying bank then the exporter will usually be required to purchase sufficient foreign currency at the current rate of exchange (i.e. re-exchange) to repay the drawing under the credit. This introduces a contingent exchange risk from the date of negotiation of the drawing until payment is made. It is important, therefore, to ensure that all terms of a credit are complied with, especially since dishonour of drawings is usually on grounds of non-compliance with such terms. Where such exports are financed by a foreign currency loan (in the currency of sale) the same contingent exchange risk exists until the foreign currency is received and the paying bank has paid the drawing. However, the `primary' exchange risk ceases on date of drawdown of the foreign currency loan and on receipt of proceeds in Australian currency by the exporter. Transfer Risk Whether a transfer risk exists, is a question of fact depending on the overseas country concerned. However, in countries having exchange control, it is generally the case that approval to issue a documentary credit means that transfer of funds will be approved when required. The exporter is normally able to obtain disbursement of the amount of the drawing from an Australian bank immediately. But, depending on the terms of the credit, the bank may then have to wait to be reimbursed by the issuing bank. Hence any post-shipment finance is carried by the Australian bank (but if the exporter so desires he may carry this finance within his own resources). (i) Documentary Credits in Australian Currency The beneficiary receives the face amount of the drawing if interest charges are for the account of the buyer. Where drafts are to be drawn at sight on the Australian advising bank (or on another Australian bank) the negotiating bank is normally able to receive value for the drawing. This is done by arrangement with the overseas issuing bank and by debiting their Australian currency account maintained with an Australian bank (claim reimbursement). However, if sight or term drafts are drawn on an overseas party, interest may be applicable from the date of negotiation until the date of receipt of payment from the issuing bank.

Post-Shipment Finance

Interest and Bank Commission

98. Chapter 13

When credits are received in Australian currency, it is desirable that the exporter ascertains from the relevant Australian bank whether interest will be charged.3 If so, the exporter may not be able to include the charge in the drawing under the credit and may therefore wish to seek amendment to the credit to enable the exporter to do so. The matter of interest on Australian currency drawings should always be specifically covered in the contract of sale. The Australian bank claims its commission from the issuing bank, unless the credit otherwise specifies. Also the beneficiary is not responsible for any overseas bank's commission charges unless the credit so specifies and this would be most unusual. However, if the letter of credit is not specific the negotiating bank is able to collect charges from the issuing bank. The applicant, in all cases, has to pay the issuing bank charges for issuing the credit and in some countries these charges are high. This can make documentary credits a costly method of payment for the buyer. (ii) Documentary Credits in Foreign Currencies The beneficiary receives the Australian currency equivalent of the foreign currency amount of the drawing, which is converted (at the applicable buying rate) for the currency concerned. Interest is not charged on telegraphic transfer drawings.4 For `on demand' and `term' drawings, interest for the term of the drawing is charged to the beneficiary by the Australian bank in the buying rate of exchange5 applied in converting the amount of the drawing to Australian currency. When a negotiation under a documentary credit is at the telegraphic transfer buying rate, the Australian bank makes a separate commission charge to the beneficiary. For a negotiation at sight, or at a term after sight,5 a separate commission charge is not made. The beneficiary is charged the commission in the buying rate of exchange applied. The beneficiary is not normally responsible for any overseas bank's payment commission6 or charges unless the credit so specifies ­ again, this would be most unusual. The buyer, however, has to pay bank charges for issuing the credit, and in some countries the charges are high and make this method of payment costly to him. (For this reason, exporters should consider the following methods with credit insurance.)

3. This will depend upon the reimbursement instruction, given to the Australian bank by the issuing bank, e.g. to either debit their Australian dollar account in the Australian bank's books or claim the amount from the issuing bank and await reimbursement. 4. For telegraphic transfer drawings, if the paying bank does not make the foreign currency amount of the drawing immediately available to the Australian bank, usually by crediting an overseas account of that bank on the date of negotiation, an interest charge will be made to the beneficiary. 5. There is a growing trend for banks in Australia to collect interest and commission rear-end, i.e. when the actual transit time and/or date of receipt of foreign currency is ascertained. 6. It is usual for the beneficiary to be responsible for a flat reimbursement commission of any reimbursing bank.

99. Chapter 13

3. Documentary Sight Bill of Exchange ­ Documents against Payment (D/P) 4. Documentary Term Bill of Exchange ­ Documents against Acceptance (D/A) See Chapter 6 for a general discussion on documentary collections and Chapter 17 for credit insurance. Credit Risk In the D/P method the exporter retains control of the goods until payment is received, but risks still exist. If the bill is not paid on presentation and the goods are lying in an overseas port, then customs dues, warehouse and additional insurance charges, and other incidental expenses may be incurred. It may be difficult to find another buyer, and re-shipping the goods may present problems. In the D/A method, when the bill has been accepted by the buyer and the documents released to him, the exporter loses control of the goods and relies solely on the buyer's credit standing and business integrity for payment of the bill on its maturity date. The exporter does have a right to action on the bill if it is not paid, but this may prove expensive and difficult to implement in some foreign countries. For shipments by air, sea waybills, courier or post special procedures are required ­ see later headings in this chapter Air Shipments, Sea Waybills, Courier and Post Receipts. Exchange Risk If the exporter is quoting in a foreign currency he has a primary exchange risk from the time the contract of sale is entered into until either (a) his bank purchases a documentary bill drawn on the buyer, or (b) proceeds of a documentary bill drawn on the buyer, and sent for collection through the exporter's bank, are received, or (c) proceeds of a foreign currency loan are received. If the exporter's bank purchases the foreign currency, and the bill is not paid by the drawee, then because the bank purchases such bills with recourse on the exporter, the exporter's bank will claim on the exporter who will have to `reexchange' the bill amount by purchasing foreign currency at the then current rate of exchange to retire the bill. This is a contingent exchange risk from the date of the negotiation of the bill until the bill is paid by the drawee or retired by the exporter. Transfer Risk The transfer risk is a question of fact for each country to which exports are sent. The soundness of the economy of the buyer's country, and the possibility of delays in remittances from the buyer, perhaps because of shortage of foreign currency reserves in his country, must be considered.

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While not strictly a transfer risk there is also the possibility that, when a buyer's country is in difficulties with its external payments, sudden imposition of import licensing, or increased stringency in licensing, may result in goods in transit arriving at the port of discharge without authority for them to be imported or paid for. Post-Shipment Finance Under this method the exporter extends credit to the buyer until the bill is paid which is some time after the goods are shipped. He has paid out the cost of the goods, and some party must carry post-shipment finance until payment is received from the buyer. This finance may be provided: (a) From the exporter's own resources. (b) By normal overdraft or commercial bill facility at a bank, or borrowings from other financial institutions. (c) Trade finance by the exporter arranging with an Australian bank to purchase, or advance against, the documentary bill.7 Interest and Bank Commission In (a) and (b), the exporter would arrange with the bank for the bill and documents to be sent for collection to a bank in the buyer's country for subsequent presentation to the buyer. On payment by the buyer, the amount is remitted to the Australian bank for payment to the exporter. The exporter therefore bears the cost of finance until payment is received. The remittance of the amount by the overseas bank would be by SWIFT/telegraphic transfer. No interest is charged by the Australian bank on the transaction, but the exporter should charge interest on his own account, since he is providing finance from his own resources or through his overdraft or commercial bill facility. The exporter should also on-charge the commission fee which the Australian bank will make for collecting the bill. In (c), the exporter receives cash from his bank immediately he hands them the documentary bill, but he remains liable to the bank until the buyer pays the bill. The bank sends the bill and documents to a bank in the buyer's country for collection. On payment the amount remitted to his bank discharges the debt in the bank's books. If the exporter's bank purchases a bill drawn in a foreign currency, the rate of exchange is the applicable `on demand' or `term-buying' rate for the currency concerned. The application of the rate of exchange automatically charges the exporter with the interest due to the bank, also its commission, since both are included in the rate of exchange.8

7. Exporters should make such arrangements prior to entering into any export transactions. The exporter must be certain that finance for sales is available before becoming committed to buyers. Refer Financing heading in Chapter 20 for further explanation of these methods of financing. 8. There is a growing trend for banks in Australia to collect interest and commission rear-end, i.e. when the actual transit time and/or date of receipt of foreign currency is ascertained.

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The bank pays the exporter by purchasing the foreign currency from him when the trade finance is drawn down. The documentary bills are handled on a collection basis by the bank and when the proceeds are received they are retained by the bank to pay out the trade finance. This procedure is of interest to exporters when overseas interest rates are more favourable than the cost of obtaining post-shipment finance in Australian dollars. It should be noted that if a foreign currency bill is financed in Australian dollars that the primary exchange risk to the exporter ceases at the date he receives the Australian currency amount, but he has a contingent exchange risk in that, if the collection items are not paid, he will be required to purchase foreign currency at the then bank's current selling rate of exchange (i.e. re-exchange) to repay the trade finance from his bank. If the bill is in Australian currency, interest is charged by the exporter's bank from the date of purchase of the bill until the date proceeds reach Australia, and in addition, commission is charged. If the exporter wishes the interest and commission to be claimed from the buyer the bill should be claused as follows: `Payable with interest thereon at ..% p.a. from ../../.. to ../../.. and bank commission at ..%'. The overseas collecting banks concerned also make charges for obtaining payment of bills. Unless the exporter has arranged with the buyer that he (the buyer) will pay these charges, the exporter will be called on to pay them in due course. If the buyer has agreed to pay them, the exporter instructs his bank to inform the overseas bank that such charges are to be collected from the drawee of the bill. 5. Clean Remittance After Buyer Receives the Goods The contract of sale may provide that the buyer is to remit payment for the goods through a bank (by international cheque (bank draft) or SWIFT/ telegraphic transfer) when goods are received, or at a certain time thereafter (i.e. on open account); or goods may be sent on consignment,9 with payments to be remitted as goods are sold. Bills are not drawn on the buyer or consignee. The documents relating to the shipment are normally despatched by the exporter direct to the buyer. This is the opposite to Method 1, and in many cases will not suit the exporter. He loses control of the goods and relies solely on the credit standing and business integrity of the buyer to make payment in due course. Credit Risk There is a credit risk, and the creditworthiness and integrity of the buyer are of prime importance.

9. It should be noted that where goods are despatched on a consignment basis any unsold stock remains the `property' of the exporter. However, in the case of bankruptcy of the overseas buyer, difficulties could be experienced in identifying, isolating and obtaining control over the unsold stock.

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Exchange Risk

If the exporter is quoting in foreign currency, he has a primary exchange risk from the time the contract of sale is entered into until he receives payment for the goods. If financed by trade finance, the primary exchange risk will cease on drawdown of the loan (and on receipt of the Australian currency equivalent), with the contingent risk not being eliminated until the buyer has paid for the goods and the loan repaid.

Transfer Risk Post-Shipment Finance

The transfer risk is as set out for Methods 3 and 4. Under this method the exporter extends credit to the buyer until the goods are paid for, which may be quite some time after the goods are shipped. The postshipment finance may be provided from his own resources, a normal bank overdraft, a commercial bill facility, or trade finance. The exporter's bank does not charge interest on the actual export transaction, but interest may be borne indirectly if it is financed through the exporter's normal bank borrowings. He should therefore consider charging interest on his own account, by adjustment of price or by other means. Air Shipments The use of air transport for the shipment of goods of all types has grown in importance, one of the main advantages being the reduced time in which goods can be delivered to buyers. However, the speed of air transport and the nature of the air transport document (air consignment note) have brought problems to exporters in evolving satisfactory methods of obtaining payment from buyers for goods shipped by air. These problems and suggested methods of overcoming them need to be covered in some detail. In airfreight shipments the air transport document10 issued to the shipper is only an acknowledgement by an airline company that they have received the goods detailed therein for despatch by air to a named consignee at the address given. Unlike an original negotiable marine bill of lading, which must be surrendered to obtain the goods, the air transport document is not a document of title, and the airline company will simply deliver the goods to the consignee on arrival. When a documentary credit11 has been issued to cover the air shipment or when payment has been made in advance the loss of control over the goods is not a major concern. However, when the exporter is obtaining payment by documentary collection, the exporter will generally wish to restrict delivery of the goods until the buyer has either paid or accepted the relative bill of exchange.

Interest and Bank Commission

10. Air transport document is discussed in detail in Chapter 4 ­ Shipping Documents. 11. This only applies if the terms of the letter of credit can be fully complied with. If discrepancies are found in the documents after the goods have been airfreighted, there is no protection as control of the goods is lost. This situation applies equally to Courier, Post Receipts and sea waybills.

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In these circumstances the following methods can be employed to give protection to the exporter. While some minor alternative procedures could apply, these are most frequently used. (a) Consign the goods to a bank in the buyer's country 12 The exporter's bank when forwarding the bill to the overseas bank would indicate that it related to goods consigned to that bank and pass on the exporter's instructions to release the goods to the buyer only after the bill has been paid/accepted. In this procedure it is essential that the exporter lodges the bill with his bank a few days prior to departure of the flight carrying the goods, to ensure that the documentary collection reaches the overseas country not later than the goods. (See URC 522 Article 10) (b) Consign the goods to a reliable agent in the buyer's country When the exporter requires the agent to handle the collection on his behalf, all documents including a sight or term bill of exchange are mailed direct to the agent. Arrangements are made with the agent to provide for the goods to be released to the buyer only after he has paid the invoice amount to the agent or accepted the relative term draft. The agent subsequently remits the funds through his bank to the exporter. Where goods are shipped to an overseas bank, or the exporter's agent, it is undesirable to include the full name of the buyer or his address as an addition to the name of the bank or agent. Insertion of the buyer's full name and address on the air transport document may result, in some countries, in the goods being delivered to him on arrival. Air shipments should bear shipping marks, and these must appear on the air transport document, invoices and any other documents where the goods are described. If the goods are shipped to an overseas bank, or agent, this enables them quickly to identify the consignment advised to them by the airline company with any documents they may have received separately. Sea Waybills The use of non-negotiable sea waybills has increased in recent years, particularly in European, Scandinavian, North American and trans-Tasman trade. As with air transport documents, a sea waybill is only an acknowledgment of receipt of goods for despatch and not a document of title. It is not, therefore, required for surrender in order to obtain the goods. Consequently, the same risks due to the loss of control over the goods associated with air transport document apply to non-negotiable sea waybills and they may be reduced or overcome in the ways outlined previously for air transport documents.

12. Not all banks are prepared to act as consignee for goods, it is therefore essential that prior arrangements be made with the overseas bank through the exporter's bank.

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Courier and Post Receipts The weight of individual parcels which can be despatched through the post office is limited by post office regulations, so courier and post receipt are used mainly for the despatch of samples, printed matter and other lightweight items. Since this method is sometimes suitable for despatching goods, exporters should be aware of the difficulties which may relate to methods of obtaining payment from buyers for goods despatched by Courier and Post Receipts. Problems similar to those for airfreight shipments arise for shipments made by courier and post receipts. The evidence of shipment in this case is a post receipt stamped by the post office at the point of despatch. The post receipt 13 is not a document of title. If the goods are addressed to the buyer, he will obtain possession of them through the post office. Therefore, although this is of little concern when a documentary credit14 has been issued to cover the shipment or when payment has been made in advance, it does become a concern where the exporter is obtaining payment by means of a documentary collection. He will wish to adopt the same special procedures that apply to air transport documents to retain control of his goods until the relative documentary collection is paid/accepted.

13. Courier and post receipts are also discussed in Chapter 4 ­ Shipping Documents. 14. This only applies if the terms of the letter of credit can be fully complied with. If discrepancies are found in the documents after the goods have been posted, there is no protection as control of the goods has been lost.

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14

Pricing

This chapter is divided into two sections: ­ Prices in foreign currency. ­ Prices in Australian currency. Each section has separate price calculations for each of the methods of payment in export trade. The following introductory remarks are made to form a foundation for the examples. Basic Export Price The term `basic export price', as detailed in Chapter 12 is reiterated hereunder in point form to enable the principles of export pricing to be fully understood. Components of the `basic export price': ­ All costs and charges in producing or acquiring the goods for export. ­ Pre-shipment finance costs (possibly included in above). ­ Export costs/allowances (e.g. export packaging, local delivery costs to wharf/terminal, insurance and freight charges for goods sold on CIF basis, cost of credit insurance cover, export incentives rebates (if exporter wishes to use such incentives in a price reduction) etc.). ­ The exporter's profit margin. ­ Cost/benefit of forward exchange cover for pre-shipment period. (Some exporters may prefer to include this cost/benefit in their post-shipment finance calculations.) To the `basic export price' must be added the post-shipment finance costs and bank charges to obtain the `export price', namely: ­ ­ ­ ­ Interest for post-shipment period, Australian banks' charges (if applicable), Overseas banks' charges (if applicable), and Cost (or benefit) of forward exchange cover for post-shipment period1 (if applicable).

It will be noted that the `basic export price' includes all factors in an export price except the post-shipment financing components. The later examples of export price calculations under each method of finance summarise the information contained in the various preceding chapters.

1. Where the export transaction is financed by a foreign currency advance for the pre and/or post-shipment period, this finance may double as cover for the exporter's exchange risk (see Chapter 8).

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Prices in Foreign Currency Conversion of `Basic Export Price' to Foreign Currency When quoting prices in a foreign currency, the exporter has to convert his basic export price in Australian dollars to the foreign currency concerned. In addition to the rate of exchange, an interest rate factor may need to be included in this conversion depending on the terms of payment (i.e. whether selling at `sight' or at a `term', etc. and method of payment). The exporter will normally apply the current rate2 for the foreign currency concerned in making calculations, since this is the most up-to-date quotation he can obtain. It should also be noted that due to the many variances in the method of cover of an exchange risk (see Chapter 12) no allowance has been made in any of the following examples for the cost/benefit of exchange risk cover. When pricing a product this factor would be superimposed on the calculation (both in the `basic export price' for the pre-shipment period and in the `export price' for the post-shipment period). Examples The examples on the following pages aim to show the principles involved in calculating foreign currency prices under each of the methods of payment. (The payment methods referred to are those listed in Chapter 13 and the exchange rates used are those listed in the specimen Exchange Rate Sheet in Chapter 2.) A uniform `basic export price' of AUD60,000 has been applied. Clean remittance in prepayment for goods Example. An exporter is shipping goods to the USA where the buyer is to forward a clean remittance in payment prior to shipment of the goods. The basic export price is AUD60,000 and a price in US dollars is required.

Convert the basic export price at the T/T buying rate3 for US dollars (USD 0.5722 = 1AUD) AUD 60,000 = US dollar price ­__________ USD 34,332

Note: Commission, if any, by the Australian bank will be nominal on the remittance. The exporter will not be responsible for the overseas bank's charges.

2. If a price is to be calculated for example in US dollars for shipment to a buyer in a country other than the USA (say Japan or the Philippines) different airmail rates of exchange to those given in the example must be used ­ see Chapter 2 ­ Buying Rates of Exchange. 3. The rate of exchange the bank will apply in converting an international cheque, SWIFT or telegraphic transfer payment issued in foreign currency to Australian currency, depends on the method used by the overseas issuing bank in paying the foreign currency to the Australian bank. Where funds are lodged in the Australian bank's foreign currency account, the T/T buying rate will be used. If the Australian bank needs to claim the funds, the on demand airmail buying rate could be applicable and this could result in a substantial reduction in the exporter's return.

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Documentary credit ­ T/T reimbursement Price in Foreign Currency Example. An exporter is shipping goods to the USA where the buyer is to arrange for the issue of a documentary credit in US dollars in favour of the exporter providing for drawings to be negotiated at the T/T buying rate4 of exchange for US dollars. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Plus Australian bank's charges: ­ Bank negotiation commission (say 0.2%) ­ Confirmation fee (if applicable) ­ Reimbursing bank's fee (if applicable) (say flat USD50) AUD 60,000 120 ­ 87 __________ AUD60,207 Convert this total Australian amount at the T/T buying rate5 for US dollars (USD 0.5722 = 1AUD) AUD 60,207 = US dollar price ­ USD 34,450.45 ___________

Notes: (i) Negotiation commission on drawings is normally charged to the exporter. To avoid dispute the contract of sale and documentary credit should clearly state who will be responsible for payment of commission charges. (ii) Where an issuing bank instructs an Australian advising bank to confirm a documentary credit, the confirmation charge is claimed from the issuing bank but the credit can specify that the charge is to be paid by the beneficiary. In such a case where this has been agreed with the buyer, the exporter should take the cost of confirmation into account in calculating his price. (iii) Unless the documentary credit indicates that reimbursing bank's charge is for buyer's account this charge would be deducted from the payment due to the beneficiary.

4. Where prices are quoted on a T/T basis, the overseas buyer may, by arrangement with his own bank (the issuing bank), have the documentary credit issued providing for on demand or term airmail drawings in lieu of T/T reimbursement (thus obtaining longer payment terms). In such a case when the documentary credit is received, the exporter does not need to amend his price provided the documentary credit specifies that discount charges for the term, acceptance commission and foreign stamp duty (where applicable) are for the buyer's account. 5. Where the negotiating bank's T/T reimbursement claim is delayed for any reason by reimbursing/paying bank, an interest charge will be made to the exporter to cover the period of delay. The exporter should consider incorporating a clause in the contract of sale (and in the credit terms) stating that any interest due to delay in reimbursement is for buyer's account and may be claimed.

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Documentary credit ­ Sight reimbursement Price in Foreign Currency Example. An exporter is shipping goods to the USA where the buyer is to arrange for the issue of a documentary credit in US dollars in favour of the exporter providing for sight airmail drawings on USA. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Plus Australian bank's charges: ­ Bank negotiation commission (say 0.2%) ­ Confirmation fee (if applicable) ­ Without recourse fee (if applicable) ­ Reimbursing bank's fee (if applicable) (say flat USD50) ­ Transit period interest (say 15 days @ 6.50% pa.) Where the Australian bank claims interest rear-end the T/T rate would be used on negotiation and the actual transit interest will be charged to the exporter separately. Convert the Australian amount at the T/T buying rate for US dollars (USD 0.5722 = 1AUD) AUD 60,369 = US dollar price ­ USD 34,543.14 ___________ AUD60,000

120 ­ ­ 87 162 __________ AUD 60,369

Notes: (i) Where an issuing bank instructs an Australian advising bank to confirm a documentary credit, the confirmation charge is claimed from the issuing bank but the credit can specify that the charge is to be paid by the beneficiary. In such a case where this has been agreed with the buyer the exporter should take the cost of confirmation into account in calculating his price. (ii) Where a documentary credit specifically provides for drafts to be drawn claused `without recourse', a charge is made on negotiation by Australian banks to the beneficiary, unless the credit specifies that all Australian banks' charges are for account of the buyer. The exporter should take the cost of `without recourse' fees, if applicable, into account in calculating his price. (iii) Unless the documentary credit indicates that reimbursing bank's charge is for buyer's account this charge would be deducted from the payment due to the beneficiary.

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Documentary credit ­ Term reimbursement Price in Foreign Currency Example. An exporter is shipping goods to the USA where the buyer is to arrange for the issue of a documentary credit in US dollars in favour of the exporter providing for 60 day term drawings on USA. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Plus Australian bank's charges: ­ Bank negotiation commission (say 0.2%) ­ Confirmation fee (if applicable) ­ Without recourse fee (if applicable) ­ Acceptance fee (if applicable) ­ Reimbursing bank's fee (if applicable) (say flat USD50) ­ Transit period interest (say 15 days @ 6.50% pa.) ­ Usance period interest (say 60 days @ 6.75% pa.) AUD60,000 120 ­ ­ ­ 87 162 675 __________ AUD61,044

Where the Australian bank claims interest rear-end T/T rate would be used on negotiation and the actual interest will be charged to the exporter separately. Convert the Australian amount at the T/T buying rate for US dollars (USD 0.5722 = 1AUD) AUD61,044 = US dollar price ­ USD34,929.38 ___________

Notes: (i) Where an issuing bank instructs an Australian advising bank to confirm a documentary credit, the confirmation charge is claimed from the issuing bank but the credit can specify that the charge is to be paid by the beneficiary. In such a case where this has been agreed with the buyer the exporter should take the cost of confirmation into account in calculating his price. (ii) Where a documentary credit specifically provides for drafts to be drawn claused `without recourse', a charge is made on negotiation by Australian banks to the beneficiary, unless the credit specifies that all Australian banks' charges are for account of the buyer. The exporter should take the cost of `without recourse' fees, if applicable, into account in calculating his price. (iii) Where drafts are drawn on an Australian bank, or an overseas bank, the transaction will in most cases be subject to an acceptance fee by the accepting bank. The cost should be included in the price if it is to be paid for by the exporter. (iv) Unless the documentary credit indicates that reimbursing bank's charge is for buyer's account this charge would be deducted from the payment due to the beneficiary.

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Documentary sight bill of exchange ­ Documents against payment (D/P) Price in Foreign Currency Example. An exporter is shipping goods to the USA where the exporter is to draw a documentary sight airmail bill of exchange D/P on the buyer. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Plus Australian bank's charges: ­ Bank negotiation commission (say 0.2%) ­ Transit period interest (say 15 days @ 6.50% pa.) Where the Australian bank claims interest rear-end the T/T rate would be used on negotiation and the actual transit interest will be charged to the exporter separately. Convert the Australian amount at the T/T buying rate for US dollars (USD 0.5722 = 1AUD) AUD 60,282 = US dollar price ­ USD 34,493.36 ___________ AUD 60,000 120 162 __________ AUD60,282

Notes: (i) If the exporter arranges for his bank to purchase the bill he receives AUD60,000 up front, but will be charged commission and transit interest on receipt of proceeds. If the exporter sends the bill for collection through his bank in lieu of arranging for them to purchase it, the commission and transit interest should be taken into account when calculating the price charged to the buyer, i.e. USD34,493.36. (ii) If the exporter is responsible for the overseas bank's charges (and has increased his price accordingly) the Australian bank, if it purchases the bill of exchange, will in due course claim the charges from the exporter. If the bill has been sent for collection the proceeds will be reduced by the amount of the charges. (iii) Where PAG (refer to Chapter 6 ­ Presentation on Arrival of Goods) is authorised or customary, it follows that quite a considerable delay in payment can result. The cost of financing this period should either be estimated and included in the export price, or covered by a clause placed on the bill that interest is to be collected from a specific date (e.g. date of export) to a specified future date (e.g. date of payment). Where this clause is not placed on the bill but merely included in the exporters instructions, it should be noted that the importer can refuse to pay the interest but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 20.)

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Documentary term bill of exchange ­ Documents against acceptance (D/A) Price in Foreign Currency Example. An exporter is shipping goods to the USA where the exporter is to draw a documentary term bill of exchange (D/A) 60 days' sight on the buyer. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Plus Australian bank's charges: ­ Bank negotiation commission (say 0.2%) ­ Transit period interest (say 15 days @ 6.50% pa.) ­ Usance period interest (say 60 days @ 6.75% pa.) Where the Australian bank claims interest rear-end the T/T rate would be used on negotiation and the actual interest will be charged to the exporter separately. Convert the Australian amount at T/T buying rate for US dollars (USD 0.5722 = 1AUD) AUD 60,957 = US dollar price ­ USD 34,879.60 ___________ AUD60,000 120 162 675 __________ AUD60,957

Notes: (i) If the exporter arranges for his bank to purchase the bill he receives AUD60,000 up front, but will be charged commission and transit/usance interest on receipt of proceeds. If the exporter sends the bill for collection through his bank in lieu of arranging for them to purchase it, the commission and transit/usance interest should be taken into account when calculating the price charged to the buyer, i.e. USD34,879.60. (ii) If the exporter is responsible for the overseas bank's charges (and has increased his price accordingly) the Australian bank, if it purchases the bill of exchange, will in due course claim the charges from the exporter. If the bill has been sent for collection the proceeds will be reduced by the amount of the charges. (iii) Where PAG (refer to Chapter 6 ­ Presentation on Arrival of Goods) is authorised or customary, it follows that quite a considerable delay in payment can result. The cost of financing this period should either be estimated and included in the export price, or covered by a clause placed on the bill that interest is to be collected from a specific date (e.g. date of export) to a specified future date (e.g. date of payment). Where this clause is not placed on the bill but merely included in the exporters instructions, it should be noted that the importer can refuse to pay the interest but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 20.)

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Clean remittance after buyer receives the goods Price in Foreign Currency Example. An exporter is shipping goods to the USA where the exporter is shipping on `open account,' with the buyer to forward a clean remittance at an agreed time, either after shipment or after receipt of goods. The basic export price is AUD60,000 and a price in US dollars is required.

Basic export price Interest for the period the exporter is "out of pocket" (say 90 days @ 6.75% pa.) AUD60,000 1,012.50 ___________ AUD 61,012.50

Convert the Australian amount at the T/T buying rate6 for US dollars (USD0.5722= 1AUD) AUD61,012.50 = US dollar price ­ USD34,911.35 ___________

Notes: (i) Commission, if any, charged by the Australian bank will be nominal on the remittance. The exporter will not be responsible for the overseas bank's charges. (ii) Since the exporter has provided post-shipment finance from his own resources and has either paid interest to obtain those resources or has utilised his own funds that could have been used in some other way to earn income, he should increase the price to cover interest for the time he has had to wait for funds to be received, i.e. from date of shipment until estimated date of receipt of payment (unless interest is charged and remitted separately by agreement between exporter and buyer). Prices in Australian Currency An exporter when pricing goods and receiving payment in Australian currency is not concerned with the exchange risk; but he should appreciate that the exchange risk is borne by the buyer who has to use his own currency to purchase Australian currency to pay for the goods. In some countries it may be difficult for buyers to obtain competitive rates of exchange for Australian dollars and, in particular, forward exchange cover. The exporter, after calculating the basic export price for the goods in Australian dollars, must give consideration to any adjustments necessary for interest and commission charges of Australian banks and charges of overseas banks. Examples The following examples illustrate the principles involved under each of the methods of payment (refer to Chapter 13).

6. The rate of exchange which an Australian bank will apply in converting an international cheque, SWIFT or telegraphic transfer payment issued in foreign currency to Australian currency, depends on the method used by the overseas issuing bank in paying the foreign currency to the Australian bank. Where funds are lodged in the Australian bank's foreign currency account, the T/T buying rate will be used. If the bank needs to claim the funds, the on demand airmail buying rate could be applicable and this could result in a substantial reduction in the exporter's return.

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Clean remittance in prepayment for goods Example. An exporter is shipping goods to the USA where the buyer is to forward a clean remittance in payment prior to shipment of the goods. The basic export price is AUD60,000.

The Australian dollar price remains at AUD 60,000 ___________

Note: Commission, if any, charged by the Australian bank, will be nominal on the remittance. The exporter will not be responsible for the overseas bank's charges. Documentary credit ­ Sight reimbursement Price in Australian Currency Example. An exporter is shipping goods to the USA where the buyer is to arrange for the issue of a documentary credit in Australian dollars in favour of the exporter providing for drawings to be negotiated at sight.7 The basic export price is AUD60,000.

Basic export price Plus Australian bank's charges: ­ Negotiation commission (say 0.2%) ­ Confirmation fee (if applicable) ­ Reimbursing Bank's fee (if applicable) ­ Without recourse fee (if applicable) ­ Transit interest (if applicable) (for say 10 days at say 9.75%8 p.a.) = Australian dollar price ­ AUD60,000 120 ­ 70 ­ 160.27 ___________ AUD60,350.27 ___________

Notes: (i) Negotiation commission on drawings will only be charged to the exporter if the credit so specifies. The contract of sale and documentary credit should clearly state who will be responsible for negotiation commission. (ii) Where an issuing bank instructs an Australian advising bank to confirm a documentary credit, the confirmation charge is claimed from the issuing bank but the credit can specify that the charge is to be paid by the beneficiary. In such a case where this has been agreed with the buyer, the exporter should take the cost of confirmation into account in calculating his price. (iii) Where a documentary credit specifically provides for drafts to be drawn claused `without recourse', a charge is made on negotiation by Australian banks to the beneficiary, unless the credit specifies that all Australian banks' charges are for account of the buyer. The exporter should take the cost of `without recourse' fees, if applicable, into account in calculating his price.

7. Where prices are quoted on a sight basis, the buyer may, by arrangement with the issuing bank, have the documentary credit issued providing for term drawings in lieu of sight drawings (thus obtaining longer terms from his bank), the price need not be amended provided the documentary credit specifies that discount charges for the term, acceptance commission and foreign stamp duty (where applicable) are for the buyer's account. 8. Rate of interest will be as applicable in Australia.

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(iv) The interest9 charged is dependent on the manner of reimbursement. Where the Australian bank is authorised to obtain reimbursement by drawing on the Australian dollar account of the overseas bank in their books no interest is charged. However, where the Australian bank must claim from the issuing bank or a third party (reimbursing bank) and await reimbursement, interest will accrue from the date of negotiation until receipt of proceeds in Australia. Care is essential in this matter and the contract of sale should clearly state which party will be responsible for the payment of interest charges. Where the buyer has agreed to bear all interest charges, the credit should provide for the drafts to bear an appropriate clause (e.g. `payable with interest at ..% p.a. from ../../.. to ../../..'). Documentary credits when received should be carefully examined by the exporter to ensure that he is not liable for interest, and an amendment to the credit sought if its terms will result in the exporter being charged interest. As a general guide only (a) where the credit calls for drafts drawn on an Australian bank, reimbursement will usually be immediate and (b) where the credit calls for drafts drawn on the overseas bank or buyer, reimbursement will usually be upon application to the issuing bank. Exporters should determine with their bankers the interest liability for each documentary credit.

9. Where interest is applicable and is for seller's account, it is usual for banks in Australia to make the charge rear-end.

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Documentary credit ­ Term reimbursement Price in Australian Currency Example. An exporter is shipping goods to the USA where the buyer is to arrange for the issue of a documentary credit in Australian dollars in favour of the exporter providing for 60 day term airmail drawings where discount charges are for exporter's account. The basic export price is AUD60,000.

Basic export price Plus Australian bank's charges: ­ Negotiation commission (say 0.2%) ­ Confirmation fee (if applicable) ­ Without recourse fee (if applicable) ­ Reimbursing Bank fee (if applicable) ­ Acceptance fee (if applicable) ­ Transit interest (for airmail transit period ­ if applicable) (for say 10 days at say 9.75% p.a.) ­ Usance interest (where discount charges are for ­ seller's account say 60 days interest at say 9.75% p.a.) = Australian dollar price ­ AUD60,000 120 ­ ­ 70 ­ 160.27 961.64 ___________ AUD61,311.91 ___________

Notes: (i) Negotiation commission on drawings will only be charged to the exporter if the credit so specifies. The contract of sale and documentary credit should clearly state who will be responsible for payment of negotiation commission. (ii) Where an issuing bank instructs an Australian advising bank to confirm a documentary credit, the confirmation charge is claimed from the issuing bank but the credit can specify that the charge is to be paid by the beneficiary. In such a case where this has been agreed with the buyer, the exporter should take the cost of confirmation into account in calculating his price. (iii) Where a documentary credit specifically provides for drafts to be drawn claused `without recourse', a charge is made on negotiation by Australian banks to the beneficiary, unless the credit specifies that all Australian banks' charges are for account of the buyer. The exporter should take the cost of `without recourse' fees, if applicable, into account in calculating his price. (iv) Where drafts are drawn on an Australian bank, or an overseas bank, the transaction will in most cases be subject to an acceptance fee by the accepting bank. The cost should be included in the price if it is to be paid for by the exporter. (v) Interest is charged at an interest rate for Australian dollars. Depending upon the arrangements made by the issuing bank, there may be interest for the airmail transit period and/or the usance period. If for exporter's account, the trend in Australia is for banks to charge interest rear-end.

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Documentary sight bill of exchange ­ Documents against payment (D/P) Price in Australian Currency Example. An exporter is shipping goods to the USA where the exporter is to draw a documentary sight bill of exchange (D/P) on the buyer. The basic export price is AUD60,000.

Basic export price Plus Australian bank's charges: ­ Documents handling commission (say 0.2%) ­ Transit interest (for say 10 days at say 9.75% p.a.) = Australian dollar price ­ AUD60,000 120 160.27 ___________ AUD60,280.27 ___________

Notes: (i) Documents handling commission is charged by the Australian bank irrespective of whether the bill is purchased, or handled on a collection basis for the exporter. The fee by agreement, can be collected from the buyer, however, it should be noted, that the importer can refuse to pay the commission but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 21.) (ii) If the exporter arranges for his bank to purchase the bill, he is charged interest from the date of purchase until proceeds are received in Australia. Alternatively, where the exporter arranges for the bill to be handled on a collection basis, the bank does not make an interest charge. Nevertheless the exporter is providing post-shipment finance from his own resources and he should make an interest charge for his own account. The price quoted therefore depends upon the terms of the contract of sale. If the buyer agrees to pay the Australian interest and commission charges they can be added to the amount of the bill of exchange by means of the following clause placed on the bill, `Payable with interest at . . % per annum from ../../.. to estimated date of receipt of payment in Australia and bank commission of AUD...'. Where an Australian bank purchases the bill, it retains the amounts resulting from the clause to meet its charges. Where the bill has been handled for collection, the bank retains the commission and pays the interest to the exporter. If the buyer insists on an `all in' price including interest and commission, the exporter must estimate the amounts applicable and increase his price accordingly. The bill is drawn for the amount required and the exporter pays the charges from the proceeds. (iii) Where PAG (refer to Chapter 6 ­ Presentation on Arrival of Goods) is authorised or customary, it follows that quite a considerable delay in payment can result. The cost of financing this period should either be estimated and included in the export price, or covered by a clause placed on the bill that interest is to be collected from a specific date (e.g. date of export) until arrival of proceeds in Australia. Where this clause is not placed on the bill but merely included in the exporters instructions, it should be noted that the importer can refuse to pay the interest but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 20.)

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Documentary term bill of exchange ­ Documents against acceptance (D/A) Price in Australian Currency Example. An exporter is shipping goods to the USA where the exporter is to draw a documentary term bill of exchange (D/A) 60 days' sight on the buyer. The basic export price is AUD60,000.

Basic export price Plus Australian bank's charges: ­ Documents handling commission (say 0.2%) ­ Transit interest (for say 10 days at say 9.75% p.a. ) ­ Usance interest (say 60 days at say 9.75% p.a. ) = Australian dollar price ­ AUD 60,000 120 160.27 961.64 ___________ AUD61,241.91 ___________

Notes: (i) Documents handling commission is charged by the Australian bank irrespective of whether the bill is purchased, or handled on a collection basis for the exporter. The fee by agreement, can be collected from the buyer, however, it should be noted, that the importer can refuse to pay the commission but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 21.) (ii) If the exporter arranges for his bank to purchase the bill, he is charged interest from the date of purchase until proceeds are received in Australia. Alternatively, where the exporter arranges for the bill to be handled on a collection basis, the bank does not make an interest charge. Nevertheless the exporter is providing post-shipment finance from his own resources and he should make an interest charge for his own account. The price quoted therefore depends upon the terms of the contract of sale. If the buyer agrees to pay the Australian interest and commission charges they can be added to the amount of the bill of exchange by means of the following clause placed on the bill, `Payable with interest at .. % per annum from ../../.. to estimated date of receipt of payment in Australia and bank commission of AUD...'. Where an Australian bank purchases the bill, it retains the amounts resulting from the clause to meet its charges. Where the bill has been handled for collection, the bank retains the commission and pays the interest to the exporter. If the buyer insists on an `all in' price including interest and commission, the exporter must estimate the amounts applicable and increase his price accordingly. The bill is drawn for the amount required and the exporter pays the charges from the proceeds. (iii) Where PAG (refer to Chapter 6 ­ Presentation on Arrival of Goods) is authorised or customary, it follows that quite a considerable delay in payment can result. The cost of financing this period should either be estimated and included in the export price, or covered by a clause placed on the bill that interest is to be collected from a specific date (e.g. date of export) until arrival of proceeds in Australia. Where this clause is not placed on the bill but merely included in the exporters instructions, it should be noted that the importer can refuse to pay the interest but still may be able to obtain the relative documents. (Refer to Uniform Rules for Collections, Article 20.)

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Clean remittance after buyer receives the goods Price in Australian Currency Example. An exporter is shipping goods to the USA where the exporter is shipping on `open account' with the buyer to forward a clean remittance at an agreed time, either after shipment or after receipt of goods. The basic export price is AUD 60,000.

Basic export price Interest for the period that the exporter is `out of pocket' (say 90 days at say 9.75% p.a.) = Australian dollar price ­ AUD60,000 1,442.47 ___________ AUD 61,442.47 ___________

Notes: (i) Commission, if any, charged by the Australian bank will be nominal on the remittance. The exporter will not be responsible for the overseas bank's charges. (ii) Since the exporter has provided post-shipment finance from his own resources and has either paid interest to obtain those resources or has utilised his own funds that could have been used in some other way to earn income, he should increase the price to cover interest for the time he has had to wait for funds to be received, i.e. from date of shipment until estimated date of receipt of payment.

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15

Medium and Long-Term Finance

Previous chapters of this book apply largely to export business in which terms of payment granted by an exporter to the buyer do not exceed 180 days after shipment. Related post-shipment finance provided or arranged by the exporter is short-term finance and applies to the main volume of Australia's exports, whether rural, mining or manufactured. These are essentially raw materials or consumer-type goods, and the method of payment follows the usual world pattern. Finance related to payment terms in excess of 180 days and up to five years after shipment is regarded as medium-term finance, while long-term finance is that required for periods in excess of five years. The purpose of this chapter is to explain briefly the various facets of medium and long-term finance. Exporters should discuss all transactions with their bank since the detailed procedure for individual transactions can vary considerably, and if the exporter wishes to arrange post-shipment finance, a close examination is essential in order to determine whether finance can be made available and, if so, the best way in which to arrange it. Medium-Term Finance ­ 180 days to 5 years After Shipment While there may be a small volume of raw materials or consumer-type goods for which buyers seek credit terms in the 180 days to one year bracket, generally the export goods for which medium-term credit facilities are required are for the more costly types of manufactured goods, particularly capital and semi-capital equipment, such as tractors, earth-moving equipment, telecommunications equipment and various types of manufacturing plant. For these goods to compete in world markets, it is often necessary for exporters to grant or arrange credit to buyers for periods of one to five years, generally tending towards the longer period. Sales of such goods may result from direct negotiations with buyers or by tendering for contracts in open competition with exporters of other countries. Long-Term Finance ­ in Excess of 5 years After Shipment For the capital type goods mentioned under the previous heading and particularly for items such as aircraft, ships, locomotives and factories with relative machinery, buyers may seek terms in excess of five years. It is not possible to make a clear distinction between the types of goods for which buyers will require medium-term facilities and those for which long-term facilities will be sought. The terms depend largely on the sum involved, the buyer's forward planning for repayment and the competitive forces between suppliers, which may induce them to offer finance for a long term in order to obtain the business.

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Supplier Credit ­ Provision of Medium and Long-Term Finance The term `supplier credit' is applied in circumstances where the supplier provides the finance for the period required either from his own resources, or by borrowing in his own name. Arrangements for payment by buyers under medium and long-term contracts vary considerably. Generally they provide for a deposit to be paid when the order is placed and a further part payment on shipment. The remaining payments are spread at regular intervals over the term for which credit is granted. Bills of exchange at varying usances may be drawn on the buyer by the exporter for instalments, promissory notes may be issued by the buyer, or the buyer may make clean payments as instalments fall due. Substantial sums are frequently involved in providing post-shipment finance for sales made on a medium or long-term payment basis, and it is seldom that an exporter is able to provide such sums from his working capital without reducing his productive capacity. So it becomes necessary for an exporter to obtain a loan, which can be repaid as payments are received from the buyer. Australian banks provide Australian currency term loans to help meet the needs of exporters for medium and long-term finance. Term Loans Each bank has term lending facilities through which loans are made to customers for capital expenditure in rural and secondary industry, for commercial undertakings and for exports of capital goods. Generally, such loans are for periods of three to ten years, but possibly longer if necessary. In the case of exports, repayments are made as proceeds are received from overseas. Supplier Credit ­ Risks in Medium and Long-Term Finance Credit Risks In sales with payments made over a medium or long-term, the buyers are frequently governmental or semi-governmental bodies in developing countries, or very large companies. Government or bank guarantees of payment may or may not be offered for the protection of the exporter. In all cases a careful assessment of any guarantees offered, the standing of the buyer, and the economic and political stability of the buyer's country is essential to determine the degree of credit risk. An export insurance policy1 to cover the credit risk is normally an essential ingredient in these transactions. Transfer Risk Because of the long payment period, in which time the economic situation of a country, particularly a developing country, may worsen, it is essential that export insurance cover for the transfer risk be obtained.

1. Refer Chapter 17 ­ Credit Insurance.

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Exchange Risk

When payments are to be made by the buyer in a foreign currency, the exporter, in conjunction with his bank, must closely study the exchange risk to ascertain whether he can gain protection against adverse movements in the value of the foreign currency before he receives payment. While forward exchange contracts in major currencies used in international trade can usually be obtained for periods of up to 12 months, banks have to enter into special negotiations in foreign currency markets to arrange forward exchange contracts for longer periods. Such negotiations may not always be successful and the contracts may be costly. In many cases it would be more appropriate to borrow in a foreign currency, particularly when interest rates are lower, and thereby eliminate the `primary' exchange risk.2 Buyer Credit ­ Provision of Long-Term Finance Through the co-operation of the Export Finance and Insurance Corporation (EFIC) `buyer credit' is also available to exporters of capital goods and banks in Australia will assist in this regard. This facility can apply where payment terms are over two years and the amount of an individual order is upwards of AUD500,000, although in very special circumstances consideration can be given to contracts with a value as low as AUD50,000. In contrast to `supplier credit', with `buyer credit' the borrowing for the period is made by the overseas buyer, or an overseas institution, from a lending institution in Australia. Normally the buyer/borrower must pay 15 per cent of the cost of the goods before or at shipment, and EFIC either provides a guarantee to the Australian lending institution to enable a loan to be made to the buyer/borrower or makes direct loans to the buyer/borrower at concessional rates governed by the `Organisation for Economic Co-operation and Development (OECD) Consensus' for the remaining 85 per cent. While the exporter will usually be responsible for the premium charged by EFIC on the transaction, and other fees, he has no liability if the buyer/borrower fails to repay the loan. The exporter therefore receives full payment at the time of shipment and does not carry any contingent liability in his books. A more detailed explanation is given in Chapter 17 ­ Credit Insurance.

2. Refer to heading Exchange Risk in Chapter 13 for explanation of `primary' and `contingent' exchange risk as used in this manner.

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16

Incentives

The Australian Trade Commission provides various export incentives to eligible Australian residents. One scheme is described briefly below. Export Market Development Grants The Export Market Development Grants (EMDG) scheme is designed to support established Australian exporters to enter new markets and launch new products and support the efforts of industry associations and groups to promote exports. The EMDG scheme is the Australian Government's principal financial assistance program for exporters, administered by Austrade. The purpose of the scheme is to encourage small and medium sized Australian exporters to promote themselves overseas, so that exports markets and sales of their products grow. An EMDG grant is a taxable grant that partially reimburses money (up to 50%) spent during the financial year on specific export promotion activities, such as market research and development, representation, advertising, the cost of participating in overseas exhibitions and fares, where the promotion of export sales is the objective to any overseas market (except New Zealand). Each exporter may receive eight grants of up to $200,000.00 per year. After the receipt of eight grants, additional grants may be claimed for promotion to new export markets developed. Grants are available to an Australian resident/principal who incurs eligible expenditure in seeking out and developing overseas markets for: · · · · · · · · goods made in Australia that have at least 50% Australian content goods made outside Australia that are substantially made up of Australian materials services provided outside of Australia (except legal, migration and real estate purchasing services) services provided in Australia (these are limited) tourism services intellectual property rights that mainly result from work done in Australia trademarks that are owned, assigned or firstly used in Australia know-how that mainly results from work done in Australia

Prospective first time applicants must register with Austrade before June 30 in the year that they intend to first apply for EMDG assistance. Further information about the grant is available from Austrade directly. Information contained in this chapter is current at the time of writing and may be subject to change.

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17

Credit Insurance

There are several institutions that offer Export Credit Insurance. The following is an outline of the types of policies and facilities available from one such institution, namely, the Export Finance and Insurance Corporation. Export Finance and Insurance Corporation (EFIC) EFIC is Australia's official Export Credit Agency (ECA). It is a Statutory Authority of the Australian Government set up in 1956 to facilitate Australia's export trade and international business. EFIC operates on a self-funding commercial basis as a Government Business Enterprise. The Role of Export Credit Agencies and EFIC Most major trading nations have an ECA whose role is to increase their respective country's export trade and overseas investment by assisting exporters manage risks. Exporters face many trading risks, ie. transport, contract disputes, currency exchange risks to payment/finance. EFIC's role is to provide products and services that assist exporters manage the payment and finance risks in exporting. Payment Risk relates to the risk of non-payment for exported products and services because of possible commercial, political or economic problems overseas. The products offered by EFIC to exporters to assist with the management of payment risks include: ­ Export Payment Protection (also known as Export Credit Insurance). ­ Political Risk Insurance. ­ Unfair Calling Insurance. ­ Indirect Exports Insurance. Financing risk refers to barriers exporters may face when bidding for an export contract. The products offered by EFIC to exporters to assist with the management of finance risks include: ­ Direct Lending. ­ Export Finance Guarantee. ­ Documentary Credit Finance. ­ Documentary Credit Guarantee. ­ Export Working Capital Guarantee. ­ Bonds/Guarantees. The following pages aim to provide a broad understanding of EFIC's products and services, and much of the text is quoted verbatim from EFIC's publications. The National expresses its appreciation to EFIC for permission to do so.

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Method of Payment Risk There are four main methods of payment that exporters and their buyers agree when negotiating contracts: Least risk for the exporter, but unfavourable to buyers PREPAYMENT ­ Low risk because buyer pays up-front. ­ Partial prepayment more realistic than prepayment in full. DOCUMENTARY CREDIT (LETTER OF CREDIT) ­ Risk is that the issuing bank will not pay. ­ Buyer bears the establishment cost (depending on the agreed terms in contract of sale). Confirmed ­ Less risk as the negotiating/reimbursing bank confirms the letter of credit. Unconfirmed ­ More risk as payment remains the responsibility of the issuing bank. DOCUMENTARY COLLECTION ­ Can be more risk as control of exports passes to buyer through presentation of shipping documents. Sight ­ Less risk as documents released at time of payment. Term ­ More risk as documents released against buyer's promise to pay at a future date. OPEN ACCOUNT (CREDIT TERMS) ­ More risk as exports are delivered before payment is secured. ­ The longer the period of credit, the riskier it is. ­ Buyer may see as simpler and more cost effective. Most risk for the exporter, but favourable to buyers Most exporters use a number of different payment methods, depending on their relationship with their buyer and the nature of the export order. Even if exporters use the same methods of payment over a long period of time, changes in the environment can prompt exporters to review the status quo. With competition in export markets only likely to increase, more buyers of Australian exports will expect open account terms. By providing favourable payment terms, exporters can cement their relationships with existing export partners, or enhance business opportunities amongst new export buyers. It can make commercial sense to use payment methods that the buyer prefers, but this can mean there is a greater risk of not being paid.

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Managing Payment Risks Australian companies that export or invest overseas are faced with the risk of possible payment delays or even non-payment. Commercial risk and country risk are two main factors influencing the overseas buyer or bank's ability to pay. Commercial Risks relate directly to the performance of buyers and overseas banks and include insolvency, default and the buyer's failure to accept the goods exported. Country Risk is the risk of loss traceable to economic, political or social instability - factors outside the control of buyers and overseas banks. Losses can occur from country risk factors affecting a buyer's commercial ability to pay. For example, when a buyer in a commercially safe market defaulted after one of their buyers in a politically unstable market defaulted in payment to them. Greater global integration highlights such interdependencies. Market Grades To assist exporters and for its own risk management, EFIC grades 225 countries for short term payment risk on a scale of 1 (least risk/most creditworthy) to 6 (highest risk/least creditworthy) GRADE 1 2 3 4 5 6 PAYMENT PROBLEMS DUE TO COUNTRY RISK Unlikely Very minor problems Minor problems possible, though unlikely Moderate problems possible or already occurring Serious problems likely or already occurring Serious problems already occurring

One of the factors which affects the fees and premiums that are charged is the market grade. EFIC considers a number of criteria in setting and revising market grades including: ­ Exchange Transfer Risk: Inability of a foreign buyer, investor or lender to convert local currency into foreign currency in order to pay import bills. ­ Currency Risk: Large devaluations of a currency that raise the local currency cost of meeting import bills and therefore cause payment delays or defaults. ­ Government Payment Delays: Delays by the government in paying its suppliers. ­ Bank Risk: Systemic risk in a banking system that leaves banks unable to honour letter of credit obligations. ­ Legal/Regulatory Risk: Aspects of the legal/judicial system that hinder foreign suppliers ability to enforce contracts and recover debts. Aspects of the regulatory system that discriminate against foreign suppliers/investors relative to local ones; regulatory changes that can unexpectedly undermine a contract or project's profitability. ­ Business Cycle Risk: Risk of buyer insolvency/bankruptcy traceable to highly amplified boom/bust economic cycles.

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EFIC Product Solutions

EFIC's range of product solutions is as follows. They reflect EFIC's commitment to meeting the needs of both exporters and banks and are designed to overcome three challenges to export success: 1. Managing payment risk with export payment protection. 2. Managing overseas investment risk with political risk insurance. 3. Providing competitive finance for overseas buyers. 1. Managing Payment Risk with Export Payment Protection (also known as Export Credit Insurance)

Reason for Credit Insurance

Risk-taking is characteristic of most businesses. As competitive pressure increases in international markets, so does buyer demand for more competitive credit terms. Intense competition among world exporters has encouraged buyers to demand trade credit, and suppliers to concede it with increasing frequency. The availability of export credit insurance helps the exporter to match credit offered by competitors while greatly reducing the risk to which they are exposed. For Australian companies committed to building export turnover, this shift away from secure terms poses some challenges in credit risk management. A major non-payment or series of smaller non-payments can represent a significant drain on profitability, cashflow and management resources.

Coverage and Indemnity

Export Payment Protection provides cover for non-payment arising from either country or commercial risks. Indemnity for commercial risks is up to 90% of the insured contract value. A reduced indemnity may apply to higher risk markets or buyers. Political risk indemnity is up to 100% of the insured contract value. COMMERCIAL RISKS (up to 90% indemnity) ­ Buyer/overseas bank default (failure to pay). ­ Buyer/overseas bank insolvency. ­ Wrongful refusal by the buyer to accept goods. POLITICAL RISKS (up to 100% indemnity) ­ Currency transfer or exchange blockage. ­ War, riot or civil unrest. ­ Import ban.

There may be marginal variations in causes of loss covered by policies issued for other types of policies and reference should be made to EFIC for information in this regard.

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Export Credit Insurance is flexible and may include the following cover: ­ Indirect Exports Cover: Where the exporter is selling to another Australian firm who exports the product. ­ Pre-Shipments Cover: For customised goods and services where losses are incurred prior to shipment, due to buyer being unable to fulfil their contractual obligations. ­ External Trade: Cover can also be provided for goods or services exported from another country. Cover for an external export is generally limited to 25% of total insured exports. It generally applies to goods or services not available in Australia, because of seasonal factors requiring supply from a third country. ­ Stocks Cover: For goods held by the exporter in storage overseas to facilitate the quick delivery to overseas buyers. ­ `Specific' Insurance: When an export contract is too large for the export company to accept all the risk, the exporter can insure the specific contract against non-payment. 2. Managing Overseas Investment Risk Political Risk Insurance Many of the Australian companies investing offshore are prepared to carry the commercial risks of the investment but look to an insurer to help manage the risks related to the country in which the investment is being made. EFIC offers two forms of Political Risk Insurance to cover equity and/or debt exposure. Equity policies cover ­ ­ ­ ­ Direct equity contributions. Shareholder loans. Guaranteed bank loans. Future retained earnings. Debt policies cover ­ Repayment of principal and interest under the loan agreement.

Political Risks insured by EFIC: ­ Currency inconvertibility and transfer blockage: An inability to convert local currency to foreign currency or to transfer the foreign currency out of the host country. ­ Expropriation/confiscation: The loss of control of assets of the foreign enterprise as a result of actions by the host country government. ­ War damage/political violence: Loss of all or part of the foreign enterprise's assets as a result of violent action undertaken with specified political objectives. An insured loss will arise if any of these political events prevents repayment of bank debt (debt policy) or the repatriation of capital (equity policy). The level of indemnity provided by EFIC may be up to 100% of the amount insured.

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Syndicating Cover

EFIC has developed close working relationships with other providers of political risk insurance, including the World Bank affiliate Multilateral Investment Guarantee Agency and other Export Credit Agencies as well as private market players such as Lloyds of London. These relationships enable EFIC to leverage the capacity of these entities and increase the level of support EFIC can consider on a transactional basis. EFIC can also take a lead role in `syndicating' cover with other insurers, either on the basis of coinsurance or reinsurance. 3. Competitive Finance for Overseas Buyers Managing credit and country risk is only part of the challenge of successful exporting. In today's increasingly sophisticated global market, the reliance on product features and pricing may not be enough to clinch the deal. In many cases, overseas buyers expect an attractive finance package to be included in their suppliers proposals. As a result, many Australian capital goods and services exporters recognise that including a finance package as part of their bid can be the differentiating factor in their favour. EFIC can help as it has a range of product solutions for financing Australian exports, including: ­ Direct lending facilities that allow EFIC to advance funds directly to the exporter on behalf of the buyer, with the buyer then repaying EFIC over time. ­ Guarantees with a payment mechanism similar to EFIC's loan facility, but with the added potential to combine support from the exporter's bank to provide a comprehensive financing package. ­ Bonding facilities when the buyer requires security should the exporter fail to meet the obligations under the export contract.

Direct Lending

EFIC's support is governed by an agreement among the Export Credit Agencies of the Organisation for Economic Co-operation and Development (OECD) nations. The `OECD Arrangement' allows EFIC to offer finance on terms directly competitive with exporters from other countries offering finance from their respective Export Credit Agency. The Arrangement stipulates the maximum repayment term and minimum interest rate EFIC can consider for a loan facility. It also limits EFIC's support to a maximum of 85% of the eligible contract value (up to 80% in relation to ships). Under an EFIC loan, or a bank loan guaranteed by an Export Finance Guarantee, funds are advanced directly to the exporter in accordance with the contract on behalf of the buyer. The buyer then repays EFIC over an agreed repayment period, through semi-annual instalments of principal and interest. The key benefit of EFIC's loan and Export Finance Guarantee facilities is flexibility. EFIC offers long-term fixed or floating rate finance in a range of currencies, as well as the ability to match the drawdowns required during the contract performance period.

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Export Finance Guarantee

Building on EFIC's direct lending facilities, the Export Finance Guarantee was developed to provide better financing solutions for buyers of Australian capital goods and services. It forges closer working relationships between EFIC and leading Australian and International banks, maximising the advantages of their existing international networks and innovative skills. Under an Export Finance Guarantee, EFIC issues a guarantee in favour of a bank for an approved export transaction. Using the EFIC guarantee as prime security for the commercial and political risks, the bank provides a loan to enable the buyer to purchase Australian capital goods and services. The terms of EFIC's guarantee under the Export Finance Guarantee are comparable to its direct loans, eg. fixed or floating rate funding with the EFICguaranteed loan amount limited to a maximum of 85% of the eligible contract value (80% in relation to ships). EFIC encourages banks to package 100% financing solutions through their provision of 15% deposit (20% in relation to ships) and local content finance. The Export Finance Guarantee offers significant benefits for all parties to the transaction. By offering the buyer a comprehensive financial package in relation to the contract, the financier can derive income from an EFIC guaranteed asset.

Documentary Credit Finance

EFIC can also offer assistance by way of Irrevocable Documentary Credit (IDC) finance arrangements. Under this facility, EFIC is made the beneficiary of IDCs issued in respect of an export contract. EFIC has found this mechanism particularly effective in the case of transactions of $500,000 or more with few contractual payments. Under the guarantee program, banks can confirm medium term documentary credits and provide without recourse trade facilities to exporters. The facility guarantees the principal and interest payment obligations of the Issuing Bank and provides the opportunity for EFIC and the trade finance bank to share risk. In certain markets or with certain buyers, financing assistance is most efficiently delivered via a line of credit. Under this facility, financial terms have been pre-negotiated with the buyer/borrower and the execution of financing for individual contracts can be expedited. When growing exporters bid for contracts larger than they are accustomed to, they often feel a number of financial pressures building - lack of funds to pay suppliers, additional staff wages and the possibility of jeopardising current client relationships by not having the resources left to meet other order requirements. All these issues can lead to a working capital shortfall. EFIC's Export Working Capital Guarantee facility provides a guarantee to the exporter's bank. The bank then (on approval) loans the exporter the necessary funds to complete an export contract.

Documentary Credit Guarantee

Lines of Credit

Export Working Capital Guarantee

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Bonds

Overseas buyers often require that exporters supply them with bonds as security for tenders, advance payments or in support of their performance obligations under a contract. EFIC issues bonds directly or provides guarantees to banks issuing bonds. EFIC will consider conditional or unconditional bonds and its security requirements are dependent upon bond type and the risks involved. Various bonds a buyer can demand from an exporter: ­ Advance Payment Bonds: Should the exporter fail to meet their obligations under the export contract, the buyer can call on the bond to recoup payments made in advance. ­ Performance Bonds: The buyer may call on the bond if the exporter fails to perform their obligations under the export contract. ­ Bid or Tender Bonds: Provides the buyer with security against losses it may face if the exporter is unwilling or unable to take on the contract, after the exporter has lodged their bid and been awarded the contract. ­ Maintenance, Warranty or Retention Bonds: Provides the buyer protection from losses should the exporter fail to comply with their warranty after the completion of the contract. On-demand or unconditional bonds may be called unfairly and without the buyer referring to the exporter. EFIC offers Unfair Calling Insurance to cover its clients against a substantial portion of the losses arising from the unfair calling of bonds.

Flexible Finance Solutions

EFIC can deliver finance packages in many ways, depending on the needs of the exporter and those of the overseas buyer. Generally, the best options in terms of cost and time are: ­ Loans: Generally suitable for transactions of $2.5million or more. ­ Export Finance Guarantees: Generally suitable for transactions of $5million or more. ­ Documentary Credit Facilities: Generally suitable for transactions of $500,000 or more. ­ Export Working Capital Guarantee: Generally suitable for transactions below $100,000 depending on contract conditions. General Information

Eligibility

Before its commitment, EFIC will wish to ensure that its eligibility criteria are satisfied. These criteria are product specific and include but are not limited to EFIC being satisfied that all parties in a transaction are acceptable and capable of fulfilling their respective obligations. In addition, EFIC will want to ensure the inherent risks and the level of Australian content or benefits are acceptable to EFIC. EFIC is a self-funding organisation. Its operating costs are covered by its income from client fees and premiums, as well as investment interest in the reserves EFIC holds to underpin the business. EFIC levy premiums, fees and other charges in relation to each of its products. These amounts are consistent with international practice.

131. Chapter 17

Premium, Fees and Charges

18

Overseas Governmental Regulations

Matters which concern exporters when they are considering exporting to any country are: ­ Whether import licensing operates in the country; and ­ Whether the government of the country has placed any restrictions on payments in foreign currencies. If these factors do operate they will not necessarily prevent sales being made, but exporters should know what effect they may have on transactions with the country concerned. The extent and nature of import and exchange controls vary greatly from country to country. For instance, in some countries the granting of an import licence results in automatic approval to the remittance of the relative foreign currency. If such approval is not automatic, or where payment restrictions exist without import licensing, exporters should know what conditions govern the granting of foreign currency, and whether there are likely to be any delays in remittances. Often by decree or law of a particular country which has a shortage of reserves, documents for imports will be released against deposit of funds of equivalent value in local currency, though the related bill of exchange and invoice may be drawn in a foreign currency.1 Such deposits will be held at the exchange and credit risk of the exporter, until foreign currency is made available. Should that country's currency devalue during this waiting period, the risk1 is for the account of the exporter. This risk cannot be covered under a forward exchange contract since, if for example; the drawing is in Australian dollars at the outset, no foreign currency amount is ascertainable. As a general rule, the issuing of a documentary credit is evidence that remittance of foreign currency in payment for the goods will not be delayed, but this remains uncertain in some countries. Furthermore, the conditions attached to import licences in some countries may affect the terms of sale for goods. For example, if it is a condition that insurance must be taken out in the importing country, goods cannot be sold on a CIF basis. Another example is where goods can only be imported against establishment of a documentary credit (all other methods of payment being prohibited). Exporters should therefore endeavour to inform themselves of any import and exchange restrictions in the countries to which they are, or are considering, exporting. Banks and Austrade can assist with such information.

1. The manner in which this type of exchange risk is incurred should be particularly noted by exporters. It should also be noted that this risk would also apply if the contract of sale was in Australian dollars.

132. Chapter 18

The proper completion of import licensing and exchange control formalities by the buyer in the importing country is of paramount importance and it must be acknowledged that the exporter relies largely on the buyer's assurances that all necessary steps have been taken. This emphasises the need to ensure that overseas buyers, in addition to being financially sound, are experienced and highly reputable.

133. Chapter 18

19

Countertrade and Offsets

This subject is covered here to complement the other subjects. It is not intended to be a detailed explanation but mainly to create an awareness of countertrade and offsets. Definition "Countertrade" is an umbrella term that covers all forms of reciprocal or compensatory trade arrangements, including barter, offset, counterpurchase and bilateral clearing which are generally used in situations where a seller is compelled by a buyer into a direct or indirect reciprocal purchasing arrangement as a condition of sale. Buyers in most countertrade transactions are government departments or agencies or, at least, are acting under government regulations in their countertrade activities. In Eastern Europe countertrade has been practised for many years. However, a number of Asian and South American countries are making increasing demands for countertrade, especially in relation to large-scale government contracts. Reasons for Countertrade Rapidly expanding foreign debt, low commodity prices, underdeveloped skills in overseas marketing and a lack of internationally competitive products have been major reasons for the adoption of countertrade by a growing number of countries. As producers of goods and services seek worldwide expansion of their markets, increasingly they must be prepared to offer or arrange for financing and other incentives to the buyers of their products. Depending on the nature and complexity for performance of the transaction, customary forms of payment or financing such as letters of credit or loans may not suit the purposes of a buyer or seller. For example, if a buyer is in a developing country, the parties may have to overcome a shortage of hard currency or unavailability of credit from traditional sources. If a buyer is a government entity, its objective may be to acquire industrial capability or technology, to create jobs and access foreign markets for exported manufactured goods and to generate hard currency. These latter motives are frequently referred to as "nation building". The seller's goal may be to make a sale that otherwise would not be possible because of a potential buyer's soft currency or bad credit. Other objectives of a seller may be to open or control a market for the seller's goods or to facilitate a

134. Chapter 19

co-production program motivated by other reasons, such as cost reduction associated with offshore manufacturing of components of goods. Due to the early significance of countertrade in Eastern Europe, Vienna is a well-established countertrade centre with a number of specialist operators, some of them subsidiaries of major Austrian banks. Singapore is developing as an important countertrade centre in Asia. Barter Perhaps the oldest form of countertrade, barter involves the direct exchange of goods and services under a single contract between two principals without the use of currencies, based upon a determination of the values of the commodities or services to be exchanged. In most so-called barter transactions, hard currencies are indeed changing hands. Generally one party's commodity is sold by a countertrade broker who pays the other party in hard currency. Barter trade is usually accomplished within a relatively short time to minimise the impact of world price fluctuations. If longer periods are required, such as to finance a long term supply contract, contracts must provide for price adjustments to reflect changing market conditions. Firms rarely engage in pure barter transactions due to the difficulty of exactly matching the needs of each party. The relative inflexibility of pure barter can be relaxed through the use of "swaps", "bilateral clearing arrangements" and "switch trading". Swaps Swaps occur when the goods destined for one party are transferred or "swapped" to another party for benefits such as reduction in transaction costs. For example, if Mexico has agreed to ship oil to Germany and Ukraine has agreed to ship oil to Cuba, a swap might be arranged which sends Mexican oil to Cuba and Ukrainian oil to Germany. Bilateral Clearing Bilateral clearing allows two nations with foreign exchange controls and shortages of hard currencies to agree officially to exchange goods over a specified period of time and the exporters in each country are paid by their respective central banks in domestic currencies. Trade imbalances at the end of the contract period are settled in the specified currency or converted into cash by "switching" the rights to the trade imbalance to interested parties at discounted prices. Switch Trading A third country with unused trade credits with one of the parties to a bilateral clearing arrangement may "switch" those credits to a party under the arrangement to help satisfy the party's trade shortfall. In practice, the creditor country under a bilateral clearing arrangement will sell for hard currency, at a discount, the products or credits to which it is entitled under the agreement to

135. Chapter 19

a specialised trading house, called a switch trader. The switch trader maintains a network of markets that will purchase the discounted goods. Depending on the difficulty of marketing the goods for hard currency, the discount can range from a few percentage points up to 40%. The switch trader earns a commission on the trade. Compensation/Buyback One of the most common forms of countertrade, a compensation or buyback arrangement involves a seller of a turnkey production plant, including machine tools, technology, raw materials, etc., who is obligated to accept a contracted amount of production from the plant as partial payment. The typical buyback period is from 5 to 20 years and the value of the buyback includes the cost of financing, which is added to the price of the plant. Counterpurchase Counterpurchase is more complex than barter and is the most common form of countertrade. In a counterpurchase, the parties agree to reciprocal purchases of goods or services for cash within a given period of time, usually one to three years. Counterpurchase requires two separate contracts which are linked together by a third contract called a protocol. The goods which the original seller is required to take in return are often of inferior quality. The original seller therefore may turn to different methods of disposing of the goods such as using the goods internally or selling the goods to a trading company at a discount. Offsets Offset is frequently a requirement in sales to foreign militaries and governments and sales of high technology civilian products and services, such as telecommunications and computer systems. Such arrangements generally require performance within a specified period of time and impose a monetary penalty for non-performance. There are typically two forms of offset: (1) direct and (2) indirect which are often required in combination. Direct offset is any business activity in the buyer country that directly relates to the seller's goods and could involve training, a licence, joint venture or subcontractor arrangement to manufacture parts or components using the seller's technology and create jobs, as well as generate hard currency. A business activity in the buyer country that does not directly relate to the seller's goods, such as the counterpurchase of unrelated goods or commodities or training or technology transfer in another industrial sector, is referred to as "indirect" offset. Such activity is aimed more at generation of hard currency than nation building, although the latter can be an important component if the seller is a diversified company with material requirements for resources produced by the buyer in other key industrial sectors. In Australia there are two offsets schemes. The Department of Industry, Science and Resources administers offsets relating to civil purchases, while the Department of Defence is responsible for defence-related offsets.

136. Chapter 19

Advantages of Countertrade Countertrade gives unique benefits and advantages to the seller of goods. A company willing to engage in countertrade can penetrate new markets and expand sales potential in existing markets. Business relationships can be created and strengthened by the willingness to accept the purchaser's domestically produced goods as payment. Additionally, countertrade can be used to obtain a steady, long term supply of raw materials. Perhaps the greatest benefits of countertrade are received by the purchaser of the goods. Countertrade preserves scarce hard currency and improves the balance of trade in the importing country. Lesser developed countries can take advantage of the distribution and marketing networks of the companies they countertrade with to distribute their products. Additionally, countertrade often results in a significant transfer of technology and know how from seller to buyer which upgrades the buyer's manufacturing capabilities. Disadvantages of Countertrade Countertrade has also a number of drawbacks for the trading parties. Countertrade usually costs more than a cash transaction. Commissions must be paid to agents and goods must often be discounted for sale when they are of inferior quality. Further if a company receiving goods as payment cannot use them internally and the company does not have an established marketing network in place, disposal of the goods may be costly and difficult. The risk of non-performance often is higher in a countertrade because both parties have a duty to deliver and accept goods. Additionally, when the contract term is long, price fluctuations of the goods can adversely affect the trade. When the complexities of the legal and financial considerations are added to the above, it is evident that companies facing countertrade obligations should seek the advice and/or involvement of countertrade specialists as early as possible. These people understand the mechanics of such transactions, they have an international trading network, and they will often know which products can be sold in world markets and at what prices. Because the Australian government attaches/offsets obligations to its substantial purchases from overseas suppliers, numerous opportunities are created for Australian companies to obtain export contracts, advanced technology, investment, and other valuable inputs from sophisticated overseas companies. These opportunities tend to be greatest for those companies operating in sectors of high technology or those which have the potential to make a real contribution to the growth of Australia's manufacturing industry. Conclusion Countertrade arrangements are complex, usually involving three or more separate contracts or protocols, which often involve parties other than the importer and exporter, and by their nature call for additional payment and finance terms as part of the transactions. Traders are advised to exercise great care when utilising a countertrade arrangement. Advice on countertrade can be obtained from the major Australian Banks and the Australian Countertrade Association .

137. Chapter 19

138.

Book 3 ­ Imports

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Chapter 20

Risks and Post-Shipment Finance s Risks in Import Transactions Goods not in accordance with contract of sale Goods do not arrive within the time required Goods are damaged or lost in transit Exchange Risk s Import Licensing and Quotas s Financing ­ Provided by Seller/Buyer ­ Provided by Bank Overdraft/Commercial Bills/Documentary Credits/Trade Finance Methods of Payment s Clean Remittance in Prepayment for Goods s Documentary Credits s Documentary Sight Bill of Exchange ­ Documents against Payment (D/P) s Documentary Term Bill of Exchange ­ Documents against Acceptance (D/A) s Clean Remittance after Buyer Receives the Goods Medium and Long-Term Finance s Exchange Risk

141 141

142 143

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21

147 147 148 151 151 153 155 156

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22

139. Book 3

140.

20

Risks and Post-Shipment Finance

Buyers should consider a number of factors in import transactions, some of which influence the choice of the method of payment. Risks in Import Transactions Goods are not in accordance with the contract of sale With methods of payment such as a clean remittance to supplier in prepayment for goods, documentary credit and sight documentary bill of exchange, the importer does not have the opportunity to inspect the goods prior to the seller receiving payment. If the goods are not in accordance with samples, or quality is not as specified, or they are otherwise unsatisfactory and amicable arrangements cannot be made with the supplier, or there is no agreed upon arbitration procedure, the question of legal action arises, based on the contract of sale, to secure damages. Whether such action is warranted depends on the amount involved, the national law applicable, where legal action must be taken, the costs of the action, and whether a judgment against the supplier, if obtained, can be enforced. Where the supplier draws a term bill of exchange on the importer, with documents released against acceptance, the importer is able to inspect the goods before payment is made to the supplier at the maturity date. In this method of payment, if the goods are not in accordance with the contract of sale the importer is able to stop payment1 on the accepted draft prior to maturity. Similarly, when payment is to be made after the importer receives the goods, he has the opportunity to inspect the goods before payment is made. Importers should consider what measures can be taken to ensure that the need for legal action does not arise. If the importer has an agent in the supplier's country it may be possible for closer supervision to be maintained over shipments. In some cases, where the type of goods and amount involved warrant greater attention, it is generally possible to arrange for an independent superintendence company (specialising in such work) to inspect the goods prior to shipment and provide their certificate that the quality, etc. is in accordance with the contract of sale. This supervision is expensive, which often prohibits its use. One of the best safeguards is a thorough investigation of the reputation and standing of the supplier and the product prior to placing orders. Where similar goods are available from other suppliers in the same overseas country, or from suppliers in other countries, the importer will closely examine the prices and terms offered. However, other factors besides competitive prices enter into the picture ­ the reliability of the supplier, his

1. This does not in any way release the importer from his liability as an acceptor of the bill of exchange (see Chapter 1).

141. Chapter 20

quality standards, and his ability to meet delivery dates. Importers should always seek status reports from banks and other sources on the standing of suppliers with whom they are considering dealing. The value of overseas visits by importers for on the spot assessments cannot be overstressed. Goods do not arrive within the time required If the date by which goods are shipped is a vital aspect (e.g. goods ordered for Christmas trade) the contract of sale should be specific, so that the importer has clear legal grounds for refusing payment, should he wish to do so, if it is apparent that goods have not been shipped by the specified shipment date. Where an importer is paying for goods by means of a documentary credit, he can instruct the issuing bank to include a `latest date for shipment' in the terms of the credit. This risk of damage to, or loss of, the goods in transit can be covered by normal marine insurance. Where the supplier has the responsibility of taking out insurance cover, it is desirable that the contract of sale sets out the agreement between the parties as to the type of cover to be obtained. This enables the importer to make sure that his interests are adequately protected. Often importers will wish to obtain insurance cover from their own insurance company under a `blanket cover', thus taking advantage of bulk billings and other relationships. Exchange Risk If an importer has contracted to make payment in Australian currency he avoids an exchange risk. However, if payment to the supplier is to be made in a foreign currency then an exchange risk exists from the date of the contract of sale until Australian currency is paid by the importer to obtain the foreign currency to pay the supplier. Forward exchange contracts, or in some cases an account in a foreign currency with an Australian bank provide the means of covering this risk. These are explained fully in Chapters 3 and 8. Import Licensing and Quotas Apart from prohibited imports, there is only a limited number of categories of goods imported into Australia which are subject to import licensing. Tariff quotas also apply to some imported goods. Banks do not normally check that import licences are held. Hence, importers need to ensure that they have obtained licences where needed. Failure to observe these requirements could result in a situation where the goods have already been paid for but entry into Australia is not permitted. Importers should also be aware of Australian Taxation (GST) Requirements. Information is available from the Australian Customs Service.

Goods are damaged or lost in transit

142. Chapter 20

Financing Finance for import transactions normally runs from the time of shipment (or shortly thereafter, depending upon the payment method used), until the importer disposes of the goods and receives payment from the ultimate buyers. This finance may be provided by the exporter or importer, or other parties such as banks, on arrangements made by either the exporter or importer. Provided by Seller/Buyer The terms of payment agreed between buyer and seller will depend largely on the bargaining strengths of the respective parties. Generally the overseas supplier will wish to obtain payment as early as possible, whereas the importer may desire to receive some extended time for payment. The degree of competition in the market for the goods concerned, coupled with the nature of the relationship between buyer and seller and the availability and cost of finance, are all factors the importer needs to consider in his endeavours to obtain the payment terms most appropriate to his needs. Each party may provide or arrange finance for part of the period, for example: ­ The importer may pay: - On arrival of the documents (by paying a collection on receipt), or - By paying a drawing under a documentary credit which could be on presentation of the documents to an overseas bank or on arrival of the documentation in Australia. ­ The exporter provides finance up to the above times. Alternatively, either party may provide finance for the full period, for example: ­ The importer may pay the exporter with the order, or before or on shipment, and thus have the responsibility of providing or arranging for finance for the full period; or ­ The exporter may grant terms of payment which do not require settlement by the importer, until he has sold and received payment for the goods from the ultimate buyers (by drawing a term draft (D/A) or by drawing under a documentary credit providing for delayed payment or by agreeing to a remittance after the goods have been sold). The cost of any finance provided or arranged by the supplier will normally be reflected in the cost of the goods, while the importer will be responsible for the cost of any finance he provides or arranges. Importers should keep under constant review the methods used in paying for goods so that as conditions change, alterations can be considered. This is provided, of course, that the importer has the bargaining and financial strength to make re-arrangements and the amounts are of significant value to warrant re-arrangement. In this regard, bank lines of credit (i.e. loans and other facilities) are of paramount importance to the importer. There will be occasions when arranging finance in one country, in preference to the other, will be of advantage to the importer. Even when the importer has ample working capital there may be occasions when it will be preferable to accept trade credit terms from a supplier. For example, in cases where the

143. Chapter 20

importer's working capital can be used in Australia to give a higher return than the cost of finance provided by the supplier. Where payment for goods is being made in foreign currency, the rates of exchange applicable to forward exchange cover should be closely watched, since, if forward cover for transactions is used, the overall cost of the goods may be increased or decreased, depending on whether forward margins are at a premium or a discount. In calculating the total cost of goods under various methods of payment, the importer commences with the price quoted by the supplier and adjusts it by other cost factors which he (the importer) is responsible for under the method of payment used. The following factors apply (apart from Customs and Tax charges in Australia), although not all are applicable in every instance: ­ ­ ­ ­ Provided by Bank Cost of finance in an overseas centre or in Australia. Bank charges ­ overseas and in Australia. Stamp duty ­ overseas and in Australia, where applicable. Cost or benefit from forward exchange contracts.

Australian banks play a major role in import financing. Terms and conditions under which finance is granted vary from case to case, because of the great variety in import goods and the conditions under which they are purchased. Banks consider requests for the financing of trade transactions on the same basis of credit assessment that is applied to all other lending. The more commonly used means of finance are: Facility ­ ­ ­ ­ Overdraft Commercial bills Documentary credits Trade finance Currency of finance Australian currency Australian currency Foreign currencies or Australian currency Foreign currencies or Australian currency

144. Chapter 20

Overdraft Facility

This form of finance enables immediate payment to suppliers where banks allow customers to overdraw their account up to an agreed limit. Repayment is made as payment is received for goods sold. This accommodation may result from an agreement to provide funds to meet sight drawings from suppliers outside letters of credit, pending disposal of the goods and receipt of payment from local buyers. Overdrafts are subject to interest rate changes which must be considered. Further, as and when goods are sold and payment is received, these funds will reduce the overdraft and reduce costs immediately. Thus, this facility is most suitable for a large number of traders who wish Australian interest rates to apply.

Commercial Bill Facility

Under a commercial bill facility, the borrower is required to draw a bill of exchange (see below). Bills are drawn with maturity dates up to 180 days, and on maturity the bill must either be met or `rolled-over' for a further term. An agreed limit for bill operations is usually established with a bank on the same basis as any other credit facility. Bill lines are subject to a facility fee plus an activation fee when the bill line is used. Bill lines available from a bank can be: ­ Bill acceptance lines. ­ Bill endorsement lines. ­ Bill acceptance (or endorsement)/discount lines. Bill acceptance lines provide for bills to be drawn by a customer on the bank for acceptance by the bank, thereby creating an instrument which can be readily discounted (sold) in the money market. The bank is not responsible for funding the customer, but by accepting the bill it is assuming the credit risk of the transaction. Bill endorsement lines provide for bills to be drawn by the importer on and accepted by another party (other than a bank ­ usually the importer's local buyer) prior to presentation to a bank for endorsement. The bill can then be sold in the money market. The bank is not responsible for funding the customer, but by endorsing the bill the bank undertakes the liability of meeting the bill on presentation, if the acceptor is unable to do so. The bank would then claim the amount from the importer. Bill acceptance (or endorsement) discount lines are similar to an acceptance (or endorsement) facility, but in this case the bank, in addition to adding its name to the bill, agrees to buy (discount) the customer's bill thereby also assuming a funding responsibility. These facilities thus provide fixed term financing with fixed interest rates (for period of each bill).

145. Chapter 20

Documentary Credits

Banks may establish documentary credits on behalf of the importer which provide for the supplier to receive immediate payment, while the importer is not required to make payment to the bank to meet drawings until a fixed period usually (up to 180 days) after shipment. This gives the importer time to sell the goods to obtain funds to meet drawings as they fall due. Interest rates are based on current rates for the currency of finance. For currencies other than Australian dollars, the period of finance involves an extended exchange risk and the cost/benefit of covering this risk should be investigated. If an importer is regularly requesting the establishment of letters of credit, a letter of credit `limit' (line of credit) sufficient to cover anticipated peak outstandings is normally necessary. When the letter of credit is established the bank incurs a liability which can be considered a commitment until a drawing under the credit is made. Once effected, the drawing under the letter of credit crystallises the liability. When the importer receives the documents this liability is generally recorded separately against the importer's line of credit, and remains outstanding until maturity of the drawing when the importer must make payment. Importers should discuss their requirements in this regard with their bankers. During the fixed period of the drawing the interest will be fixed.

Trade Finance

Banks are able to grant finance to customers in a foreign currency or Australian dollars. This financing is normally limited for consumer financing to 180 days after shipment of goods. The borrowing2 is in a currency or Australian dollars against a line of credit. The applicable interest rate will be based on current rates for the currency concerned. The important consideration for the importer is that this type of finance will extend the period of exchange risk and the cost/benefit3 of covering this exchange risk must be considered. It should be remembered, however, that borrowing in foreign currencies can sometimes be cheaper than domestic borrowings. Once again, if it is regular practice of the importer to establish trade finance, it will normally be necessary for him to arrange with his bank an approved line of credit within which he may operate for borrowings of this nature. With this method, interest rates are fixed for the period financed (normally for periods up to 180 days at a time).

2. The importer may also overdraw a foreign currency account with his bank. To do this he must have a line of credit in place. This facility is similar to normal overdrafts in Australian currency, with fluctuating terms of finance and interest rates applying. See previous page and also Chapter 8. 3. If forward cover is considered necessary, it should be noted that as the cost/benefit (i.e. premium/discount) in a forward exchange contract is based on the interest differential of the two currencies. The interest rate on the loan minus/plus the premium/discount will approximate the cost of discounting commercial bills in Australia. Therefore, importers should carefully consider using this type of financing.

146. Chapter 20

21

Methods of Payment

The basic methods of payment between importers and exporters are obviously the same as set out in Chapter 13. These methods are now considered in detail with comments on exchange risk1, finance and interest charges, and bank commission charges. 1. Clean Remittance in Prepayment for Goods This method entails a remittance by the importer to the supplier through a bank at time of placing the order, or at some time prior to shipment. Buyers (importers) seldom find this an acceptable method of payment unless the supplier is an overseas affiliate, or the buyer is urgently in need of the goods and the supplier is in a position to dictate the terms of sale. The importer may make the remittance: ­ By purchasing an international cheque (draft)2 from his bank, payable at an overseas bank, and mailing it to the supplier (preferably by registered airmail); or ­ By arranging through his bank for an overseas bank to be instructed by SWIFT or telex to pay the supplier. The international cheque (draft) or telegraphic transfer should be in the currency specified in the contract of sale for payment for the goods, since the supplier is expecting to receive payment in that currency and, if other than local currency, may have forward exchange cover arranged for the transaction. A clean payment is made unconditionally to the payee, except possibly against simple receipt. It remains the responsibility of the supplier to ship the goods and despatch the relative documents direct to the buyer. A telegraphic transfer providing that payment is to be made to the payee only against specified shipping documents is not a clean remittance, and obviously is not a prepayment for the goods. Such remittances are similar in effect to documentary credits, and usually it is preferable to use a documentary credit, since procedures for such instruments are more clearly codified and understood. Exchange Risk If the importer has contracted to pay in a foreign currency, an exchange risk exists from the date of the contract of sale until he pays out Australian currency to his bank to obtain the foreign currency for remittance to the supplier.

1. The methods of mitigating exchange risk are also discussed in Chapters 3 and 8. 2. An importer may forward his own cheque in payment but this could cause problems since the cheque will need to be processed through the seller's bank, incurring expense, and then be forwarded back to Australia for payment. An international cheque (draft) will, in most cases, be payable in the seller's country and will therefore be treated as a local cheque.

147. Chapter 21

Finance and Interest Charges

The importer must find the finance from date of the remittance until, in due course, he disposes of the goods and receives payment from the ultimate buyers. This may be from his own working capital or from borrowings. Interest is payable on any borrowings made by the importer and used in the transaction. Even if he has funds available without borrowing, they represent a certain earning capacity if otherwise employed, and consideration should be given to this in assessing the true cost of this method of payment.

Bank Commission Charges

Banks in Australia apply a nominal handling fee for remittances. The overseas bank may also make a charge for payment of remittances and agreement should be reached between supplier and importer on who is to pay the charges. 2. Documentary Credits See Chapter 5 for a general discussion on documentary credits. Banks in Australia are able to issue a documentary credit in most currencies. The standard form issued is an irrevocable credit, and if required, arrangements can be made to have such a credit confirmed by a bank in the country of the beneficiary. Where confirmation of a credit is requested, the credit application should specify whether the confirmation commission is for the account of the applicant or beneficiary. If a contract of sale entered into by buyer and seller calls for settlement by documentary credit, the importer (applicant) will request his bank (issuing bank) to issue the credit in favour of the exporter (beneficiary). The negotiating bank, which is often the advising bank of the credit, will examine the documents presented to it by the exporter after shipment to ensure that the terms and conditions of the credit have been complied with completely. It will then make payment to the exporter in terms of the credit and forward the documents to the issuing (Australian) bank, obtaining reimbursement as agreed between the two banks. The issuing bank examines the documents and passes them to the importer. Payment is made in accordance with arrangements agreed between the bank and the customer. Such reimbursement for a sight drawing will be required on receipt by the issuing bank of a SWIFT/telex or airmail advice of a drawing from a bank overseas, or, if the credit provides for drawings at a term (e.g. up to 180 days), on maturity date of the term drawing. Should discrepancies in the documents presented relative to a drawing under a credit come to the notice of the issuing bank, either by advice from an overseas negotiating/paying bank, or from their own checking of the documents, the drawing can be paid only with the concurrence of the applicant (importer). After receipt of advice of the discrepancies from the issuing bank the applicant must decide, within a reasonable time, on the basis of the documents alone,

148. Chapter 21

whether or not to agree to payment. If he agrees the documents are regarded as being in order, then he is bound to reimburse the issuing bank for the payment. Should the importer decide not to ratify the drawing, the documents are held to the order of the overseas negotiating or paying bank which has the responsibility of giving instructions for protection of the shipment. An important point to remember is that banks deal only in documents and not in goods. Banks ensure that all documentary conditions of the transaction relating to the credit are complied with, however if contractual obligations such as those relating to the merchandise are broken, then it is a matter for the buyer and seller and does not concern the bank. It follows that it is pointless for the importer to include in a documentary credit excessive details describing the goods. It does not give him any more protection than a brief description, possibly including an order number. Provided the description of the goods specified by the credit appears on the documents, such documents are in order insofar as the description is concerned. Exchange Risk If an importer has contracted to pay for goods in a foreign currency, he has an exchange risk from the date of the contract of sale until the Australian currency amount he has to pay to meet drawings is determined. A documentary credit is the most flexible instrument, and besides comprising the means by which payment can be made to the supplier, it can also be used to facilitate provision of finance to the importer. While there may be some minor variations in types of documentary credits issued by Australian banks, they are generally adaptable for the following procedures. Sight Credit A sight credit provides for the supplier to receive payment usually as soon as goods are shipped and correct documentation is lodged with the overseas (negotiating) bank. The credit may provide for drafts to be drawn or for payment against stipulated documents. The sales contract may indicate that a sight credit is to be issued, or alternatively it may state that credit is to provide for `cash against documents' (CAD). If payment is in a currency other than the exporter's own currency he may have to negotiate a sight draft under the credit in that currency, drawn on a bank in another country, and therefore pay interest for the airmail transit period. Technically he is providing finance for the airmail period, and would probably have allowed for the cost in the price for the goods. The importer will be required to pay the issuing bank the amount of the drawing on its arrival by airmail, or on receipt of SWIFT/telex advice of the amount of the drawing from the paying/negotiating bank. In the case of foreign currency drawings, the importer may be required to pay interest to the issuing bank for any payment made in Australia later than the date the Australian bank's account in the foreign currency concerned is debited (since such account would be overdrawn).

Finance and Interest Charges

149. Chapter 21

In most cases the importer will have paid the drawing before the goods arrive and must finance the transaction until the goods are ultimately sold and paid for. Such finance may be from his own working capital or from borrowings from a bank or other sources. The importer must pay interest on any such borrowings. Even if he has funds available without borrowing, they represent a certain earning capacity if otherwise employed, and consideration should be given to this in assessing the true cost of this method of payment. Term Credit A term credit is established when arrangements have been made for finance to be provided by supplier allowing the importer time to pay.3 Alternatively, a term contract can be issued where the supplier requires a sight credit (or a credit providing for `cash against documents') and the importer's banker grants him time to pay. Depending on contractual arrangements between applicant and beneficiary as detailed in the previous paragraphs the credit may provide for `discount' charges (interest, acceptance commission and other charges incurred in providing finance) to be either for the beneficiary's (if beneficiary is providing extended terms) or the importer's (if importer requests his bank for extended finances) account. Where term credits are established on the basis that discount charges are for the importer's account (i.e. where the supplier requires payment at sight) the bank can arrange for finance, based on the current market rates at time of discount, in Australian dollars and in most major foreign currencies. While the credit is at a term, the issuing bank will pay the exporter the face value of his draft on presentation of his drawing, and the importer is not required to pay the drawing until maturity of the finance period. The discount charges applied are to be paid by the importer, and cost factors will have a bearing on determining the method of finance for the ongoing period. A factor to be considered by the importer is: ­ Whether to convert any drawing from foreign currency to Australian dollars and obtain finance in Australian dollars, or ­ Defer until maturity date, conversion of foreign currency amount to Australian dollars because of: - lower off-shore interest rates, - possible favourable exchange rate movement or a favourable discount margin under a forward exchange contract, which when combined, provide cheaper finance than Australian dollar financing. Discount rates are subject to fluctuation and are not normally `fixed' until the date of negotiation (discount). Therefore, at the time of establishing the credit the actual rate will not be known, however, banks can provide importers with the current rates for comparing financing in the different currencies.

3. A supplier may also grant an importer time to pay. In such cases a Deferred Payment Credit may be issued. This type of credit calls for payment to be made at a specified or determinable future date, but, as it does not require drafts to be drawn, it may not be acceptable to the supplier since he may require a draft to be drawn which he can readily discount.

150. Chapter 21

Bank Commission Charges

Australian banks charge applicants a commission for issuing documentary credits/handling drawings. Also, overseas negotiating or paying banks usually impose a payment commission on drawings made under credits. Where credits are issued providing for term drafts on a bank, the bank concerned (accepting bank) charges an acceptance commission on drafts accepted by them (a typical acceptance commission may be 1.5% per annum or at rate of 0.125% per month). In some countries a payment commission is charged in addition to the acceptance charge. The applicant of a credit should give specific instructions regarding who is to pay the overseas bank's charges. 3. Documentary Sight Bill of Exchange ­ Documents against Payment (D/P) 4. Documentary Term Bill of Exchange ­ Documents against Acceptance (D/A) See Chapter 6 for general discussion of documentary collections. Where the supplier is granting credit to the importer for the airmail transit time only, he draws a sight bill on the importer; but if he is granting longer terms the bill is drawn at a usance to conform with the terms given (e.g. 30, 60 or 90 days' sight, etc.). The exporter hands his bill of exchange (draft) and documents to his bankers, with precise instructions on how the collection is to be handled, and the bankers forward the items to a bank in Australia (collecting bank). In some cases the exporter may forward the items direct to the collecting bank. The collecting bank presents the draft to the importer (drawee) for payment, if a sight draft, or requests payment of the invoice amount if no draft is drawn. If the draft is drawn at a term it is normally presented to the importer for acceptance, against which documents may be released.4 In all cases the importer is permitted to examine the documents, but is unable to obtain possession of them (and therefore to take delivery of the relative goods)5 until he has paid or accepted the bill. If the documents are to be released against payment, the collecting bank transfers the amount to the exporter's bank. If the documents are to be released against acceptance, the collecting bank remits proceeds to the exporter's bank at maturity of the term draft.

4. (a) In some instances the instructions may require the term draft to be accepted, but documents to be released only against payment. If the importer requires the documents he either prepays the term draft or arranges with his bank to take the documents on acceptance with the bank undertaking the responsibility for making payment at maturity. The importer, therefore, needs a line of credit with his banker for this facility and is also normally required to undertake to provide funds to the bank at maturity regardless of any other dispute on quality, etc. (b) In other cases, the instructions from the overseas bank may stipulate that documents are to be released on the importer's acceptance and the `aval' of his bankers. Here the exporter requires the importer's banker to, in effect, add their endorsement to the draft as a guarantee of payment ­ refer to Chapter 1 for liability of an endorser and Chapter 20 under sub-heading Commercial Bill Facility for further information. 5. Refer to Chapter 13 headings Air Shipments and Courier and Post Receipts for alternative methods adopted by exporters to prevent importers taking charge of goods before making payment.

151. Chapter 21

Exchange Risk

If the importer has contracted to pay for the goods in foreign currency, he is subject to an exchange risk from the date of the contract of sale until the date on which an Australian bank sells him foreign currency to meet the draft. In these methods of payment, consideration needs to be given to any interest charged. Even though the exporter might extend credit through a term draft, the price charged may include interest for whatever period of credit is involved. However, in some cases the exporter may instruct that interest at a stated rate is to be collected from the importer in addition to the amount of the bill. This is a matter for arrangement between supplier and importer, and the latter should always ensure that the contract of sale clearly states the total amount payable. Where payment by the importer is on a sight draft or invoice value basis, even with deferment such as PAG (Present on Arrival of Goods) instructions, he is likely to have to arrange finance for the period until he has disposed of the goods to the ultimate buyers and received payment. This may be from his own resources or other loans (in Australian or foreign currencies). If the supplier is granting terms, and the importer accepts a term bill, the question arises as to whether the period elapsing before he has to pay the accepted bill is sufficient to enable him to dispose of the goods and obtain funds, thus eliminating the need to arrange finance in Australia to cover the shipment for a period. Should the importer be able to arrange finance in Australia, it is desirable that he compares the cost of such finance against the cost of accepting credit terms from the supplier, to ascertain the means by which the goods can be obtained more cheaply. Broadly this entails a comparison of the supplier's price for the goods if shipped on sight draft terms with the price for the same goods if paid for by term drawings.

Finance and Interest Charges

Bank Commission Charges

Commission charges for the collection of drafts are made by the banks concerned, both in Australia and overseas. It is essential that a clear agreement be reached by importers and suppliers regarding who is responsible for the relative charges. A common practice is for suppliers to pay bank charges in their country, while importers pay bank charges in Australia. The responsibility of giving instructions on liability for payment of the various bank commission charges rests with the supplier, and should be detailed in the underlying sales contract.

152. Chapter 21

5. Clean Remittance After Buyer Receives the Goods In this method of payment the supplier ships the goods to the importer and forwards the shipping documents to him, thus losing control of the goods, the documents and payment. The goods are invoiced in a foreign currency or in Australian currency, depending on the contract of sale between the parties. The importer makes a clean remittance for all or part of the balance owing by an international cheque (draft) or telegraphic transfer through his bank. There will usually be an agreement between the supplier and the importer on the period of credit the importer is allowed before making payment for shipments. Business on open account is only likely to be possible between parties when the supplier is completely confident of the integrity of the buyer, and his ability to make payment when due, or when affiliated companies are trading with each other. Consignment The same considerations are likely to apply to the supplying of goods on consignment from an overseas party to an importer. Under a consignment agreement, the exporter ships the goods to the importer while still retaining actual title to the merchandise. The importer has access to the inventory, but does not have to pay for the goods until they have been sold to a third party. The exporter is trusting the importer to remit payment for the goods sold at that time. If the importer fails to pay, the exporter has limited recourse, since there is no draft involved and the goods have already been sold. As a result of the high risk, the consignment method is seldom used except by affiliated subsidiary companies trading with the parent company. The importer has the responsibility of providing an `account sales', setting out details of sales made, and remitting payment to the supplier by international cheque (draft) or telegraphic transfer through his bank. The currency in which the remittance is to be made will be specified by the supplier. Exchange Risk In open account trading, if the goods are invoiced in a foreign currency and payment is required in that currency, the importer has an exchange risk from the time he agreed to the price specified until he makes a clean remittance in payment for the goods concerned. Where goods are received on consignment by an importer, and the supplier requires payment for goods sold in a foreign currency, the importer would normally have an exchange risk from the date on which the goods were sold, until the date he makes a remittance in foreign currency to the supplier in payment. Unless arrangements are made to the contrary, the supplier will usually consider that he is entitled to his local currency equivalent of the Australian currency amount of the sale, on the date of sale.

153. Chapter 21

Finance and Interest Charges

In open account trading, if the period of credit agreed to by the supplier is sufficiently long, the importer may find it possible to dispose of the goods and receive payment from the ultimate buyers in time to provide funds to make the remittance overseas. This eliminates his need to provide finance from Australian sources for the goods, but it will depend entirely on the agreed period of credit. Normally, where goods are handled by an importer on true consignment terms, he is not concerned with methods of financing transactions, since he receives payment from the ultimate buyers before a remittance needs to be made to the consignor (exporter).

Bank Commission Charges

Since the supplier normally forwards the shipping documents direct to the buyer or consignee, no bank charges apply to the handling of documents.

154. Chapter 21

22

Medium and Long-Term Finance

Australian buyers of capital equipment from overseas suppliers are major users of medium and long-term finance. Medium term finance is regarded as finance for periods in excess of six months and up to five years, while long-term finance is for periods in excess of five years. When the buyer of capital equipment is not immediately able to make payment to the supplier from available resources, the question arises as to how finance can be obtained for whatever period is necessary, having due regard to the repayment schedule that can be met by the buyer. Medium and long-term finance may be arranged by the supplier or the buyer. Many countries have organisations similar in function to the Export Finance and Insurance Corporation in Australia, which lend support in various ways to medium and long- term financing arrangements. Irrespective of the means of finance, the normal pattern, although it may vary, is for the importer to pay part of the purchase price of the equipment, possibly up to 20 per cent, at or before shipment: the balance of the purchase price is subject to the financing arrangement, with repayment inclusive of interest usually by instalments at six-monthly intervals. The financial position of the importer may be sufficiently strong for the party providing the finance to seek no additional security, but sometimes it may be necessary for the importer to provide further security or a satisfactory guarantee from another party securing repayment, normally from a bank. The following are means by which the finance can be made available. Supplier Credit Payments are made to the supplier by the importer over the period in the currency agreed on and in terms of the contract of sale. The supplier makes whatever arrangements are open to him to borrow in his own name so that he can permit deferred payments from the buyer, and the interest cost of obtaining such finance will be reflected in his price for the equipment. The importer's liability is to the supplier until payment is completed. On arrangements usually initiated by the supplier, and subject to a full investigation, a financial institution in the supplier's country makes a loan for the period required and in the currency agreed on, direct to the buyer for the balance of the amount owing to the supplier after initial payments at or before shipment as agreed has been made. The loan is used to pay the supplier, and from then he has no further interest in the transaction; he has received payment in full without recourse. The importer's liability is to the financial institution providing the loan, and repayments are made in accordance with the loan agreement signed by the two parties. The rate of interest on the loan is set out in the loan agreement.

155. Chapter 22

Buyer Credit

Finance from Australian Sources

As an alternative to supplier or buyer credit from overseas sources, it may be possible for the importer to make payment for the equipment by obtaining medium or long-term finance from sources in Australia. Such finance may be provided by a bank or other financial institution or, for large sums, by a consortium of institutions formed to make the loan. The interest rate would be determined in accordance with current conditions. Such finance is usually in Australian currency, however an Australian bank or other financial institution may borrow foreign currency to pay the supplier and make a loan in that currency to the importer. The amount would be used to pay the supplier, and the importer would have a liability to the Australian institution designated in foreign currency. The interest rate would be based on the cost of the foreign borrowing, and the buyer would purchase the foreign currency with Australian currency to meet repayments as they fall due.

Exchange Risk If payments are to be made over a lengthy period in a foreign currency, adverse movements in the exchange rate may considerably increase the cost of the equipment. If finance can be obtained from Australian sources in Australian currency, permitting prompt total payment to the supplier, the long-term exchange risk problem is overcome. However, where the importer is buying on supplier or buyer credit terms, or using a foreign currency loan from an Australian institution, the exchange risk may have to be accepted. The question of forward exchange contracts is relevant. However, while forward exchange contracts in the main currencies used in international trade can usually be obtained for periods up to 12 months, banks have to enter into special negotiations in foreign currency markets to arrange forward exchange contracts for longer periods. Thus, such negotiations may not always be successful and the contracts may be costly. The information in this chapter deals broadly with the subject of medium and long-term finance for importers. Any importer with a specific transaction in mind should seek further advice from his bank.

156. Chapter 22

Appendix

___________________________________________________________________________

Appendix

Checking of Documents Under Credits Check List Specimen set of Documents presented under a Documentary Credit

159 159 163

157. Appendix

158.

Appendix

Checking of Documents Under Credits

It is a fundamental principle of documentary credits that drawings carry no right to payment unless the documents tendered conform to the terms and conditions of the credit. Banks, therefore, when negotiating or paying under letters of credit, carefully check all documents. This section sets out a method for checking documents. Use of the checklist will enable exporters to ascertain whether there are discrepancies in the documents when they are prepared. It is essential that each document be specifically labelled as described in the letter of credit. This will avoid disagreements. Most credits are issued subject to the provisions of UCP, so documents must also comply with the requirements of UCP except where the credit terms specifically provide otherwise. Reference is made in the text to each relative article. Checking is twofold: 1. The documents must comply with the terms1 of the credit, so all the terms and conditions of the credit must be checked from the credit advice to the documents. Every word of the credit advice should be read to the documents. Thus, commence checking from top of credit to end until all words on the credit are checked (somewhere) to the documents. This will avoid missing any requirement in the credit. Once this check is completed the credit can be placed to one side. 2. Check the regularity of each document within itself and as compared with each other document. Check List Draft 1. Check from the credit to the draft: (a) Negotiated on or before expiry date and within 21 days after shipment or as specified in the credit (refer Articles 42, 43 and 44). (b) Drawn in the same currency as the credit for an amount not exceeding the amount available. (c) Bears all clauses specified. (d) Drawn for correct tenor (i.e. sight, 30 days' sight, etc.).

1. When checking transport documents against a credit it should be noted that UCP: ­ Article 23 is applicable where a marine/ocean bill of lading is a requirement, ­ Article 29 is applicable where a courier or post receipt is required, and ­ Article 24 is applicable to non-negotiable sea waybills, ­ Article 25 is applicable to charter party bills of lading, ­ Article 26 is applicable to multimodal transport documents, ­ Article 27 is applicable to air transport documents, ­ Article 28 is applicable to road, rail or inland waterway transport documents, ­ Article 30 is applicable to transport documents issued by freight forwarders.

159. Appendix

(e) Drawn to order of correct party if specified; (in most cases credits do not specify any party, in which case draft is drawn to order of the bank which will process the drawing). (f) Drawn by party specified (usually the exporter). (g) Drawn on party specified (usually a bank - refer UCP article 9(a)(iv)). 2. Check to ensure regularity within the draft and when compared with the other documents: (a) Domiciled and dated on or before date of presentation. (b) Amount in figures and words agree. (c) Bears correct local stamp duty (if applicable). (d) Signed by drawer and in good order without erasures. (e) Agrees with invoice amount. Invoice 1. Check from credit to the invoice: (a) Invoice in name of beneficiary (usually printed heading). (b) Addressed to the applicant (refer Article 37(a) - exception 48(h)). (c) Description of merchandise agrees exactly with that called for (refer Article 37c). (d) Quantity agrees with that called for (refer Article 39b for 5% tolerance that may be allowed. This tolerance refers to measurement, e.g. metres, etc. not to quantity in terms of packing units or individual items). Partial shipments are acceptable (refer Article 40). (e) Price and price basis (i.e. FOB, CIF, etc.) as specified. (f) Bears all other details specified. (g) Invoices signed, certified, or notarised if so specified (if credit specifies certified invoices then the words `certified correct' should be inserted above signature). (h) Correct number of copies presented. 2. Check to ensure regularity within the invoice and when compared with the other documents: (a) Identifying marks of shipment agree with all other documents. (b) Gross, tare and net weights, if any, agree with all other documents. (c) Number of containers, bales, etc. agree with all other documents. (d) Extraneous or sundry expenses (e.g. communication/telex costs, storage, commission, etc.), and adjustments of accounts, etc., not included unless credit permits. Insurance Document 1. Check from the credit to the insurance document: (a) Must be of type specified (i.e. policy, certificate, etc.) and issued/signed by insurance companies or underwriters or their agents. Cover notes are not acceptable (refer Article 34).

160. Appendix

(b) For amount specified or the CIF (named port of destination) or CIP (named place of destination) value of the goods plus 10 per cent. If CIF or CIP is not determinable the minimum amount is to be 110% of the gross amount of the drawing or of the commercial invoice whichever is the greater (refer Article 34(f)(ii)). (c) Covers all risks specified. If risks are not specified document as presented is good tender (refer Articles 35 and 36). (d) Correct number of copies as specified. 2. Check to ensure regularity in insurance document and when compared with other documents: (a) Currency is same currency as the credit (refer Article 34(f)(i)). (b) If the goods are to be transhipped, covers transhipment. (c) Must cover full period of transit. (d) Must be dated on or before date of loading on board or despatch or taking in charge of the goods as indicated by the bill of lading, or otherwise indicate such cover (refer Article 34e). (e) Must be in negotiable form (where in favour of shipper all copies properly endorsed in blank or as specified in credit). (f) Claims to be payable in country of destination, unless otherwise specified in credit. (g) Bears correct stamp duty (where applicable). (h) All attachments and alterations identified with document by insurance company's stamp and signature or initial, or by reference in insurance document. (i) All negotiable copies must be signed. (j) Must state the number of original copies in the set. (k) Adequately describes the merchandise, number of packages, etc., and identifying marks agree with other documents. The description may be in general terms but must not include an additional description (refer Article 37c). (l) Name of carrying vessel, ports of shipment and destination agree.

161. Appendix

Marine/Ocean Bill of Lading2 (Refer Article 23)

1. Check from the credit to the bill of lading: (a) Must be a `marine/ocean' bill of lading and in terms of Article 23. (b) Port of shipment, routing, port of destination, date of shipment, consignee, `notify party' as specified. (c) If `order blank endorsed' bills of lading are required, they are to be endorsed by the shipper. Credit may specify that the bill of lading is to be to the order of a certain party (e.g. buyer or buyer's bank). However, the consignor may be a party other than the beneficiary (refer Article 31iii). (d) Must cover merchandise specified in invoice but may be described in general terms. However, the description must not include any additional descriptive terms not included in the credit (refer Article 37c). (e) Must be presented within 21 days after shipment or as specified in the credit but always prior to the expiry date of the credit (refer Articles 42, 43 and 44). Where credit stipulates a latest date for shipment (or loading or taking in charge) this must be adhered to. This date cannot be extended (refer Article 44b). (f) If CIF shipment or if `freight paid' or `freight prepaid' is specified then notation `freight paid' or `freight prepaid' or words to similar effect must appear on bill of lading, or receipted freight account is to be attached to bill of lading3 (refer Article 33b). (g) Correct number of copies and always a full set, unless otherwise specified. 2. Check to ensure regularity in the bill of lading and when compared with the other documents: (a) Must be `clean'4 (refer Article 32). (b) A clause such as `shipper's load and count' or `said to contain' or similar, is acceptable (refer Article 31(ii)). (c) Must not show `on deck' shipment (refer Article 31(i)). (d) A transhipment bill of lading is acceptable, provided the entire voyage is covered by the same bill of lading (refer Article 23c).

2. Where other than a `marine' bill of lading is required refer to Article 24-30 as the case may be. 3. For multimodal transport documents, charges are usually divided into three parts: ­ basic sea freight; ­ charges in exporter's country; and ­ charges in importer's country, and the document indicates which charges have been paid and which are to be collected. A conventional marine bill of lading can be issued either `freight paid' or `freight collect', but in a multimodal transport document the indication `paid' or `collect' must be applied to each component making up the total charges. 4. Refer Chapter 4 under heading Clean and Claused Bills of Lading. A bill of lading may be technically `clean' but it may have superimposed clauses which render it unacceptable as good tender under a documentary credit.

162. Appendix

(e) All negotiable copies to be signed by authorised person and any alteration authorised by stamp and initial of shipping company or its authorised agent. (f) Bears correct stamp duty (where applicable). (g) Number of packages and marks agree with other documents. Courier and Post Receipts (Refer Article 29) 1. Check from the credit to courier or post receipt: (a) Transport by such means must be authorised (refer Article 29). (b) Addressee/consignee named as stipulated. 2. Check for regularity of details with details of other documents. Transport documents (Other than a marine/ocean bill of lading or courier and post receipts 1. Check from the credit to transport documents to see that all requirements in the credit are covered. 2. Check for regularity in document and when compared with other documents. 3. Refer to: UCP Article 24 for non-negotiable sea waybills UCP Article 25 for charter party bills of lading UCP Article 26 for multimodal transport documents UCP Article 27 for air transport documents UCP Article 28 for road, rail or inland waterway transport documents UCP Article 30 for transport documents issued by freight forwarders 1. Check from the credit to ensure the document meets requirements of the credit, and is issued by the particular party or authority, if so specified in credit. 2. Check for regularity of details with details of other documents. The credit should specify `...by whom such documents are to be issued and their wording or data content...'. If the credit does not specify, then such documents as presented are good tender provided the data content is not inconsistent with any other stipulated document presented (refer Article 21). Specimen set of Documents presented under a Documentary Credit The examples that follow is a set of export shipping documents presented thereunder by the beneficiary of the credit to National Australia Bank Limited for negotiation. Examination of the documents against the terms of the credit reveals that the documents are in order. Only one copy of each document has been produced and the specimen documents have been individually prepared. In practice exporters should explore the advantages of computer prepared or aligned documentation.

Other Documents (Weight lists, certificates of origin, inspection, analysis, etc.)

163. Appendix

Covering Advice for Export Credit As a service, the advising bank often attaches to the letter of credit an advice which details any special comments they may wish to add for the beneficiary's guidance.

164. Appendix

Export Documentary Credit Specimen of an export documentary credit advised to the beneficiary (exporter) on an advice form prepared by National Australia Bank Limited following receipt of details from the issuing bank. (For credits received by telex it is common international practice to simply authenticate the original telex advice and forward it to the beneficiary rather than preparing a separate advice.)

165. Appendix

The following documents have been prepared in accordance with the terms and conditions specified in the letter of credit shown on page 165. (The method of checking documents against a credit is described in this Appendix.) Bill of Exchange

Invoice

166. Appendix

Insurance Certificate (Reverse of the insurance certificate showing the exporter's endorsement in blank.)

10th May

10th May

167. Appendix

Bill of Lading (Reverse of the bill of lading showing the exporter's endorsement in blank as required in terms of the credit.)

10th May 20YY 10 May 20YY

168. Appendix

Index

Air Shipments, 103 Air Transport Document, 45, 103 Assignment of Proceeds, 90 Australian Bills of Exchange Act, 9, 10 Austrade, 35, 123, 132 Back-to-Back Credits, 65 Bank Commission Charges, methods of payment ­ exports, 97, 98, 101, 103 methods of payment ­ imports, 148, 151, 152, 154 Barter, 135 Basic Export Price, components, 95, 106 Discount Lines, 145 Bill Endorsement Lines, 145 Bills of Exchange, acceptance of, 12 clean, 9 definition of, 9 documentary, 9, 36 endorsement of, 12 liability of parties, 10 noting of, 13 parties to, 10 protest of, 13 sight, on demand, 10 term, 10 without recourse, 12 Bills of Lading, charter party, 42 checking, 162 claused, 41 clean, 41 lighters aboard ship ­ LASH, 42 lost or missing, 44 multimodal transport document, 42 negotiable, 39 non-negotiable, 39 on-board or shipped marine, 40 received or accepted for shipment, 40 sea waybills, 44 short form, 40 stale, 41 transport document issued by freight forwarders, 43 Buyback, 136 169. Index

Checking of Documents, courier and post receipts, 163 draft, 159 invoice, 160 insurance, 160 marine/ocean bill of lading, 162 other documents, 163 transport documents, 163 Collections ­ see Documentary Collections Confirmed Letters of Credit, 52, 53 Confirming Bank, 52 Confirming Houses, 79 Counter-credit, 66 Counterpurchase, 136 Countertrade, advantages, 137 disadvantages, 137 forms of, barter, 135 buyback or compensation, 136 counterpurchase, 136 offsets, 136 Courier Receipt, 46 Credits ­ see Documentary Credits Credit Insurance, competition finance for overseas buyers, 129 bonds, 131 direct lending, 129 documentary credit finance, 130 documentary credit guarantee, 130 export finance guarantee, 130 export working capital guarantee, 130 flexible finance solutions, 131 lines of credit, 130 Export Finance and Insurance Corporation, 124 general information, 131 eligibility, 131 premium, fees and charges, 131 managing payment risks, 126 EFIC product solutions, 127 market grades, 126 managing overseas investment risk, 128 political risk insurance, 128 syndicating cover, 129 managing payment risk with export payment protection (also known as export credit insurance), 127 coverage and indemnity, 127 reasons for credit insurance, 127 method of payment risk, 125 the role of export credit agencies and EFIC, 124

Credit Risk, export transactions, 91 long-term finance ­ exports, 121 medium-term finance ­ exports, 121 methods of payment ­ exports, 97, 100, 102 Currency Options, 21

Drawer, of a bill of exchange, 10 E-Commerce, 83 Euro, 15 Exchange Rate ­ see Rates of Exchange

Depots (CFS ­ Container Station), 42 Document Checking, 159 Documentary Collections, avalisation, 73 methods of collecting bills, 72 documents against acceptance, 72 documents against payment, 72 parties, collecting bank, 72 drawee, 72 presenting bank, 72 principal, 72 remitting bank, 72 presentation on arrival of goods, 73 Documentary Credits, alternative grouping, acceptance type, 58 deferred payment type, 58 negotiation type, 58 payment type, 58 availability of funds, deferred payment, 54 sight or cash against documents, 54 term credits, 55 cycle of, 57 definition of, 50 details included in, 59 documents in relation to, 60 guarantees, 66 parties, accepting bank, 56 advising bank, 55 negotiating bank, 56 paying bank, 56 restricted, 56 silent confirmation, 53 specialised credits and arrangements, back-to-back credits, 65 red clause credits, 64 stand-by credits, 66 transferable credits, 64 types, confirmed, 52, 53 irrevocable, 51 revocable, 54 uniform rules for bank-to-bank reimbursements, 59 Drafts ­ see Bills of Exchange Drawee, of a bill of exchange, 10 Exchange Risk, 20 contingent, 92, 97, 98, 100 export transactions, 92 import transactions, 142 medium and long-term finance ­ exports, 122 medium and long-term finance ­ imports, 156 methods of payment ­ exports, 97, 98, 100, 103 methods of payment ­ imports, 147, 149, 152, 153 primary, 100, 103 Export Finance and Insurance Corporation ­ EFIC, 124 Export Price, 95, 106 components, 95, 106 examples, 107 Factoring, 79 Finance and Interest Charges, methods of payment ­ imports, 148, 149, 152, 154 Finance ­ Exports, medium and long term, buyer credit, 122 supplier credit, 121 term loans, 121 post-shipment finance, methods of payment, 97, 98, 101, 103 pre-shipment finance, assignment of proceeds, 90 back-to-back credits, 90 commercial bills, 89 overdraft, 89 red clause credit, 90 transferable credit, 90 working capital and local supplier credit, 89 Finance ­ Imports, forms of, commercial bill facility, 145 documentary credits, 146 overdraft facility, 145 trade finance, 146 provided by bank, 144 provided by buyer, 143 provided by seller, 143 medium and long-term, buyer credit, 155 finance from Australian sources, 156 supplier credit, 155 Foreign Currency Accounts, 77 Foreign Currency Term Deposits (including overnight deposits), 78 170. Index

Forward Exchange Contracts, applications, 30 between two foreign currencies, 31 cancellations, 28 counter risk, 28 deliveries, 27 definition, 23 extensions, 28 factors to be considered when entering into a contract, 30 types, fixed term, 24 optional term, 24 variable forward, 33 Forward Rates of Exchange, example of rate calculations, 25 forward margins, adjustments, 25 discount, 25 par, 24 premium, 24 Governmental Regulations ­ Overseas, 132 Guarantees, 66 Incentives ­ Exports, Export Market Development Grants (EMDG), 123 Incoterms, see Shipping Terms and Abbreviations Insurance, certificates, 38 checking, 160 cover notes, 38 marine, 37 open cover, 38 policies, 38 valued policy, 39 Interest and Bank Commission, methods of payment ­ exports, 97, 98, 101, 103 Invoice, checking, 160 commercial, certified by chamber of commerce or chamber of manufactures, 37 combined with certificate of origin and value, 37 consular, 37 legalised, 37 special, 36 Invoice Discounting, 81 Letters of Credit ­ see Documentary Credits

Lodgment Authority, 71 Methods of Payment ­ Exports, clean remittance after buyer receives the goods, 102 clean remittance in prepayment for goods, 96 documentary credits, 97 documentary sight bill of exchange, 100 documentary term bill of exchange, 100 Methods of Payment ­ Imports, clean remittance after buyer receives the goods, 153 clean remittance in prepayment for goods, 147 documentary credits, 148, sight credit, 149 term credit, 150 documentary sight bill of exchange, 151 documentary term bill of exchange, 151 Offsets ­ see Countertrade Options, 21 Payee, of a bill of exchange, 10 Post Receipt, 45, 105 checking, 163 Post-Shipment Finance ­ Exports, see Finance ­ Exports Presentation on Arrival of Goods (PAG), 73 Pre-Shipment Finance ­ Exports see Finance - Exports Prices in Australian Currency ­ Exports, clean remittance after buyer receives the goods, 119 clean remittance in prepayment for goods, 114 documentary credit ­ sight reimbursement, 114 documentary credit ­ term reimbursement, 116 documentary sight bill of exchange documents against payment, 117 documentary term bill of exchange documents against acceptance, 118 Prices in Foreign Currency ­ Exports, clean remittance after buyer receives the goods, 113 clean remittance in prepayment for goods, 107 documentary credit ­ sight reimbursement, 109 documentary credit ­ T/T reimbursement, 108 documentary credit ­ term reimbursement, 110 documentary sight bill of exchange, documents against payment, 111 documentary term bill of exchange, documents against acceptance, 112

171. Index

Rates of Exchange, airmail buying rates, 18 airmail transit period, 18 buying rates of exchange, 16 definition, 14 euro, 15 on-demand sight, 18 options, 21 quotation, 14 selling rates of exchange, 19 special buying rates, 19 telegraphic transfer rates, buying, 18 selling, 19 term (usance), 19 value dates for large transactions, 20 spot, 20 today, 20 tomorrow, 20 Remittances, international cheques, 74 international money laundering, 76 personal cheques, 75 real time gross settlements, 75 sanctioned countries, 76 telegraphic transfers, 75 Risks ­ Exchange see Exchange Risk Risks ­ Import Transactions, exchange risk, 142 goods are damaged or lost in transit, 142 goods not in accordance with contract of sale, 141 goods do not arrive within the required time, 142 Sea Waybills, 104 Shipping Terms and Abbreviations, CFR cost and freight, 48 CIF cost insurance and freight, 48 CIP carriage and insurance paid to, 48 CPT carriage paid to, 48 EXW ex works, 47 FAS free alongside ship, 47 FCA free carrier, 47 FOB free on board, 48 variations, 49

Specimens ­ Documents and Forms, application for forward exchange contract, 29 application for import documentary credit, 63 bill of exchange, 11, 166 bill of lading, 168 covering advice for export credit, 164 export documentary credit, 165 foreign exchange rate sheet, 17 insurance certificate, 167 invoice, 166 lodgment authority, 71 Stand-by Credits, 66 SWIFT, 86 Terminal (CY ­ Container Yard), 42 Transfer Risk, export transactions, 93 medium and long term finance ­ exports, 121 methods of payment ­ exports, 97, 98, 100, 103 Transferable Credits, 64 Transport Documents, checking, 163 Uniform Rules for Bank-to-Bank Reimbursements ­ URR, 59

Typesetting: City Graphics Printing: The Craftsman Press Pty Ltd

172. Index

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24314 1. Chap. 1-3

172 pages

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24314 1. Chap. 1-3