CMA Webinar Series T R E A S U R Y S E R V I C E S William Hindon Vice President LC 101 + 9AM – 10AM (PST) Tuesday, January 16, 2007

Risks Commercial Insolvency Protracted periods of non-payment Political Wars Insurrections Boycotts Tariffs Expropriations Central Bank’s failure to provide foreign exchange Governmental subsidies

Commercial

Insolvency

Protracted periods of non-payment

Political

Wars

Insurrections

Boycotts

Tariffs

Expropriations

Central Bank’s failure to provide foreign exchange

Governmental subsidies

Rules of the Game International Chamber of Commerce (ICC) ICP Pub 556 - Model International Sales Contract ICP Pub 560 / ICC Pub 620 / ICC Pub 616 - INCOTERMS 2000 ICP Pub 623 - A to Z of International Trade URC 522 - Uniform Rules for Collections UCP 500 - Uniform Customs and Practice for Documentary Credits URR 525 - Uniform Rules for Reimbursements UCP 500 - Uniform Customs and Practice for Documentary Credits ISP 98 - International Standby Practices

International Chamber of Commerce (ICC)

ICP Pub 556 - Model International Sales Contract

ICP Pub 560 / ICC Pub 620 / ICC Pub 616 - INCOTERMS 2000

ICP Pub 623 - A to Z of International Trade

URC 522 - Uniform Rules for Collections

UCP 500 - Uniform Customs and Practice for Documentary Credits

URR 525 - Uniform Rules for Reimbursements

UCP 500 - Uniform Customs and Practice for Documentary Credits

ISP 98 - International Standby Practices

Sales Contract Buyer Issuing Bank Formal Agreement Proforma Invoice Purchase Order Exchange of Telexes CONTRACT = OFFER + ACCEPTANCE Seller

Sales Contract Provisions Merchandise Description - Be specific Packing and Marking Requirements Delivery Instructions - Time and place Price - Itemize goods and seller-supplied non-product services Shipping Terms - Incoterms 2000 Transfer of Ownership Insurance Inspection - By whom and at what cost Warranties - Type and duration Applicable Law - CISG or other Dispute Resolution Procedures Method of Payment - CIA, L/C, DC , OA

Merchandise Description - Be specific

Packing and Marking Requirements

Delivery Instructions - Time and place

Price - Itemize goods and seller-supplied non-product services

Shipping Terms - Incoterms 2000

Transfer of Ownership

Insurance

Inspection - By whom and at what cost

Warranties - Type and duration

Applicable Law - CISG or other

Dispute Resolution Procedures

Method of Payment - CIA, L/C, DC , OA

Incoterms 2000 EXW FCA FAS FOB DAF DES DEQ DDU DDP CFR CIF CPT CIP Dock of Exportation Dock of Importation Transportation to Dock Transportation to Buyer Import Duty Loading onto Vessel Ocean Freight Marine Insurance Unloading Charges Price/Shipping Terms Cost - Risk Equation Beneficiary (Seller) Applicant (Buyer)

Methods of Payment Exporter’s uncertainty increases Cash in Advance Letter of Credit Confirmed Advised Documentary Collections D/P D/A Open Account Importer’s uncertainty increases

Cash in Advance

Letter of Credit

Confirmed

Advised

Documentary Collections

D/P

D/A

Open Account

Factors to Consider Buyer’s credit standing Seller’s ability to fulfill order Law of supply and demand Political risks Amount and Tenor Competition Financing requirement of buyer and seller Cost of bank services Past experience….KYC

Buyer’s credit standing

Seller’s ability to fulfill order

Law of supply and demand

Political risks

Amount and Tenor

Competition

Financing requirement of buyer and seller

Cost of bank services

Past experience….KYC

Sales Contract Bank Cash in Advance Open Account L/C Collections Bank Signing Shipment Receipt of Documents Receipt of Goods/ Acceptance JAN FEB MAR APR MAY JUN JUL Seller Buyer

Documentary Collections

Documentary Collection Defined as the process by which a bank known as the Remitting Bank, acting upon the instructions of an exporter, presents document(s) associated with a sales transaction to the importer. This is done with the assistance of a second bank known as the Collecting Bank. Documents typically consist of one financial (bill of exchange) and multiple commercial (invoice, bill of lading, etc.) instruments.

Defined as the process by which a bank known as the Remitting Bank, acting upon the instructions of an exporter, presents document(s) associated with a sales transaction to the importer. This is done with the assistance of a second bank known as the Collecting Bank. Documents typically consist of one financial (bill of exchange) and multiple commercial (invoice, bill of lading, etc.) instruments.

Drawer = Exporter = Seller = Beneficiary Drawee = Importer= Applicant = Buyer Payee = Remitting Bank

Drawer = Exporter = Seller = Beneficiary

Drawee = Importer= Applicant = Buyer

Payee = Remitting Bank

Draft/Bill of Exchange TO: (TENOR) PAYEE DRAWEE (IMPORTER) EXPORTER DRAWER

Collection Cycle Draft B/L Invoice Instruction Letter (1) (1) (1) (2) (10) Seller (Drawer) Buyer (Drawee) Remitting Bank Sales Contract Collection Document Collecting Bank

Seller’s Risks Buyer unable or unwilling to honor demand Added costs due to non-payment or non-acceptance Demurrage Storage Insurance Return freight Slow pay due to system constraints Mail time Collecting bank procedures

Buyer unable or unwilling to honor demand

Added costs due to non-payment or non-acceptance

Demurrage

Storage

Insurance

Return freight

Slow pay due to system constraints

Mail time

Collecting bank procedures

Documentary Letters Of Credit

Documentary Letter of Credit Defined as a written undertaking by a bank (Issuing Bank), acting at the request and on the instructions of its customer (Applicant) to: Make payment to, or to the order of, a third party (Beneficiary); Accept and pay bills of exchange (drafts) drawn by the Beneficiary; or Authorize another bank to effect such payment or to pay, accept, or negotiate such bills of exchange (drafts) against stipulated document(s), provided that the terms and conditions of the Credit are complied with

Defined as a written undertaking by a bank (Issuing Bank), acting at the request and on the instructions of its customer (Applicant) to:

Make payment to, or to the order of, a third party (Beneficiary);

Accept and pay bills of exchange (drafts) drawn by the Beneficiary; or

Authorize another bank to effect such payment or to pay, accept, or negotiate such bills of exchange (drafts)

against stipulated document(s), provided that the terms and conditions of the Credit are complied with

Parties Involved Seller Beneficiary Exporter Buyer Applicant Importer

Applicant (Buyer) Issuing Bank Beneficiary (Seller) Sales Contract Beneficiary (Seller) Letter of Credit Applicant (Buyer) Bank Opening Bank SUBSTITUTES ITS NAME FOR THAT OF “ We the Buyer Obligate to pay Seller.” “ We the Bank Obligate to pay Seller.”

Letter of Credit Application & Security Agreement Applicant (Buyer) Sales Contract Beneficiary (Seller) Letter of Credit Opening Bank (2) L/C Application and Security Agreement (1) (3)

Issuing Bank Definite Undertaking Honor Without Recourse Stipulated Documents Drafts, if any Terms and Conditions “ We Hereby Authorize You to Value on Us”

Definite Undertaking

Honor Without Recourse

Stipulated Documents

Drafts, if any

Terms and Conditions

Advising Bank Functions: Authenticates Scrutinizes* * Optional This is solely an advice of a credit issued by the above named

Functions:

Authenticates

Scrutinizes*

* Optional

Advising Bank May also be asked/nominated to: Pay Accept draft(s) - if any Create deferred payment obligation(s) Negotiate Confirm

May also be asked/nominated to:

Pay

Accept draft(s) - if any

Create deferred payment obligation(s)

Negotiate

Confirm

Confirmed vs. Unconfirmed Implication Constitutes a definite undertaking of confirming bank Independent of the issuing bank’s obligation Purpose Mitigates or eliminates political risk factors Confirmation

Implication Constitutes a definite undertaking of confirming bank

Independent of the issuing bank’s obligation

Purpose Mitigates or eliminates political risk factors

Confirming Bank Acts upon request of issuer A second promise Definite undertaking Honor without recourse Stipulated Documents Drafts, if any Terms& Conditions “ We Confirm the Credit and Thereby Undertake…”

Acts upon request of issuer

A second promise

Definite undertaking

Honor without recourse

Stipulated Documents

Drafts, if any

Terms& Conditions

“Silent” Confirmation Agreement to Negotiate (ATN) Definition : An undertaking by JPMorgan Chase Bank to negotiate documents and purchase the related drafts and/or documents under a Sight, Time or Deferred Payment L/C (usually on a without full recourse basis) at the request of a JPMorgan Chase Bank customer who is the Beneficiary of such L/C. Notes : The bank’s commitment to negotiate is made prior to the negotiation. ATNs are offered to customers as an alternative if they are unable to obtain an “open” confirmation in their favor. ATNs covering Standby L/Cs are not authorized.

Agreement to Negotiate (ATN)

Definition : An undertaking by JPMorgan Chase Bank to negotiate documents and purchase the related drafts and/or documents under a Sight, Time or Deferred Payment L/C (usually on a without full recourse basis) at the request of a JPMorgan Chase Bank customer who is the Beneficiary of such L/C.

Notes : The bank’s commitment to negotiate is made prior to the negotiation. ATNs are offered to customers as an alternative if they are unable to obtain an “open” confirmation in their favor. ATNs covering Standby L/Cs are not authorized.

Types of Credit Irrevocable - Revocable Straight - Negotiable Sight - Time/Usance - Deferred

Irrevocable - Revocable

Straight - Negotiable

Sight - Time/Usance - Deferred

Irrevocable vs . Revocable Revocable: May be amended or cancelled without prior notice to beneficiary Irrevocable: Cannot be amended or cancelled without agreement of all parties

Revocable: May be amended or cancelled

without prior notice to beneficiary

Irrevocable: Cannot be amended or cancelled

without agreement of all parties

Straight Credit Obligation of the Issuing Bank to pay/accept drafts, or to incur a deferred payment obligation extends only to the beneficiary of the credit.

Obligation of the Issuing Bank to pay/accept drafts, or to incur a deferred payment obligation extends only to the beneficiary of the credit.

Negotiable Credit The issuing bank’s obligation extended to a third party; usually a bank willing to negotiate. Negotiation is usually with recourse unless otherwise agreed.

The issuing bank’s obligation extended to a third party; usually a bank willing to negotiate.

Negotiation is usually with recourse unless otherwise agreed.

Sight Letters of Credit Payment effected immediately after presentation of conforming draft(s) and/or document(s) = $$

Time/Usance Letters of Credit Payment made at some specified time after presentation of conforming draft(s) and/or document(s) + = 2001 $$

Engagement Clauses Available with: Restricted (Named) Nominated Bank Freely Negotiable “Any Bank” = Nominated Bank Available by: Sight Payment Acceptance Deferred Payment Negotiation

Available with:

Restricted (Named) Nominated Bank

Freely Negotiable “Any Bank” = Nominated Bank

Available by:

Sight Payment

Acceptance

Deferred Payment

Negotiation

Amendment Consent of Parties Establishment Issuer Confirmer Beneficiary Acceptance Partial Acceptance “ We Hereby Amend Our Letter of Credit as Follows…”

Consent of Parties

Establishment

Issuer

Confirmer

Beneficiary Acceptance

Partial Acceptance

Special Letter of Credit Assignment of Proceeds Transferable Revolving Installment Red Clause Back-to-Back

Assignment of Proceeds

Transferable

Revolving

Installment

Red Clause

Back-to-Back

Discrepancies Studies show that 60% of all document sets contain one or more discrepancies

Studies show that 60% of all document sets contain one or more discrepancies

Discrepancies Act as impartial arbitrator and “trusted” intermediary Determine whether to accept or refuse the documents Notify presenter immediately if documents are refused Job of the Bank

Act as impartial arbitrator and “trusted” intermediary

Determine whether to accept or refuse the documents

Notify presenter immediately if documents are refused

Most Common Discrepancies 1. Late Shipment 2. Late Presentation 3. Credit Expired 4. Credit Overdrawn 5. Missing Documents

1. Late Shipment

2. Late Presentation

3. Credit Expired

4. Credit Overdrawn

5. Missing Documents

Implications for Seller Delayed payment Increased/extended credit exposure Discrepancy costs Higher processing costs Demurrage Opportunity costs Loss of control over transaction

Delayed payment

Increased/extended credit exposure

Discrepancy costs

Higher processing costs

Demurrage

Opportunity costs

Loss of control over transaction

Implications for Buyer Delayed payment Delayed clearance of goods Option to refuse goods Option to negotiate

Delayed payment

Delayed clearance of goods

Option to refuse goods

Option to negotiate

Discrepancies Correct documents Direct bank to cable for authority to honor Direct bank to send documents on approval basis Request bank to pay under reserve/guarantee Never instruct bank to send documents on collection basis Beneficiary’s options:

Correct documents

Direct bank to cable for authority to honor

Direct bank to send documents on approval basis

Request bank to pay under reserve/guarantee

Never instruct bank to send documents on collection basis

Discrepancies Approach Applicant for waiver Give notice Without delay By telecommunication Stating all discrepancies Advice if documents are being held or returned Issuing Bank’s Options:

Approach Applicant for waiver

Give notice

Without delay

By telecommunication

Stating all discrepancies

Advice if documents are being held or returned

Not to Exceed 7 Banking Days Examine Determine Give Notice Reasonable Time xx 20 1 7 CONFIDENTIAL This Document can not be duplicated, re-transmitted, or circulated without the permission of JPMorganChase - Global Trade Finance Group.

Not to Exceed 7 Banking Days

Examine

Determine

Give Notice

Standby Letters of Credit

Standby Letters of Credit Standby L/C is defined as any Letter of Credit or similar arrangement however named or described which represents an obligation to the beneficiary on the part of the issuer

Standby L/C is defined as any Letter of Credit or similar arrangement however named or described which represents an obligation to the beneficiary on the part of the issuer

Standby Letters of Credit 1. To repay money borrowed by or advanced to or for the account of the account party 2. To make payment on account of any indebtedness undertaken by the account party 3. To make payment on account of any default by the account party in the performance of an obligation

1. To repay money borrowed by or advanced to or for the account of the account party

2. To make payment on account of any indebtedness undertaken by the account party

3. To make payment on account of any default by the account party in the performance of an obligation

OCC Safety and Soundness Criteria Conspicuously state that it is a Letter of Credit or be conspicuously entitled as such Contain a specified expiration date or be a definite term Be limited in amount Bank is to pay only upon presentation of required documents. Bank must not determine question of fact or law at issue between account party and beneficiary Bank’s customer should have an unqualified obligation to reimburse the Bank

Conspicuously state that it is a Letter of Credit or be conspicuously entitled as such

Contain a specified expiration date or be a definite term

Be limited in amount

Bank is to pay only upon presentation of required documents. Bank must not determine question of fact or law at issue between account party and beneficiary

Bank’s customer should have an unqualified obligation to reimburse the Bank

Standby Letters of Credit Financial To assure payment of such obligations as: - Promissory Notes - Deferred insurance premiums - Invoices for open account sales - Commodity margin requirements on futures contracts - Loan by a foreign bank to a corporation’s overseas subsidiary

Financial

To assure payment of such obligations as: - Promissory Notes - Deferred insurance premiums - Invoices for open account sales - Commodity margin requirements on futures contracts - Loan by a foreign bank to a corporation’s overseas subsidiary

Standby Letters of Credit Performance To assure performance under contractual obligations such as: - Bid bonds - Performance bonds - Advance payment bonds - Warranty/Maintenance/Retention bonds

Performance

To assure performance under contractual obligations such as:

- Bid bonds

- Performance bonds

- Advance payment bonds

- Warranty/Maintenance/Retention bonds

Risk-based Capital Adequacy Conversion Factor Commercial L/C 20% Performance Standby 50% Financial Standby 100%

Commercial L/C Standby L/C Primary Bank of Obligation Primary Primary Payment Mechanism for Underlying Transaction Secondary Commercial Documents: Financial Documents: Invoice, Packing List Statement, Certificate of Origin Certificate, Inspection Certificates, Draft Transport Document

COMPARISON