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There are now market practice guidelines for the forfaiting industry – after three years of sometimes passionate and controversial debate, the forfaiting market has a set of guidelines to follow when conducting their business. At a recent publicity lunch held by some members of the board of the International Forfaiting Association (IFA) and the Market Practice Committee (MPC) at the offices of law firm Denton Wilde Sapte, the board of the IFA explained the background behind the new guidelines and what they will mean for the market.

Lucio Matassoni of Sumitomo Mitsui Banking Corp Europe, chairman of the IFA, declared that the board will encourage the use of the guidelines as much as possible but give a bit of time for them to sink in. “If something happens – say, a case ends up in court – there’s a document behind reflecting what the market does,” he said.

“New members want to play with the good guys. Long-term, this can only be beneficial to players and the market,” added Salvatore Chiappinelli, head of the IFA Secretariat.

Geoffrey Wynne is partner at Denton Wilde Sapte and was instrumental in drafting the guidelines with the IFA and with Sean Edwards, Sumitomo Mitsui’s in-house counsel. He added: “Fraud is the fear [and the guidelines] should deter fraudsters. We ‘ve now got rules about the checking of documents. We are telling exporters that for genuine transactions there is a marketplace and it’s policed. This wasn ‘t done as a reaction to a market full of fraud but because forfaiting’s a good product.”

As Edwards added, some frauds such as the recent Parmalat case are too deep within the company to be spotted by normal due diligence and no liability for these should attach to a seller in any event, but the guidelines make it even clearer that a seller will not suffer in such circumstances.

The Germans, however, instigated a caveat for their own market participants because of their legal system. Under German law, a seller has legal responsibility for the validity of the undertaking, ie, it is responsible for selling a fraudulent deal. Elsewhere, it is up to legal interpretation and the principle of “buyer beware “applies. This difference has been highlighted in the guidelines and so market participants have been told to cater for this adjustment.

Simon Lay of London Forfaiting Company and head of the Northern Europe Regional Committee, said: “The guidelines say that you can ask for additional representations and warranties and this did give the Germans some additional comfort. The guidelines seek to highlight such issues and come to an agreement, so there should be fewer disputes.”

The guidelines have created much debate and argument over the years they have been formulated. One area in particular caused rancour among membership – that of “subject to satisfactory documentation “The guidelines do now deal with “satisfactory documentation “in Article 6 where an exhaustive but broad list of grounds is set out on the basis of which documentation may be found unsatisfactory.

The recent hard graft by the MPC, the lawyers involved and the IFA board to get something on paper as a starting block has been widely accepted by the market. The International Chamber of Commerce (ICC) is now looking at linking in with the IFA guidelines in some way and more meetings between the two bodies are scheduled soon.

The ICC could well offer an “approval “of the guidelines which would be a “seal of approval “claimed Matassoni. Wynne added that the guidelines follow the same sort of format as the ICC’s UCP rules anyway and, like the UCP, should evolve and improve as years progress. “To believe that the guidelines won ‘t evolve would be foolish,” said Wynne. “Perhaps in a year or two it would be a good time to look at how they are working.”

There are a few areas that the guidelines have steered clear of but may well examine at a later date. One area is risk participation. Another area is a user’s guide where aspects of the guidelines can be clarified. Here, Edwards is working on a user’s guide which will be circulated for comment before being published on the IFA website. A third area is that of training programmes and courses for users. Other areas are money laundering procedures and arbitration, which the board is keen to look into. Importantly, the area of the relationship between the primary forfaiter and the market have been omitted from the guidelines. As Edwards said: “The relationship of the primary forfaiter with the underlying debtor or obligor is not dealt with here directly although indirectly some of the reps and warranties he gives to his buyer may in practice result in his having to ask more searching questions of his client than he previously did. His relationship with his buyer is, however, most definitely dealt with in Article 8 by providing for more extensive reps and warranties than have to be given by a non-primary forfaiter seller.”

Meanwhile, Stephen Coleman has been elected vice-chairman of the IFA and remains co-head of the market practice committee (MPC), while Edwards has been elected as the other co-head. Waltraud Raderschall of Dresdner Bank has been admitted as a board member following the exit of Dino Skandalis as chairman and from Standard Chartered Bank. The IFA is to introduce stricter membership criteria in future too. Chiappinelli explained that in Switzerland, where the IFA is domiciled, if one pays a membership fee then one expects to have the right to bring in new members to any organisation. “We wanted to bring in a filter,” he said. “The IFA statutes require some criteria.”

Forfaiting is a form of trade finance involving the non-recourse discount financing of trade. There is a primary – or origination – market and a secondary – or trading – market. Forfaiting is often ideal for emerging markets trade deals where the exporter wants to lay off the risk and get paid as soon as possible.