There is a great deal of misinformation circulating regarding various elements of the trading business. Some of these false facts have resulted from simple misunderstandings which have then been widely propagated, and other untruths have been deliberately engineered by unscrupulous types who seek to scam honest traders.
The following seeks to clarify some of the more common procedures which are likely to be encountered in the course of commodities trading.
Agreements or contracts can only be regulated by the laws of one jurisdiction. This is because international contract law states that a contract cannot be regulated in multiple jurisdictions due to potential legal conflicts in various jurisdictions making the contract unenforceable.
It is not necessary, nor is it advisable for buyers to send personally identifying information, or sensitive information via a broker. This includes things such as bank account details, passports, and so on. It is advised that this type of information is only sent directly between the seller and the buyer.
The seller should be open and forthright regarding providing proof of product and other relevant information to the buyer. There is no need for secrecy, and indeed, an unwillingness to divulge necessary or pertinent information should be considered a red flag for a potential buyer.
Fee protection agreements should always have named pay masters. Fee protection agreements which do not name pay masters are essentially useless.
The maximum amount of any international trade is $500 million. Amounts exceeding this limit will be frozen and investigated, due to the growth of terrorist activities in the past decade. It is not wise to enter into transactions which require more than $500 million to be moved at any one time.
A LOI (Letter of Intent) is not a contract. Letters of intent serve to notify the seller that the buyer wishes to enter into negotiations to purchase. They do not contractually oblige either the buyer or the seller to go through with the trade.
Letters of intent should be regarded only as an opening point. Issuing an LOI does not make the buyer culpable for anything written in it. Until a contract is agreed upon and signed, both parties are free to back out of negotiations at any time, and buyers cannot be held liable for statements made in the LOI
Banking information is not sent with a LOI. Banking information needs to be provided so that the seller can conduct a soft probe on the buyer’s accounts, but this is not necessary at the LOI stage.
Speaking of proof of funds, it is not a legal requirement that a buyer provide proof of funds before entering into a contractual agreement with a seller. Most sellers will prefer this, and many will insist upon it, but it is not an absolute legal requirement
You cannot buy a letter of credit. These are financial instruments which should be obtained from your bank, never from a third party. Financial instruments offered by third parties are almost always a scam.
There is no such thing as a discounted letter of credit. If you follow the previous rule, this is obvious, but many buyers are tempted into purchasing so called ‘discounted’ letters of credit in order to save money. Remember that a letter of credit is a financial instrument prepared by your bank that will be drawn on your accounts when the seller fulfills their contracted obligations. There is no way to save money on a letter of credit, other than negotiating for a lower price with the seller.
Banks do not sell or buy financial instruments.
SWIFT is the Society for Worldwide Interbank Financial Telecommunications. This organization operates a closed network which operates between banks and financial institutions for the purposes of exchanging messages relating to financial information. SWIFT was founded in Brussels, Belgium, in 1973 at a time when it was fast becoming apparent that globalization was a major market force, but banks in various countries were having trouble keeping up with the emerging demand for quickly and efficiently sending money and communicating financial information across borders.
When it was first founded, the SWIFT network operated in just fifteen countries and had less than 300 banks and financial institutions associated with its network. Nowadays SWIFT operates in 208 countries and there are well over 8,000 banking institutions who make use of the SWIFT messaging network.
SWIFT codes are simply a means of differentiating between different kinds of SWIFT messages. The SWIFT messaging network operates using a series of standardized message types. In order to send a SWIFT message, the banking officer simply fills in the appropriate information in the appropriate fields, and sends the message. In order to identify the different types of SWIFT message, there are numbers assigned to each of them. The ‘MT’ prefix stands for ‘Message Type’, and the three digit number that follows it represents a specific message type
There is no such thing as an MT543. At one time there was a SWIFT message with the code MT543, however this was withdrawn from the SWIFT messaging system in 2003. When the MT543 was in existence, it was a bank commitment, however it was almost never used as banks are not in the business of taking on liability on behalf of their customers.
There is also no such thing as an MT100. The MT100 has been replaced by the MT103
SWIFT MT-103′s are the most commonly used form of SWIFT communication, and one which many people will have utilized without even knowing it. For most bank customers, they are known not as MT-103′s at all, but rather as wire transfers, telegraphic transfers, or SWIFT transfers. A SWIFT MT-103 is used by the bank when its customers wish to make payment to customers of another bank in another country
If the buyer and seller have a good relationship, then they may use a MT-103 to make payments, however standard practices dictate that payment for shipments is made via a letter of credit. Letters of credit are documents which guarantee that the seller will be paid once the product has been shipped, and documentary evidence of this has been provided. Paying by MT-103 in advance can leave a buyer open to fraud, and few, if any sellers, will send product before they receive payment or a guarantee backed by a major world bank that payment will be made upon shipping.
The MT-760 is a type of SWIFT message that is sometimes requested in trading because it functions much like a Bank Guarantee, although it carries with it a much higher level of risk for the issuer (usually the buyer), and a reduced level of risk for the recipient (the seller). Essentially, a MT-760 is a SWIFT message which guarantees that a bank will make payment in favor of a client of another bank. When a MT-760 is issued, the issuing bank puts a hold on its client’s funds, thereby ensuring that the funds are in place to make payment to the recipient of the MT-760.
One of the more commonly requested, but lesser understood documents is the MT-799.
Many sellers will request that the buyer issue an MT-799 before they provide proof of product, or proceed beyond the initial stages of the sale.
The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade.
The MT-799 is usually issued before a contract is signed and before a letter of credit or bank guarantee is issued. After the MT-799 has been received by the seller’s bank, it is then normally the responsibility of the seller’s bank to send a POP (proof of product) to the buyer’s bank, at which point the trade continues towards commencement.
The actual payment method commonly used is a documentary letter of credit, which the seller presents to the issuing or confirming bank along with shipping documents. Once the bank confirms the documents, the seller is then paid. An alternative method is to use a bank guarantee in place of a letter of credit. It is normally at the seller’s discretion which method of payment is used.
Information required to issue MT-799
When commodities are shipped, there are many documents which accompany it. Some of these documents are required in order for the seller to be paid, others are required in order that the shipment can be imported into a foreign country, others provide assurances that the products meets the requirements set out in the contract and that has being properly handled and is being shipped aboard a seaworthy vessel. This is a list of the most commonly provided types of shipping documentation, along with explanations of their function
A commercial invoice is made out from the seller to the buyer. It details the specifications of the product being shipped and the total cost of the shipment. This invoice is normally required in order for the seller to receive payment under the terms of a letter of credit, and functions as a tax invoice for the buyer.
Clean on Board Bill of Lading
A bill of lading is a document which is issued by a carrier or transporter. The document confirms the specifications of the shipment received, the port where it was loaded, and the destination port. It also outlines the terms of carriage. Bills of lading can be negotiable or non negotiable. A negotiable bill of lading enables the holder of the bill of lading to change the destination port of the shipment. A non negotiable bill of lading means that the shipment will be delivered to a specified port, and this port cannot be changed
A packing list is simply a document which outlines the quantity and type of product shipped. This document is normally very detailed. In order for the seller to obtain payment it is important that the packing list is identical to the terms of the contract and those set out in the letter of credit.
SGS Certificate of Weight Grade, Quality, and Condition
SGS is an international independent inspection company which will inspect the sugar shipment before it leaves the port and verify that the sugar is of the correct weight, grade, quality, and condition as stated in the bill of lading, packing list, and contract. If all is in order, they will issue an SGS certificate which states that the product met certain standards when it was shipped.
A certificate of origin states where the product is from. This is essential when importing commodities from one country to another. The certificate of origin is often issued by the exporter, although it can sometimes be issued by a government agency.
Phytosanitary Certificate
A phytosanitary certificate states that the shipment meets the phytosanitary requirements which are in place in the country it is being exported to. Phytosanitary certificates are always required for plants and plant products, as these can represent a potential hazard to the ecosystem of the country to which they are being exported.
Loading / Stowage Supervision Certificate
A loading /stowage supervision certificate is offered by SGS, and covers the following elements of loading:
The loading/stowage certificate provides the buyer with peace of mind that not only was the product good condition when it left the mill or warehouse, but that it was handled properly prior to shipping. It is also important from the seller’s perspective that a loading/stowage certificate be obtained as it is additional proof in case of mishap in transit that all due care was taken to ensure successful delivery to the buyer.
A certificate of radiation states that the shipment is within internationally acceptable radiation levels
A crop certificate states the crop from which the product was produced. This allows the product to be traced right back to the exact point of its origin where it was grown.
Shipping Company Statement
A shipping company statement relates to the ship aboard which the product will travel. It normally states that the ship is of a certain age, and that it is well maintained. This document is designed to provide assurance that the vessel is sea worthy
CARGO VESSEL SIZE INFORMATION
This classification almost always refers to an oil tanker although it is occasionally applied to other bulk commodities. These vessels serve oil producing areas with limited port resources or where man made canals lead to terminals that load raw petroleum products.
The size limitations in this class are few. The main restriction is the beam of a vessel which in this case cannot exceed 32.3 Meters or 106 feet. Tonnage of this type of vessel is approximately 120,000 DWT.
Here is one of the instances where the naming scheme is different but the concept is the same. A Capesize class of ship is limited by the depth of the Suez Canal which is currently 62 feet or about 19 meters. The soft geology of the region has allowed the canal to be dredged to a greater depth since it was first built and it possible the canal will be dredged again in the future so this classification may change its maximum draft limit.
Capesize vessels are large bulk carriers and tankers that get their name from the route they must take to bypass the Suez Canal. This route takes the past the Cape of Good Hope in Africa or Cape Horn off of South America depending on the final destination of the ship.
The displacement of these vessels can range from 150,000 to as much as 400,000 DWT.
Chinamax is a little bit different since it is determined by the size of port facilities rather than physical obstructions. This term is not only applied to ships but also to port facilities themselves. Ports that can accommodate these very large vessels are referred to as Chinamaxcompatable.
These ports do not necessarily need to be anywhere near China they only need to meet the draft requirements of dry bulk carriers in the 350,000 to 400,000 DWT range while not exceeding 24 meters or 79 feet of draft, 65 meters or 213 feet of beam, and 360 meters 1,180 feet of overall length.
Here is another situation for naval architects where the main restriction is draft of the vessel. The Strait of Malacca has a depth of 25 meters or 82 feet so ships of this class must not exceed this depth at the lowest point of the tidal cycle
Vessels serving this route can gain capacity in the design phase by increasing beam and length at the waterline in order to carry a greater capacity in a limited draft situation.
This class is the most commonly recognized to most people since it refers to the Panama Canal which is quite famous in its own right.
The current size limitations are 294 meters or 965 feet in length, 32 meters or 106 feet of beam, 12 meters or 39.5 feet of draft, and 58 meters or 190 feet of air draft so vessels can fit under the Bridge of the Americas.
The canal opened in 1914 and by 1930 there were already plans to enlarge the locks to pass larger vessels. In 2014 a third larger set of locks will begin operations and define a new class of vessels called New Panamax.
New Panamax has size limitations of 366 meters or 1200 feet of overall length, 49 meters or about 160 feet of beam, and a draft of 15 meters or 50 feet. The air draft will remain the same under the Bridge of the Americas which is now the main limiting factor for large vessels passing through the canal
This class of vessels is designed to achieve the maximum size for passage through the Saint Lawrence Seaway inbound or outbound from the Great Lakes system.
The locks of the seaway are the limiting factor and can receive ships no larger than 225.5 meters or 740 feet of overall length, about 24 meters or 78 feet of beam, about 8 meters or 26 feet of draft, and an air draft of 35.5 meters or 116 feet above the water
Larger vessels operate on the lakes but they are unable to reach the sea because of the bottleneck at the locks.
Once again this is a class of ships that is not restricted by a specific set of locks or bridges but instead it refers to cargo capacity and the ability to use ports. Ports are often designated to be Supermax or Handymaxcompatiable.
Supermax as you probably guessed is the largest of the vessels with a size of around 50,000 to 60,000 DWT and can be as long as 200 meters or 656 feet.
Handymax vessels are slightly smaller and have a displacement of 40,000 to 50,000 DWT. These ships are usually at least 150 meters or 492 feet.
The Suez Canal’s dimensions are the limiting factor for ship size in this case. Since there are no locks along the one hundred plus miles of the canal the only limitations are draft and air draft.
The canal has a useful draft of 19 meters or 62 feet and vessels are limited by the height of the Suez Canal Bridge which has a clearance of 68 meters or 223 feet.
