Is an MT999 Acceptance Message Available for Forfaiting?
When it comes to banking matters，for an exporter with different types of international settlements，forfaiting can be used mainly in two ways in transaction: one is under documentary credits and the other is under documents against acceptance with Aval. According to UCP600 article 2，both the "irrevocable" and the "independent" characteristics of a documentary credit stated in UCP600，make forfaiting under documentary credits favored by the exporter.
In the case of an exporter's complying presentation and receipt of an acceptance message，the issuing bank has an irrevocable liability to the beneficiary. Therefore，the beneficiary can still get the issuing bank’s reimbursement even if the applicant is in a bankruptcy or default situation. Consequently，regardless of 100% pledge or credit for the importer's application of issuing a documentary credit，forfaiting under documentary credits in many banks is considered as a low-risk trade finance product. Benefiting from convenience and low cost，forfaiting has been applied widely in recent years.
As a low-risk trade finance product，forfaiting under a documentary credit takes the following as a premise. First is the beneficiary’s complying presentation and second is the acceptance message sent by the issuing bank. When sending the acceptance message through the SWIFT system，the message between two institutions with an authorized relationship normally starts with a 7. It might look like MT799，MT756，MT752，or MT754，for example. Because some issuing banks may not have established an authorized relationship with the advising bank in another country，the acceptance message sent by the issuing bank is consequently uses the MT999 format. In this case，is it possible to do forfaiting on behalf of the exporter and if so，how to do it? What kinds of risk would the forfaiter be confronted with?
Case Study
A company we will call "Company S" is an export-oriented enterprise，exporting denim fabrics to Southeast Asia，South America and other regions. Its international settlements are mainly based on TT，but partly by documentary credits. On May 5，the advising bank known as "Bank C" informed Company S that it had received a letter of credit from the issuing bank，"Bank U" in another foreign country. The main elements on the document were as follows (number indicates the field in the document):
41D: AVAILABLE WITH ANY BANK IN CHINA BY NEGOTIATION
42C: 120 DAYS AFTER SIGHT
Upon completion of the shipment，Company S made a presentation to Bank C on July 7th，and received a MT999 acceptance message on July 22th. The main elements were as follows:
79: YOUR BILL FOR USD1,000,000.00 UNDER A/M REFERENCE HAS BEEN ACCEPTED BY THE APPLICANT AND WILL BE MATURED ON XX.11.201X FOR PAYMENT.
YOUR PAYMENT WILL BE MADE ON OR BEFORE DUE DATE AS PER L/C TERMS AND CONDITIONS.
AT MATURITY WE SHALL EFFECT PAYMENT IN ACCORDANCE WITH YOUR INSTRUCTIONS LESS ALL OUR CHARGES. IF MATURITY DATE FALLS ON A BANKING HOLIDAY WE SHALL REMIT FUNDS VALUE THE NEXT BANKING DAY.
Upon receipt of the MT999 acceptance message，the Company S applied to Bank C for forfaiting. Although Bank U's interbank facility has been available，Bank C declined to offer forfaiting for Company S because the MT999 was considered as free format message without any authorization.
Analysis
The "low risk" characteristic of forfaiting under documentary credits is mainly based on the outstanding credit rating of the issuing bank，the acceptance of the drawee，and the real transfer of property in the basic transaction. Most banks in the issuing bank’s country do not establish an authorized relationship with Bank C. As the settlement bank，Bank C has a comprehensive understanding of the normal accounts receivables and trade partners of Company S. It is unreasonable not to accept the application of forfaiting only owing to the acceptance message in the format of MT999. In this regard，the analysis is as follows.
Firstly，an MT999 acceptance message cannot be the reason for application refusal. There are ten categories of SWIFT messages. The 7th category applies to documentary credit and guarantee，such as the credit issuing in the form of MT700. The 9th category applies to cash management and accounting. Compared with the 7th category，which is only suitable for credit and guarantee，the 9th category applies to various types of messages，including the SWIFT messages between two institutions without authorized relationship. However，forfaiting under letters of credit is one kind of trade finance products，which should base on the authenticity of the basic transaction and should not be limited to the message format only.
In this case，the transaction reference number in field 20 and the related reference number in field 21 are in line with the letter of credit and related documents. Although belonging to a non-authorized message，the bank sending the acceptance message does share the same SWIFT Code with the issuing bank. The contents of field 79 also indicate that the bills of exchange under this documentary credit have been accepted by the issuing bank.
Secondly，the bank should bear the liability for payment at maturity after accepting the drafts. The drafts are not required under a deferred payment LC，and the drafts must be presented under an acceptance LC. The credit in this case is a negotiation credit，and the beneficiary is required to present the drafts.