The following article details the basic elements of the standard FCO (Firm Corporate Offer also known as Full Corporate Offer) which we issue to buyers prior to signing a final contract. This is for the reference of potential buyers who may wish to gain a greater understanding of our trading procedures.

FCO Details

We trade in Brazilian ICUMSA 45 refined cane sugar with a polarity of 99.8%. Our sugar is from the latest crops, those harvested in the current season. It has a maximum 0.04% ash content, and maximum 0.04% moisture content. The price of sugar is to be determined in negotiations and will depend upon quantities ordered, the current going rate of sugar on the international market, and other relevant factors.

On average, we can ship a maximum of 300,000 metric tons per month, for a total of three million six hundred thousand metric tons per year. The sugar is to be packed in 50 kilogram bags, and shipped in new polypropylene or polylined ethylene packaging

Ordering Procedures

Procedures relating to payment terms and conditions and contract negotiations will be detailed in the Firm Corporate Offer, and for your convenience are also outlined below.

Once the buyer receives the Soft Offer (or simple price and terms quotation), they will need to send an ICPO (Irrevocable Corporate Purchase Order), and permission for the seller to conduct a soft probe on their accounts. Bank Comfort Letter (BCL) might also be required. Once the soft probe has been conducted, the seller will send the buyer a FCO (Firm Corporate Offer) within three days. After the buyer returns the signed FCO, seller will issue the draft contract. In some cases the FCO step might be skipped and negotiations can go directly to draft contract. The buyer is free to review the contract at their leisure, and make any desired changes. The contract, with changes, is sent back to the seller, and the seller reviews the changes, makes any additional corrections, sends it back to the buyer for their review, and so on and so forth until both parties are satisfied and the draft contract is agreed upon.

Within five days of the draft contract being received and signed, the buyer’s bank should send a SWIFT message MT799 to the seller’s bank with a notification that the buyer is RWA (Ready Willing and Able) to issue the necessary financial instruments. This step is also known as POF (Proof of Funds).

Once this is received, with buyer’s bank approval of the buyer’s financial instruments, the seller will produce six hard copies of the contract and send them to the buyer who must review and initial each page within two days, then send four copies back to the seller. The buyer’s bank must also SWIFT a non operational financial instrument to the seller’s bank at this time (Stand by Letter of Credit, covering a predefined number of monthly shipments).

Within five days after the non operational financial instrument is received by the seller’s bank, the seller will SWIFT POP (Proof of Product) which includes a license to export and an approval to export, both issued by the Brazilian government, a warehouse receipt or a refinery’s commitment to produce the sugar.

Payment for sugar is made via a documentary letter of credit which is issued or confirmed by a Top 25 major world bank, payable on sight. If shipments are to take place over the course of several months, then the letter of credit should be revolving. A standby letter of credit for the value of (at least) two shipments is also required to cover the seller in the event of the buyer breaching the contract. The buyer will also receive a stand-by letter of credit from the seller as a performance bond. The performance bond is equal to two percent of the total value of the contract, and is valid for the duration of the contract with an additional thirty day extension.

Once a contract is signed, and the buyer’s financial instruments have been activated, shipments begin within twenty eight to forty five days. Before shipments leave the port they are inspected by qualified and independent SGS inspectors, and the buyer will receive the following documentation upon shipping of the sugar, SGS Certificate of Weight Grade, Quality, and Condition, Certificate of Origin, Phytosanitary Certificate, Certificate of Radiation, Crop Certificate, Signed Commercial Invoice, Clean on Board Bill of Lading, Packing List, and a Shipping Company Statement. The buyer is also welcome to inspect the product in person at this stage.

Terminology

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The following seeks to clarify some of the more common myths which are likely to be encountered in the course of sugar trading, and is important reading for anyone new to buying sugar.

Letter of Intent

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 sugar. 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.

Letter of Credit

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 Messages

MT799’s are a type of SWIFT message which verifies funds in the sender’s accounts. The sending of an MT799 does not constitute a promise to pay, nor can it be considered a contractual agreement to pay. There are many sources which claim a MT799 is an unconditional financial instrument, this is unequivocally false.

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. The MT103 is a SWIFT message type that allows a bank to wire funds from a customer’s account to the account of a customer of another bank in another country. MT!03’s are quite often known as wire transfers, SWIFT transfers, or telegraphic transfers.

Bank Liability

It is natural that both buyers and sellers seek to have documents verified, confirmed, or guaranteed by major world banks. This provides a level of security which cannot be obtained from a private entity. However there is a limit to what banks will do. A bank will issue a bank guarantee or letter of credit if the client has sufficient funds or collateral to do so. Banks will not assume liability for their customers however, which means that they will not endorse things like letters of intent or contracts.

General Information

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.

Terminology

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When trading sugar there are multiple documents and forms requested by both parties. One of the more commonly requested, but lesser understood documents is the MT-799. Many sugar 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. For new traders who are not familiar with international banking systems, this can be a rather confusing request. This article provides information on the SWIFT system, as well as on the MT-799 itself.

What does SWIFT stand for?

SWIFT is an acronym which stands for ‘Society for Worldwide Interbank Financial Telecommunications’. Formed in 1973, SWIFT is a Belgian creation, and its main offices are still in Belgium to this day. SWIFT was formed in response to a growing need for an internationally sound communications network that could facilitate business transactions across borders effectively, quickly, and securely. When SWIFT was first formed it linked 239 banks in fifteen different countries. Now in 2008, SWIFT has grown to be a world wide organization which facilitates communications between banks, corporations, and securities institutions. SWIFT communications are now the global standard for international banking transactions, and as such are utilized millions of times daily. It is estimated that more than eight thousand banking institutions currently use the SWIFT messaging system for their transactions, and SWIFT systems are now in place in two hundred and eight countries.

What has made SWIFT so very effective? SWIFT’s success has primarily been the result of understanding and responding to the unique demands of a global market. The SWIFT system utilizes standardized messages, which increase efficiency, and is fully automated, which means that the days of lost messages are all but over. International transactions depend on security, reliability, and accuracy. The SWIFT system provides all these elements.

In addition to providing a safe and secure messaging system for the financial world, SWIFT also provides opportunities for companies to build revenue streams, and offers a wide range of services outside the messaging field. Some of these services include directories, market information, and market solutions.

SWIFT Codes

SWIFT Codes are actually very easy to understand, in spite of their unfathomable appearance. The ‘MT’ at the beginning of the code stands for ‘Message Type’, and the number indicates one of the many standardized message formats which comprise the SWIFT messaging system.

The MT-799
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.

How Do I Issue A MT-799

The short answer is that you don’t. Approach your bank, and make an arrangement with them to have an MT-799 wired to the seller’s bank. Some banks are reluctant to issue MT-799’s, as these make them liable for the full cost of the trade, which can sometimes be in the millions. A bank will normally not issue an MT-799 without some form of collateral to secure their own interests, so be prepared to put up a hefty amount of collateral.

What Does A MT-799 Look Like?

An MT-799 is an automated message sent electronically from one bank to another, so you won’t really ’see’ an MT-799 at all. The paperwork associated with an MT-799 will vary from bank to bank, though most banks follow a similar format.

What Information Do I Need To Send A MT-799?

You will need the following information to send an MT-799.

• Name of the advising bank.
• LC Number.
• LC Amount.
• Tenor of Draft.
• Latest shipment date.
• Person or entity liable for confirmation fee.
• Whether the LC is restricted for negotiation or not.
• A description of the merchandise.
• Port and/or country where sugar will be loaded.
• Port and/or country where sugar will be unloaded.

Terminology

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