Abstract

To enable all members of the Fund to participate in the SDR system, the Interim Committee, in its September 29, 1996 Communique, endorsed the Executive Board’s proposal that all participants in the Special Drawing Rights Department should receive an equitable share of cumulative SDR allocations through an amendment of the Fund’s Articles that would provide for a one-time allocation of SDRs, based on a common benchmark ratio of cumulative allocations to present quotas. The Interim Committee emphasized that such an amendment would not in any way affect the Fund’s existing power to allocate SDRs on the basis of a finding of a long-term global need to supplement reserves as and when that need arises.1

Appendix I International Financial Materials

1 Report of the Executive Board to the Board of Governors on the Proposed Fourth Amendment of the Articles of Agreement of the International Monetary Fund

Part I. Introduction

To enable all members of the Fund to participate in the SDR system, the Interim Committee, in its September 29, 1996 Communique, endorsed the Executive Board’s proposal that all participants in the Special Drawing Rights Department should receive an equitable share of cumulative SDR allocations through an amendment of the Fund’s Articles that would provide for a one-time allocation of SDRs, based on a common benchmark ratio of cumulative allocations to present quotas. The Interim Committee emphasized that such an amendment would not in any way affect the Fund’s existing power to allocate SDRs on the basis of a finding of a long-term global need to supplement reserves as and when that need arises.1

A proposed amendment that provides for a special one-time allocation to participants (“special allocation”) is attached to this Report. Set forth below in Part II of this Report is a Commentary on the proposed amendment. Part III describes the procedures for adoption of this amendment and Part IV contains a draft Resolution.

Part II. Commentary

Section A describes the terms that will govern special allocations made to the various categories of participants under Schedule M of the amendment. General features of the proposed amendment, including the relationship between special allocations and allocations made pursuant to Article XVIII, are described in Section B. The description of the proposed amendment contains references to the relevant paragraphs of Schedule M.

One of the important features of the proposed amendment is its treatment of participants with overdue obligations to the Fund. As is discussed further in Section B, in the event that a participant is in arrears to the Fund at the time it receives the special allocation, the SDRs allocated to that participant will be deposited and held in an escrow account within the Special Drawing Rights Department and shall be released to the participant upon its discharge of all its overdue obligations to the Fund (paragraph 5). This mechanism would not apply to general allocations made pursuant to Article XVIII.

A. Categories of Recipients

1. Existing Participants

Under the proposed amendment, the amount of SDRs that will be allocated to members that are participants as of September 19, 1997 (“existing participants”) will be an amount that will raise their net cumulative allocation-to-quota ratios to a level corresponding to a ratio of 29.315788813 percent (the “benchmark ratio”). As a general rule, this ratio will be applied to existing participants’ quotas as of September 19, 1997 (paragraph 1). The application of the benchmark ratio to quotas as of September 19, 1997 has the effect that changes in net cumulative allocations or quotas after September 19, 1997 will not affect the size of the special allocation received by existing participants. As an exception to the above rule, existing participants that have not been able to increase their quotas under the Ninth General Review by September 19, 1997, because they have failed to discharge their overdue obligations to the General Resources Account, will be allocated an amount that is calculated on the basis of their proposed quotas under the Ninth General Review (as set forth in Resolution No. 45-2 of the Board of Governors of the Fund) rather than on the basis of their actual quotas as of September 19, 1997 (paragraph 1). This proposed quota will be used as a basis for calculating the amount of allocation even if the participant never actually increases its quota under the Ninth General Review.

Each existing participant will receive its special allocation on the 30th day following the effective date of the amendment (paragraph 1) unless it has notified the Fund of its desire not to receive the special allocation (paragraph 4).

2. Future Participants

The proposed amendment also makes provision for a special allocation to countries that become participants in the SDR Department after September 19, 1997 but within three months of the date of their membership in the Fund (“future participants”) (paragraph 2).

Regarding the method of calculation, the proposed amendment sets forth a formula that attempts to achieve, to the extent possible, comparability of treatment between existing participants and future participants (paragraph 2(b) and (c)). A future participant will receive a special allocation that will result in its ratio of net cumulative allocation to quota being equal to the benchmark ratio applied to existing participants, as adjusted downwards, in proportion to the change in the total quotas of existing participants that has occurred since September 19, 19972 (paragraph 2(b)(i)), and upwards, in proportion to the change in the total net cumulative allocations of existing participants that are attributable to general allocations made after September 19, 19973 (paragraph 2(b)(ii)).

Future participants will receive a special allocation on the 30th day following the later of: (i) the date of their participation, or (ii) the effective date of the fourth amendment (paragraph 2(a)), unless they notify the Fund of their desire not to receive the allocation (paragraph 4).

3. The Federal Republic of Yugoslavia (Serbia/Montenegro)

As of September 19, 1997, the Federal Republic of Yugoslavia (Serbia/Montenegro) (the “FRY”) has not succeeded to membership in the Fund and participation in the Special Drawing Rights Department in accordance with the terms and conditions of Executive Board Decision No. 10237-(92/150), adopted December 14, 1992, and, therefore, is not an existing participant. Upon satisfying these conditions, it will not be eligible to receive an allocation as a future participant because it will have succeeded retroactively to the former Socialist Federal Republic of Yugoslavia’s (the “SFRY”) membership in the Fund and participation in the SDR Department, along with the four other successor states of the SFRY. Accordingly, the text of the proposed amendment includes a provision that enables the FRY to receive a special allocation once it becomes a participant (paragraph 3).

With respect to the method of calculation, the proposed amendment provides that the amount to be received will be based on the proposed Ninth Review quota offered to the FRY under paragraph 3(c) of Executive Board Decision No. 10237-(92/150), as adjusted upwards in proportion to the change in the total net cumulative allocations of existing participants that are attributable to general allocations made after September 19, 1997 but prior to the date on which the FRY succeeds to membership in the Fund and participation in the Special Drawing Rights Department (paragraph 3(b)). The method of calculating this upward adjustment is the same as that used in the case of future participants.

B. General Features

1. The special allocation to be made pursuant to the proposed amendment will not be made on the basis of a finding of “long-term global need.” Rather, the proposed amendment will add a sentence to Article XV to provide for a one-time allocation of SDRs to existing and future participants in accordance with the provisions of Schedule M.

2. The special allocation will not in any way affect the Fund’s existing power to allocate SDRs on the basis of a finding of “long-term global need” in accordance with Article XVIII. The text of Article XVIII will not be modified by the amendment. Moreover, a specific reference will be added by the amendment to the first sentence of Article XV for the purpose of emphasizing that allocations made on the basis of “long-term global need” will continue to be made exclusively in accordance with the provisions of Article XVIII.

3. Participants will receive only one allocation under the proposed amendment. Accordingly, the proposed amendment will not establish a permanent mechanism for periodic harmonization of net cumulative allocation-to-quota ratios.

4. Unlike Article XVIII, the special allocation provision will operate without the necessity of a decision by an organ of the Fund; conversely, an organ of the Fund will have no authority to modify the operation of the provision.4

5. As noted in the Introduction, SDRs allocated to a participant with overdue obligations to the Fund when the special allocation is made will be deposited in an escrow account within the Special Drawing Rights Department and shall be released to the participant upon discharge of all its overdue obligations to the Fund. The concept of overdue obligations for purposes of this proposed amendment is defined in paragraph 5(c) of Schedule M; it does not include arrears on maintenance of value obligations under Article V, Section 11.

During the period when SDRs are held in an escrow account, these SDRs shall not be available to the participant for any use. Moreover, during this period, the SDRs held in the escrow account would not be included in any calculations of the participant’s allocations or holdings of SDRs for the purposes of the Articles other than calculations under Schedule M. Accordingly, they would not be subject to charges or assessments or give rise to payment of interest under Article XX. They would not be taken into consideration for purposes of calculating the extent of the participant’s obligations to either reconstitute SDRs (Article XIX, Section 6) or accept SDRs from other participants (Article XIX, Section 4). Since SDRs held in an escrow account would not be available to the participant, they would not be taken into consideration for purposes of calculating a participant’s reserves. If SDRs are held in an escrow account when the participant terminates its participation in the Special Drawing Rights Department or when it is decided to liquidate the Special Drawing Rights Department, such SDRs shall be canceled (paragraph 5(b)).

Paragraph 5(d) clarifies that, except for the provisions of that paragraph as described above, the principle of separation between the General Department and the Special Drawing Rights Department and the unconditional character of SDRs as reserve assets shall be maintained.

6. Except for those SDRs that are held in an escrow account pursuant to paragraph 5 of Schedule M, the characteristics of SDRs allocated pursuant to a special allocation will be the same as those of SDRs allocated under Article XVIII.

7. The proposed amendment will also be without prejudice to the application of Article XVIII, Section 2(d), which sets forth the rules regarding the receipt of regular allocations by members that become participants after the commencement of a basic period. Under that provision, the Fund may authorize a new participant to receive regular allocations made during the remainder of the basic period.5 Accordingly, if a future member becomes a participant during a basic period when allocations are being made, it may be authorized to receive a regular allocation under Article XVIII in addition to its special allocation.

Part III. Procedure

1. The procedure for the adoption of amendments of the Articles of Agreement is set forth in Article XXVIII. Under this Article, a proposed amendment is to be communicated to the Chairman of the Board of Governors for consideration by the Board of Governors. If the proposed amendment is approved by the Board of Governors, the Fund is to ask all members whether they accept it. When three-fifths of the members, having 85 percent of the total voting power, have accepted the proposed amendment, the Fund is to certify that fact by a formal communication to all members. Under Article XXVIII(c), an amendment enters into force for every member, whether or not it has accepted the amendment, three months after that date of that communication unless a shorter period is specified. In the case of the amendment now being proposed, the Executive Board recommends that it should enter into force on the date of the formal communication.

2. Members whose voting rights have been suspended cannot appoint a Governor or Alternate Governor to participate in the vote on the Resolution of the Board of Governors (Schedule L, paragraphs 1(b) and 3(a)). However, since this amendment pertains exclusively to the Special Drawing Rights Department, these members have the right to participate in the acceptance of the proposed amendment under Article XXVIII. Therefore, they shall be counted in the total number of members and included in the calculation of the total voting power for that purpose (Schedule L, paragraphs 1(a) and 2).

Part IV. Resolution

WHEREAS the Interim Committee of the Board of Governors has invited the Executive Board to propose an amendment of the Articles of Agreement of the International Monetary Fund providing for a special one-time allocation of SDRs to allow all participants in the Special Drawing Rights Department to receive an equitable share of cumulative SDR allocations; and

WHEREAS the Executive Board has proposed such an amendment and prepared a report on the same;

NOW, THEREFORE, The Board of Governors, noting the said Report of the Executive Board, hereby RESOLVES that:

1. The proposals for modifications (Proposed Fourth Amendment) that are attached to this Resolution and are to be incorporated in the Articles of Agreement of the International Monetary Fund are approved.

2. The Secretary of the Fund is directed to ask, by circular letter, telegram, or other rapid means of communications, all members of the Fund whether they accept, in accordance with the provisions of Article XXVIII of the Articles, the Proposed Fourth Amendment.

3. The circular letter, telegram, or other communication to be sent to all members in accordance with 2 above shall specify that the Proposed Fourth Amendment shall enter into force for all members as of the date on which the Fund certifies, by formal communication addressed to all members, that three-fifths of the members, having eighty-five percent of the total voting power, have accepted the modifications.

APPENDIX

Proposed Fourth Amendment of the Articles of Agreement of the International Monetary Fund

The Governments on whose behalf the present Agreement is signed agree as follows:

  • 1. The text of Article XV, Section 1 shall be amended to read as follows:

    • (a) To meet the need, as and when it arises, for a supplement to existing reserve assets, the Fund is authorized to allocate special drawing rights in accordance with the provisions of Article XVIII to members that are participants in the Special Drawing Rights Department.

    • (b) In addition, the Fund shall allocate special drawing rights to members that are participants in the Special Drawing Rights Department in accordance with the provisions of Schedule M.

  • 2. A new Schedule M shall be added to the Articles, to read as follows:

SCHEDULE M

Special One-Time Allocation of Special Drawing Rights

1. Subject to 4 below, each member that, as of September 19, 1997, is a participant in the Special Drawing Rights Department shall, on the 30th day following the effective date of the fourth amendment of this Agreement, receive an allocation of special drawing rights in an amount that will result in its net cumulative allocation of special drawing rights being equal to 29.315788813 percent of its quota as of September 19, 1997, provided that, for participants whose quotas have not been adjusted as proposed in Resolution No. 45-2 of the Board of Governors, calculations shall be made on the basis of the quotas proposed in that resolution.

2. (a) Subject to 4 below, each country that becomes a participant in the Special Drawing Rights Department after September 19, 1997 but within three months of the date of its membership in the Fund shall receive an allocation of special drawing rights in an amount calculated in accordance with (b) and (c) below on the 30th day following the later of: (i) the date on which the new member becomes a participant in the Special Drawing Rights Department, or (ii) the effective date of the fourth amendment of this Agreement.

(b) For the purposes of (a) above, each participant shall receive an amount of special drawing rights that will result in such participant’s net cumulative allocation being equal to 29.315788813 percent of its quota as of the date on which the member becomes a participant in the Special Drawing Rights Department, as adjusted:

  • (i) first, by multiplying 29.315788813 percent by the ratio of the total of quotas, as calculated under 1 above, of the participants described in (c) below to the total of quotas of such participants as of the date on which the member became a participant in the Special Drawing Rights Department, and

  • (ii) second, by multiplying the product of (i) above by the ratio of the total of the sum of the net cumulative allocations of special drawing rights received under Article XVIII of the participants described in (c) below as of the date on which the member became a participant in the Special Drawing Rights Department and the allocations received by such participants under 1 above to the total of the sum of the net cumulative allocations of special drawing rights received under Article XVIII of such participants as of September 19, 1997 and the allocations received by such participants under 1 above.

(c) For the purposes of the adjustments to be made under (b) above, the participants in the Special Drawing Rights Department shall be members that are participants as of September 19, 1997 and (i) continue to be participants in the Special Drawing Rights Department as of the date on which the member became a participant in the Special Drawing Rights Department, and (ii) have received all allocations made by the Fund after September 19, 1997.

3. (a) Subject to 4 below, if the Federal Republic of Yugoslavia (Serbia/Montenegro) succeeds to the membership in the Fund and the participation in the Special Drawing Rights Department of the former Socialist Federal Republic of Yugoslavia in accordance with the terms and conditions of Executive Board Decision No. 10237-(92/150), adopted December 14, 1992, it shall receive an allocation of special drawing rights in an amount calculated in accordance with (b) below on the 30th day following the later of: (i) the date on which the Federal Republic of Yugoslavia (Serbia/Montenegro) succeeds to membership in the Fund and participation in the Special Drawing Rights Department in accordance with the terms and conditions of Executive Board Decision No. 10237-(92/150), or (ii) the effective date of the fourth amendment of this Agreement.

(b) For the purposes of (a) above, the Federal Republic of Yugoslavia (Serbia/Montenegro) shall receive an amount of special drawing rights that will result in its net cumulative allocation being equal to 29.315788813 percent of the quota proposed to it under paragraph 3(c) of Executive Board Decision No. 10237-(92/150), as adjusted in accordance with 2(b)(ii) and (c) above as of the date on which the Federal Republic of Yugoslavia (Serbia/Montenegro) qualifies for an allocation under (a) above.

4. The Fund shall not allocate special drawing rights under this Schedule to those participants that have notified the Fund in writing prior to the date of the allocation of their desire not to receive the allocation.

5. (a) If, at the time an allocation is made to a participant under 1, 2, or 3 above, the participant has overdue obligations to the Fund, the special drawing rights so allocated shall be deposited and held in an escrow account within the Special Drawing Rights Department and shall be released to the participant upon discharge of all its overdue obligations to the Fund.

(b) Special drawing rights being held in an escrow account shall not be available for any use and shall not be included in any calculations of allocations or holdings of special drawing rights for the purposes of the Articles, except for calculations under this Schedule. If special drawing rights allocated to a participant are held in an escrow account when the participant terminates its participation in the Special Drawing Rights Department or when it is decided to liquidate the Special Drawing Rights Department, such special drawing rights shall be canceled.

(c) For purposes of this paragraph, overdue obligations to the Fund consist of overdue repurchases and charges in the General Resources Account, overdue principal and interest on loans in the Special Disbursement Account, overdue charges and assessments in the Special Drawing Rights Department, and overdue liabilities to the Fund as trustee.

(d) Except for the provisions of this paragraph, the principle of separation between the General Department and the Special Drawing Rights Department and the unconditional character of special drawing rights as reserve assets shall be maintained.

Appendix II Payments Materials

1 Convention Providing a Uniform Law for Bills of Exchange and Promissory Notes

Article I1

The High Contracting Parties undertake to introduce in their respective territories, either in one of the original texts or in their own languages, the Uniform Law forming Annex I of the present Convention.

This undertaking shall, if necessary, be subject to such reservations as each High Contracting Party shall notify at the time of its ratification or accession. These reservations shall be chosen from among those mentioned in Annex II of the present Convention.

The reservation referred to in Articles 8, 12 and 18 of the said Annex II may, however, be made after ratification or accession, provided that they are notified to the Secretary-General of the League of Nations, who shall forthwith communicate the text thereof to the Members of the League of Nations and to the non-Member States on whose behalf the present Convention has been ratified or acceded to. Such reservations shall not take effect until the ninetieth day following the receipt by the Secretary-General of the above-mentioned notification.

Each of the High Contracting Parties may, in urgent cases, make use of the reservations contained in Articles 7 and 22 of the said Annex II, even after ratification or accession. In such cases they must immediately notify direct all other High Contracting Parties and the Secretary-General of the League of Nations. The notification of these reservations shall take effect two days following its receipt by the High Contracting Parties.

Article II

In the territories of each of the High Contracting Parties the Uniform Law shall not apply to bills of exchange and promissory notes already issued at the time of the coming into force of the present Convention.

Article III

The present Convention, the French and English texts of which shall be equally authentic, shall bear this day’s date.

It may be signed thereafter until September 6th, 1930, on behalf of any Member of the League of Nations or non-Member State.

Article IV

The present Convention shall be ratified.

The instruments of ratification shall be deposited before September 1st, 1932, with the Secretary-General of the League of Nations, who shall forthwith notify receipt thereof to all the Members of the League of Nations and to the non-Member States Parties to the present Convention.

Article V

As from September 6th, 1930, any Member of the League of Nations and any non-Member State may accede thereto.

Such accession shall be effected by a notification to the Secretary-General of the League of Nations, such notification to be deposited in the archives of the Secretariat.

The Secretary-General shall notify such deposit forthwith to all High Contracting Parties that have signed or acceded to the present Convention.

Article VI

The present Convention shall not come into force until it has been ratified or acceded to on behalf of seven Members of the League of Nations or non-Member States, including therein three of the Members of the League permanently represented on the Council.

The date of entry into force shall be the ninetieth day following the receipt by the Secretary-General of the League of Nations of the seventh ratification or accession in accordance with the first paragraph of the present Article.

The Secretary-General of the League of Nations, when making the notifications provided for in Articles IV and V, shall state in particular that the ratifications or accessions referred to in the first paragraph of the present Article have been received.

Article VII

Every ratification or accession effected after the entry into force of the Convention in accordance with Article VI shall take effect on the ninetieth day following the date of receipt thereof by the Secretary-General of the League of Nations.

Article VIII

Except in urgent cases the present Convention may not be denounced before the expiry of two years from the date on which it has entered into force in respect of the Member of the League or non-Member State denouncing it; such denunciation shall take effect as from the ninetieth day following the receipt by the Secretary-General of the notification addressed to him.

Every denunciation shall be immediately communicated by the Secretary-General of the League of Nations to all the other High Contracting Parties.

In urgent cases a High Contracting Party which denounces the Convention shall immediately notify direct all other High Contracting Parties, and the denunciation shall take effect two days after the receipt of such notification by the said High Contracting Parties. A High Contracting Party denouncing the Convention in these circumstances shall also inform the Secretary-General of the League of Nations of its decision.

Each denunciation shall take effect only as regards the High Contracting Party on whose behalf it has been made.

Article IX

Every Member of the League of Nations and every non-Member State in respect of which the present Convention is in force, may forward to the Secretary-General of the League of Nations, after the expiry of the fourth year following the entry into force of the Convention, a request for the revision of some or all of the provisions of this Convention.

If such request, after being communicated to the other Members or non-Member States between which the Convention is at that time in force, is supported within one year by at least six of them, the Council of the League of Nations shall decide whether a Conference shall be convened for the purpose.

Article X

The High Contracting Parties may declare at the time of signature, ratification or accession that it is not their intention in accepting the present Convention to assume any liability in respect of all or any of their colonies, protectorates or territories under suzerainty or mandate, in which case the present Convention shall not be applicable to the territories mentioned in such declaration.

The High Contracting Parties may at any time subsequently inform the Secretary-General of the League of Nations that they intend to apply the present Convention to all or any of their territories referred to in the declaration provided for in the preceding paragraph. In this case, the Convention shall apply to the territories referred to in the notification ninety days after its receipt by the Secretary-General of the League of Nations.

They further reserve the right to denounce it, in accordance with the conditions of Article VIII, on behalf of all or any of their colonies, protectorates or territories under suzerainty or mandate.

Article XI

The present Convention shall be registered by the Secretary-General of the League of Nations as soon as it comes into force. It shall then be published as soon as possible in the League of Nations Treaty Series.

* * *

In faith whereof the above-mentioned Plenipotentiaries have signed the present Convention.

DONE at Geneva, the seventh day of June, one thousand nine hundred and thirty, in a single copy, which shall be deposited in the archives of the Secretariat of the League of Nations, and of which authenticated copies shall be delivered to all Members of the League of Nations and non-Member States represented at the Conference.

ANNEX I UNIFORM LAW ON BILLS OF EXCHANGE AND PROMISSORY NOTES

TITLE I BILLS OF EXCHANGE

CHAPTER I. ISSUE AND FORM OF A BILL OF EXCHANGE

Article 1

A bill of exchange contains:

1. The term “bill of exchange” inserted in the body of the instrument and expressed in the language employed in drawing up the instrument;

2. An unconditional order to pay a determinate sum of money;

3. The name of the person who is to pay (drawee);

4. A statement of the time of payment;

5. A statement of the place where payment is to be made;

6. The name of the person to whom or to whose order payment is to be made;

7. A statement of the date and of the place where the bill is issued;

8. The signature of the person who issues the bill (drawer).

Article 2

An instrument in which any of the requirements mentioned in the preceding article is wanting is invalid as a bill of exchange, except in the case specified in the following paragraphs:

A bill of exchange in which the time of payment is not specified is deemed to be payable at sight.

In default of special mention, the place specified beside the name of the drawee is deemed to be the place of payment, and at the same time the place of the domicile of the drawee.

A bill of exchange which does not mention the place of its issue is deemed to have been drawn in the place mentioned beside the name of the drawer.

Article 3

A bill of exchange may be drawn payable to drawer’s order.

It may be drawn on the drawer himself.

It may be drawn for account of a third person.

Article 4

A bill of exchange may be payable at the domicile of a third person either in the locality where the drawee has his domicile or in another locality.

Article 5

When a bill of exchange is payable at sight, or at a fixed period after sight, the drawer may stipulate that the sum payable shall bear interest. In the case of any other bill of exchange, this stipulation is deemed not to be written (non écrite).

The rate of interest must be specified in the bill; in default of such specification, the stipulation shall be deemed not to be written (non écrite).

Interest runs from the date of the bill of exchange, unless some other date is specified.

Article 6

When the sum payable by a bill of exchange is expressed in words and also in figures, and there is a discrepancy between the two, the sum denoted by the words is the amount payable.

Where the sum payable by a bill of exchange is expressed more than once in words or more than once in figures, and there is a discrepancy, the smaller sum is the sum payable.

Article 7

If a bill of exchange bears signatures of persons incapable of binding themselves by a bill of exchange, or forged signatures, or signatures of fictitious persons, or signatures which for any other reason cannot bind the persons who signed the bill of exchange or on whose behalf it was signed, the obligations of the other persons who signed it are none the less valid.

Article 8

Whosoever puts his signature on a bill of exchange as representing a person for whom he had no power to act is bound himself as a party to the bill and, if he pays, has the same rights as the person for whom he purported to act. The same rule applies to a representative who has exceeded his powers.

Article 9

The drawer guarantees both acceptance and payment.

He may release himself from guaranteeing acceptance; every stipulation by which he releases himself from the guarantee of payment is deemed not to be written (non écrite).

Article 10

If a bill of exchange, which was incomplete when issued, has been completed otherwise than in accordance with the agreements entered into, the non-observance of such agreements may not be set up against the holder unless he has acquired the bill of exchange in bad faith or, in acquiring it, has been guilty of gross negligence.

CHAPTER II. ENDORSEMENT

Article 11

Every bill of exchange, even if not expressly drawn to order, may be transferred by means of endorsement.

When the drawer has inserted in a bill of exchange the words “not to order” or an equivalent expression, the instrument can only be transferred according to the form, and with the effects of an ordinary assignment.

The bill may be endorsed even in favour of the drawee, whether he has accepted or not, or of the drawer, or of any other party to the bill. These persons may re-endorse the bill.

Article 12

An endorsement must be unconditional. Any condition to which it is made subject is deemed not to be written (non écrite).

A partial endorsement is null and void.

An endorsement “to bearer” is equivalent to an endorsement in blank.

Article 13

An endorsement must be written on the bill of exchange or on a slip affixed thereto (allonge). It must be signed by the endorser.

The endorsement may leave the beneficiary unspecified or may consist simply of the signature of the endorser (endorsement in blank). In the latter case, the endorsement, to be valid, must be written on the back of the bill of exchange or on the slip attached thereto (allonge).

Article 14

An endorsement transfers all the rights arising out of a bill of exchange.

If the endorsement is in blank, the holder may:

  • (1) Fill up the blank either with his own name or with the name of some other person;

  • (2) Re-endorse the bill in blank, or to some other person;

  • (3) Transfer the bill to a third person without filling up the blank, and without endorsing it.

Article 15

In the absence of any contrary stipulation, the endorser guarantees acceptance and payment.

He may prohibit any further endorsement; in this case, he gives no guarantee to the persons to whom the bill is subsequently endorsed.

Article 16

The possessor of a bill of exchange is deemed to be the lawful holder if he establishes his title to the bill through an uninterrupted series of endorsements, even if the last endorsement is in blank. In this connection, cancelled endorsements are deemed not to be written (non écrits). When an endorsement in blank is followed by another endorsement, the person who signed this last endorsement is deemed to have acquired the bill by the endorsement in blank.

Where a person has been dispossessed of a bill of exchange, in any manner whatsoever, the holder who establishes his right thereto in the manner mentioned in the preceding paragraph is not bound to give up the bill unless he has acquired it in bad faith, or unless in acquiring it he has been guilty of gross negligence.

Article 17

Persons sued on a bill of exchange cannot set up against the holder defences founded on their personal relations with the drawer or with previous holders, unless the holder, in acquiring the bill, has knowingly acted to the detriment of the debtor.

Article 18

When an endorsement contains the statements “value in collection” (“valeur en recouvrement”), “for collection” (“pour encaissement “by procuration” (“par procuration”) or any other phrase implying a simple mandate, the holder may exercise all rights arising out of the bill of exchange, but he can only endorse it in his capacity as agent.

In this case, the parties liable can only set up against the holder defences which could be set up against the endorser.

The mandate contained in an endorsement by procuration does not terminate by reason of the death of the party giving the mandate or by reason of his becoming legally incapable.

Article 19

When an endorsement contains the statements “value in security” (“valeur en garantie”), “value in pledge” (“valeur en gage”), or any other statement implying a pledge, the holder may exercise all the rights arising out of the bill of exchange, but an endorsement by him has the effects only of an endorsement by an agent.

The parties liable cannot set up against the holder defences founded on their personal relations with the endorser, unless the holder, in receiving the bill, has knowingly acted to the detriment of the debtor.

Article 20

An endorsement after maturity has the same effects as an endorsement before maturity. Nevertheless, an endorsement after protest for non-payment, or after the expiration of the limit of time fixed for drawing up the protest, operates only as an ordinary assignment.

Failing proof to the contrary, an endorsement without date is deemed to have been placed on the bill before the expiration of the limit of time fixed for drawing up the protest.

CHAPTER III. ACCEPTANCE

Article 21

Until maturity, a bill of exchange may be presented to the drawee for acceptance at his domicile, either by the holder or by a person who is merely in possession of the bill.

Article 22

In any bill of exchange, the drawer may stipulate that it shall be presented for acceptance with or without fixing a limit of time for presentment.

Except in the case of a bill payable at the address of a third party or in a locality other than that of the domicile of the drawee, or, except in the case of a bill drawn payable at a fixed period after sight, the drawer may prohibit presentment for acceptance.

He may also stipulate that presentment for acceptance shall not take place before a named date.

Unless the drawer has prohibited acceptance, every endorser may stipulate that the bill shall be presented for acceptance, with or without fixing a limit of time for presentment.

Article 23

Bills of exchange payable at a fixed period after sight must be presented for acceptance within one year of their date.

The drawer may abridge or extend this period.

These periods may be abridged by the endorsers.

Article 24

The drawee may demand that a bill shall be presented to him a second time on the day after the first presentment. Parties interested are not allowed to set up that this demand has not been complied with unless this request is mentioned in the protest.

The holder is not obliged to surrender to the drawee a bill presented for acceptance.

Article 25

An acceptance is written on the bill of exchange. It is expressed by the word “accepted” or any other equivalent term. It is signed by the drawee. The simple signature of the drawee on the face of the bill constitutes an acceptance.

When the bill is payable at a certain time after sight, or when it must be presented for acceptance within a certain limit of time in accordance with a special stipulation, the acceptance must be dated as of the day when the acceptance is given, unless the holder requires that it shall be dated as of the day of presentment. If it is undated, the holder, in order to preserve his right of recourse against the endorsers and the drawer, must authenticate the omission by a protest drawn up within the proper time.

Article 26

An acceptance is unconditional, but the drawee may restrict it to part of the sum payable.

Every other modification introduced by an acceptance into the tenor of the bill of exchange operates as a refusal to accept. Nevertheless, the acceptor is bound according to the terms of his acceptance.

Article 27

When the drawer of a bill has indicated a place of payment other than the domicile of the drawee without specifying a third party at whose address payment must be made, the drawee may name such third party at the time of acceptance. In default of this indication, the acceptor is deemed to have undertaken to pay the bill himself at the place of payment.

If a bill is payable at the domicile of the drawee, the latter may in his acceptance indicate an address in the same place where payment is to be made.

Article 28

By accepting, the drawee undertakes to pay the bill of exchange at its maturity.

In default of payment, the holder, even if he is the drawer, has a direct action on the bill of exchange against the acceptor for all that can be demanded in accordance with Articles 48 and 49.

Article 29

Where the drawee who has put his acceptance on a bill has cancelled it before restoring the bill, acceptance is deemed to be refused. Failing proof to the contrary, the cancellation is deemed to have taken place before the bill was restored.

Nevertheless, if the drawee has notified his acceptance in writing to the holder or to any party who has signed the bill, he is liable to such parties according to the terms of his acceptance.

CHAPTER IV. “AVALS”

Article 30

Payment of a bill of exchange may be guaranteed by an “aval” as to the whole or part of its amount.

This guarantee may be given by a third person or even by a person who has signed as a party to the bill.

Article 31

The “aval” is given either on the bill itself or on an “allonge”.

It is expressed by the words “good as aval” (“bon pour aval”) or by any other equivalent formula. It is signed by the giver of the “aval”.

It is deemed to be constituted by the mere signature of the giver of the “aval” placed on the face of the bill, except in the case of the signature of the drawee or of the drawer.

An “aval” must specify for whose account it is given. In default of this, it is deemed to be given for the drawer.

Article 32

The giver of an “aval” is bound in the same manner as the person for whom he has become guarantor.

His undertaking is valid even when the liability which he has guaranteed is inoperative for any reason other than defect of form.

He has, when he pays a bill of exchange, the rights arising out of the bill of exchange against the person guaranteed and against those who are liable to the latter on the bill of exchange.

CHAPTER V. MATURITY

Article 33

A bill of exchange may be drawn payable:

  • At sight;

  • At a fixed period after sight;

  • At a fixed period after date;

  • At a fixed date.

Bills of exchange at other maturities or payable by instalments are null and void.

Article 34

A bill of exchange at sight is payable on presentment. It must be presented for payment within a year of its date. The drawer may abridge or extend this period. These periods may be abridged by the endorsers.

The drawer may prescribe that a bill of exchange payable at sight must not be presented for payment before a named date. In this case, the period for presentment begins from the said date.

Article 35

The maturity of a bill of exchange payable at a fixed period after sight is determined either by the date of the acceptance or by the date of the protest.

In the absence of the protest, an undated acceptance is deemed, so far as regards the acceptor, to have been given on the last day of the limit of time for presentment for acceptance.

Article 36

Where a bill of exchange is drawn at one or more months after date or after sight, the bill matures on the corresponding date of the month when payment must be made. If there be no corresponding date, the bill matures on the last day of this month.

When a bill of exchange is drawn at one or more months and a-half after date or sight, entire months must first be calculated.

If the maturity is fixed at the commencement, in the middle (mid-January or mid-February, etc.) or at the end of the month, the first, fifteenth or last day of the month is to be understood.

The expressions “eight days” or “fifteen days” indicate not one or two weeks, but a period of eight or fifteen actual days.

The expression “half-month” means a period of fifteen days.

Article 37

When a bill of exchange is payable on a fixed day in a place where the calendar is different from the calendar in the place of issue, the day of maturity is deemed to be fixed according to the calendar of the place of payment.

When a bill of exchange drawn between two places having different calendars is payable at a fixed period after date, the day of issue is referred to the corresponding day of the calendar in the place of payment, and the maturity is fixed accordingly.

The time for presenting bills of exchange is calculated in accordance with the rules of the preceding paragraph.

These rules do not apply if a stipulation in the bill or even the simple terms of the instrument indicate an intention to adopt some different rule.

CHAPTER VI. PAYMENT

Article 38

The holder of a bill of exchange payable on a fixed day or at a fixed period after date or after sight must present the bill for payment either on the day on which it is payable or on one of the two business days which follow.

The presentment of a bill of exchange at a clearing-house is equivalent to a presentment for payment.

Article 39

The drawee who pays a bill of exchange may require that it shall be given up to him receipted by the holder.

The holder may not refuse partial payment.

In case of partial payment the drawee may require that mention of this payment shall be made on the bill, and that a receipt therefor shall be given to him.

Article 40

The holder of a bill of exchange cannot be compelled to receive payment thereof before maturity.

The drawee who pays before maturity does so at his own risk and peril.

He who pays at maturity is validly discharged, unless he has been guilty of fraud or gross negligence. He is bound to verify the regularity of the series of endorsements, but not the signature of the endorsers.

Article 41

When a bill of exchange is drawn payable in a currency which is not that of the place of payment, the sum payable may be paid in the currency of the country, according to its value on the date of maturity. If the debtor is in default, the holder may at his option demand that the amount of the bill be paid in the currency of the country according to the rate on the day of maturity or the day of payment.

The usages of the place of payment determine the value of foreign currency. Nevertheless, the drawer may stipulate that the sum payable shall be calculated according to a rate expressed in the bill.

The foregoing rules shall not apply to the case in which the drawer has stipulated that payment must be made in a certain specified currency (stipulation for effective payment in foreign currency).

If the amount of the bill of exchange is specified in a currency having the same denomination, but a different value in the country of issue and the country of payment, reference is deemed to be made to the currency of the place of payment.

Article 42

When a bill of exchange is not presented for payment within the limit of time fixed by Article 38, every debtor is authorised to deposit the amount with the competent authority at the charge, risk and peril of the holder.

CHAPTER VII. RECOURSE FOR NON-ACCEPTANCE OR NON-PAYMENT

Article 43

The holder may exercise his right of recourse against the endorsers, the drawer and the other parties liable:

At maturity:

  • If payment has not been made;

Even before maturity:

  • (1) If there has been total or partial refusal to accept;

  • (2) In the event of the bankruptcy (faillite) of the drawee, whether he has accepted or not, or in the event of a stoppage of payment on his part, even when not declared by a judgment, or where execution has been levied against his goods without result;

  • (3) In the event of the bankruptcy (faillite) of the drawer of a non-acceptable bill.

Article 44

Default of acceptance or of payment must be evidenced by an authentic act (protest for non-acceptance or non-payment).

Protest for non-acceptance must be made with the limit of time fixed for presentment for acceptance. If, in the case contemplated by Article 24, paragraph 1, the first presentment takes place on the last day of that time, the protest may nevertheless be drawn up on the next day.

Protest for non-payment of a bill of exchange payable on a fixed day or at a fixed period after date or sight must be made on one of the two business days following the day on which the bill is payable. In the case of a bill payable at sight, the protest must be drawn up under the conditions specified in the foregoing paragraph for the drawing up of a protest for non-acceptance.

Protest for non-acceptance dispenses with presentment for payment and protest for non-payment.

If there is a stoppage of payment on the part of the drawee, whether he has accepted or not, or if execution has been levied against his goods without result, the holder cannot exercise his right of recourse until after presentment of the bill to the drawee for payment and after the protest has been drawn up.

If the drawee, whether he has accepted or not, is declared bankrupt (faillite déclarée), or the event of the declared bankruptcy of the drawer of a non-acceptable bill, the production of the judgment declaring the bankruptcy suffices to enable the holder to exercise his right of recourse.

Article 45

The holder must give notice of non-acceptance or non-payment to his endorser and to the drawer within the four business days which follow the day for protest or, in case of a stipulation “retour sans frais”, the day for presentment. Every endorser must, within the two business days following the day on which he receives notice, notify his endorser of the notice he has received, mentioning the names and addresses of those who have given the previous notices, and so on through the series until the drawer is reached. The periods mentioned above run from the receipt of the preceding notice.

When, in conformity with the preceding paragraph, notice is given to a person who has signed a bill of exchange, the same notice must be given within the same limit of time to his avaliseur.

Where an endorser either has not specified his address or has specified it in an illegible manner, it is sufficient that notice should be given to the preceding endorser.

A person who must give notice may give it in any form whatever, even by simply returning the bill of exchange.

He must prove that he has given notice within the time allowed. This time-limit shall be regarded as having been observed if a letter giving the notice has been posted within the prescribed time.

A person who does not give notice within the limit of time mentioned above does not forfeit his rights. He is responsible for the injury, if any, caused by his negligence, but the damages shall not exceed the amount of the bill of exchange.

Article 46

The drawer, an endorser, or a person guaranteeing payment by aval(avaliseur) may, by the stipulation “retour sans frais”, “sans protêt”, or any other equivalent expression written on the instrument and signed, release the holder from having a protest of non-acceptance or non-payment drawn up in order to exercise his right of recourse.

This stipulation does not release the holder from presenting the bill within the prescribed time, or from the notices he has to give. The burden of proving the non-observance of the limits of time lies on the person who seeks to set it up against the holder.

If the stipulation is written by the drawer, it is operative in respect of all persons who have signed the bill; if it is written by an endorser or an avaliseur, it is operative only in respect of such endorser or avaliseur. If, in spite of the stipulation written by the drawer, the holder has the protest drawn up, he must bear the expenses thereof. When the stipulation emanates from an endorser or avaliseur, the cost of the protest, if one is drawn up, may be recovered from all the persons who have signed the bill.

Article 47

All drawers, acceptors, endorsers or guarantors by aval of a bill of exchange are jointly and severally liable to the holder.

The holder has the right of proceeding against all these persons individually or collectively without being required to observe the order in which they have become bound.

The same right is possessed by any person signing the bill who has taken it up and paid it.

Proceedings against one of the parties liable do not prevent proceedings against the others, even though they may be subsequent to the party first proceeded against.

Article 48

The holder may recover from the person against whom he exercises his right of recourse:

(1) The amount of the unaccepted or unpaid bill of exchange with interest, if interest has been stipulated for;

(2) Interest at the rate of 6 per cent from the date of maturity;

(3) The expenses of protest and of the notices given as well as other expenses.

If the right of recourse is exercised before maturity, the amount of the bill shall be subject to a discount. This discount shall be calculated according to the official rate of discount (bank-rate) ruling on the date when recourse is exercised at the place of domicile of the holder.

Article 49

A party who takes up and pays a bill of exchange can recover from the parties liable to him:

(1) The entire sum which he has paid;

(2) Interest on the said sum calculated at the rate of 6 per cent, starting from the day when he made payment;

(3) Any expenses which he has incurred.

Article 50

Every party liable against whom a right of recourse is or may be exercised, can require against payment, that the bill shall be given up to him with the protest and a receipted account.

Every endorser who has taken up and paid a bill of exchange may cancel his own endorsement and those of subsequent endorsers.

Article 51

In the case of the exercise of the right of recourse after partial acceptance, the party who pays the sum in respect of which the bill has not been accepted can require that this payment shall be specified on the bill and that he shall be given a receipt therefor. The holder must also give him a certified copy of the bill, together with the protest, in order to enable subsequent recourse to be exercised.

Article 52

Every person having the right of recourse may, in the absence of agreement to the contrary, reimburse himself by means of a fresh bill (redraft) to be drawn at sight on one of the parties liable to him and payable at the domicile of that party.

The redraft includes, in addition to the sums mentioned in Articles 48 and 49, brokerage and the cost of stamping the redraft.

If the redraft is drawn by the holder, the sum payable is fixed according to the rate for a sight bill drawn at the place where the original bill was payable upon the party liable at the place of his domicile. If the redraft is drawn by an endorser, the sum payable is fixed according to the rate for a sight bill drawn at the place where the drawer of the redraft is domiciled upon the place of domicile of the party liable.

Article 53

After the expiration of the limits of time fixed:

For the presentment of a bill of exchange drawn at sight or at a fixed period after sight;

For drawing up the protest for non-acceptance or non-payment;

For presentment for payment in the case of a stipulation retour sans frais, the holder loses his rights of recourse against the endorsers, against the drawer and against the other parties liable, with the exception of the acceptor.

In default of presentment for acceptance within the limit of time stipulated by the drawer, the holder loses his right of recourse for nonpayment, as well as for non-acceptance, unless it appears from the terms of the stipulation that the drawer only meant to release himself from the guarantee of acceptance.

If the stipulation for a limit of time for presentment is contained in an endorsement, the endorser alone can avail himself of it.

Article 54

Should the presentment of the bill of exchange or the drawing up of the protest within the prescribed limits of time be prevented by an insurmountable obstacle (legal prohibition (prescription légale) by any State or other case of vis major), these limits of time shall be extended.

The holder is bound to give notice without delay of the case of vis major to his endorser and to specify this notice, which he must date and sign, on the bill or on an allonge; in other respects the provisions of Article 45 shall apply.

When vis major has terminated, the holder must without delay present the bill of exchange for acceptance or payment and, if need be, draw up the protest.

If vis major continues to operate beyond thirty days after maturity, recourse may be exercised, and neither presentment nor the drawing up of a protest shall be necessary.

In the case of bills of exchange drawn at sight or at a fixed period after sight, the time-limit of thirty days shall run from the date on which the holder, even before the expiration of the time for presentment, has given notice of vis major to his endorser. In the case of bills of exchange drawn at a certain time after sight, the above time-limit of thirty days shall be added to the period after sight specified in the bill of exchange.

Facts which are purely personal to the holder or to the person whom he has entrusted with the presentment of the bill or drawing up of the protest are not deemed to constitute cases of vis major.

CHAPTER VIII. INTERVENTION FOR HONOUR
1. GENERAL PROVISIONS

Article 55

The drawer, an endorser, or a person given an aval may specify a person who is to accept or pay in case of need.

A bill of exchange may, subject as hereinafter mentioned, be accepted or paid by a person who intervenes for the honour of any debtor against whom a right of recourse exists.

The person intervening may be a third party, even the drawee, or, save the acceptor, a party already liable on the bill of exchange.

The person intervening is bound to give, within two business days, notice of his intervention to the party for whose honour he has intervened. In default, he is responsible for the injury, if any, due to his negligence, but the damages shall not exceed the amount of the bill of exchange.

2. ACCEPTANCE BY INTERVENTION (FOR HONOUR)

Article 56

There may be acceptance by intervention in all cases where the holder has a right of recourse before maturity on a bill which is capable of acceptance.

When the bill of exchange indicates a person who is designated to accept or pay it in case of need at the place of payment, the holder may not exercise his rights of recourse before maturity against the person naming such referee in case of need and against subsequent signatories, unless he has presented the bill of exchange to the referee in case of need and until, if acceptance is refused by the latter, this refusal has been authenticated by a protest.

In other cases of intervention the holder may refuse an acceptance by intervention. Nevertheless, if he allows it, he loses his right of recourse before maturity against the person on whose behalf such acceptance was given and against subsequent signatories.

Article 57

Acceptance by intervention is specified on the bill of exchange. It is signed by the person intervening. It mentions the person for whose honour it has been given and, in default of such mention, the acceptance is deemed to have been given for the honour of the drawer.

Article 58

The acceptor by intervention is liable to the holder and to the endorsers, subsequent to the party for whose honour he intervened, in the same manner as such party.

Notwithstanding an acceptance by intervention, the party for whose honour it has been given and the parties liable to him may require the holder, in exchange for payment of the sum mentioned in Article 48, to deliver the bill, the protest, and a receipted account, if any.

3. PAYMENT BY INTERVENTION

Article 59

Payment by intervention may take place in all cases where, either at maturity or before maturity, the holder has a right of recourse on the bill.

Payment must include the whole amount payable by the party for whose honour it is made.

It must be made at the latest on the day following the last day allowed for drawing up the protest for non-payment.

Article 60

If a bill of exchange has been accepted by persons intervening who are domiciled in the place of payment, or if persons domiciled there have been named as referees in case of need, the holder must present the bill to all these persons and, if necessary, have a protest for non-payment drawn up at the latest on the day following the last day allowed for drawing up the protest.

In default of protest within this limit of time, the party who has named the referee in case of need, or for whose account the bill has been accepted, and the subsequent endorsers, are discharged.

Article 61

The holder who refuses payment by intervention loses his right of recourse against any persons who would have been discharged thereby.

Article 62

Payment by intervention must be authenticated by a receipt given on the bill of exchange mentioning the person for whose honour payment has been made. In default of such mention, payment is deemed to have been made for the honour of the drawer.

The bill of exchange and the protest, if any, must be given up to the person paying by intervention.

Article 63

The person paying by intervention acquires the rights arising out of the bill of exchange against the party for whose honour he has paid and against persons who are liable to the latter on the bill of exchange. Nevertheless, he cannot re-endorse the bill of exchange.

Endorsers subsequent to the party for whose honour payment has been made are discharged.

In case of competition for payment by intervention, the payment which effects the greater number of releases has the preference. Any person who, with a knowledge of the facts, intervenes in a manner contrary to this rule, loses his right of recourse against those who would have been discharged.

CHAPTER IX. PARTS OF A SET AND COPIES
1. PARTS OF A SET

Article 64

A bill of exchange can be drawn in a set of two or more identical parts.

These parts must be numbered in the body of the instrument itself; in default, each part is considered as a separate bill of exchange.

Every holder of a bill which does not specify that it has been drawn as a sole bill may, at his own expense, require the delivery of two or more parts. For this purpose he must apply to his immediate endorser, who is bound to assist him in proceeding against his own endorser, and so on in the series until the drawer is reached. The endorsers are bound to reproduce their endorsements on the new parts of the set.

Article 65

Payment made on one part of a set operates as a discharge, even though there is no stipulation that this payment annuls the effect of the other parts. Nevertheless, the drawee is liable on each accepted part which he has not recovered.

An endorser who has transferred parts of a set to different persons, as well as subsequent endorsers, are liable on all the parts bearing their signature which have not been restored.

Article 66

A party who has sent one part for acceptance must indicate on the other parts the name of the person in whose hands this part is to be found. That person is bound to give it up to the lawful holder of another part.

If he refuses, the holder cannot exercise his right of recourse until he has had a protest drawn up specifying:

(1) That the part sent for acceptance has not been given up to him on his demand;

(2) That acceptance or payment could not be obtained on another of the parts.

2. COPIES

Article 67

Every holder of a bill of exchange has the right to make copies of it.

A copy must reproduce the original exactly, with the endorsements and all other statements to be found therein. It must specify where the copy ends.

It may be endorsed and guaranteed by aval in the same manner and with the same effects as the original.

Article 68

A copy must specify the person in possession of the original instrument. The latter is bound to hand over the said instrument to the lawful holder of the copy.

If he refuses, the holder may not exercise his right of recourse against the persons who have endorsed the copy or guaranteed it by aval until he has had a protest drawn up specifying that the original has not been given up to him on his demand.

Where the original instrument, after the last endorsement before the making of the copy contains a clause “commencing from here an endorsement is only valid if made on the copy” or some equivalent formula, a subsequent endorsement on the original is null and void.

CHAPTER X. ALTERATIONS

Article 69

In case of alteration of the text of a bill of exchange, parties who have signed subsequent to the alteration are bound according to the terms of the altered text; parties who have signed before the alteration are bound according to the terms of the original text.

CHAPTER XI. LIMITATION OF ACTIONS

Article 70

All actions arising out of a bill of exchange against the acceptor are barred after three years, reckoned from the date of maturity.

Actions by the holder against the endorsers and against the drawer are barred after one year from the date of a protest drawn up within proper time, or from the date of maturity where there is a stipulation retour sans frais.

Actions by endorsers against each other and against the drawer are barred after six months, reckoned from the day when the endorser took up and paid the bill or from the day when he himself was sued.

Article 71

Interruption of the period of limitation is only effective against the person in respect of whom the period has been interrupted.

CHAPTER XII. GENERAL PROVISIONS

Article 72

Payment of a bill of exchange which falls due on a legal holiday (jour férié légal) cannot be demanded until the next business day. So, too, all other proceedings relating to a bill of exchange, in particular presentment for acceptance and protest, can only be taken on a business day.

Where any of these proceedings must be taken within a certain limit of time the last day of which is a legal holiday (jour férié légal), the limit of time is extended until the first business day which follows the expiration of that time. Intermediate holidays (jours fériés) are included in computing limits of time.

Article 73

Legal or contractual limits of time do not include the day on which the period commences.

Article 74

No days of grace, whether legal or judicial, are permitted.

TITLE II PROMISSORY NOTES

Article 75

A promissory note contains:

  • (1) The term “promissory note” inserted in the body of the instrument and expressed in the language employed in drawing up the instrument;

  • (2) An unconditional promise to pay a determinate sum of money;

  • (3) A statement of the time of payment;

  • (4) A statement of the place where payment is to be made;

  • (5) The name of the person to whom or to whose order payment is to be made;

  • (6) A statement of the date and of the place where the promissory note is issued;

  • (7) The signature of the person who issues the instrument (maker).

Article 76

An instrument in which any of the requirements mentioned in the preceding article are wanting is invalid as a promissory note except in the cases specified in the following paragraphs:

A promissory note in which the time of payment is not specified is deemed to be payable at sight.

In default of special mention, the place where the instrument is made is deemed to be the place of payment and at the same time the place of the domicile of the maker.

A promissory note which does not mention the place of its issue is deemed to have been made in the place mentioned beside the name of the maker.

Article 77

The following provisions relating to bills of exchange apply to promissory notes so far as they are not inconsistent with the nature of these instruments, viz.:

  • Endorsement (Articles 11 to 20);

  • Time of payment (Articles 33 to 37);

  • Payment (Articles 38 to 42);

  • Recourse in case of non-payment (Articles 43 to 50, 52 to 54);

  • Payment by intervention (Articles 55, 59 to 63);

  • Copies (Articles 67 and 68);

  • Alterations (Article 69);

  • Limitation of actions (Articles 70 and 71);

  • Holidays, computation of limits of time and prohibition of days of grace (Articles 72, 73, and 74).

The following provisions are also applicable to a promissory note: The provisions concerning a bill of exchange payable at the address of a third party or in a locality other than that of the domicile of the drawee (Articles 4 and 27); stipulation for interest (Article 5); discrepancies as regards the sum payable (Article 6); the consequences of signature under the conditions mentioned in Article 7, the consequences of signature by a person who acts without authority or who exceeds his authority (Article 8); and provisions concerning a bill of exchange in blank (Article 10).

The following provisions are also applicable to a promissory note: Provisions relating to guarantee by aval (Articles 30-32); in the case provided for in Article 31, last paragraph, if the aval does not specify on whose behalf it has been given, it is deemed to have been given on behalf of the maker of the promissory note.

Article 78

The maker of a promissory note is bound in the same manner as an acceptor of a bill of exchange.

Promissory notes payable at a certain time after sight must be presented for the visa of the maker within the limits of time fixed by Article 23. The limit of time runs from the date of the visa signed by the maker on the note. The refusal of the maker to give his visa with the date thereon must be authenticated by a protest (Article 25), the date of which marks the commencement of the period of time after sight.

ANNEX II

Article 1

Each of the High Contracting Parties may stipulate that the obligation to insert in bills of exchange issued in its territory the term “bill of exchange”, as laid down in Article 1, 1 of the Uniform Law, shall not apply until six months after the entry into force of the present Convention.

Article 2

Each of the High Contracting Parties has, as regards undertakings entered into in respect of bills of exchange in its own territory, the right to determine in what manner an actual signature may be replaced by an authentic declaration written on the bill which evidences the consent of the party who should have signed.

Article 3

Each of the High Contracting Parties reserves the right not to embody Article 10 of the Uniform Law in its national law.

Article 4

By way of derogation from Article 31, paragraph 1, of the Uniform Law, each of the High Contracting Parties shall have the right to decide that an aval may be given in its territory by a separate instrument specifying the place in which the instrument has been executed.

Article 5

Each of the High Contracting Parties may supplement Article 38 of the Uniform Law so as to provide that the holder of a bill of exchange payable in its territory shall be obliged to present it on the actual day of maturity. Failure to comply with this obligation may only give rise to a right to damages.

The other High Contracting Parties shall have the right to determine the conditions subject to which such obligation will be recognised by them.

Article 6

For the purpose of giving effect to the last paragraph of Article 38 of the Uniform Law, each of the High Contracting Parties shall determine the institutions which, according to its national law, are to be regarded as clearing-houses.

Article 7

Each of the High Contracting Parties shall have the right, if it deems fit, in exceptional circumstances connected with the rate of exchange in such State, to derogate from the stipulation contained in Article 41 for effective payment in foreign currency as regards bills of exchange payable in its territory. The above rule may also be applied as regards the issue in the national territory of bills of exchange payable in foreign currencies.

Article 8

Each of the High Contracting Parties may prescribe that protest to be drawn up in its territory may be replaced by a declaration dated and written on the bill itself, and signed by the drawee, except where the drawer stipulates in the body of the bill of exchange itself for an authenticated protest.

Each of the High Contracting Parties may also prescribe that the said declaration shall be inscribed in a public register within the limit of time fixed for protests.

In the case provided for in the preceding paragraphs, an undated endorsement is presumed to have been made prior to the protest.

Article 9

By way of derogation from Article 44, paragraph 3, of the Uniform Law, each of the High Contracting Parties has the right to prescribe that a protest for non-payment must be drawn up either on the day when the bill is payable or on one of the two following business days.

Article 10

It is reserved to the legislation of each of the High Contracting Parties to determine the exact legal situations referred to in Article 43, Nos. 2 and 3, and in Article 44, paragraphs 5 and 6, of the Uniform Law.

Article 11

By way of derogation from the provisions of Article 43, Nos. 2 and 3, and Article 74 of the Uniform Law, each of the High Contracting Parties reserves the right to include in its legislation the possibility for persons guaranteeing a bill of exchange to obtain, in the event of recourse being exercised against them, periods of grace which may in no case extend beyond the maturity of the bill.

Article 12

By way of derogation from Article 45 of the Uniform Law, each of the High Contracting Parties shall be entitled to maintain or introduce the following system of notification by the public official, viz., that, when protesting for non-acceptance or non-payment, the notary or official who, under the national law, is authorised to draw up the protest, is required to give notice in writing to the persons liable under the bill of exchange whose addresses are specified in the bills or are known to the public official drawing up the protest, or are specified by the persons demanding the protest. The costs of such notice shall be added to the costs of the protest.

Article 13

Each of the High Contracting Parties is entitled to prescribe, as regards bills of exchange which are both issued and payable in its territory, that the rate of interest mentioned in Article 48, No. 2, and Article 49, No. 2, of the Uniform Law be replaced by the legal rate in force in the territory of that High Contracting Party.

Article 14

By derogation from Article 48 of the Uniform Law each of the High Contracting Parties reserves the right to insert in its national law a rule prescribing that the holder may claim from the party against whom he is exercising his right of recourse a commission the amount of which shall be determined by the national law.

The same applies, by derogation from Article 49 of the Uniform Law, to a person who, having taken up and paid the bill of exchange, claims the amount from the parties liable to him.

Article 15

Each of the High Contracting Parties is free to decide that, in the event of extinctive prescription (déchéance) or limitation of actions (prescription), proceedings may be taken in its territory against a drawer who has not provided cover (provision) for the bill, or against a drawer or endorser who has made an inequitable gain. The same right exists in the case of limitation of action as regards an acceptor who has received cover or made an inequitable gain (se serait enrichi injustement).

Article 16

The question whether the drawer is obliged to provide cover (provision) at maturity and whether the holder has special rights to this cover remains outside the scope of the Uniform Law.

The same applies to any other question concerning the legal relations on the basis of which the bill was issued.

Article 17

It is for the legislation of each of the High Contracting Parties to determine the causes of interruption or suspension of limitation (prescription) in the case of actions on bills of exchange which come before its courts.

The other High Contracting Parties are entitled to determine the conditions subject to which they will recognise such causes. The same applies to the effect of an action as a means of indicating the commencement of the period of limitation (prescription) laid down in Article 70, paragraph 3, of the Uniform Law.

Article 18

Each of the High Contracting Parties has the right to prescribe that certain business days shall be assimilated to legal holidays (jours fériés légaux) as regards presentment for acceptance or payment and all other acts relating to bills of exchange.

Article 19

Each of the High Contracting Parties may determine the denomination to be adopted in the national laws for the instruments referred to in Article 75 of the Uniform Law, or may exempt them from any special denomination, provided that they contain an express mention that they are drawn to order.

Article 20

The provisions of Articles 1 to 18 of the present Annex with regard to bills of exchange apply likewise to promissory notes.

Article 21

Each of the High Contracting Parties reserves the right to restrict the undertaking mentioned in Article 1 of the Convention to the provisions dealing with bills of exchange only, and not to introduce into its territory the provisions dealing with promissory notes contained in Title II of the Uniform Law. In this case the High Contracting Party making use of this reservation shall only be regarded as a contracting party in respect of bills of exchange.

Each of the High Contracting Parties further reserves the right to embody the provisions concerning promissory notes in a special regulation, which shall exactly conform to the stipulations in Title II of the Uniform Law and which shall reproduce the rules on bills of exchange to which reference is made, subject only to the modifications resulting from Articles 75, 76, 77 and 78 of the Uniform Law and from Articles 19 and 20 of the present Annex.

Article 22

Each of the High Contracting Parties has the right to adopt exceptional measures of a general nature relating to the extension of the limits of time for conservatory measures in relation to recourse (actes conservatoires des recours) and to the extension of maturities.

Article 23

Each of the High Contracting Parties undertakes to recognise the provisions adopted by every other High Contracting Party in virtue of Articles 1 to 4, 6, 8 to 16 and 18 to 21 of the present Annex.

2 Convention Providing a Uniform Law for Cheques

Article I1

The High Contracting Parties undertake to introduce in their respective territories, either in one of the original texts or in their own languages, the Uniform Law forming Annex I of the present Convention.

This undertaking shall, if necessary, be subject to such reservations as each High Contracting Party shall notify at the time of its ratification or accession. These reservations shall be chosen from among those mentioned in Annex II of the present Convention.

The reservations referred to in Articles 9, 22, 27 and 30 of the said Annex II may, however, be made after ratification or accession, provided that they are notified to the Secretary-General of the League of Nations, who shall forthwith communicate the text thereof to the Members of the League of Nations and to the non-member States on whose behalf the present Convention has been ratified or acceded to. Such reservations shall not take effect until the ninetieth day following the receipt by the Secretary-General of the above-mentioned notification.

Each of the High Contracting Parties may, in urgent cases, make use of the reservations contained in Articles 17 and 28 of the said Annex II, even after ratification or accession. In such cases, they must immediately notify direct all other High Contracting Parties and the Secretary-General of the League of Nations. The notification of these reservations shall take effect two days following its receipt by the High Contracting Parties.

Article II

In the territories of each of the High Contracting Parties, the Uniform Law shall not apply to cheques already issued at the time of the coming into force of the present Convention.

Article III

The present Convention, the French and English texts of which shall be equally authentic, shall bear this day’s date.

It may be signed thereafter until July 15th, 1931, on behalf of any Member of the League of Nations or non-member State.

Article IV

The present Convention shall be ratified.

The instruments of ratification shall be deposited before September 1, 1933, with the Secretary-General of the League of Nations, who shall forthwith notify receipt thereof to all the Members of the League of Nations and to the non-member States on whose behalf the present Convention has been signed or acceded to.

Article V

As from July 15, 1931, any Member of the League of Nations and any non-member State may accede thereto.

Such accession shall be effected by a notification to the Secretary-General of the League of Nations, such notification to be deposited in the archives of the Secretariat.

The Secretary-General shall notify such deposit forthwith to all the Members of the League of Nations and to the non-member States on whose behalf the present Convention has been signed or acceded to.

Article VI

The present Convention shall not come into force until it has been ratified or acceded to on behalf of seven Members of the League of Nations or non-member States, including therein three of the Members of the League permanently represented on the Council.

The date of entry into force shall be the ninetieth day following the receipt by the Secretary-General of the League of Nations of the seventh ratification or accession in accordance with the first paragraph of the present Article.

The Secretary-General of the League of Nations, when making the notifications provided for in Articles IV and V, shall state in particular that the ratifications or accessions referred to in the first paragraph of the present Article have been received.

Article VII

Every ratification or accession effected after the entry into force of the Convention in accordance with Article VI shall take effect on the ninetieth day following the date of receipt thereof by the Secretary-General of the League of Nations.

Article VIII

Except in urgent cases, the present Convention may not be denounced before the expiry of two years from the date on which it has entered into force in respect of the Member of the League or non-member State denouncing it; such denunciation shall take effect as from the ninetieth day following the receipt by the Secretary-General of the notification addressed to him.

Every denunciation shall be immediately communicated by the Secretary-General of the League of Nations to all the other High Contracting Parties.

In urgent cases a High Contracting Party which denounces the Convention shall immediately notify direct all other High Contracting Parties, and the denunciation shall take effect two days after the receipt of such notification by the said High Contracting Parties. A High Contracting Party denouncing the Convention in these circumstances shall also inform the Secretary-General of the League of Nations of its decision.

Each denunciation shall take effect only as regards the High Contracting Party on whose behalf it has been made.

Article IX

Every Member of the League of Nations and every non-member State in respect of which the present Convention is in force may forward to the Secretary-General of the League of Nations, after the expiry of the fourth year following the entry into force of the Convention, a request for the revision of some or all of the provisions of this Convention.

If such request, after being communicated to the other Members or non-member States between which the Convention is at that time in force, is supported within one year by at least six of them, the Council of the League of Nations shall decide whether a Conference shall be convened for the purpose.

Article X

The High Contracting Parties may declare at the time of signature, ratification or accession, that it is not their intention in accepting the present Convention to assume any liability in respect of all or any of their colonies, protectorates or territories under suzerainty or mandate, in which case the present Convention shall not be applicable to the territories mentioned in such declaration.

The High Contracting Parties may any time subsequently inform the Secretary-General of the League of Nations that they intend to apply the present Convention to all or any of their territories referred to in the declaration provided for in the preceding paragraph. In this case, the Convention shall apply to the territories referred to in the notification ninety days after its receipt by the Secretary-General of the League of Nations.

They further reserve the right to denounce it, in accordance with the conditions of Article VIII, on behalf of all or any of their colonies, protectorates or territories under suzerainty or mandate.

Article XI

The present Convention shall be registered by the Secretary-General of the League of Nations as soon as it comes into force.

* * *

In faith whereof the above-mentioned Plenipotentiaries have signed the present Convention.

DONE at Geneva, the nineteenth day of March, one thousand nine hundred and thirty-one, in a single copy, which shall be deposited in the archives of the Secretariat of the League of Nations, and of which authenticated copies shall be delivered to all Members of the League of Nations and non-member States represented at the Conference.

ANNEX I UNIFORM LAW ON CHEQUES

CHAPTER I. THE DRAWING AND FORM OF A CHEQUE

Article 1

A cheque contains:

  • 1. The term “cheque” inserted in the body of the instrument and expressed in the language employed in drawing up the instrument;

  • 2. An unconditional order to pay a determinate sum of money;

  • 3. The name of the person who is to pay (drawee);

  • 4. A statement of the place where payment is to be made;

  • 5. A statement of the date when and the place where the cheque is drawn;

  • 6. The signature of the person who draws the cheque (drawer).

Article 2

An instrument in which any of the requirements mentioned in the preceding article is wanting is invalid as a cheque, except in the cases specified in the following paragraphs:

In the absence of special mention, the place specified beside the name of the drawee is deemed to be the place of payment. If several places are named beside the name of the drawee, the cheque is payable at the first place named.

In the absence of these statements, and of any other indication, the cheque is payable at the place where the drawee has his principal establishment.

A cheque which does not specify the place at which it was drawn is deemed to have been drawn in the place specified beside the name of the drawer.

Article 3

A cheque must be drawn on a banker holding funds at the disposal of the drawer and in conformity with an agreement, express or implied, whereby the drawer is entitled to dispose of those funds by cheque. Nevertheless, if these provisions are not complied with, the instrument is still valid as a cheque.

Article 4

A cheque cannot be accepted. A statement of acceptance on a cheque shall be disregarded.

Article 5

A cheque may be made payable:

  • To a specified person with or without the express clause “to order”, or

  • To a specified person, with the words “not to order” or equivalent words, or

  • To bearer.

A cheque made payable to a specified person with the words “or to bearer”, or any equivalent words, is deemed to be a cheque to bearer.

A cheque which does not specify the payee is deemed to be a cheque to bearer.

Article 6

A cheque may be drawn to the drawer’s own order.

A cheque may be drawn for account of a third person.

A cheque may not be drawn on the drawer himself unless it is drawn by one establishment on another establishment belonging to the same drawer.

Article 7

Any stipulation concerning interest which may be embodied in the cheque shall be disregarded.

Article 8

A cheque may be payable at the domicile of a third person either in the locality where the drawee has his domicile or in another locality, provided always that such third person is a banker.

Article 9

Where the sum payable by a cheque is expressed in words and also in figures, and there is any discrepancy, the sum denoted by the words is the amount payable.

Where the sum payable by a cheque is expressed more than once in words or more than once in figures, and there is any discrepancy, the smaller sum is the sum payable.

Article 10

If a cheque bears signatures of persons incapable of binding themselves by a cheque, or forged signatures, or signatures of fictitious persons, or signatures which for any other reason cannot bind the persons who signed the cheque or on whose behalf it was signed, the obligations of the other persons who have signed it are none the less valid.

Article 11

Whosoever puts his signature on a cheque as representing a person for whom he had no power to act is bound himself as a party to the cheque and, if he pays, has the same rights as the person for whom he purported to act. The same rule applies to a representative who has exceeded his powers.

Article 12

The drawer guarantees payment. Any stipulation by which the drawer releases himself from this guarantee shall be disregarded.

Article 13

If a cheque which was incomplete when issued has been completed otherwise than in accordance with the agreements entered into, the non-observance of such agreements may not be set up against the holder unless he has acquired the cheque in bad faith or, in acquiring it, has been guilty of gross negligence.

CHAPTER II. NEGOTIATION

Article 14

A cheque made payable to a specified person, with or without the express clause “to order”, may be transferred by means of endorsement.

A cheque made payable to a specified person, in which the words “not to order” or any equivalent expression have been inserted, can only be transferred according to the form and with the effects of an ordinary assignment.

A cheque may be endorsed even to the drawer or to any other party to the cheque. These persons may re-endorse the cheque.

Article 15

An endorsement must be unconditional. Any condition to which it is made subject shall be disregarded.

A partial endorsement is null and void.

An endorsement by the drawee is also null and void.

An endorsement “to bearer” is equivalent to an endorsement in blank.

An endorsement to the drawee has the effect only of a receipt, except in the case where the drawee has several establishments and the endorsement is made in favour of an establishment other than that on which the cheque has been drawn.

Article 16

An endorsement must be written on the cheque or on a slip affixed thereto (allonge). It must be signed by the endorser.

The endorsement may leave the beneficiary unspecified or may consist simply of the signature of the endorser (endorsement in blank). In the latter case, the endorsement, to be valid, must be written on the back of the cheque or on the slip attached thereto (allonge).

Article 17

An endorsement transfers all the rights arising out of a cheque.

If the endorsement is in blank, the holder may:

  • (1) Fill up the blank either with his own name or with the name of some other person;

  • (2) Re-endorse the cheque in blank or to some other person;

  • (3) Transfer the cheque to a third person without filling up the blank and without endorsing it.

Article 18

In the absence of any contrary stipulation, the endorser guarantees payment.

He may prohibit any further endorsement; in this case he gives no guarantee to the persons to whom the cheque is subsequently endorsed.

Article 19

The possessor of an endorsable cheque is deemed to be the lawful holder if he establishes his title to the cheque through an uninterrupted series of endorsements, even if the last endorsement is in blank. In this connection, cancelled endorsements shall be disregarded. When an endorsement in blank is followed by another endorsement, the person who signed this last endorsement is deemed to have acquired the cheque by the endorsement in blank.

Article 20

An endorsement on a cheque to bearer renders the endorser liable in accordance with the provisions governing the right of recourse; but it does not convert the instrument into a cheque to order.

Article 21

Where a person has, in any manner whatsoever, been dispossessed of a cheque (whether it is a cheque to bearer or an endorsable cheque to which the holder establishes his right in the manner mentioned in Article 19), the holder into whose possession the cheque has come is not bound to give up the cheque unless he has acquired it in bad faith or unless in acquiring it he has been guilty of gross negligence.

Article 22

Persons sued on a cheque cannot set up against the holder defences founded on their personal relations with the drawer or with previous holders, unless the holder in acquiring the cheque has knowingly acted to the detriment of the debtor.

Article 23

When an endorsement contains the statement “value in collection” (“valeur en recouvrement”), “for collection” (“pour encaissement”), “by procuration” (“par procuration”), or any other phrase implying a simple mandate, the holder may exercise all rights arising out of the cheque, but he can endorse it only in his capacity as agent.

In this case the parties liable can only set up against the holder defences which could be set up against the endorser.

The mandate contained in an endorsement by procuration does not terminate by reason of the death of the party giving the mandate or by reason of his becoming legally incapable.

Article 24

An endorsement after protest or after an equivalent declaration or after the expiration of the limit of time for presentment operates only as an ordinary assignment.

Failing proof to the contrary, an undated endorsement is deemed to have been placed on the cheque prior to the protest or equivalent declaration or prior to the expiration of the limit of time referred to in the preceding paragraph.

CHAPTER III. “AVALS”

Article 25

Payment of a cheque may be guaranteed by an “aval” as to the whole or part of its amount.

This guarantee may be given by a third person other than the drawee, or even by a person who has signed the cheque.

Article 26

An “aval” is given either on the cheque itself or on an “allonge”.

It is expressed by the words “good as aval”, or by any other equivalent formula. It is signed by the giver of the “aval”.

It is deemed to be constituted by the mere signature of the giver of the “aval”, placed on the face of the cheque, except in the case of the signature of the drawer.

An “aval” must specify for whose account it is given. In default of this, it is deemed to be given for the drawer.

Article 27

The giver of an “aval” is bound in the same manner as the person for whom he has become guarantor.

His undertaking is valid even when the liability which he has guaranteed is inoperative for any reason other than defect of form.

He has, when he pays the cheque, the rights arising out of the cheque against the person guaranteed and against those who are liable to the latter on the cheque.

CHAPTER IV. PRESENTMENT AND PAYMENT

Article 28

A cheque is payable at sight. Any contrary stipulation shall be disregarded.

A cheque presented for payment before the date stated as the date of issue is payable on the day of presentment.

Article 29

A cheque payable in the country in which it was issued must be presented for payment within eight days.

A cheque issued in a country other than in which it is payable must be presented within a period of twenty days or of seventy days, according as to whether the place of issue and the place of payment are situated respectively in the same continent or in different continents.

For the purposes of this article cheques issued in a European country and payable in a country bordering on the Mediterranean or vice versa are regarded as issued and payable in the same continent.

The date from which the above-mentioned periods of time shall begin to run shall be the date stated on the cheque as the date of issue.

Article 30

Where a cheque is drawn in one place and is payable in another having a different calendar, the day of issue shall be construed as being the corresponding day of the calendar of the place of payment.

Article 31

Presentment of a cheque at a clearing-house is equivalent to presentment for payment.

Article 32

The countermand of a cheque only takes effect after the expiration of the limit of time for presentment.

If a cheque has not been countermanded, the drawee may pay it even after the expiration of the time-limit.

Article 33

Neither the death of the drawer nor his incapacity taking place after the issue of the cheque shall have any effect as regards the cheque.

Article 34

The drawee who pays a cheque may require that it shall be given up to him receipted by the holder.

The holder may not refuse partial payment.

In case of partial payment the drawee may require that the partial payment shall be mentioned on the cheque and that a receipt shall be given to him.

Article 35

The drawee who pays an endorsable cheque is bound to verify the regularity of the series of endorsements, but not the signature of the endorsers.

Article 36

When a cheque is drawn payable in a currency which is not that of the place of payment, the sum payable may, within the limit of time for the presentment of the cheque, be paid in the currency of the country according to its value on the date of payment. If payment has not been made on presentment, the holder may at his option demand that payment of the amount of the cheque in the currency of the country shall be made according to the rate on the day of presentment or on the day of payment.

The usages of the place of payment shall be applied in determining the value of foreign currency. Nevertheless, the drawer may stipulate that the sum payable shall be calculated according to a rate expressed in the cheque.

The foregoing rules shall not apply to the case in which the drawer has stipulated that payment must be made in a certain specified currency (stipulation for effective payment in a foreign currency).

If the amount of the cheque is specified in a currency having the same denomination but a different value in the country of issue and the country of payment, reference is deemed to be made to the currency of the place of payment.

CHAPTER V. CROSSED CHEQUES AND CHEQUES PAYABLE IN ACCOUNT

Article 37

The drawer or holder of a cheque may cross it with the effects stated in the next article hereof.

A crossing takes the form of two parallel lines drawn on the face of the cheque. The crossing may be general or special.

The crossing is general if it consists of the two lines only or if between the lines the term “banker” or some equivalent is inserted; it is special if the name of a banker is written between the lines.

A general crossing may be converted into a special crossing, but a special crossing may not be converted into a general crossing.

The obliteration either of a crossing or of the name of the banker shall be regarded as not having taken place.

Article 38

A cheque which is crossed generally can be paid by the drawee only to a banker or to a customer of the drawee.

A cheque which is crossed specially can be paid by the drawee only to the named banker, or if the latter is the drawee, to his customer. Nevertheless, the named banker may procure the cheque to be collected by another banker.

A banker may not acquire a crossed cheque except from one of his customers or from another banker. He may not collect it for the account of other persons than the foregoing.

A cheque bearing several special crossings may not be paid by the drawee except in a case where there are two crossings, one of which is for collection through a clearing-house.

The drawee or banker who fails to observe the above provisions is liable for resulting damage up to the amount of the cheque.

Article 39

The drawer or the holder of a cheque may forbid its payment in cash by writing transversally across the face of the cheque the words “payable in account” (“à porter en compte”) or a similar expression.

In such a case the cheque can only be settled by the drawee by means of book-entry (credit in account, transfer from one account to another, set off or clearing-house settlement). Settlement by book-entry is equivalent to payment.

Any obliteration of the words “payable in account” shall be deemed not to have taken place.

The drawee who does not observe the foregoing provisions is liable for resulting damage up to the amount of the cheque.

CHAPTER VI. RECOURSE FOR NON-PAYMENT

Article 40

The holder may exercise his right of recourse against the endorsers, the drawer and the other parties liable if the cheque on presentment in due time is not paid, and if the refusal to pay is evidenced:

  • (1) By a formal instrument (protest), or

  • (2) By a declaration dated and written by the drawee on the cheque and specifying the day of presentment, or

  • (3) By a dated declaration made by a clearing-house, stating that the cheque has been delivered in due time and has not been paid.

Article 41

The protest or equivalent declaration must be made before the expiration of the limit of time for presentment.

If the cheque is presented on the last day of the limit of time, the protest may be drawn up or the equivalent declaration made on the first business day following.

Article 42

The holder must give notice of non-payment to his endorser and to the drawer within the four business days which follow the day on which the protest is drawn up or the equivalent declaration is made or, in case of a stipulation (retour sans frais), the day of presentment. Every endorser must, within the two business days following the day on which he receives notice, inform his endorser of the notice which he has received, mentioning the names and addresses of those who have given the previous notices and so on through the series until the drawer is reached. The periods mentioned above run from the receipt of the preceding notice.

When, in conformity with the preceding paragraph, notice is given to a person who has signed a cheque, the same notice must be given within the same limit of time to his avaliseur.

Where an endorser either has not specified his address or has specified it in an illegible manner, it is sufficient if notice is given to the endorser preceding him.

The person who must give notice may give it in any form whatever, even by simply returning the cheque.

He must prove that he has given notice within the limit of time prescribed. This time-limit shall be regarded as having been observed if a letter giving the notice has been posted within the said time.

A person who does not give notice within the limit of time prescribed above does not forfeit his rights. He is liable for the damage, if any, caused by his negligence, but the amount of his liability shall not exceed the amount of the cheque.

Article 43

The drawer, an endorser, or an avaliseur may, by the stipulation “retour sans frais”, “sans protêt”, or any other equivalent expression written on the instrument and signed, release the holder from having a protest drawn up or an equivalent declaration made in order to exercise his right of recourse.

This stipulation does not release the holder from presenting the cheque within the prescribed limit of time, or from giving the requisite notices. The burden of proving the non-observance of the limit of time lies on the person who seeks to set it up against the holder.

If the stipulation is written by the drawer, it is operative in respect of all persons who have signed the cheque; if it is written by an endorser or an avaliseur, it is operative only in respect of such endorser or avaliseur. If, in spite of the stipulation written by the drawer, the holder has the protest drawn up or the equivalent declaration made, he must bear the expenses thereof. When the stipulation emanates from an endorser or avaliseur, the costs of the protest or equivalent declaration, if drawn up or made, may be recovered from all the persons who have signed the cheque.

Article 44

All the persons liable on a cheque are jointly and severally bound to the holder.

The holder has the right to proceed against all these persons individually or collectively without being compelled to observe the order in which they have become bound.

The same right is possessed by any person signing the cheque who has taken it up and paid it.

Proceedings against one of the parties liable do not prevent proceedings against the others, even though such other parties may be subsequent to the party first proceeded against.

Article 45

The holder may claim from the party against whom he exercises his right of recourse:

  • (1) The unpaid amount of the cheque;

  • (2) Interest at the rate of 6% as from the date of presentment;

  • (3) The expenses of the protest or equivalent declaration, and of the notices given as well as other expenses.

Article 46

A party who takes up and pays a cheque can recover from the parties liable to him:

  • (1) The entire sum which he has paid;

  • (2) Interest on the said sum calculated at the rate of 6%, as from the day on which he made payment;

  • (3) Any expenses which he has incurred.

Article 47

Every party liable against whom a right of recourse is, or may be, exercised, can require against payment, that the cheque shall be given up to him with the protest or equivalent declaration and a receipted account.

Every endorser who has taken up and paid a cheque may cancel his own endorsement and those of subsequent endorsers.

Article 48

Should the presentment of the cheque or the drawing up of the protest or the making of the equivalent declaration within the prescribed limits of time be prevented by an insurmountable obstacle (legal prohibition (prescription légale) by any State or other case of vis major), these limits of time shall be extended.

The holder is bound to give notice without delay of the case of vis major to his endorser and to make a dated and signed declaration of this notice, on the cheque or on an allonge; in other respects, the provisions of Article 42 shall apply.

When vis major has terminated, the holder must without delay present the cheque for payment and, if need be, procure a protest to be drawn up or an equivalent declaration made.

If vis major continues to operate beyond fifteen days after the date on which the holder, even before the expiration of the time-limit for presentment, has given notice of vis major to his endorser, recourse may be exercised and neither presentment nor a protest nor an equivalent declaration shall be necessary.

Facts which are purely personal to the holder or the person whom he has entrusted with the presentment of the cheque or the drawing up of the protest or the making of the equivalent declaration are not deemed to constitute cases of vis major.

CHAPTER VII. PARTS OF A SET

Article 49

With the exception of bearer cheques, any cheque issued in one country and payable in another or payable in a separate part overseas of the same country or vice versa, or issued and payable in the same or in different parts overseas of the same country, may be drawn in a set of identical parts. When a cheque is in a set of parts, each part must be numbered in the body of the instrument, failing which each part is deemed to be a separate cheque.

Article 50

Payment made on one part operates as a discharge, even though there is no stipulation that such payment shall render the other parts of no effect.

An endorser who has negotiated parts to different persons and also the endorsers subsequent to him are liable on all the parts bearing their signatures, which have not been given up.

CHAPTER VIII. ALTERATIONS

Article 51

In case of alteration of the text of a cheque, parties who have signed subsequent to the alteration are bound according to the terms of the altered text; parties who have signed before the alteration are bound according to the terms of the original text.

CHAPTER IX. LIMITATION OF ACTIONS

Article 52

Actions of recourse by the holder against the endorsers, the drawer and the other parties liable are barred after six months as from the expiration of the limit of time fixed for presentment.

Actions of recourse by the different parties liable for the payment of a cheque against other such parties are barred after six months as from the day on which the party liable has paid the cheque or the day on which he was sued thereon.

Article 53

Interruption of the period of limitation is only effective against the person in respect of whom the period has been interrupted.

CHAPTER X. GENERAL PROVISIONS

Article 54

In the present law the word “banker” includes the persons or institutions assimilated by the law to bankers.

Article 55

The presentment or protest of a cheque may only take place on a business day.

When the last day of the limit of time prescribed by the law for performing any act relating to a cheque, and particularly for presentment or for the drawing up of a protest or the making of an equivalent declaration, is a legal holiday, the limit of time is extended until the first business day which follows the expiration of that time. Intermediate holidays are included in computing limits of time.

Article 56

The limits of time stipulated in the present law shall not include the day on which the period commences.

Article 57

No days of grace, whether legal or judicial, are permitted.

ANNEX II

Each of the High Contracting Parties may prescribe that the obligation to insert in cheques drawn in his territory the term “cheque”, as laid down in Article 1, No. 1 of the Uniform Law, and the obligation stipulated in No. 5 of the said article to state the place where the cheque was drawn, shall not apply until six months after the entry into force of the present Convention.

Article 2

Each of the High Contracting Parties may, as regards undertakings entered into in respect of cheques in his own territory, determine in what manner an actual signature may be replaced by an authentic declaration written on the cheque which evidences the consent of the party who should have signed.

Article 3

By way of derogation from Article 2, paragraph 3, of the Uniform Law, each of the High Contracting Parties may prescribe that a cheque which does not specify the place of payment shall be regarded as payable at the place where it was drawn.

Article 4

Each of the High Contracting Parties reserves the right, with regard to cheques issued and payable in his territory, to decide that instruments drawn on persons other than bankers or persons or institutions assimilated by the law to bankers, shall not be valid as cheques.

Each of the High Contracting Parties also reserves the right to embody Article 3 of the Uniform Law in his national law in the form and in the terms best suited to the use he may make of the provisions of the preceding paragraph.

Article 5

Each of the High Contracting Parties may determine the moment at which the drawer must have funds available with the drawee.

Article 6

Each of the High Contracting Parties may provide that a drawee may write on the cheque a statement of certification, confirmation, visa, or other equivalent declaration, provided that such declaration shall not operate as an acceptance, and may also determine the legal effects thereof.

Article 7

By way of derogation from Articles 5 and 14 of the Uniform Law, each of the High Contracting Parties reserves the right to prescribe, as regards cheques payable in his territory, and marked “not transferable”, that a cheque of this description may be paid only to the holder who has received it thus marked.

Article 8

Each of the High Contracting Parties reserves the right to determine whether, apart from the cases referred to in Article 6 of the Uniform Law, a cheque may be drawn on the drawer himself.

Article 9

By way of derogation from Article 6 of the Uniform Law, each of the High Contracting Parties, whether as a general rule he allows cheques to be drawn on the drawer himself (Article 8 of the present Annex), or whether he allows such cheques to be drawn only in the case of businesses with several establishments (Article 6 of the Uniform Law), reserves the right to prohibit the issue of cheques of this kind to bearer.

Article 10

By way of derogation from Article 8 of the Uniform Law, each of the High Contracting Parties reserves the right to allow a cheque to be made payable at the domicile of a third person other than a banker.

Article 11

Each of the High Contracting Parties reserves the right not to embody Article 13 of the Uniform Law in his national law.

Article 12

Each of the High Contracting Parties reserves the right not to apply Article 21 of the Uniform Law so far as bearer cheques are concerned.

Article 13

By way of derogation from Article 26 of the Uniform Law, each of the High Contracting Parties has the right to decide that an “aval” may be given in his territory by a separate instrument specifying the place in which the instrument has been executed.

Article 14

Each of the High Contracting Parties reserves the right to prolong the time-limit provided for in the first paragraph of Article 29 of the Uniform Law and to fix the limits of time for presentment as regards the territories under his sovereignty or authority.

Each of the High Contracting Parties, by way of derogation from Article 29, paragraph 2, of the Uniform Law, reserves the right to prolong the time-limits provided for in the said paragraph for cheques issued and payable in different continents or in different countries in a continent other than Europe.

Two or more of the High Contracting Parties may agree, as regards cheques issued and payable in their respective territories, to modify the time-limits provided for in Article 29, paragraph 2, of the Uniform Law.

Article 15

For the purpose of giving effect to Article 31 of the Uniform Law, each of the High Contracting Parties may determine the institutions which according to his national law are to be regarded as clearing-houses.

Article 16

By way of derogation from Article 32 of the Uniform Law, each of the High Contracting Parties reserves the right in regard to cheques payable in his territory:

  • (a). To allow the countermand of a cheque even before the expiration of the limit of the time for presentment;

  • (b). To prohibit the countermand of a cheque even after the expiration of the limit of time for presentment.

Furthermore, each of the High Contracting Parties may determine the measures to be taken in case of the loss or theft of a cheque, and may regulate the legal consequences thereof.

Article 17

Each of the High Contracting Parties may, if he deems it necessary, in exceptional circumstances connected with the rate of exchange of the currency of his country, derogate from the stipulation contained in Article 36 of the Uniform Law for effective payment in foreign currency as regards cheques payable in his territory. The above rule may also be applied as regards the issue in the national territory of cheques payable in foreign currency.

Article 18

Each of the High Contracting Parties reserves the right, by way of derogation from Articles 37, 38, and 39 of the Uniform Law, to recognise in his national law only crossed cheques or only cheques payable in account. Nevertheless, crossed cheques and cheques payable in account issued abroad and payable in the territory of each of the High Contracting Parties shall be treated as cheques payable in account and as crossed cheques respectively.

Each of the High Contracting Parties may also determine the wording which, under its national law, shall indicate that the cheque is a cheque payable in account.

Article 19

The question whether the holder has special rights to the cover and the consequences of these rights remain outside the scope of the Uniform Law.

The same applies to any other question concerning the legal relations on the basis of which the cheque is issued.

Article 20

Each of the High Contracting Parties reserves the right not to make it a condition for the exercise of the right of recourse against the drawer that the cheque must be presented and the protest drawn up or an equivalent declaration made within due time, and to determine the effects of this recourse.

Article 21

Each of the High Contracting Parties reserves the right to prescribe, as regards cheques payable in his territory, that the declaration of the refusal of payment stipulated in Articles 40 and 41 of the Uniform Law as a condition of the preservation of the right of recourse must in each and every case take the form of a protest to the exclusion of any equivalent declaration.

Each of the High Contracting Parties may also prescribe that the declarations provided for in Nos. 2 and 3 of Article 40 of the Uniform Law must be entered in a public register within the limit of time fixed for the protest.

Article 22

By way of derogation from Article 42 of the Uniform Law, each of the High Contracting Parties may maintain or introduce the following system of notification by the public official—viz., that, when drawing up the protest, the notary or official who, under the national law, is authorised to draw up the protest is required to give notice in writing to the persons liable on the cheque whose addresses are specified in the cheque or are known to the public official drawing up the protest, or are specified by the persons demanding the protest. The expenses of such notice shall be added to the expenses of the protest.

Article 23

Each of the High Contracting Parties may prescribe, as regards cheques which are both issued and payable in his territory, that the rate of interest mentioned in Article 45, No. 2, and in Article 46, No. 2, of the Uniform Law may be replaced by the legal rate in force in his territory.

Article 24

By way of derogation from Article 45 of the Uniform Law, each of the High Contracting Parties reserves the right to insert in his national law a rule prescribing that the holder may claim from the party against whom he is exercising his right of recourse a commission the amount of which shall be determined by that law.

By way of derogation from Article 46 of the Uniform Law, the same applies to a person who, having taken up and paid the cheque, claims the amount from the parties liable to him.

Article 25

Each of the High Contracting Parties is free to decide that, in the event of forfeiture of rights or limitation of actions, proceedings may be taken in his territory against a drawer who has not provided cover or against a drawer or endorser who has made an inequitable gain (condictiones).

Article 26

It is for the legislation of each of the High Contracting Parties to determine the causes of interruption or suspension of limitation in the case of actions on cheques which are brought before his courts.

The other High Contracting Parties may determine the conditions under which they will recognise such causes. The same applies to the effect of an action as a means of indicating the commencement of the period of limitation laid down in Article 52, paragraph 2, of the Uniform Law.

Article 27

Each of the High Contracting Parties may prescribe that certain business days shall be assimilated to legal holidays as regards the limit of time for presentment and all acts relating to cheques.

Article 28

Each of the High Contracting Parties may enact exceptional measures of a general nature relating to the postponement of payment and to the limits of time for conservatory measures in relation to recourse (actes conservatoires des recours).

Article 29

For the purpose of giving effect to the Uniform Law, it is within the competence of each of the High Contracting Parties to determine what persons are to be regarded as bankers and what persons or institutions are, in view of the nature of their activities, to be assimilated to bankers.

Article 30

Each of the High Contracting Parties reserves the right to exclude the application of the Uniform Law in whole or in part in regard to postal cheques, and in regard to the special cheque of banks of issue or of public revenue offices or of public credit institutions, in so far as the instruments mentioned above are subject to special regulations.

Article 31

Each of the High Contracting Parties undertakes to recognise the provisions adopted by every other High Contracting Party in virtue of Articles 1 to 13, 14 (paragraphs 1 and 2), 15 and 16, 18 to 25, 27, 29 and 30 of the present Annex.

3 U.K. Bills of Exchange Act, 18821

Part I2

Preliminary

1. Short title. This Act may be cited as the Bills of Exchange Act, 1882.

2. Interpretation of terms. In this Act, unless the context otherwise requires,—

“Acceptance” means an acceptance completed by delivery or notification.

“Action” includes counter claim and set off.

“Banker” includes a body of persons whether incorporated or not who carry on the business of banking.

“Bankrupt” includes any person whose estate is vested in a trustee or assignee under the law for the time being in force relating to bankruptcy.

“Bearer” means the person in possession of a bill or note which is payable to bearer.

“Bill” means bill of exchange, and “note” means promissory note.

“Delivery” means transfer of possession, actual or constructive, from one person to another.

“Holder” means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

“Indorsement” means an indorsement completed by delivery.

“Issue” means the first delivery of a bill or note, complete in form to a person who takes it as a holder.

“Person” includes a body of persons whether incorporated or not.

“Value” means valuable consideration.

“Written” includes printed, and “writing” includes print.

Part II

Bills of Exchange
Form and Interpretation

3. Bill of exchange defined. (1) A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.

(2) An instrument which does not comply with these conditions, or which orders any act to be done in addition to the payment of money, is not a bill of exchange.

(3) An order to pay out of a particular fund is not unconditional within the meaning of this section; but an unqualified order to pay, coupled with (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited with the amount, or (b) a statement of the transaction which gives rise to the bill, is unconditional.

(4) A bill is not invalid by reason—

  • (a) That it is not dated;

  • (b) That it does not specify the value given, or that any value has been given therefor;

  • (c) That it does not specify the place where it is drawn or the place where it is payable.

4. Inland and foreign bills. (1) An inland bill is a bill which is or on the face of it purports to be

  • (a) both drawn and payable within the British Islands, or

  • (b) drawn within the British Islands upon some person resident therein. Any other bill is a foreign bill.

For the purposes of this Act “British Islands” mean any part of the United Kingdom of Great Britain and Ireland, the islands of Man, Guernsey, Jersey, Alderney, and Sark, and the islands adjacent to any of them being part of the dominions of Her Majesty.

  • (2) Unless the contrary appear on the face of the bill the holder may treat it as an inland bill.

5. Effect where different parties to bill are the same person. (1) A bill may be drawn payable to, or to the order of, the drawer; or it may be drawn payable to, or to the order of, the drawee.

(2) Where in a bill drawer and drawee are the same person, or where the drawee is a fictitious person or a person not having capacity to contract, the holder may treat the instrument, at his option, either as a bill of exchange or as a promissory note.

6. Address to drawee. (1) The drawee must be named or otherwise indicated in a bill with reasonable certainty.

(2) A bill may be addressed to two or more drawees whether they are partners or not, but an order addressed to two drawees in the alternative or to two or more drawees in succession is not a bill of exchange.

7. Certainty required as to payee. (1) Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty.

(2) A bill may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two, or one or some of several payees. A bill may also be made payable to the holder of an office for the time being.

(3) Where the payee is a fictitious or non-existing person the bill may be treated as payable to bearer.

8. What bills are negotiable. (1) When a bill contains words prohibiting transfer, or indicating an intention that it should not be transferable, it is valid as between the parties thereto, but is not negotiable.

(2) A negotiable bill may be payable either to order or to bearer.

(3) A bill is payable to bearer which is expressed to be so payable, or on which the only or last indorsement is an indorsement in blank.

(4) A bill is payable to order which is expressed to be so payable, or which is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.

(5) Where a bill, either originally or by indorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option.

9. Sum payable. (1) The sum payable by a bill is a sum certain within the meaning of this Act, although it was required to be paid—

  • (a) With interest.

  • (b) By stated instalments.

  • (c) By stated instalments, with a provision that upon default in payment of any instalment the whole shall become due.

  • (d) According to an indicated rate of exchange or according to a rate of exchange to be ascertained as directed by the bill.

(2) Where the sum payable is expressed in words and also in figures, and there is a discrepancy between the two, the sum denoted by the words is the amount payable.

(3) Where a bill is expressed to be payable with interest, unless the instrument otherwise provides, interest runs from the date of the bill, and if the bill is undated from the issue thereof.

10. Bill payable on demand. (1) A bill is payable on demand—

  • (a) Which is expressed to be payable on demand, or at sight, or on presentation; or

  • (b) In which no time for payment was expressed.

(2) Where a bill is accepted or indorsed when it is overdue, it shall, as regards the acceptor who so accepts, or any indorser who so indorses it, be deemed a bill payable on demand.

11. Bill payable at a future time. A bill is payable at a determinable future time within the meaning of this Act which is expressed to be payable—

  • (1) At a fixed period after date or sight.

  • (2) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening may be uncertain.

An instrument expressed to be payable on a contingency is not a bill, and the happening of the event does not cure the defect.

12. Omission of date in bill payable after date. Where a bill expressed to be payable at a fixed period after date is issued undated, or where the acceptance of a bill payable at a fixed period after sight is undated, any holder may insert therein the true date of issue or acceptance, and the bill shall be payable accordingly.

Provided that (1) where the holder in good faith and by mistake inserts a wrong date, and (2) in every case where a wrong date is inserted, if the bill subsequently comes into the hands of a holder in due course the bill shall not be avoided thereby, but shall operate and be payable as if the date so inserted had been the true date.

13. Ante-dating and post-dating. (1) Where a bill or an acceptance or any indorsement on a bill is dated, the date shall, unless the contrary be proved, be deemed to be the true date of the drawing, acceptance, or indorsement, as the case may be.

(2) A bill is not invalid by reason only that it is ante-dated or post-dated, or that it bears date on a Sunday.

14. Computation of time of payment. Where a bill is not payable on demand the day on which it falls due is determined as follows:

(1) Three days, called days of grace, are, in every case where the bill itself does not otherwise provide, added to the time of payment as fixed by the bill, and the bill is due and payable on the last day of grace: Provided that—

  • (a) When the last day of grace falls on Sunday, Christmas Day, Good Friday, or a day appointed by Royal proclamation as a public fast or thanksgiving day, the bill is, except in the case herein-after provided for, due and payable on the preceding business day;

  • (b) When the last day of grace is a bank holiday (other than Christmas Day or Good Friday) under the Bank Holidays Act, 1871, and Acts amending or extending it, or when the last day of grace is a Sunday, and the second day of grace is a Bank Holiday, the bill is due and payable on the succeeding business day.

(2) Where a bill is payable at a fixed period after date, after sight, or after the happening of a specified event, the time of payment is determined by excluding the day from which the time is to begin to run and by including the day of payment.

(3) Where a bill is payable at a fixed period after sight, the time begins to run from the date of the acceptance if the bill be accepted, and from the date of noting or protest if the bill be noted or protested for non-acceptance, or for non-delivery.

(4) The term “month” in a bill means calendar month.

15. Case of need. The drawer of a bill and any indorser may insert therein the name of a person to whom the holder may resort in case of need, that is to say, in case the bill is dishonoured by non-acceptance or non-payment. Such person is called the referee in case of need. It is in the option of the holder to resort to the referee in case of need or not as he may think fit.

16. Optional stipulations by drawer or indorser. The drawer of a bill, and any indorser, may insert therein an express stipulation—

(1) negativing or limiting his own liability to the holder.

(2) waiving as regards himself some or all of the holder’s duties.

17. Definition and requisites of acceptance. (1) The acceptance of a bill is the signification by the drawee of his assent to the order of the drawer.

(2) An acceptance is invalid unless it complies with the following conditions, namely:

  • (a) It must be written on the bill and be signed by the drawee. The mere signature of the drawee without additional words is sufficient.

  • (b) It must not express that the drawee will perform his promise by any other means than the payment of money.

18. Time for acceptance. A bill may be accepted—

(1) before it has been signed by the drawer, or while otherwise incomplete:

(2) when it is overdue, or after it has been dishonoured by a previous refusal to accept, or by non-payment:

(3) when a bill payable after sight is dishonoured by non-acceptance, and the drawee subsequently accepts it, the holder, in the absence of any different agreement, is entitled to have the bill accepted as of the date of first presentment to the drawee for acceptance.

19. General and qualified acceptances. (1) An acceptance is either

  • (a) general or

  • (b) qualified.

(2) A general acceptance assents without qualification to the order of the drawer. A qualified acceptance in express terms varies the effect of the bill as drawn.

In particular an acceptance is qualified which is—

  • (a) conditional, that is to say, which makes payment by the acceptor dependent on the fulfilment of a condition therein stated:

  • (b) partial, that is to say, an acceptance to pay part only of the amount for which the bill is drawn:

  • (c) local, that is to say, an acceptance to pay only at a particular specified place:

An acceptance to pay at a particular place is a general acceptance, unless it expressly states that the bill is to be paid there only and not elsewhere:

  • (d) qualified as to time:

  • (e) the acceptance of some one or more of the drawees, but not of all.

20. Inchoate instruments. (1) Where a simple signature on a blank stamped paper is delivered by the signer in order that it may be converted into a bill, it operates as a prima facie authority to fill it up as a complete bill for any amount the stamp will cover, using the signature for that of the drawer, or the acceptor, or an indorser; and, in like manner, when a bill is wanting in any material particular, the person in possession of it has a prima facie authority to fill up the omission in any way he thinks fit.

(2) In order that any such instrument when completed may be enforceable against any person who became a party thereto prior to its completion, it must be filled up within a reasonable time, and strictly in accordance with the authority given. Reasonable time for this purpose is a question of fact.

Provided that if any such instrument after completion is negotiated to a holder in due course it shall be valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up within a reasonable time and strictly in accordance with the authority given.

21. Delivery. (1) Every contract on a bill, whether it be the drawer’s, the acceptor’s, or an indorser’s, is incomplete and revocable, until delivery of the instrument in order to give effect thereto.

Provided that where an acceptance is written on a bill, and the drawee gives notice to or according to the directions of the person entitled to the bill that he has accepted it, the acceptance then becomes complete and irrevocable.

(2) As between immediate parties, and as regards a remote party other than a holder in due course, the delivery—

  • (a) in order to be effectual must be made either by or under the authority of the party drawing, accepting, or indorsing, as the case may be.

  • (b) may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill.

But if the bill be in the hands of a holder in due course a valid delivery of the bill by all parties prior to him so as to make them liable to him is conclusively presumed.

(3) Where a bill is no longer in the possession of a party who has signed it as drawer, acceptor, or indorser, a valid and unconditional delivery by him is presumed until the contrary is proved.

Capacity and Authority of Parties

22. Capacity of parties. (1) Capacity to incur liability as a party to a bill is co-extensive with capacity to contract.

Provided that nothing in this section shall enable a corporation to make itself liable as drawer, acceptor, or indorser of a bill unless it is competent to it so to do under the law for the time being in force relating to corporations.

(2) Where a bill is drawn or indorsed by an infant, minor, or corporation having no capacity or power to incur liability on a bill, the drawing or indorsement entitles the holder to receive payment of the bill, and to enforce it against any other party thereto.

23. Signature essential to liability. No person is liable as drawer, indorser, or acceptor of a bill who has not signed it as such: Provided that

(1) Where a person signs a bill in a trade or assumed name, he is liable thereon as if he had signed it in his own name:

(2) The signature of the name of a firm is equivalent to the signature by the person so signing of the names of all persons liable as partners in that firm.

24. Forged or unauthorised signature. Subject to the provisions of this Act, where a signature on a bill is forged or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorised signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

Provided that nothing in this section shall affect the ratification of an unauthorised signature not amounting to a forgery.

25. Procuration signatures. A signature by procuration operates as notice that the agent has but a limited authority to sign, and the principal is only bound by such signature if the agent in so signing was acting within the actual limits of his authority.

26. Person signing as agent or in representative capacity. (1)

Where a person signs a bill as drawer, indorser, or acceptor, and adds words to his signature, indicating that he signs for or on behalf of a principal, or in a representative character, he is not personally liable thereon; but the mere addition to his signature of words describing him as an agent, or as filling a representative character, does not exempt him from personal liability.

(2) In determining whether a signature on a bill is that of the principal or that of the agent by whose hand it is written, the construction most favourable to the validity of the instrument shall be adopted.

The Consideration for a Bill

27. Value and holder for value. (1) Valuable consideration for a bill may be constituted by—

  • (a) any consideration sufficient to support a simple contract;

  • (b) an antecedent debt or liability. Such a debt or liability is deemed valuable consideration whether the bill is payable on demand or at a future time.

(2) Where value has at any time been given for a bill the holder is deemed to be a holder for value as regards the acceptor and all parties to the bill who became parties prior to such time.

(3) Where the holder of a bill has a lien on it arising either from contract or by implication of law, he is deemed to be a holder for value to the extent of the sum for which he has a lien.

28. Accommodation bill or party. (1) An accommodation party to a bill is a person who has signed a bill as drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.

(2) An accommodation party is liable on the bill to a holder for value; and it is immaterial whether, when such holder took the bill, he knew such party to be an accommodation party or not.

29. Holder in due course. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions; namely,

  • (a) That he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact:

  • (b) That he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

(2) In particular, the title of a person who negotiates a bill is defective within the meaning of this Act when he obtained the bill, or the acceptance thereof, by fraud, duress, or force and fear, or other unlawful means, or an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud.

(3) A holder (whether for value or not), who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder.

30. Presumption of value and good faith. (1) Every party whose signature appears on a bill is primâ facie deemed to have become a party thereto for value.

(2) Every holder of a bill is prima facie deemed to be a holder in due course; but if in an action on a bill it is admitted or proved that the acceptance, issue, or subsequent negotiation of the bill is affected with fraud, duress, or force and fear, or illegality, the burden of proof is shifted, unless and until the holder proves that subsequent to the alleged fraud or illegality, value has in good faith been given for the bill.

Negotiation of Bills

31. Negotiation of bill. (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.

(2) A bill payable to bearer is negotiated by delivery.

(3) A bill payable to order is negotiated by the indorsement of the holder completed by delivery.

(4) Where the holder of a bill payable to his order transfers it for value without indorsing it, the transfer gives the transferee such title as the transferor had in the bill, and the transferee in addition acquires the right to have the indorsement of the transferor.

(5) Where any person is under obligation to indorse a bill in a representative capacity, he may indorse the bill in such terms as to negative personal liability.

32. Requisites of a valid indorsement. An indorsement in order to operate as a negotiation must comply with the following conditions, namely—

(1) It must be written on the bill itself and be signed by the indorser. The simple signature of the indorser on the bill, without additional words, is sufficient.

An indorsement written on an allonge, or on a “copy” of a bill issued or negotiated in a country where “copies” are recognised, is deemed to be written on the bill itself.

(2) It must be an indorsement of the entire bill. A partial indorsement, that is to say, an indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the bill to two or more indorsees severally, does not operate as a negotiation of the bill.

(3) Where a bill is payable to the order of two or more payees or indorsees who are not partners all must indorse, unless the one indorsing has authority to indorse for the others.

(4) Where, in a bill payable to order, the payee or indorsee is wrongly designated, or his name is mis-spelt, he may indorse the bill as therein described, adding, if he think fit, his proper signature.

(5) Where there are two or more indorsements on a bill, each indorsement is deemed to have been made in the order in which it appears on the bill, until the contrary is proved.

(6) An indorsement may be made in blank or special. It may also contain terms making it restrictive.

33. Conditional indorsement. Where a bill purports to be indorsed conditionally the condition may be disregarded by the payer, and payment to the indorsee is valid whether the condition has been fulfiled or not.

34. Indorsement in blank and special indorsement. (1) An indorsement in blank specifies no indorsee, and a bill so indorsed becomes payable to bearer.

(2) A special indorsement specifies the person to whom, or to whose order, the bill is to be payable.

(3) The provisions of this Act relating to a payee apply with the necessary modifications to an indorsee under a special indorsement.

(4) When a bill has been indorsed in blank, any holder may convert the blank indorsement into a special indorsement by writing above the indorsee’s signature a direction to pay the bill to or to the order of himself or some other person.

35. Restrictive indorsement. (1) An indorsement is restrictive which prohibits the further negotiation of the bill or which expresses that it is a mere authority to deal with the bill as thereby directed and not a transfer of the ownership thereof, as, for example, if a bill be indorsed “Pay D. only,” or “Pay D. for the account of X.,” or “Pay D. or order for collection.”

(2) A restrictive indorsement gives the indorsee the right to receive payment of the bill and to sue any party thereto that his indorser could have sued, but gives him no power to transfer his rights as indorsee unless it expressly authorise him to do so.

(3) Where a restrictive indorsement authorises further transfer, all subsequent indorsees take the bill with the same rights and subject to the same liabilities as the first indorsee under the restrictive indorsement.

36. Negotiation of overdue or dishonoured bill. (1) Where a bill is negotiable in its origin it continues to be negotiable until it has been

  • (a) restrictively indorsed or

  • (b) discharged by payment or otherwise.

(2) Where an overdue bill is negotiated, it can only be negotiated subject to any defect of title affecting it at its maturity, and thenceforward no person who takes it can acquire or give a better title than that which the person from whom he took it had.

(3) A bill payable on demand is deemed to be overdue within the meaning and for the purposes of this section, when it appears on the face of it to have been in circulation for an unreasonable length of time. What is an unreasonable length of time for this purpose is a question of fact.

(4) Except where an indorsement bears date after the maturity of the bill, every negotiation is prima facie deemed to have been effected before the bill was overdue.

(5) Where a bill which is not overdue has been dishonoured any person who takes it with notice of the dishonour takes it subject to any defect of title attaching thereto at the time of dishonour, but nothing in this subsection shall affect the rights of a holder in due course.

37. Negotiation of bill to party already liable thereon. Where a bill is negotiated back to the drawer, or to a prior indorser or to the acceptor, such party may, subject to the provisions of this Act, re-issue and further negotiate the bill, but he is not entitled to enforce payment of the bill against any intervening party to whom he was previously liable.

38. Rights of the holder. The rights and powers of the holder of a bill are as follows:

(1) He may sue on the bill in his own name:

(2) Where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill:

(3) Where his title is defective:

  • (a) if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill, and

  • (b) if he obtains payment of the bill the person who pays him in due course gets a valid discharge for the bill.

General Duties of the Holder

39. When presentment for acceptance is necessary. (1) Where a bill is payable after sight, presentment for acceptance is necessary in order to fix the maturity of the instrument.

(2) Where a bill expressly stipulates that it shall be presented for acceptance, or where a bill is drawn payable elsewhere than at the residence or place of business of the drawee, it must be presented for acceptance before it can be presented for payment.

(3) In no other case is presentment for acceptance necessary in order to render liable any party to the bill.

(4) Where the holder of a bill, drawn payable elsewhere than at the place of business or residence of the drawee, has not time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due, the delay caused by presenting the bill for acceptance before presenting it for payment is excused, and does not discharge the drawer and indorsers.

40. Time for presenting bill payable after sight. (1) Subject to the provisions of this Act, when a bill payable after sight is negotiated, the holder must either present it for acceptance or negotiate it within a reasonable time.

(2) If he does not do so, the drawer and all indorsers prior to that holder are discharged.

(3) In determining what is a reasonable time within the meaning of this section, regard shall be had to the nature of the bill, the usage of trade with respect to similar bills, and the facts of the particular case.

41. Rules as to presentment for acceptance, and excuses for non-presentment. (1) A bill is duly presented for acceptance which is presented in accordance with the following rules:

  • (a) The presentment must be made by or on behalf of the holder to the drawee or to some person authorised to accept or refuse acceptance on his behalf at a reasonable hour on a business day and before the bill is overdue:

  • (b) Where a bill is addressed to two or more drawees, who are not partners, presentment must be made to them all, unless one has authority to accept for all, then presentment may be made to him only:

  • (c) Where the drawee is dead, presentment may be made to his personal representative:

  • (d) Where the drawee is bankrupt, presentment may be made to him or to his trustee:

  • (e) Where authorised by agreement or usage, a presentment through the post office is sufficient.

(2) Presentment in accordance with these rules is excused, and a bill may be treated as dishonoured by non-acceptance—

  • (a) Where the drawee is dead or bankrupt, or is a fictitious person or a person not having capacity to contract by bill:

  • (b) Where, after the exercise of reasonable diligence, such presentment cannot be effected:

  • (c) Where, although the presentment has been irregular, acceptance has been refused on some other ground.

(3) The fact that the holder has reason to believe that the bill, on presentment, will be dishonoured does not excuse presentment.

42. Non-acceptance. When a bill is duly presented for acceptance and is not accepted within the customary time, the person presenting it must treat it as dishonoured by non-acceptance. If he does not, the holder shall lose his right of recourse against the drawer and indorsers.

43. Dishonour by non-acceptance and its consequences. (1) A bill is dishonoured by non-acceptance—

  • (a) when it is duly presented for acceptance, and such an acceptance as is prescribed by this Act is refused or cannot be obtained; or

  • (b) when presentment for acceptance is excused and the bill is not accepted.

(2) Subject to the provisions of this Act when a bill is dishonoured by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder, and no presentment for payment is necessary.

44. Duties as to qualified acceptances. (1) The holder of a bill may refuse to take a qualified acceptance, and if he does not obtain an unqualified acceptance may treat the bill as dishonoured by non-acceptance.

(2) Where a qualified acceptance is taken, and the drawer or an indorser has not expressly or impliedly authorised the holder to take a qualified acceptance, or does not subsequently assent thereto, such drawer or indorser is discharged from his liability on the bill.

The provisions of this subsection do not apply to a partial acceptance, whereof due notice has been given. Where a foreign bill has been accepted as to part, it must be protested as to the balance.

(3) When the drawer or indorser of a bill receives notice of a qualified acceptance, and does not within reasonable time express his dissent to the holder he shall be deemed to have assented thereto.

45. Rules as to presentment for payment. Subject to the provisions of this Act a bill must be duly presented for payment. If it be not so presented the drawer and indorsers shall be discharged.

A bill is duly presented for payment which is presented in accordance with the following rules—

(1) Where the bill is not payable on demand, presentment must be made on the day it falls due.

(2) Where the bill is payable on demand, then, subject to the provisions of the Act, presentment must be made within a reasonable time after its issue in order to render the drawer liable, and within a reasonable time after its indorsement, in order to render the indorser liable.

In determining what is a reasonable time, regard shall be had to the nature of the bill, the usage of trade with regard to similar bills, and the facts of the particular case.

(3) Presentment must be made by the holder or by some person authorised to receive payment on his behalf at a reasonable hour on a business day, at the proper place as herein-after defined, either to the person designated by the bill as payer, or to some person authorised to pay or refuse payment on his behalf if with the exercise of reasonable diligence such person can there be found.

(4) A bill is presented at the proper place—

  • (a) where a place of payment is specified in the bill and the bill is there presented.

  • (b) where no place of payment is specified, but the address of the drawee or acceptor is given in the bill, and the bill is there presented.

  • (c) where no place of payment is specified and no address given, and the bill is presented at the drawee’s or acceptor’s place of business if known, and if not, at his ordinary residence if known.

  • (d) in any other case if presented to the drawee or acceptor wherever he can be found, or if presented at his last known place of business or residence.

(5) Where a bill is presented at the proper place, and after the exercise of reasonable diligence no person authorised to pay or refuse payment can be found there, no further presentment to the drawee or acceptor is required.

(6) Where a bill is drawn upon, or accepted by two or more persons who are not partners, and no place of payment is specified, presentment must be made to them all.

(7) Where the drawee or acceptor of a bill is dead, and no place of payment is specified, presentment must be made to a personal representative, if such there be, and with the exercise of reasonable diligence he can be found.

(8) Where authorised by agreement or usage a presentment through the post office is sufficient.

46. Excuses for delay or non-presentment for payment. (1) Delay in making presentment for payment is excused when the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate presentment must be made with reasonable diligence.

(2) Presentment for payment is dispensed with—

  • (a) where, after the exercise of reasonable diligence presentment, as required by this Act, cannot be effected.

The fact that the holder has reason to believe that the bill will, on presentment, be dishonoured, does not dispense with the necessity for presentment.

  • (b) where the drawee is a fictitious person.

  • (c) as regards the drawer where the drawee or acceptor is not bound as between himself and the drawer, to accept or pay the bill, and the drawer has no reason to believe that the bill would be paid if presented.

  • (d) as regards an indorser, where the bill was accepted or made for the accommodation of that indorser, and he has no reason to expect that the bill would be paid if presented.

  • (e) by waiver of presentment, express or implied.

47. Dishonour by non-payment. (1) A bill is dishonoured by non-payment—

  • (a) when it is duly presented for payment and payment is refused or cannot be obtained, or

  • (b) when presentment is excused and the bill is overdue and unpaid.

(2) Subject to the provisions of this Act, when a bill is dishonoured by non-payment, an immediate right of recourse against the drawer and indorsers accrues to the holder.

48. Notice of dishonour and effect of non-notice. Subject to the provisions of this Act, when a bill has been dishonoured by non-acceptance or by non-payment, notice of dishonour must be given to the drawer and each indorser, and any drawer or indorser to whom such notice is not given is discharged: Provided that—

(1) Where a bill is dishonoured by non-acceptance, and notice of dishonour is not given, the rights of a holder in due course, subsequent to the omission, shall not be prejudiced by the omission.

(2) Where a bill is dishonoured by non-acceptance, and due notice of dishonour is given, it shall not be necessary to give notice of a subsequent dishonour by non-payment unless the bill shall in the meantime have been accepted.

49. Rules as to notice of dishonour. Notice of dishonour in order to be valid and effectual must be given in accordance with the following rules—

(1) The notice must be given by or on behalf of the holder, or by or on behalf of an indorser who, at the time of giving it, is himself liable on the bill.

(2) Notice of dishonour may be given by an agent either in his own name, or in the name of any party entitled to give notice whether that party be his principal or not.

(3) Where the notice is given by or on behalf of the holder, it enures for the benefit of all subsequent holders and all prior indorsers who have a right of recourse against the party to whom it is given.

(4) Where notice is given by or on behalf of an indorser entitled to give notice as herein-before provided, it enures for the benefit of the holder and all indorsers subsequent to the party to whom notice is given.

(5) The notice may be given in writing or by personal communication, and may be given in any terms which sufficiently identify the bill, and intimate that the bill has been dishonoured by non-acceptance or non-payment.

(6) The return of a dishonoured bill to the drawer or an indorser is, in point of form, deemed a sufficient notice of dishonour.

(7) A written notice need not be signed, and an insufficient written notice may be supplemented and validated by verbal communication. A misdescription of the bill shall not vitiate the notice unless the party to whom the notice is given is in fact misled thereby.

(8) Where notice of dishonour is required to be given to any person, it may be given either to the party himself, or to his agent in that behalf.

(9) Where the drawer or indorser is dead, and the party giving notice knows it, the notice must be given to a personal representative if such there be, and with the exercise of reasonable diligence he can be found.

(10) Where the drawer or indorser is bankrupt, notice may be given either to the party himself or to the trustee.

(11) Where there are two or more drawers or indorsers who are not partners, notice must be given to each of them, unless one of them has authority to receive such notice for the others.

(12) The notice may be given as soon as the bill is dishonoured and must be given within a reasonable time thereafter.

In the absence of special circumstances notice is not deemed to have been given within a reasonable time, unless—

  • (a) where the person giving and the person to receive notice reside in the same place, the notice is given or sent off in time to reach the latter on the day after the dishonour of the bill.

  • (b) where the person giving and the person to receive notice reside in different places, the notice is sent off on the day after the dishonour of the bill, if there be a post at a convenient hour on that day, and if there be no post on that day then by the next post thereafter.

(13) Where a bill when dishonoured is in the hands of an agent, he may either himself give notice to the parties liable on the bill, or he may give notice to his principal. If he give notice to his principal, he must do so within the same time as if he were the holder, and the principal upon receipt of such notice has himself the same time for giving notice as if the agent had been an independent holder.

(14) Where a party to a bill receives due notice of dishonour, he has after the receipt of such notice the same period of time for giving notice to antecedent parties that the holder has after the dishonour.

(15) Where a notice of dishonour is duly addressed and posted, the sender is deemed to have given due notice of dishonour, notwithstanding any miscarriage by the post office.

50. Excuses for non-notice and delay. (1) Delay in giving notice of dishonour is excused where the delay is caused by circumstances beyond the control of the party giving notice, and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate the notice must be given with reasonable diligence.

(2) Notice of dishonour is dispensed with—

  • (a) when, after the exercise of reasonable diligence, notice as required by this Act cannot be given to or does not reach the drawer or indorser sought to be charged:

  • (b) by waiver express or implied. Notice of dishonour may be waived before the time of giving notice has arrived, or after the omission to give due notice:

  • (c) as regards the drawer in the following cases, namely, (i) where drawer and drawee are the same person, (ii) where the drawee is a fictitious person or a person not having capacity to contract, (iii) where the drawer is the person to whom the bill is presented for payment, (iv) where the drawee or acceptor is as between himself and the drawer under no obligation to accept or pay the bill, (v) where the drawer has countermanded payment:

  • (d) as regards the indorser in the following cases, namely, (i) where the drawee is a fictitious person or a person not having capacity to contract, and the indorser was aware of the fact at the time he indorsed the bill, (ii) where the indorser is the person to whom the bill is presented for payment, (iii) where the bill was accepted or made for his accommodation.

51. Noting or protest of bill. (1) Where an inland bill has been dishonoured it may, if the holder think fit, be noted for non-acceptance or non-payment, as the case may be; but it shall not be necessary to note or protest any such bill in order to preserve the recourse against the drawer or indorser.

(2) Where a foreign bill, appearing on the face of it to be such, has been dishonoured by non-acceptance it must be duly protested for non-acceptance, and where such a bill, which has not been previously dishonoured by non-acceptance, is dishonoured by non-payment it must be duly protested for non-payment. If it be not so protested the drawer and indorsers are discharged. Where a bill does not appear on the face of it to be a foreign bill, protest thereof in case of dishonour is unnecessary.

(3) A bill which has been protested for non-acceptance may be subsequently protested for non-payment.

(4) Subject to the provisions of this Act, when a bill is noted or protested [it may be noted on the day of its dishonour and must be noted not later than the next succeeding business day]. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting.

(5) Where the acceptor of a bill becomes bankrupt or insolvent or suspends payment before it matures, the holder may cause the bill to be protested for better security against the drawer and indorsers.

(6) A bill must be protested at the place where it is dishonoured: Provided that—

  • (a) when a bill is presented through the post office, and returned by post dishonoured, it may be protested at the place to which it is returned and on the day of its return if received during business hours, and if not received during business hours, then not later than the next business day:

  • (b) when a bill drawn payable at the place of business or residence of some person other than the drawee has been dishonoured by non-acceptance, it must be protested for non-payment at the place where it is expressed to be payable, and no further presentment for payment to, or demand on, the drawee is necessary.

(7) A protest must contain a copy of the bill, and must be signed by the notary making it, and must specify—

  • (a) the person at whose request the bill is protested:

  • (b) the place and date of protest, the cause or reason for protesting the bill, the demand made, and the answer given, if any, or the fact that the drawee or acceptor could not be found.

(8) Where a bill is lost or destroyed, or is wrongly detained from the person entitled to hold it, protest may be made on a copy or written particulars thereof.

(9) Protest is dispensed with by any circumstances which would dispense with notice of dishonour. Delay in noting or protesting is excused when the delay is caused by circumstances beyond the control of the holder, and not imputable to his default, misconduct, or negligence. When the cause of delay ceases to operate the bill must be noted or protested with reasonable diligence.

52. Duties of holder as regards drawee or acceptor. (1) When a bill is accepted generally presentment for payment is not necessary in order to render the acceptor liable.

(2) When by the terms of a qualified acceptance presentment for payment is required, the acceptor, in the absence of an express stipulation to that effect, is not discharged by the omission to present the bill for payment on the day that it matures.

(3) In order to render the acceptor of a bill liable it is not necessary to protest it, or that notice of dishonour should be given to him.

(4) Where the holder of a bill presents it for payment, he shall exhibit the bill to the person from whom he demands payment, and when a bill is paid the holder shall forthwith deliver it up to the party paying it.

Liabilities of Parties

53. Funds in hands of drawee. (1) A bill, of itself, does not operate as an assignment of funds in the hands of the drawee available for the payment thereof, and the drawee of a bill who does not accept as required by this Act is not liable on the instrument. This subsection shall not extend to Scotland.

(2) (Application to Scotland.)

54. Liability of acceptor. The acceptor of a bill, by accepting it—

(1) Engages that he will pay it according to the tenour of his acceptance:

(2) Is precluded from denying to a holder in due course:

  • (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the bill;

  • (b) In the case of a bill payable to drawer’s order, the then capacity of the drawer to indorse, but not the genuineness or validity of his indorsement;

  • (c) In the case of a bill payable to the order of a third person, the existence of the payee and his then capacity to indorse, but not the genuineness or validity of his indorsement.

55. Liability of drawer or indorser. (1) The drawer of a bill by drawing it—

  • (a) Engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured he will compensate the holder or any indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken;

  • (b) Is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse.

(2) The indorser of a bill by indorsing it—

  • (a) engages that on due presentment it shall be accepted and paid according to its tenor, and that if it be dishonoured he will compensate the holder or a subsequent indorser who is compelled to pay it, provided that the requisite proceedings on dishonour be duly taken;

  • (b) is precluded from denying to a holder in due course the genuineness and regularity in all respects of the drawer’s signature and all previous indorsements;

  • (c) is precluded from denying to his immediate or a subsequent indorsee that the bill was at the time of his indorsement a valid and subsisting bill, and that he had then a good title thereto.

56. Stranger signing bill liable as indorser. Where a person signs a bill otherwise than as drawer or acceptor, he thereby incurs the liabilities of an indorser to a holder in due course.

57. Measure of damages against parties to dishonoured bill. Where a bill is dishonoured, the measure of damages, which shall be deemed to be liquidated damages, shall be as follows:

(1) The holder may recover from any party liable on the bill, and the drawer who has been compelled to pay the bill may recover from the acceptor, and an indorser who has been compelled to pay the bill may recover from the acceptor or from the drawer, or from a prior indorser—

  • (a) the amount of the bill:

  • (b) interest thereon from the time of presentment for payment if the bill is payable on demand, and from the maturity of the bill in any other case:

  • (c) the expenses of noting, or, when protest is necessary, and the protest has been extended, the expenses of protest.

(2) In the case of a bill which has been dishonoured abroad, in lieu of the above damages, the holder may recover from the drawer or an indorser, and the drawer or an indorser who has been compelled to pay the bill may recover from any party liable to him, the amount of the re-exchange with interest thereon until the time of payment.

(3) Where by this Act interest may be recovered as damages, such interest may, if justice require it, be withheld wholly or in part, and where a bill is expressed to be payable with interest at a given rate, interest as damages may or may not be given at the same rate as interest proper.

58. Transferor by delivery and transferee. (1) Where the holder of a bill payable to bearer negotiates it by delivery without indorsing it he is called a “transferor by delivery.”

(2) A transferor by delivery is not liable on the instrument.

(3) A transferor by delivery who negotiates a bill thereby warrants to his immediate transferee being a holder for value that the bill is what it purports to be, that he has a right to transfer it, and that at the time of transfer he is not aware of any fact which renders it valueless.

Discharge of Bill

59. Payment in due course. (1) A bill is discharged by payment in due course by or on behalf of the drawee or acceptor.

“Payment in due course” means payment made at or after the maturity of the bill to the holder thereof in good faith and without notice that his title to the bill is defective.

(2) Subject to the provisions herein-after contained, when a bill is paid by the drawer or an indorser it is not discharged; but

  • (a) Where a bill payable to, or to the order of, a third party is paid by the drawer, the drawer may enforce payment thereof against the acceptor, but may not re-issue the bill.

  • (b) Where a bill is paid by an indorser, or where a bill payable to drawer’s order is paid by the drawer, the party paying it is remitted to his former rights as regards the acceptor or antecedent parties, and he may, if he thinks fit, strike out his own subsequent indorsements, and again negotiate the bill.

(3) Where an accommodation bill is paid in due course by the party accommodated the bill is discharged.

60. Banker paying demand draft whereon indorsement is forged. When a bill payable to order on demand is drawn on a banker, and the banker on whom it is drawn pays the bill in good faith and in the ordinary course of business, it is not incumbent on the banker to show that the indorsement of the payee or any subsequent indorsement was made by or under the authority of the person whose indorsement it purports to be, and the banker is deemed to have paid the bill in due course, although such indorsement has been forged or made without authority.

61. Acceptor the holder at maturity. When the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged.

62. Express waiver. (1) When the holder of a bill at or after its maturity absolutely and unconditionally renounces his rights against the acceptor the bill is discharged.

The renunciation must be in writing, unless the bill is delivered up to the acceptor.

(2) The liabilities of any party to a bill may in like manner be renounced by the holder before, at, or after its maturity; but nothing in this section shall affect the rights of a holder in due course without notice of the renunciation.

63. Cancellation. (1) Where a bill is intentionally cancelled by the holder or his agent, and the cancellation is apparent thereon, the bill is discharged.

(2) In like manner any party liable on a bill may be discharged by the intentional cancellation of his signature by the holder or his agent. In such case any indorser who would have had a right of recourse against the party whose signature is cancelled is also discharged.

(3) A cancellation made unintentionally, or under a mistake, or without the authority of the holder is inoperative; but where a bill or any signature thereon appears to have been cancelled the burden of proof lies on the party who alleges that the cancellation was made unintentionally, or under a mistake, or without authority.

64. Alteration of bill. (1) Where a bill or acceptance is materially altered without the assent of all parties liable on the bill, the bill is avoided except as against a party who has himself made, authorised, or assented to the alteration, and subsequent indorsers. Provided that,

Where a bill has been materially altered, but the alteration is not apparent, and the bill is in the hands of a holder in due course, such holder may avail himself of the bill as if it had not been altered, and may enforce payment of it according to its original tenour.

(2) In particular the following alterations are material, namely, any alteration of the date, the sum payable, the time of payment, the place of payment, and, where a bill has been accepted generally, the addition of a place of payment without the acceptor’s assent.

Acceptance and Payment for Honour

65. Acceptance for honour suprà protest. (1) Where a bill of exchange has been protested for dishonour by non-acceptance, or protested for better security, and is not overdue, any person, not being a party already liable thereon, may, with the consent of the holder, intervene and accept the bill suprà protest for the honour of any party liable thereon, or for the honour of the person for whose account the bill is drawn.

(2) A bill may be accepted for honour for part only of the sum for which it is drawn.

(3) An acceptance for honour suprà protest in order to be valid must—

  • (a) be written on the bill, and indicate that it is an acceptance for honour:

  • (b) be signed by the acceptor for honour.

(4) Where an acceptance for honour does not expressly state for whose honour it is made it is deemed to be an acceptance for the honour of the drawer.

(5) Where a bill payable after sight is accepted for honour, its maturity is calculated from the date of the noting for non-acceptance, and not from the date of the acceptance for honour.

66. Liability of acceptor for honour. (1) The acceptor for honour of a bill by accepting it engages that he will, on due presentment, pay the bill according to the tenor of his acceptance, if it is not paid by the drawee, provided it has been duly presented for payment, and protested for non-payment, and that he receives notice of these facts.

(2) The acceptor for honour is liable to the holder and to all parties to the bill subsequent to the party for whose honour he has accepted.

67. Presentment to acceptor for honour. (1) Where a dishonoured bill has been accepted for honour suprà protest, or contains a reference in case of need, it must be protested for non-payment before it is presented for payment to the acceptor for honour, or referee in case of need.

(2) Where the address of the acceptor for honour is in the same place where the bill is protested for non-payment, the bill must be presented to him not later than the day following its maturity; and where the address of the acceptor for honour is in some place other than the place where it was protested for non-payment, the bill must be forwarded not later than the day following its maturity for presentment to him.

(3) Delay in presentment or non-presentment is excused by any circumstance which would excuse delay in presentment for payment or non-presentment for payment.

(4) When a bill of exchange is dishonoured by the acceptor for honour it must be protested for non-payment by him.

68. Payment for honour suprà protest. (1) Where a bill has been protested for non-payment, any person may intervene and pay it suprà protest for the honour of any party liable thereon, or for the honour of the person for whose account the bill is drawn.

(2) Where two or more persons offer to pay a bill for the honour of different parties, the person whose payment will discharge most parties to the bill shall have the preference.

(3) Payment for honour suprà protest, in order to operate as such and not as a mere voluntary payment, must be attested by a notarial act of honour which may be appended to the protest or form an extension of it.

(4) The notarial act of honour must be founded on a declaration made by the payer for honour, or his agent in that behalf, declaring his intention to pay the bill for honour, and for whose honour he pays.

(5) Where a bill has been paid for honour, all parties subsequent to the party for whose honour it is paid are discharged, but the payer for honour is subrogated for, and succeeds to both the rights and duties of, the holder as regards the party for whose honour he pays, and all parties liable to that party.

(6) The payer for honour on paying to the holder the amount of the bill and the notarial expenses incidental to its dishonour is entitled to receive both the bill itself and the protest. If the holder do not on demand deliver them up he shall be liable to the payer for honour in damages.

(7) Where the holder of a bill refuses to receive payment suprà protest he shall lose his right of recourse against any party who would have been discharged by such payment.

Lost Instruments

69. Holder’s right to duplicate of lost bill. Where a bill has been lost before it is overdue the person who was the holder of it may apply to the drawer to give him another bill of the same tenor, giving security to the drawer if required to indemnify him against all persons whatever in case the bill alleged to have been lost shall be found again.

If the drawer on request as aforesaid refuses to give such duplicate bill he may be compelled to do so.

70. Action on lost bill. In any action or proceeding upon a bill, the court or a judge may order that the loss of the instrument shall not be set up, provided an indemnity be given to the satisfaction of the court or judge against the claims of any other person upon the instrument in question.

Bill in a Set

71. Rules as to sets. (1) Where a bill is drawn in a set, each part of the set being numbered, and containing a reference to the other parts the whole of the parts constitute one bill.

(2) Where the holder of a set indorses two or more parts to different persons, he is liable on every such part, and every indorser subsequent to him is liable on the part he has himself indorsed as if the said parts were separate bills.

(3) Where two or more parts of a set are negotiated to different holders in due course, the holder whose title first accrues is as between such holders deemed the true owner of the bill; but nothing in this subsection shall affect the rights of a person who in due course accepts or pays the part first presented to him.

(4) The acceptance may be written on any part, and it must be written on one part only.

If the drawee accepts more than one part, and such accepted parts get into the hands of different holders in due course, he is liable on every such part as if it were a separate bill.

(5) When the acceptor of a bill drawn in a set pays it without requiring the part bearing his acceptance to be delivered up to him, and that part at maturity is outstanding in the hands of a holder in due course, he is liable to the holder thereof.

(6) Subject to the preceding rules, where any one part of a bill drawn in a set is discharged by payment or otherwise, the whole bill is discharged.

Conflict of Laws

72. Rules where laws conflict. Where a bill drawn in one country is negotiated, accepted, or payable in another, the rights, duties, and liabilities of the parties thereto are determined as follows:

(1) The validity of a bill as regards requisites in form is determined by the law of the place of issue, and the validity as regards requisites in form of the supervening contracts, such as acceptance, or indorsement, or acceptance suprà protest, is determined by the law of the place where such contract was made. Provided that,

  • (a) Where a bill is issued out of the United Kingdom it is not invalid by reason only that it is not stamped in accordance with the law of the place of issue:

  • (b) Where a bill, issued out of the United Kingdom, conforms, as regards requisites in form, to the law of the United Kingdom, it may, for the purpose of enforcing payment thereof, be treated as valid as between all persons who negotiate, hold, or become parties to it in the United Kingdom.

(2) Subject to the provisions of this Act, the interpretation of the drawing, indorsement, acceptance, or acceptance suprà protest of a bill, is determined by the law of the place where such contract is made.

Provided that where an inland bill is indorsed in a foreign country the indorsement shall as regards the payer be interpreted according to the law of the United Kingdom.

(3) The duties of the holder with respect to presentment for acceptance or payment and the necessity for or sufficiency of a protest or notice of dishonour, or otherwise, are determined by the law of the place where the act is done or the bill is dishonoured.

(4) Where a bill is drawn out of but payable in the United Kingdom and the sum payable is not expressed in the currency of the United Kingdom the amount shall, in the absence of some express stipulation, be calculated according to the rate of exchange for sight drafts at the place of payment on the day the bill is payable.

(5) Where a bill is drawn in one country and is payable in another, the due date thereof is determined according to the law of the place where it is payable.

Part III

Cheques on a Banker

73. Cheque defined. A cheque is a bill of exchange drawn on a banker payable on demand.

Except as otherwise provided in this Part, the provisions of this Act applicable to a bill of exchange payable on demand apply to a cheque.

74. Presentment of cheque for payment. Subject to the provisions of this Act—

(1) Where a cheque is not presented for payment within a reasonable time of its issue, and the drawer or the person on whose account it is drawn had the right at the time of such presentment as between him and the banker to have the cheque paid and suffers actual damage through the delay, he is discharged to the extent of such damage, that is to say, to the extent to which such drawer or person is a creditor of such banker to a larger amount than he would have been had such cheque been paid.

(2) In determining what is a reasonable time regard shall be had to the nature of the instrument, the usage of trade and of bankers, and the facts of the particular case.

(3) The holder of such cheque as to which such drawer or person is discharged shall be a creditor, in lieu of such drawer or person, of such banker to the extent of such discharge, and entitled to recover the amount from him.

74A. Presentment of cheque for payment: alternative place of presentment. Where the banker on whom a cheque is drawn—

  • (a) has by notice published in the London, Edinburgh and Belfast Gazettes specified an address at which cheques drawn on him may be presented, and

  • (b) has not by notice so published cancelled the specification of that address, the cheque is also presented at the proper place if it is presented there.

74B. Presentment of cheque for payment: alternative means of presentment by banker. (1) A banker may present a cheque for payment to the banker on whom it is drawn by notifying him of its essential features by electronic means or otherwise, instead of by presenting the cheque itself.

(2) If a cheque is presented for payment under this section, presentment need not be made at the proper place or at a reasonable hour on a business day.

(3) If, before the close of business on the next business day following presentment of a cheque under this section, the banker on whom the cheque is drawn requests the banker by whom the cheque was presented to present the cheque itself—

  • (a) the presentment under this section shall be disregarded, and

  • (b) this section shall not apply in relation to the subsequent presentment of the cheque.

(4) A request under subsection (3) above for the presentment of a cheque shall not constitute dishonour of the cheque by non-payment.

(5) Where presentment of a cheque is made under this section, the banker who presented the cheque and the banker on whom it is drawn shall be subject to the same duties in relation to the collection and payment of the cheque as if the cheque itself had been presented for payment.

(6) For the purposes of this section, the essential features of a cheque are—

  • (a) the serial number of the cheque,

  • (b) the code which identifies the banker on whom the cheque is drawn,

  • (c) the account number of the drawer of the cheque, and

  • (d) the amount of the cheque as entered by the drawer of the cheque.

74C. Cheques presented for payment under section 74B: disapplication of section 52(4). Section 52(4) above—

  • (a) so far as relating to presenting a bill for payment, shall not apply to presenting a cheque for payment under section 74B above, and

  • (b) so far as relating to a bill which is paid, shall not apply to a cheque which is paid following presentment under that section.

75. Revocation of banker’s authority. The duty and authority of a banker to pay a cheque drawn on him by his customer are determined by—

  • (1) countermand of payment:

  • (2) notice of the customer’s death.

Crossed Cheques

76. General and special crossings defined. (1) Where a cheque bears across its face an addition of—

  • (a) the words “and company” or any abbreviation thereof between two parallel transverse lines, either with or without the words “not negotiable”; or

  • (b) two parallel transverse lines simply, either with or without the words “not negotiable”;

that addition constitutes a crossing, and the cheque is crossed generally.

(2) Where a cheque bears across its face an addition of the name of a banker, either with or without the words “not negotiable,” that addition constitutes a crossing, and the cheque is crossed specially and to that banker.

77. Crossing by drawer or after issue. (1) A cheque may be crossed generally or specially by the drawer.

(2) Where a cheque is uncrossed, the holder may cross it generally or specially.

(3) Where a cheque is crossed generally the holder may cross it specially.

(4) Where a cheque is crossed generally or specially, the holder may add the words “not negotiable.”

(5) Where a cheque is crossed specially, the banker to whom it is crossed may again cross it specially to another banker for collection.

(6) Where an uncrossed cheque, or a cheque crossed generally, is sent to a banker for collection, he may cross it specially to himself.

78. Crossing a material part of cheque. A crossing authorised by this Act is a material part of the cheque; it shall not be lawful for any person to obliterate or, except as authorised by this Act, to add to or alter the crossing.

79. Duties of banker as to crossed cheques. (1) Where a cheque is crossed specially to more than one banker except when crossed to an agent for collection being a banker, the banker on whom it is drawn shall refuse payment thereof.

(2) Where the banker on whom a cheque is drawn which is so crossed nevertheless pays the same, or pays a cheque crossed generally otherwise than to a banker, or if crossed specially otherwise than to the banker to whom it is crossed, or his agent for collection being a banker, he is liable to the true owner of the cheque for any loss he may sustain owing to the cheque having been so paid.

Provided that where a cheque is presented for payment which does not at the time of presentment appear to be crossed, or to have had a crossing which has been obliterated, or to have been added to or altered otherwise than as authorised by this Act, the banker paying the cheque in good faith and without negligence shall not be responsible or incur any liability, nor shall the payment be questioned by reason of the cheque having been crossed, or of the crossing having been obliterated or having been added to or altered otherwise than as authorised by this Act, and of payment having been made otherwise than to a banker or to the banker to whom the cheque is or was crossed, or to his agent for collection being a banker, as the case may be.

80. Protection to banker and drawer where cheque is crossed.

Where the banker, on whom a crossed cheque (including a cheque which under section 81A below or otherwise is not transferable) is drawn, in good faith and without negligence pays it, if crossed generally, to a banker, and if crossed specially, to the banker to whom it is crossed, or his agent for collection being a banker, the banker paying the cheque, and, if the cheque has come into the hands of the payee, the drawer, shall respectively be entitled to the same rights and be placed in the same position as if payment of the cheque had been made to the true owner thereof.

81. Effect of crossing on holder. Where a person takes a crossed cheque which bears on it the words “not negotiable,” he shall not have and shall not be capable of giving a better title to the cheque than that which the person from whom he took it had.

81A. Non-transferable cheques. (1) Where a cheque is crossed and bears across its face the words “account payee” or “a/c payee,” either with or without the word “only,” the cheque shall not be transferable, but shall only be valid as between the parties thereto.

(2) A banker is not to be treated for the purposes of section 80 above as having been negligent by reason only of his failure to concern himself with any purported indorsement of a cheque which under subsection (1) above or otherwise is not transferable.

82. Protection to collecting banker. Where a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself, and the customer has no title or a defective title thereto, the banker shall not incur any liability to the true owner of the cheque by reason only of having received such payment.

Part IV

Promissory Notes

83. Promissory note defined. (1) A promissory note is an unconditional promise in writing made by one person to another signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to, or to the order of, a specified person or to bearer.

(2) An instrument in the form of a note payable to maker’s order is not a note within the meaning of this section unless and until it is indorsed by the maker.

(3) A note is not invalid by reason only that it contains also a pledge of collateral security with authority to sell or dispose thereof.

(4) A note which is, or on the face of it purports to be, both made and payable within the British Islands is an inland note. Any other note is a foreign note.

84. Delivery necessary. A promissory note is inchoate and incomplete until delivery thereof to the payee or bearer.

85. Joint and several notes. (1) A promissory note may be made by two or more makers, and they may be liable thereon jointly, or jointly and severally according to its tenour.

(2) Where a note runs “I promise to pay” and is signed by two or more persons it is deemed to be their joint and several note.

86. Note payable on demand. (1) Where a note payable on demand has been indorsed, it must be presented for payment within a reasonable time of the indorsement. If it be not so presented the indorser is discharged.

(2) In determining what is reasonable time, regard shall be had to the nature of the instrument, the usage of trade, and the facts of the particular case.

(3) Where a note payable on demand is negotiated, it is not deemed to be overdue, for the purpose of affecting the holder with defects of title of which he had no notice, by reason that it appears that a reasonable time for presenting it for payment has elapsed since its issue.

87. Presentment of note for payment. (1) Where a promissory note is in the body of it made payable at a particular place, it must be presented for payment at that place in order to render the maker liable. In any other case, presentment for payment is not necessary in order to render the maker liable.

(2) Presentment for payment is necessary in order to render the indorser of a note liable.

(3) Where a note is in the body of it made payable at a particular place, presentment at that place is necessary in order to render an indorser liable; but when a place of payment is indicated by way of memorandum only, presentment at that place is sufficient to render the indorser liable, but a presentment to the maker elsewhere, if sufficient in other respects, shall also suffice.

88. Liability of maker. The maker of a promissory note by making it—

(1) engages that he will pay it according to its tenour;

(2) is precluded from denying to a holder in due course the existence of the payee and his then capacity to indorse.

89. Application of Part II to notes. (1) Subject to the provisions in this part, and except as by this section provided, the provisions of this Act relating to bills of exchange apply, with the necessary modifications, to promissory notes.

(2) In applying those provisions the maker of a note shall be deemed to correspond with the acceptor of a bill, and the first indorser of a note shall be deemed to correspond with the drawer of an accepted bill payable to drawer’s order.

(3) The following provisions as to bills do not apply to notes; namely, provisions relating to

  • (a) presentment for acceptance;

  • (b) acceptance;

  • (c) acceptance suprà protest;

  • (d) bills in a set.

(4) Where a foreign note is dishonoured, protest thereof is unnecessary.

Part V

Supplementary

90. Good faith. A thing is deemed to be done in good faith, within the meaning of this Act, where it is in fact done honestly, whether it is done negligently or not.

91. Signature. (1) Where, by this Act, any instrument or writing is required to be signed by any person it is not necessary that he should sign it with his own hand, but it is sufficient if his signature is written thereon by some other person by or under his authority.

(2) In the case of a corporation, where, by this Act, any instrument or writing is required to be signed, it is sufficient if the instrument or writing be sealed with the corporate seal.

But nothing in this section shall be construed as requiring the bill or note of a corporation to be under seal.

92. Computation of time. Where, by this Act, the time limited for doing any act or thing is less than three days, in reckoning time, nonbusiness days are excluded.

“Non-business days” for the purposes of this Act mean—

  • (a) Saturday, Sunday, Good Friday, Christmas Day:

  • (b) A bank holiday under the Banking and Financial Dealings Act 1971:

  • (c) A day appointed by Royal proclamation as a public fast or thanksgiving day:

  • (d) A day declared by an order under section 2 of the Banking and Financial Dealings Act 1971 to be a nonbusiness day.

Any other day is a business day.

93. When noting equivalent to protest. For the purposes of this Act, where a bill or note is required to be protested within a specified time or before some further proceeding is taken, it is sufficient that the bill has been noted for protest before the expiration of the specified time or the taking of the proceeding; and the formal protest may be extended at any time thereafter as of the date of the noting.

94. Protest when notary not accessible. Where a dishonoured bill or note is authorised or required to be protested, and the services of a notary cannot be obtained at the place where the bill is dishonoured, any householder or substantial resident of the place may, in the presence of two witnesses, give a certificate, signed by them, attesting the dishonour of the bill, and the certificate shall in all respects operate as if it were a formal protest of the bill.

The form given in Schedule I to this Act may be used with necessary modifications, and if used shall be sufficient.

95. Dividend warrants may be crossed. The provisions of this Act as to crossed cheques shall apply to a warrant for payment of dividend.

96. (Rep. by the S.L.R. Act, 1898 (c.22).)

97. Savings. (1) The rules in bankruptcy relating to bills of exchange, promissory notes, and cheques, shall continue to apply thereto notwithstanding anything in this Act contained.

(2) The rules of common law including the law merchant, save in so far as they are inconsistent with the express provisions of this Act, shall continue to apply to bills of exchange, promissory notes, and cheques.

(3) Nothing in this Act or in any repeal effected thereby shall affect—

  • (a) … any law or enactment for the time being in force relating to the revenue:

  • (b) the provisions of the Companies Act, 1862, or Acts amending it, or any Act relating to joint stock banks or companies:

  • (c) the provisions of any Act relating to or confirming the privileges of the Bank of England or the Bank of Ireland respectively:

  • (d) the validity of any usage relating to dividend warrants, or the indorsements thereof.

98. (Application to Scotland.).

99. Construction with other Acts, etc. Where any Act or document refers to any enactment repealed by this Act, the Act or document shall be construed, and shall operate, as if it referred to the corresponding provisions of this Act.

100. (Application to Scotland.).

Schedules

First Schedule
Section 94

Form of protest which may be used when the services of a notary cannot be obtained.

Know all men that I, A.B. [householder], of __________ in the county of __________ in the United Kingdom, at the request of C.D., there being no notary public available, did on the __________ day of __________ at __________ demand payment [or acceptance] of the bill of exchange hereunder written, from E.F., to which demand he made answer [state answer, if any] wherefore I now, in the presence of G.H. and J.K. do protest the said bill of exchange.

(Signed)

A.B.

G.H. witness

J.K. witness

N.B. The bill itself should be annexed, or a copy of the bill and all that is written thereon should be underwritten.

(Second Schedule Rep. by the S.L.R. Act, 1898 (c.22).)

4 Central Bank Payment and Settlement Services with Respect to Cross-Border and Multi-Currency Transactions

[Excerpt]1

2. SUMMARY AND CONCLUSIONS

2.1 Reflecting their different domestic origins, payments systems within the G-10 countries vary considerably. Some systems complete home-currency large-value funds transfer on a gross, payment-by-payment basis, while other systems rely on net settlement procedures. In some countries, final (i.e. irrevocable and unconditional) transfers can be made in “real time” throughout the business day, while other such transfers might not become final until several hours or possibly a day or more after they are initiated. Each country’s payments system has its own hours of operation, and these hours typically are not synchronised with payments system operating hours in other countries.

2.2 Using these diverse home-currency payments systems to settle cross-border and multi-currency transactions can be cumbersome and may entail considerable risk. For instance, when the hours of operation of two payments systems do not overlap, it is technically impossible to arrange for the simultaneous settlement of both sides of a foreign exchange transaction. Even when operating hours do overlap, local payments arrangements often make it difficult to control and coordinate the timing of payments in several currencies. More generally, differences and uncertainty in the timing of finality in each country present other obstacles to the effective management of the risks that arise in cross-border and multi-currency settlements.

2.3 Home-currency payments system hours and arrangements and the timing of finality thus make it difficult, if not impossible, to achieve settlements involving two or more currencies (i.e. multicurrency settlements) in which final transfers in one currency occur if and only if final transfers in the other currency or currencies also take place. In the absence of such a delivery-versus-payment (DVP) process for settling obligations in multiple currencies, significant credit risks can be present. These risks include the potential loss of principal (often called “principal” or “Herstatt” risk) that would arise if transfers in one currency become final while associated transfers in another currency did not take place. This is a significant risk to international market participants since the loss of principal in settling, for instance, a foreign exchange trade would dwarf any gain or loss that might have accrued to the counterparties to the original transaction.

2.4 Liquidity risks can also arise in the absence of a multi-currency DVP settlement process. For instance, a fear of incurring principal risk might lead some market participants to refuse to honour their obligations in earlier-settling currencies out of concern that a “suspect” counterparty would not be able to settle its associated obligations in later-settling currencies. The sudden interruption of a significant level of expected payment flows could cause serious liquidity problems for the counterparty and, hence, for other market participants that expect to receive payments from the counterparty. This liquidity risk might also spread to other payments systems in the same or other countries if concern about loss of principal during the settlement process became widespread.

Summary of options

2.5 The Working Group examined a range of central bank payment and settlement services that might reduce these risks and increase the efficiency of cross-border and multi-currency settlements. The options that were considered by the Working Group included: (1) modifying or making available certain home-currency payment and settlement services; (2) extending the operating hours of home-currency large-value funds transfer systems; (3) establishing cross-border operational links between these payment systems; and (4) developing multi-currency payment and settlement services. These central bank service options were evaluated in circumstances where they would facilitate the settlement both of individual transactions and of a stream of transactions between two or more counterparties that have been netted through the operation of a private sector netting scheme.

2.6 Home-currency payment and settlement services. Certain home-currency payment and settlement services might be modified or made available to increase the level of support for international settlements. In particular, where they do not currently exist, settlement accounts and intraday final transfer capabilities could be made available by central banks to settle home-currency obligations related to cross-border and multi-currency transactions. An intraday final transfer capability is defined as the ability to initiate—and to receive timely confirmation of—transfers between accounts at the central bank of issue that become final within a brief period of time. It is important to recognise that the availability of these services would not be sufficient to permit the simultaneous settlement of obligations in all currencies. Hence these home-currency services could not, per se, eliminate the credit and liquidity risks that exist in the absence of multi-currency DVP capabilities.

2.7 Recognising that they cannot eliminate the risks associated with non-DVP settlement, intraday final transfers and settlement accounts nonetheless significantly improve the ability of market participants to manage and control these and other settlement risks. Accurate information about when obligations in each currency are finally discharged would enable individual institutions and clearing houses to quantify and control more precisely and efficiently than they can at present the level and duration of exposures that may be incurred in the process of settling both individual and netted transactions in two or more currencies. It is apparent that the capability in each country’s domestic large-value payments system to effect final transfers at any time of the business day between accounts at the central bank of issue is the foundation stone upon which risk reduction measures can be developed in respect of a range of domestic and cross-border transactions.

2.8 Operating hours of home-currency payments systems. The operating hours of home-currency large-value funds transfer systems could be extended to increase the level of support for international settlements. At one end of the range of possibilities, a modest lengthening of the operating hours of an individual payments system would reduce its current gap (or increase its current overlap) with the operating hours of payments systems in other countries. Towards the other end of the spectrum (which, in the extreme, could involve the large-value funds transfer systems in a number of countries operating round-the-clock), a major extension of the hours of several key home-currency payments systems could result in an operational overlap of most major currencies. Combined with the availability of final transfers over those systems, such an overlap could create the technical ability to conduct on the same value date a DVP settlement of all relevant currencies in which counterparties would be assured that payments in one currency would be made if and only if payments in all relevant currencies are made. This would help support the potential elimination of the credit and liquidity risks associated with the current lack of multi-currency DVP capabilities. However, without directly linking payments made over different large-value funds transfer systems, this assurance would have to come from private sector procedures that would use the available home-currency payment and settlement services during the extended hours of operation.

2.9 Cross-border links between payments systems. Another possible option might be the establishment of bilateral or multilateral cross-border links between large-value funds transfer systems in conjunction, where necessary, with an extension of their operating hours to increase the level of support for international settlements. In particular, direct operational and informational links could be created that would give participating central banks the joint capability to monitor, control and execute simultaneously final transfers over their respective home-currency payments systems. With such cross-border connections, central banks could directly provide the private sector with DVP settlement services for currencies with overlapping payments system operating hours.

2.10 Multi-currency payment and settlement services. Another possible option might involve the joint offering of multi-currency payment and settlement services. Multi-currency accounts and settlement facilities might be provided by the central banks of issue through a “common agent”. Specifically, a central bank controlled common agent could accept deposits in multiple currencies and facilitate final transfers between these accounts. A variant of this arrangement would involve one or more central banks acting as the common agent in providing multi-currency services. In both cases, an important issue is whether arrangements would be in place to provide assurances that sufficient liquidity would be available to complete settlement in the relevant currencies.

2.11 The purpose of jointly offering multi-currency services would be similar to that of creating an overlap in the operating hours (with or without direct operational and informational links) of the major large-value funds transfer systems: to provide the private sector with the technical ability to achieve DVP in the settlement of multi-currency obligations. With multi-currency services this would be accomplished by effecting settlement over operational accounts in each currency held either at the common agent or, in the case of the variant discussed above, at one or more individual central banks.

5 Settlement Risk in Foreign Exchange Transactions

[Excerpt]1

1. EXECUTIVE SUMMARY

1.1 Introduction

The Governors of the central banks of the Group of Ten (G-10) industrial countries have endorsed a comprehensive strategy under which the private and public sectors can together seek to contain the systemic risk inherent in current arrangements for settling foreign exchange transactions. This report, prepared by the Committee on Payment and Settlement Systems (CPSS) of the central banks of the G-10 countries, describes the strategy and presents its underlying analysis.

1.1.1 Central bank concerns

The vast size of daily foreign exchange (FX) trading, combined with the global interdependencies of FX market and payments system participants, raises significant concerns regarding the risk stemming from the current arrangements for settling FX trades. These concerns include the effects on the safety and soundness of banks, the adequacy of market liquidity, market efficiency and overall financial stability.

The risk to domestic payments systems, and to the international financial system, posed by the FX settlement process came into focus at the time of the 1974 failure of Bankhaus Herstatt. More recent examples include Drexel, BCCI, the attempted Soviet coup d’état and Barings.

1.1.2 G-10 initiatives to address concerns

In response to the Herstatt episode, the G-10 central banks began by working together on supervisory issues, including FX market risk and the need for an international early warning system. In the early 1980s, they began to study the payments systems used for the settlement of domestic and cross-border transactions, with a view to ensuring that the structures and designs of those systems did not create unacceptable interbank credit exposures and did not generate liquidity risks for the financial markets or for the national or international banking systems. It was in particular apparent that large-value cross-border payments, including those made in settlement of FX transactions, account for a large, and sometimes very large, proportion of flows through domestic payments systems, and this was seen to require detailed analysis.

The work of the G-10 central banks on international payment arrangements has produced several studies, including the February 1989 Report on Netting Schemes (the Angell Report), the November 1990 Report of the Committee on Interbank Netting Schemes (the Lamfalussy Report) and the September 1993 report on Central Bank Payment and Settlement Services with respect to Cross-Border and Multi-Currency Transactions (the Noel Report). Through these studies the central banks identified issues that may be raised by cross-border and multi-currency netting arrangements, recommended minimum standards and an oversight regime for cross-border netting schemes, and examined possible central bank service options that might decrease risk in the settlement of FX trades.

In June 1994 the CPSS formed the Steering Group on Settlement Risk in Foreign Exchange Transactions to build upon this past work and to develop a strategy for reducing FX settlement risk. In preparing its report, the Steering Group developed a definition and methodology for measuring FX settlement exposure.… Using this analytical framework, the Steering Group surveyed approximately 80 banks in the G-10 countries to document current market practices for, and barriers to, managing settlement risks in a prudent manner. This work yielded the following key findings:

  • FX settlement exposure is not just an intraday phenomenon: current FX settlement practices create interbank exposures that can last, at a minimum, one to two business days, and it can take a further one to two business days for banks to know with certainty that they received the currency they bought.

  • Given current practices, a bank’s maximum FX settlement exposure could equal, or even surpass, the amount receivable for three days’ worth of trades, so that at any point in time—including weekends and public holidays—the amount at risk to even a single counterparty could exceed a bank’s capital.

  • Individual banks could, if they so choose, significantly reduce their own exposures and systemic risk more broadly by improving their back office payments processing, correspondent banking arrangements, obligation netting capabilities and risk management controls.

  • Well-designed multi-currency services such as multi-currency settlement mechanisms and bilateral and multilateral obligation netting arrangements could greatly enhance the efforts of individual banks to reduce their FX settlement exposures.

  • Some major banks are concerned about the sizable FX settlement risks they face and are actively pursuing ways to improve their own settlement practices and to collectively develop risk-reducing multicurrency services.

  • Nevertheless, despite their considerable capacity to reduce FX settlement risk through individual and collective action, many banks remain sceptical about devoting significant resources to such efforts.

1.2 Summary of strategy

Overall, the G-10 central banks believe that private sector institutions have the ability, through individual and collective action, to significantly reduce the systemic risks associated with FX settlements. Accordingly, the Governors of the G-10 central banks have agreed that the following three-track strategy should be implemented:

  • Action by individual banks to control their foreign exchange settlement exposures

Individual banks should take immediate steps to apply an appropriate credit control process to their FX settlement exposures. This recognises the considerable scope for individual banks to address the problem by improving their current practices for measuring and managing their FX settlement exposures.

  • Action by industry groups to provide risk-reducing multicurrency services

Industry groups are encouraged to develop well-constructed multicurrency services that would contribute to the risk reduction efforts of individual banks. This recognises the significant potential benefits of multi-currency settlement mechanisms and bilateral and multilateral obligation netting arrangements, and the G-10 central banks’ view that such services would best be provided by the private sector rather than the public sector.

  • Action by central banks to induce rapid private sector progress

Each central bank, in cooperation, where appropriate, with the relevant supervisory authorities, will choose the most effective steps to foster satisfactory private sector action over the next two years in its domestic market. In addition, where appropriate and feasible, central banks will make or seek to achieve certain key enhancements to national payments systems and will consider other steps to facilitate private sector risk reduction efforts. This recognises the likely need for public authorities to encourage action by individual banks and industry groups, and to cooperate with these groups, to bring about timely, market-wide progress.

The G-10 central banks believe that this strategy can adequately address the systemic risk inherent in current practices for settling FX transactions. Indeed, several important industry initiatives are well under way. For instance, in 1994 the New York Foreign Exchange Committee issued a report and a set of recommendations designed to help market participants reduce their FX settlement exposures.… That report, and the general topic of FX settlement risk, have since received considerable attention. In addition, … several risk-reducing multi-currency services are currently available in the market. These include bilateral obligation netting arrangements provided by FXNET, S.W.I.F.T. and VALUNET, and multilateral obligation netting and settlement services provided by ECHO and, prospectively, the proposed Multinet International Bank. Furthermore, the recently formed “Group of 20” banks and other private sector organisations are exploring the feasibility of establishing other multi-currency settlement services. The G-10 central banks for their part stand ready to cooperate, where appropriate and feasible, with all industry groups seeking to develop risk-reducing multi-currency settlement services.

Although any or all of these private sector efforts could play a major role in improving the current situation, they have yet to bring about a substantial and permanent reduction in FX settlement risk throughout the market. Accordingly, the G-10 central banks will closely monitor the progress of private sector action over the next two years to determine the need for further action.

6 Reducing Foreign Exchange Settlement Risk

[Excerpt]1

III. RECOMMENDATIONS FOR PRIVATE-SECTOR BEST PRACTICES

The sixteen best practices cited below fall into four categories: internal procedures, netting, credit risk management, and crisis management. Many of the best practices can be easily implemented; others may entail expensive or complicated changes in back office operations and systems technology. While many of the best practices can be implemented by the firm internally, others require the cooperation of the firm’s correspondent or counterparty. Several of the recommended practices are presently being followed in some parts of the industry. Most of the banks that participated in the Committee’s study have implemented at least some of these practices.

The Committee urges market participants to review their own methods of quantifying and controlling settlement risk and to adopt the designated best practices in their operations, credit controls, and crisis management procedures.

Improve Internal Procedures and Correspondent Bank Services to Reduce Settlement Exposures

Together, improving internal procedures and obtaining the best available correspondent bank services have been shown to have the greatest impact in reducing settlement exposure. Because internal procedures are wholly within the control of the individual firm, an evaluation of current operational procedures and their impact on settlement exposure is recommended as the first step to reducing settlement risk. Similarly, services rendered by a firm’s correspondent banks are critical in their impact on settlement risk. Accordingly, firms should seek the highest level of correspondent services available.

Recommendation No. 1 Understand the settlement process

Senior management should promote a complete understanding of the settlement process at all decision-making levels.

To improve internal procedures and controls, decision-makers at all levels, from operations and administrative personnel to credit and senior management, should understand the settlement process fully. Knowledge of when payment instructions are made, when they become irrevocable, and when confirmation of counterparty payment is received with finality is key to determining both the duration and the value of foreign exchange settlement exposure.

Recommendation No. 2 Understand settlement exposure

Credit and risk managers should understand the impact of their internal procedures on settlement exposure and develop accurate methods of quantifying the extent of their risk.

Once a firm has released payment in one currency, its settlement risk with a counterparty is 100 percent of the full amount it expects to receive in another. At a minimum, the full amount is at risk for those hours between the actual payment of currency and the firm’s receipt of final funds. More significantly, the period of potential exposure extends from the time that payment instructions become irrevocable until the firm knows that payment has been received. The timing of the settlement process can extend the period of settlement risk on a single day’s transactions from several hours to one or more days. For example, if irrevocable instructions for tomorrow’s payments have been sent out before the firm has reconciled today’s receipts, the value of settlement exposure will increase to the total of two days’ expected receipts. As a first step in reducing risk, therefore, credit and risk management personnel must understand and accurately measure the extent of their firm’s settlement exposure.

Recommendation No. 3 Review and upgrade correspondent services

The bank relations department should review the firm’s correspondent bank relationships to ensure that the services provided give the firm maximum control over its nostro account. Emphasis should be placed on obtaining the latest possible cutoff times for cancellation and amendment of payment instructions and the earliest possible confirmation of final receipt.

Historically, many firms have based their choice of correspondent on relationship considerations, attaching less importance to the quality of settlement services provided. Bank relations management should shift that emphasis toward selecting the correspondent that can provide the highest level of services available. Bank relations personnel need to be aware of the cutoff times imposed by their correspondents on receipt of payment instructions, cancellations, and amendments, and they need to know how quickly a correspondent can provide notification of final receipts.

The Committee’s survey results and discussions with providers of correspondent services suggest that, firms have usually been able to negotiate more favorable terms in more recently established correspondent relationships than exist in their longer standing relationships. Bank relations personnel should, therefore, review existing correspondent bank terms on a regular basis and negotiate improvements where necessary.

a. Cutoff times for cancellations/amendments

A correspondent bank should provide the latest possible cutoff time for a firm to cancel or amend payment instructions with same day effect. Correspondent banks should distinguish cutoff times for cancellations that can be effected before funds have left their control (in other words, before instructions have been submitted to the payments system) from cutoff times for cancellations that are done after. The distinction is important: in the first case, counterparty exposure is avoided, but in the second case, it is not. A cancellation after payment has already been processed in the payments system may require the consent of the beneficiary or receiving bank, and the return of funds typically occurs on the following business day. For this reason correspondents’ cutoff times for same-day cancellations usually fall some time before the opening of the payments system. Correspondents may also offer different cutoff times for cancellations of “book-entry” transfers (i.e., payments requiring only an internal transfer of funds to the recipient’s account with the correspondent). These times may be earlier or later, depending on the individual correspondent’s practices.

If the cutoff time for cancellation or amendment has passed, but payment has not yet been released, the correspondent bank may attempt to cancel or amend the instructions on a best efforts basis. Many times, a correspondent bank can cancel payment instructions after the cutoff time, but because it cannot guarantee a cancellation with 100 percent certainty, it sets a very early formal cutoff time. Firms should be aware of the distinctions in cutoff times and the additional management capability, particularly in crisis situations, that best efforts services may impart.

A firm that negotiates with the correspondent bank for cutoff times as close to the opening of the payments system as possible and for the latest possible cutoff times for book-entry transfers will have the greatest flexibility in managing crisis situations. All cutoff times should be confirmed in writing by the correspondent bank. Finally, firms should maintain high-level personal contacts at the correspondent bank and have access to correspondent bank personnel 24 hours a day in crisis situations.

b. Intra-day notification of receipts

Correspondent banks should be able to provide intra-day notice of receipt and to send account statements as soon after finality of the relevant currency as possible. With the proper systems interface, intra-day notices may be used to reconcile payments and receipts on the value date. When the currency is settled through a gross real-time transfer system with intra-day finality, reconciliation can actually be done throughout the day. In a net payments system, reconciliation can begin earlier in the day but can only be done with complete assurance upon finality in the payments system.

Recommendation No. 4 Complete reconciliation as early as possible

Creating the system support necessary to process intra-day notification of receipts and to begin the reconciliation process before the end of the day is an investment that will significantly reduce the amount of time that the total settlement receivable due from each counterparty must be considered at risk.

If reconciliation is completed by the close of the currency’s payments system, operations personnel can identify problems much earlier and prevent the release of additional payments if necessary. Automated reconciliation systems should be in place to take advantage of electronic bank statements so that the debit/credit matching process can begin as soon as possible against the firm’s own internal records. Exception reports should be available as quickly as possible for investigation.

Recommendation No. 5 Monitor non-receipts and establish and practice clear follow-up procedures

Senior management should establish procedures to evaluate non-receipts of payments and to alert all concerned parties to potential problem situations.

An ongoing dialogue should exist between operations, risk management, trading and sales, and credit to identify potential problem situations as early as possible. Non-receipts should be prioritized using counterparty credit ratings, payment amount and currency, or an internally generated counterparty watch list. The reporting of fails, like the reporting of excesses, should follow standard protocols. In the event that a fail is not an isolated incident, clear problem management procedures should come into play; all outstanding trades should be reviewed, and consideration given to stopping all new activity. Information heard in the market should be communicated from sales and trading to credit and management. The legal department should be notified of any fails that are not resolved through the regular investigation process.

The effectiveness of each of the controls discussed above is dependent upon the settlement operations and the communications and technical capabilities of the firm and its correspondent banks. Firms and their correspondents will need to weigh the costs of upgrading their settlement procedures and information flows against the long-term benefits. Senior management should make the necessary investment to ensure that the reconciliation process is completed as soon as possible.

Institute Payment Netting to Reduce Settlement Risk
Recommendation No. 6 Establish netting arrangements

Payment netting arrangements should be established with market participants to reduce settlement risk.

Well documented netting of payments (settling net currency amounts on value date rather than settling transactions individually) can dramatically reduce settlement risk in the foreign exchange market. The Committee’s analysis demonstrates that netting payments can reduce settlement exposure substantially. Netting is most effective in reducing exposure when the counterparties to a transaction actively trade on both sides of the market.

Firms must ensure to the best of their ability that all netting arrangements are supported by agreements that are legally enforceable in all jurisdictions where the arrangements will be operative.

However, senior management should understand that the legal framework of an executed agreement does not by itself reduce settlement risk in the underlying transaction. The driving force behind agreements such as the IFEMA (International Foreign Exchange Master Agreement) or other netting agreements has been for the bankruptcy close-out provisions required under FAS 105 for netting balance sheet reportables. These bilateral agreements also allow firms to comply with the amended Basle Accord for recognition of netting benefits for calculation of capital requirements. A number of firms are executing netting agreements but not physically netting settlements with the parties to those agreements. Greater risk reduction is offered by an agreement mandating that parties both net payments and provide close-out netting.

Recommendation No. 7 Establish operational capability to net payments

Management should develop the operational capability to net payments.

Firms often resist netting on the grounds that it requires expensive and complex changes in systems technology. Firms might consider purchasing one of the commercially available netting systems as an alternative to upgrading existing in-house systems. In either case, initial investments in technology and operational training are returned in cost savings over a very short period of time. Dealers who net settlements with their major counterparties report significant operational cost savings not only because fewer payments are processed, but also because clear procedures for confirming and matching netted transactions result in fewer errors. Clearly, in the event of a non-receipt due to counterparty default, a netted amount due in all likelihood represents a significantly smaller loss than would otherwise have been suffered.

Formally documented, netting of payments is the most significant means of reducing routine settlement exposure among active participants in the foreign exchange market. Netting of payments enables market participants not only to reduce settlement volumes and risk, but also to realize substantial operational cost savings over time. The differences in size between settlement losses and pre-settlement close-out losses can be large. While documentation alone can give a firm the right to net pre-settlement gains and losses in the event of a counterparty default, reduction of settlement risk must additionally be addressed in actual practice.

Promote Sound Settlement Risk Management Practices
Recommendation No. 8 Make credit risk managers responsible for monitoring and controlling settlement exposure

Credit risk managers stationed on the trading floor should have primary responsibility for the monitoring and control of foreign exchange counterparty exposure.

Credit risk managers should have a thorough understanding of foreign exchange trading, including operations and settlement procedures, and associated pre-settlement and settlement risk. They should understand the various means available to mitigate or eliminate those risks and be familiar with the credit and legal issues addressed in netting agreements and other supporting documentation.

Responsibility for the day-to-day monitoring of counterparty exposure and compliance with credit limits falls to credit managers. They should ensure that settlements exceeding approved limits are addressed appropriately, either by obtaining the credit department’s approval to settle excesses or by taking action to reduce exposure. They should also monitor trends in credit line use in order to identify repeated over-limit settlements. Credit risk managers should be apprised of all payment fails and respond directly to those requiring immediate management attention.

Another function of the credit risk manager is to oversee any measures necessary to reduce settlement exposure. To reduce exposure, counterparties may agree to roll trades out to settle on a different value date, close out positions by doing an offsetting transaction, or settle trades on a delivery-versus-payment basis (i.e., require the counterparty to deliver the currency bought before paying out the currency sold). Because such measures can involve changes to funding requirements and payments instructions and may entail interest compensation, the credit risk manager should keep the traders and operations personnel informed of these activities. If a counterparty refuses a request to reduce settlement exposure, credit risk managers should join with senior management in negotiating a resolution.

Credit risk managers should encourage ongoing dialogue between trading, sales, operations, credit, and management to ensure that information heard in the market is conveyed to credit and senior management and that the concerns of credit and management are being conveyed to trading, sales, and operations personnel.

Recommendation No. 9 Set prudent settlement exposure limits

The credit department, functioning autonomously from the trading and sales areas, should set settlement exposure limits for all counterparties regardless of size.

Limits should be based on the creditworthiness of the counterparty and should conform to the firm’s guidelines on counterparty exposure. Follow-up reviews of existing counterparty relationships should be conducted regularly at prudent intervals.

Settlement limits should be applied to the full value of all currencies due from a counterparty but not confirmed paid with finality. If a firm irrevocably issues a given day’s payment instructions before receipts from the preceding day or days have been reconciled, the amount of settlement exposure should include not just that day’s expected receipts but all unconfirmed and non-final (provisional) amounts from preceding days as well.

Recommendation No. 10 Update exposures on-line and aggregate exposure globally across all dealing centers

When a firm has dealing centers located in different time zones, counterparty exposure should be monitored in real time and aggregated globally across the firm’s dealing centers and the various trading locations of the counterparty.

Without on-line reporting capability, a trader in one time zone who has very limited knowledge of what dealing centers in earlier time zones have transacted with the counterparty will be unable to assess counterparty exposure and line usage in a timely manner. However, the Committee does recognize that it may be difficult to switch to an on-line system immediately because of cost considerations.

Alternatively, in the absence of global monitoring capability, credit risk managers should make allocations of lines for each of their dealing centers. This means of setting limits is less efficient than on-line global monitoring, however, because manual intervention is often required to reallocate line availability from one center to another on the basis of need.

Settlement positions should also be monitored not only for the spot date, but for each future date so that if exposure is unacceptably high, there is sufficient time to arrange to reduce it. The potential settlement exposure value should also be projected for all over-the-counter options on foreign exchange, regardless of whether the option is presently in the money.

A firm should have clear procedures in place for communicating limit violations to the appropriate areas. These procedures should include the communication of all overages to the credit department for approval to settle and the notification of senior management when unacceptably high levels of exposure require remedial action.

Recommendation No. 11 Enforce adherence to settlement limits

The credit department should ensure that traders have up-to-date information on counterparty limits and exposure before they execute a trade.

Traders should adhere to settlement limits, unless they have obtained prior permission from the credit department to exceed them. Procedures should be in place to ensure a rapid response by credit officers to requests to exceed limits on a one-off basis or increase limits on a permanent basis. Similarly, credit officers should clearly communicate to the traders and sales staff when over-limit settlement exposure with a counterparty will not be tolerated. The importance of this two-way communication must be emphasized. Taking exposure-reducing measures without the agreement of the counterparty can compromise the counterparty relationship or create other, more serious problems. At the same time, of course, the firm must recognize that withholding payment may cause liquidity problems for the counterparty and impede its ability to meet other obligations.

Recommendation No. 12 Mandate ownership of credit risk

Senior management policy should clearly indicate which area takes responsibility for losses stemming from counterparty failure.

Management may choose to allocate the losses resulting from a counterparty default directly to the area responsible for approving or controlling the exposure or to the trading or sales group responsible for maintaining the counterparty relationship. Losses directly attributable to an overlimit or unauthorized trade should be debited directly to the profit and loss of the trader responsible. However, if management chooses to allocate credit losses, its policy should be clearly defined and communicated to all personnel before a loss occurs.

Establish Contingency Plans for Crisis Management

Crisis situations can be either systemic or counterparty related. Systemic problems include technical failure, settlement system breakdown, settling agent failure, and force majeure. Counterparty situations include insolvency, repudiation of trades, liquidity problems, and largescale operational failure.

In crisis situations of any kind, a firm must be sensitive to the potential ramifications of risk-reducing actions. A firm’s decision to withhold a settlement payment from a counterparty could create liquidity problems for a single counterparty or in the payment system itself, setting off a domino effect that ultimately affects many participants. As events in the financial markets have demonstrated in recent years, the reaction of the market to a perceived crisis may actually exacerbate the situation.

Recommendation No. 13 Prepare for crisis situations

Firms should anticipate crises and prepare internally.

Each firm should assemble a crisis management team headed by a member of senior management and composed of credit, risk management, and operations personnel. The team should simulate different crisis situations to identify weaknesses in internal communication and to practice a coordinated response. The team should know how and at what level to communicate effectively with other institutions, correspondent banks, regulators, and central banks.

Recommendation No. 14 Utilize all correspondent capabilities

The quality of services provided by a firm’s correspondents should be proved well in advance of a crisis.

During a crisis, a correspondent’s capabilities become critical to the firm’s management of its settlement exposures. The firm should identify those individuals at its correspondent who can provide support offhours, and most important, the individual who can accomplish the most within the operating constraints of both the correspondent and the payment system.

Recommendation No. 15 Involve senior management

Senior management should be apprised of a crisis situation at the outset and directly involved in controlling it.

The potential repercussions of major settlement failures require that senior management be directly involved in seeking a resolution. Much can be done at the senior level to verify news heard in the market or to coordinate a concerted response to a crisis situation by the industry.

Recommendation No. 16 Establish industry working groups

At the industry level, working committees should be formed to study the dynamics of crisis situations.

Representation should include senior managers of the major market participants, correspondent agents, and payment service providers. The committee would explore coordinated responses to crises that would minimize disruption to the market, avert liquidity squeezes, and preserve the integrity of the markets.

These groups should study past crises and their resolutions. Their goal should be to recommend or develop methods by which market participants can protect themselves at the same time they avoid exacerbating liquidity problems and disruption to the market.

Appendix III: Materials on Financial Institution Supervision

Appendix III 1 Basle Committee on Banking Supervision’s Core Principles for Effective Banking Supervision

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SECTION I: INTRODUCTION

Effective supervision of banking organisations is an essential component of a strong economic environment in that the banking system plays a central role in making payments and mobilising and distributing savings. The task of supervision is to ensure that banks operate in a safe and sound manner and that they hold capital and reserves sufficient to support the risks that arise in their business. Strong and effective banking supervision provides a public good that may not be fully provided in the marketplace and, along with effective macroeconomic policy, is critical to financial stability in any country. While the cost of banking supervision is indeed high, the cost of poor supervision has proved to be even higher.

In drawing up these core principles for effective banking supervision the following precepts are fundamental:

  • the key objective of supervision is to maintain stability and confidence in the financial system, thereby reducing the risk of loss to depositors and other creditors;

  • supervisors should encourage and pursue market discipline by encouraging good corporate governance (through an appropriate structure and set of responsibilities for a bank’s board of directors and senior management2 and enhancing market transparency and surveillance;

  • in order to carry out its tasks effectively, a supervisor must have operational independence, the means and powers to gather information both on and off site, and the authority to enforce its decisions;

  • supervisors must understand the nature of the business undertaken by banks and ensure to the extent possible that the risks incurred by banks are being adequately managed;

  • effective banking supervision requires that the risk profile of individual banks be assessed and supervisory resources allocated accordingly;

  • supervisors must ensure that banks have resources appropriate to undertake risks, including adequate capital, sound management, and effective control systems and accounting records; and

  • close cooperation with other supervisors is essential, particularly where the operations of banking organisations cross national boundaries.

Banking supervision should foster an efficient and competitive banking system that is responsive to the public’s need for good quality financial services at a reasonable cost. Generally, it should be recognised that there is a trade-off between the level of protection that supervision provides and the cost of financial intermediation. The lower the tolerance of risk to banks and the financial system, the more intrusive and costly supervision is likely to be, eventually having an adverse effect on innovation and resource allocation.

Supervision cannot, and should not, provide an assurance that banks will not fail. In a market economy, failures are a part of risk-taking. The way in which failures are handled, and their costs borne, is in large part a political matter involving decisions on whether, and the extent to which, public funds should be committed to supporting the banking system. Such matters cannot therefore always be entirely the responsibility of banking supervisors; however, supervisors should have in place adequate arrangements for resolving problem bank situations.

There are certain infrastructure elements that are required to support effective supervision. Where such elements do not exist, supervisors should seek to persuade government to put them in place (and may have a role in designing and developing them)….

In some countries responsibility for licensing banks is separate from the process of ongoing supervision. It is clearly essential that, wherever the responsibility lies, the licensing process establishes the same high standards as the process of ongoing supervision which is the main focus of this paper….

The core principles of banking supervision… will provide the foundation necessary to achieve a sound supervisory system. Local characteristics will need to be taken into account in the specific way in which these standards are implemented. These standards are necessary but may not be sufficient, on their own, in all situations. Supervisory systems should take into account the nature of and risks involved in the local banking market as well as more generally the local infrastructure. Each country should therefore consider to what extent it needs to supplement these standards with additional requirements to address particular risks and general conditions prevailing in its own market. Furthermore, banking supervision is a dynamic function that needs to respond to changes in the marketplace. Consequently supervisors must be prepared to reassess periodically their supervisory policies and practices in the light of new trends or developments. A sufficiently flexible legislative framework is necessary to enable them to do this.

SECTION II: PRECONDITIONS FOR EFFECTIVE BANKING SUPERVISION

Banking supervision is only part of wider arrangements that are needed to promote stability in financial markets. These arrangements include:

1. Providing sound and sustainable macro-economic policies are not within the competence of banking supervisors. Supervisors, however, will need to react if they perceive that existing policies are undermining the safety and soundness of the banking system. In the absence of sound macro-economic policies, banking supervisors will be faced with a virtually impossible task. Therefore, sound macro-economic policies must be the foundation of a stable financial system.

2. A well-developed public infrastructure needs to cover the following facilities, which, if not adequately provided, can significantly contribute to the destabilisation of financial systems:

  • a system of business laws including corporate, bankruptcy, contract, consumer protection and private property laws, that is consistently enforced and provides a mechanism for fair resolution of disputes;

  • comprehensive and well-defined accounting principles and rules that command wide international acceptance;

  • a system of independent audits for companies of significant size so that users of financial statements, including banks, have independent assurance that the accounts provide a true and fair view of the financial position of the company and are prepared according to established accounting principles, with auditors held accountable for their work;

  • effective banking supervision (as outlined in this document);

  • well-defined rules governing, and adequate supervision of, other financial markets and, where appropriate, their participants; and,

  • a secure and efficient payment and clearing system for the settlement of financial transactions where counterparty risks are controlled.

3. Effective market discipline depends on an adequate flow of information to market participants, appropriate financial incentives to reward well managed institutions and arrangements that ensure that investors are not insulated from the consequences of their decisions. Among the issues to be addressed are corporate governance and ensuring that accurate, meaningful, transparent and timely information is provided by borrowers to investors and creditors.

Market signals can be distorted and discipline undermined if governments seek to influence or override commercial decisions, particularly lending decisions, to achieve public policy objectives. In these circumstances, it is important that if guarantees are provided for such lending, they are disclosed and arrangements are made to compensate financial institutions when policy loans cease to perform.

4. Sufficiently flexible powers are necessary in order to effect an efficient resolution of problems in banks. Where problems are remediable, supervisors will normally seek to identify and implement solutions that fully address their concerns; where they are not, the prompt and orderly exit of institutions that are no longer able to meet supervisory requirements is a necessary part of an efficient financial system. Forebearance, whether or not the result of political pressure, normally leads to worsening problems and higher resolution costs. The supervisory agency should be responsible for, or assist in, the orderly exit of problem banks in order to ensure that depositors are repaid to the fullest extent possible from the resources of the bank (supplemented by any applicable deposit insurance)3 and ahead of shareholders, subordinated debt holders and other connected parties.

In some cases, the best interests of depositors may be served by some form of restructuring, possibly takeover by a stronger institution or injection of new capital or shareholders. Supervisors may be able to facilitate such outcomes. It is essential that the end result fully meets all supervisory requirements, that it is realistically achievable in a short and determinate time frame, and that, in the interim, depositors are protected.

5. Deciding on the appropriate level of systemic protection is by and large a policy question to be taken by the relevant authorities (including the central bank), particularly where it may result in a commitment of public funds. Supervisors will also normally have a role to play because of their in-depth knowledge of the institutions involved. In order to preserve the operational independence of supervisors, it is important to draw a clear distinction between this systemic protection (or safety net) role and day-to-day supervision of solvent institutions. In handling systemic issues, it will be necessary to address, on the one hand, risks to confidence in the financial system and contagion to otherwise sound institutions, and, on the other hand, the need to minimise the distortion to market signals and discipline. Deposit insurance arrangements, where they exist, may also be triggered.

* * * * *

LIST OF CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION

Preconditions for Effective Banking Supervision

1. An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banking organisations. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorisation of banking organisations and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.

Licensing and Structure

2. The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined, and the use of the word “bank” in names should be controlled as far as possible.

3. The licensing authority must have the right to set criteria and reject applications for establishments that do not meet the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organisation’s ownership structure, directors and senior management, its operating plan and internal controls, and its projected financial condition, including its capital base; where the proposed owner or parent organsation is a foreign bank, the prior consent of its home country supervisor should be obtained.

4. Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or controlling interests in existing banks to other parties.

5. Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision.

Prudential Regulations and Requirements

6. Banking supervisors must set prudent and appropriate minimum capital adequacy requirements for all banks. Such requirements should reflect the risks that the banks undertake, and must define the components of capital, bearing in mind their ability to absorb losses. At least for internationally active banks, these requirements must not be less than those established in the Basle Capital Accord and its amendments.

7. An essential part of any supervisory system is the evaluation of a bank’s policies, practices and procedures related to the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.

8. Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices and procedures for evaluating the quality of assets and the adequacy of loan loss provisions and loan loss reserves.

9. Banking supervisors must be satisfied that banks have management information systems that enable management to identify concentrations within the portfolio and supervisors must set prudential limits to restrict bank exposures to single borrowers or groups of related borrowers.

10. In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements that banks lend to related companies and individuals on an arm’s-length basis, that such extensions of credit are effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.

11. Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks.

12. Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor and adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital charge on market risk exposures, if warranted.

13. Banking supervisors must be satisfied that banks have in place a comprehensive risk management process (including appropriate board and senior management oversight) to identify, measure, monitor and control all other material risks and, where appropriate, to hold capital against these risks.

14. Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations.

15. Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements.

Methods of Ongoing Banking Supervision

16. An effective banking supervisory system should consist of some form of both on-site and off-site supervision.

17. Banking supervisors must have regular contact with bank management and thorough understanding of the institution’s operations.

18. Banking supervisors must have a means of collecting, reviewing and analyzing prudential reports and statistical returns from banks on a solo and consolidated basis.

19. Banking supervisors must have a means of independent validation of supervisory information either through on-site examinations or use of external auditors.

20. An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a consolidated basis.

Information Requirements

21. Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial condition of the bank and profitability of its business, and that the bank publishes on a regular basis financial statements that fairly reflect its condition.

Formal Powers of Supervisors

22. Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should include the ability to revoke the banking licence or recommend its revocation.

Cross-border Banking

23. Banking supervisors must practise global consolidated supervision over their internationally-active banking organisations, adequately monitoring and applying appropriate prudential norms to all aspects of the business conducted by these banking organisations worldwide, primarily at their foreign branches, joint ventures, and subsidiaries.

24. A key component of consolidated supervision is establishing contact and information exchange with the various other supervisors involved, primarily host country supervisory authorities.

25. Banking supervisors must require the local operations of foreign banks to be conducted to the same high standards as are required of domestic institutions and must have powers to share information needed by the home country supervisors of those banks for the purpose of carrying out consolidated supervision.

Appendix III: 2 Tripartite Group of Bank, Securities, and Insurance Regulators’ Report: The Supervision of Financial Conglomerates

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Executive Summary

Introduction

1. The deregulation of domestic financial markets over the past decade together with the internationalisation of financial markets has led to new ways and means of doing business in the highly competitive, integrated world economy of the 1980s and 1990s. One notable development has been the emergence of financial conglomerates, often with significantly large balance sheets (and off-balance-sheet positions), providing a wide range of financial services in a variety of geographic locations.

2. Over the past several years, a number of supervisory and regulatory groups within the international financial community have sought to explore the ways in which some of their concerns relating to the supervision of financial conglomerates could be addressed. Those groups have approached the subject from the perspective of a particular sector—the supervision of banks, or of securities firms, or of insurance companies. This report brings together the efforts of a Tripartite Group of bank, securities and insurance regulators, who are acting in a personal capacity but are able to draw on the experience of their respective institutions. The Tripartite Group was set up at the beginning of 1993 specifically to consider ways of improving the supervision of financial conglomerates.

Working definition

3. The Tripartite Group agreed that, for its purposes, the term “financial conglomerate” would be used to refer to “any group of companies under common control whose exclusive or predominant activities consist of providing significant services in at least two different financial sectors (banking, securities, insurance)”. It was recognised that many of the problems encountered in the supervision of financial conglomerates would also arise in the case of “mixed conglomerates” offering not only financial services (perhaps restricted to just one of the three sectors mentioned above), but also non-financial or commercial services. However, the primary focus of this report is on financial conglomerates.

Present situation

4. The present situation with regard to the supervision of conglomerates was clarified through the medium of a questionnaire (Appendix II to this report analyses the responses). This provided valuable information on the types of financial conglomerates in existence and their different structural features, many of which are largely a reflection of national laws and traditions. From the responses to the questionnaire, it was also possible to compare approaches to the overall supervision of financial conglomerates.

Identification of issues

5. Subsequently, building on previous work in other forums, the Tripartite Group identified a number of problems which financial conglomerates pose for supervisors, and discussed ways in which these problems might be overcome. Among the issues discussed were the overall approach to the supervision of financial conglomerates; the assessment of capital adequacy and ways of preventing double gearing; contagion, in particular the effect of intra-group exposures; large exposures at group level; problems in applying a suitability test to shareholders and a fitness and propriety test to managers; transparency of group structures; the exchange of prudential information between supervisors responsible for different entities within a conglomerate; rights of access to information about non-regulated entities; supervisory arbitrage; and mixed conglomerates.

Overall approach to supervision

6. The rapid growth of financial conglomerates which cut across the banking, securities and insurance sectors raises questions as to whether the traditional approach to prudential supervision—whereby each supervisor monitors institutions in one constituency without much contact with supervisors responsible for other parts of the group—is still appropriate. Fundamentally, the Tripartite Group agreed that supervision of financial conglomerates cannot be effective if the individual components of a group are supervised on a purely solo basis. The solo supervision of individual entities continues to be of primary importance, but it needs to be complemented by an assessment from a group-wide perspective.

Capital adequacy

7. Banks, insurance companies and securities firms are subject to different prudential requirements, and accordingly supervisors face a difficult problem in determining whether there is adequate capital coverage. The Tripartite Group discussed this issue in some depth and concluded that the desired group-wide perspective can be achieved either by adopting a consolidated type of supervision, or by a “solo-plus” approach to supervision.2 For the purposes of this report, the following working definitions were agreed upon:

  • Consolidated supervision—This supervisory approach focuses on the parent or holding company, although individual entities may (and the Tripartite Group advocates that they should) continue to be supervised on a solo basis according to the capital requirements of their respective regulators. In order to determine whether the group as a whole has adequate capital, the assets and liabilities of individual companies are consolidated; capital requirements are applied to the consolidated entity at the parent company level; and the result is compared with the parent’s (or group’s) capital.

  • Solo-plus supervision—This supervisory approach focuses on individual group entities. Individual entities are supervised on a solo basis according to the capital requirements of their respective regulators. The solo supervision of individual entities is complemented by a general qualitative assessment of the group as a whole and, usually, by a quantitative group-wide assessment of the adequacy of capital. There are several ways in which this quantitative assessment can be carried out (see below).

8. Recognising the different starting points of the solo-plus and consolidated supervision approaches, the Tripartite Group discussed a range of techniques available to supervisors for making a quantitative assessment of capital adequacy in a financial conglomerate. The Group recognised the value of accounting-based consolidation (involving a comparison, on a single set of valuation principles, of total consolidated group assets and liabilities, and the application at parent level of capital adequacy rules to the consolidated figures) as an appropriate technique for assessing capital adequacy in homogeneous groups. This is the technique commonly used by bank supervisors in respect of banking groups; under European legislation, it is also a technique applied to groups made up of banks and securities companies.

9. As a means of applying accounting-based consolidation in respect of heterogenous groups, the Tripartite Group considered a technique referred to as “block capital adequacy”, which envisages the classification and aggregation of assets and liabilities according to the type of risk involved (rather than according to the institution to which they pertain), and the development of harmonised standards for assessing a conglomerate’s capital requirement. However, this technique was not thought to be a practical possibility for heterogenous groups in the immediately foreseeable future.

10. Instead, the Tripartite Group concluded that three techniques—the “building-block prudential approach” (which takes as its basis the consolidated accounts at the level of the parent company), a simple form of risk-based aggregation and risk-based deduction—are all capable of providing an accurate insight into the risks and capital coverage. It is suggested that these three techniques might form the basis of a set of minimum ground rules for the assessment of capital adequacy in financial conglomerates and that some form of mutual recognition of their acceptability would be eminently desirable. The Group also agreed that “total deduction” might be recognised as a fourth technique, which deals effectively and conservatively with double gearing but one which does not in itself seek to provide a full picture of the risks being carried by the conglomerate. The type and structure of the conglomerate in question may determine which of these four techniques is most appropriate for supervisory use.

11. Detailed consideration was given to the way in which supervisors should regard a parent institution’s participation of less than 100% in a financial subsidiary for the purposes of assessing group capital adequacy. It was agreed that simple minority shareholdings over which the group has neither control nor significant influence (i.e. less than 20% of the shares or voting rights owned) should not be taken into account for group capital adequacy purposes. They would normally simply be regarded as portfolio investments and would be treated by the parent’s supervisor in accordance with the relevant solo rules. Only in exceptional circumstances would supervisors expect to integrate such shareholdings in an assessment of capital adequacy from a group perspective.

12. Where the group has what is deemed to be a “significant influence” (i.e. ownership of between 20% and 50% of the shares or voting rights) over a subsidiary undertaking, a pro-rata approach is advocated with regard to the inclusion of capital in the group-wide assessment. As far as subsidiary undertakings which are not wholly-owned, but over which the group has effective control (i.e. more than 50% of the shares or voting rights), are concerned, most members of the Tripartite Group agreed that the full extent of any deficit should be attributed to the group. However, there was less of a consensus as to the appropriate treatment for any capital surplus in such a subsidiary. Some members favoured attributing such surpluses in full to the parent group for capital adequacy purposes, while others considered a pro-rata approach to be more appropriate. A few members were inclined towards an asymmetric approach, under which any capital deficit would be attributed to the group in full but surpluses would only be attributed pro-rata.

13. The suitability and availability of capital surpluses for transfer from subsidiary to parent, and from one subsidiary to a sister company, were other issues considered by the Tripartite Group. The divergent definitions of capital from sector to sector, make it necessary for supervisors to examine both the distribution and structure of capital across a financial conglomerate in order to ensure that excess capital in one group entity, which is used to cover risks in another, is suitable for those purposes. The Group agreed that the simplest approach would be to assess the extent and nature of any excess in a dependant by reference to the capital requirements of that dependant; but to admit any excess for the purposes of the parent only to the extent that the excess capital elements are suitable according to the rules applied to the parent (or other regulated entity). The supervisors of the parent and the dependant would clearly need to liaise closely over the acceptability and admission of different forms of capital.

14. As far as availability is concerned, some members of the Tripartite Group, recognising various obstacles to the free movement of capital surpluses around a group, are in favour of applying a test before accepting that surpluses in individual group entities are available at parent/group level. Other members of the Group, however, view a financial conglomerate as a single economic unit and, from a “going concern” perspective, they are prepared to assume that capital surpluses in individual entities are available to the group as a whole. It did not prove possible to reach consensus on this point.

15. A difficult problem occurs when a group includes substantial nonregulated entities, either at the ownership level or downstream. The Tripartite Group is of the view that, notwithstanding moral hazard, supervisors should be able to obtain prudential information about the unregulated entities in a group in order to supervise the regulated parts effectively, and to be able to conduct a group-based risk assessment. Most members of the Group take the view that unregulated entities whose activities are similar to those of regulated entities should be included in group-wide assessments of capital adequacy through the application of notional capital requirements derived from the analogous regulated activity.3 A small minority of the Group, on the other hand, have a preference for the establishment of qualitative standards aimed at the regulated entities (rather than notional capital requirements for the unregulated ones) wherever they appear in the group structure. Most members also advocate that unregulated holding companies at the top of the group structure and intermediate holding companies should be encompassed in the group-wide assessment of capital adequacy.

Contagion

16. Contagion is recognised as one of the most important issues facing supervisors in relation to conglomerates. Psychological contagion—where problems in one part of a group are transferred to other parts by market reluctance to deal with a tainted group—is difficult for supervisors to guard against. However, contagion resulting from the existence of extensive intra-group exposures can, in principle, be contained and the Tripartite Group believes that, at the very minimum, it is essential for supervisors to be informed on a regular basis of the existence and nature of all such exposures.

Intra-group exposures

17. The Group takes the view that the potential problems of intra-group exposures are best tackled as an element of solo supervision, not least because the parent regulator’s perspective is likely to be quite different from that of a subsidiary’s regulator. Solo regulators should ensure that the pattern of activity and aggregate exposure between the regulated entity for which they are responsible and other group companies is not such that failure of another group company (or the mere existence of such intra-group transactions) will undermine the regulated entity. Solo supervisors also need to liaise closely with other group supervisors when uncertainties arise; they need powers to limit or prohibit intra-group exposures when necessary; and they should be particularly concerned about situations where funds are being invested by a subsidiary in securities issued by a parent, or are being deposited directly with a parent.

Large exposures at group level

18. Wide differences between the large exposure rules pertaining in the banking, securities and insurance sectors provide ample scope for regulatory arbitrage, and the differences are such that it is difficult to envisage the gaps being bridged in the foreseeable future. The Tripartite Group agreed that a combination of large exposures to the same counterparty in different parts of a conglomerate could be dangerous to the group as a whole and a group-wide perspective is therefore considered necessary. One practical way of proceeding might be to develop a system whereby the parent or lead regulator is furnished with sufficient information to enable him to assess major group-wide exposures to individual counterparties; this would provide valuable information on gross exposures. It might be possible to identify suitable “trigger points” of concern which, when reached, would trigger discussions on a case-by-case basis between the supervisors involved on the nature of any perceived problems and on any proposed action to be taken.

Fit and proper test for managers

19. Most supervisors already have the power to check the fitness and propriety of the managers of the firms for which they are responsible. The problem facing supervisors in applying such tests is that, as the banking, insurance and securities businesses become more and more integrated, it is possible that decision-making processes will be shifted away from individually-regulated entities to the parent or holding company level of the structure, enabling managers of other (perhaps unregulated) companies in the group to exercise control over the regulated entity. Because of this, the Tripartite Group believes that, in applying the fit and proper test to managers, supervisors should be able to “look through” a conglomerate’s legal structure and focus on the people who are actually managing the supervised entity, regardless of exactly where they feature in the group’s organigram.

Structure

20. The Tripartite Group is of the view that the way in which a conglomerate is structured is crucial to effective supervision. It believes that supervisors need powers, at both the authorisation stage and on a continuing basis, to obtain adequate information regarding managerial and legal structures, and, if necessary, to prohibit structures which impair adequate supervision. Where supervision is impaired, supervisors should be able to insist that financial conglomerates organise themselves in a way that makes adequate supervision possible.

Suitability of shareholders

21. The Tripartite Group is of the view that shareholders who have a stake in a financial conglomerate (enabling them to exert material influence on a regulated firm within it) should meet certain standards, and that supervisors should endeavour to ensure that this is the case by applying, on an objective basis, an appropriate test, both at the authorisation stage and on an ongoing basis. Responsibility for applying such a test clearly rests with the supervisors of individually regulated entities, but the Tripartite Group advocates close cooperation between supervisors and a sharing of information on shareholders in this respect.

Access to information

22. In the case of a financial conglomerate, intensive cooperation between supervisors is essential and supervisors should have the right to exchange prudential information. There was general support for the idea of appointing a lead supervisor or “convenor”, who would be responsible for gathering such information as they require in order to have a perspective on the risks assumed by the group as a whole (including information on non-regulated entities). Using this data, a convenor would make an assessment of the capital adequacy of the group and would also be responsible for ensuring that the supervisors of individual entities are made aware of any developments which might affect the financial viability of the group. In addition, when supervisory action involving more than one regulated entity is called for, the convenor would be responsible for the coordination of this action. This would not interfere with the power of the solo supervisor to obtain information regarding the group and to act individually when necessary. In all probability, the convenor would be the supervisor of the dominant operational business entity in a group. The Tripartite Group also believes that the precise role of the lead regulator or convenor, and indeed the responsibilities of all individual supervisors involved in a financial conglomerate, could be defined and agreed upon effectively through the establishment of Memoranda of Understanding or Protocols between the relevant supervisors, particularly when a financial conglomerate has a complex structure. Where the relevant supervisors are located in the same country, however, more informal information sharing arrangements may be sufficient. External auditors are recognised as another valuable source of information for supervisors.

Mixed conglomerates

23. Although many of the problems associated with the supervision of financial conglomerates also arise in the case of “mixed conglomerates” (groups which are predominantly industrially or commercially oriented but contain at least one regulated financial entity), the latter also raise some rather different issues for supervisors and can demand a fundamentally different approach. For example, there are difficult issues to be tackled in ascertaining the suitability of the shareholders of the regulated entities and the fitness and propriety of the managers responsible for running the regulated businesses. Intra-group exposures are another problem area and it is essential that supervisors establish that such business is conducted at “arm’s length” (i.e. at the terms prevailing in the market in general at the time). Clearly, there is scope for supervisory discretion in this area, but supervisors must be satisfied that, as a rule, intra-group business is not being conducted at rates or on terms which significantly differ from those prevailing generally.4

24. At the heart of the problem with regard to mixed conglomerates is the difficulty for supervisors in assessing overall group capital adequacy because supervisory rules and practices cannot be extended to commercial and industrial entities in the same way as they can to non-regulated financial entities. The Tripartite Group believes that, ideally, supervisors should be able to insist on the establishment of an intermediate holding company to provide a legal separation of the regulated financial parts of a mixed conglomerate from the non-financial parts; this would enable supervision to be carried out in the same way as for other financial conglomerates.

Conclusion

25. In summary, considerable progress has been made in identifying broad areas of agreement between supervisors in the three disciplines and a number of recommendations have been made as to ways in which the supervision of financial conglomerates could be improved. However, any further progress that can be made by the Tripartite Group seems certain to be restricted by the informal nature of the group. It is hoped that this paper will provide a sound basis for any further work that may be undertaken in this regard.

Appendix III 3 Joint Report on the Supervision of Cross-Border Banking

II. Summary of conclusions and recommendations

[Excerpt]1

1. Improving the access of home supervisors to information necessary for effective consolidated supervision

  • (i) In order to exercise comprehensive consolidated supervision of the global activities of their banking organisations, home supervisors must be able to make an assessment of all significant aspects of their banks’ operations that bear on safety and soundness, wherever those operations are conducted and using whatever evaluative techniques are central to their supervisory process.2

  • (ii) Home supervisors need to be able to verify that quantitative information received from banking organisations in respect of subsidiaries and branches in other jurisdictions is accurate and to reassure themselves that there are no supervisory gaps.

  • (iii) While recognising that there are legitimate reasons for protecting customer privacy, the working group believes that secrecy laws should not impede the ability of supervisors to ensure safety and soundness in the international banking system.

  • (iv) If the home supervisor needs information about non-deposit operations, host supervisors are encouraged to assist in providing the requisite information to home supervisors if this is not provided through other supervisory means. The working group believes it is essential that national legislation that in any way obstructs the passage of non-deposit supervisory information be amended.

  • (v) Where the liabilities side of the balance sheet is concerned, home supervisors do not routinely need to know the identity of individual depositors. However, in certain well-defined circumstances, home supervisors would need access to individual depositors’ names and to deposit account information.

  • (vi) It should not normally be necessary for the home supervisor to know the identity of investors for whom a bank in a host country is managing investments at the customer’s risk. However, in certain exceptional circumstances, home supervisors would need access to individual investors’ names and to investment account information subject to the safeguards in paragraph 10.

  • (vii) The working group recommends that host supervisors whose legislation does not allow a home supervisor to have access to depositor information use their best endeavours to have their legislation reviewed and if necessary amended to provide for a mechanism whereby in exceptional cases a home supervisor, with the consent of the host supervisor, will gain access to depositor information subject to the same conditions as outlined in (viii) below.

  • (viii) In order to provide legitimate protection for bank customers, it is important that the information obtained by home supervisors, especially that relating to depositors’ or investors’ names, is subject to strict confidentiality. The working group recommends that those host jurisdictions whose legislation allows foreign supervisors to have access to banks’ depositor or investor information should subject such access (at the host country’s discretion) to the following conditions:

    • - the purpose for which the information is sought should be specific and supervisory in nature;

    • - information received should be restricted solely to officials engaged in prudential supervision and not be passed to third parties without the host supervisor’s prior consent;3

    • - there is assurance that all possible steps will be taken to preserve the confidentiality of information received by a home supervisor in the absence of the explicit consent of the customer;

    • - there should be a two-way flow of information between the host and home supervisors, though perfect reciprocity should not be demanded;

    • - before taking consequential action, those receiving information will undertake to consult with those supplying it.

  • (ix) If a host supervisor has good cause to doubt a home supervisor’s ability to limit the use of information obtained in confidence solely for supervisory purposes, the host would retain the right not to provide such information.

  • (x) Subject to appropriate protection for the identity of customers, home supervisors should be able at their discretion, and following consultation with the host supervisor, to carry out on-site inspections in other jurisdictions for the purposes of carrying out effective comprehensive consolidated supervision. This ability should include, with the consent of the host supervisor and within the laws of the host country, the right to look at individual depositors’ names and relevant deposit account information if the home supervisor suspects serious crime…. If a host supervisor has reason to believe that the visit is for non-supervisory purposes, it should have the right to prevent the visit taking place or to terminate the inspection.

  • (xi) It would avoid potential misunderstandings if a standard routing were laid down for conducting cross-border inspections along the lines recommended in Annex A.

  • (xii) In those countries where laws do not allow for on-site inspections by supervisors from other jurisdictions, the working group advocates that host supervisors use their best endeavours to have their legislation amended. In the meantime, host supervisors should, within the limits of their laws, be willing to cooperate with any home supervisor that wishes to make an inspection. The working group believes that the host supervisor should have the option to accompany the home supervisor throughout the inspection.

  • (xiii) It is important that the confidentiality of information obtained during the course of an inspection be maintained. Home supervisors should use their best endeavours to have their legislation modified if it does not offer sufficient protection that information obtained for the purposes of effective consolidated supervision is limited to that use.

  • (xiv) In the event that a home supervisor, during an on-site inspection in a host country, detects a serious criminal violation of home country law, the home supervisor may be under a strict legal obligation to pass the information immediately to the appropriate law enforcement authorites in its home country. In these circumstances, the home supervisor should inform the host supervisor of the action he intends to take.4

  • (xv) In order to carry out effective comprehensive consolidated supervision, home supervisors also need information on certain qualitative aspects of the business undertaken in other jurisdictions by branches and subsidiaries of banking organisations for which they are the home supervisor. All members of the working group agree that it is essential for effective consolidated supervision that there are no impediments to the passing of such qualitative information to the home supervisor.

2. Improving the access of host supervisors to information necessary for effective host supervision

  • (xvi) In the case of information which is specific to the local entity, an early sharing of information may be important in enabling a potential problem to be resolved before it becomes serious. The home supervisor should therefore consult the host supervisor in such cases and the latter should report back on its findings. In particular, it is essential that the home supervisor inform the host supervisor immediately if the former has reason to suspect the integrity of the local operation, the quality of its management or the quality of internal controls being exercised by the parent bank.

  • (xvii) A home supervisor should have on its regular mailing list for relevant material all foreign supervisors which act as hosts to its banks.

  • (xviii) While the working group agrees that home supervisors should endeavour to keep host supervisors appraised of material adverse changes in the global condition of banking groups, the Group recognises that this will typically be a highly sensitive issue and that decisions on information-sharing necessarily will have to be made on a case-by-case basis.

3. Ensuring that all cross-border banking operations are subject to effective home and host supervision

  • (xix) The working group has formulated a set of principles of effective consolidated supervision (see Annex B) which could be used by host supervisors as a checklist to assist in determining whether a home supervisor is meeting the Minimum Standards.

  • (xx) Regional group procedures might be used to support the implementation of the Minimum Standards, as the Offshore Group is now doing.

  • (xxi) The working group recommends that other regional groups consider the possibility of using a checklist similar to the one used by the Offshore Group (see Annex C) as a means of establishing which of their members might be certified as meeting certain general criteria.

  • (xxii) The Basle Committee encourages its member countries to assist the Offshore Group or another regional group in the fact-finding verification process, but any decision-making regarding membership of a regional group should be left to that group alone. The Committee has asked its Secretariat to maintain a list of competent persons (for example, retired supervisors) who are available to undertake exercises of this nature.

  • (xxiii) The supervisor that licenses a so-called shell branch has responsibility for ensuring that there is effective supervision of that shell branch. No banking operation should be permitted without a license, and no shell office should be licensed without ascertaining that it will be subject to effective supervision. In the event that any host supervisor receives an application to license a new shell branch that will be managed in another jurisdiction, that supervisor should take steps to notify both the home supervisor and the appropriate host supervisor in the other jurisdiction in order to establish that there will be appropriate supervision of the branch before approving the application.

  • (xxiv) Home supervisors should not authorise their banks to establish or acquire offices in any host jurisdiction without satisfying themselves in advance that such offices will be subject to appropriate supervision.

  • (xxv) Where the home authority wishes to inspect on-site, they should be permitted to examine the books of the shell branch wherever they are kept. The working group believes that in no case should access to these books be protected by secrecy requirements in the country that licenses the shell branch.

  • (xxvi) The working group recommends that home or host supervisors be vigilant to ensure that parallel-owned banks (where a bank in one jurisdiction has the same ownership as a bank in another jurisdiction, where one is not a subsidiary of the other) become subject to consolidated supervision, if necessary by enforcing a change in group structure as indicated by the Minimum Standards.

  • (xxvii) Any home supervisor that licenses a banking entity has a responsibility to monitor its operations on a worldwide basis.

  • (xxviii) No entity should be allowed to use the word “bank” in its name if it is not conducting banking activities and being supervised as a bank.

  • (xxix) The working group believes the Basle Committee should advise all host countries to be extremely cautious about approving the establishment of cross-border operations by banks incorporated in under-regulated financial centres, and even more cautious about accepting other financial institutions conducting banking activities from those centres.

Annex A

Standard procedures for cross-border inspections

The working group recommends that the following routine should be followed in cases where the home supervisor wishes to undertake a cross-border inspection:

  • (i) The home supervisor should contact the host supervisor to let the latter know of an intention to make a visit to a specified branch/subsidiary within the host supervisor’s jurisdiction;

  • (ii) The home supervisor should be prepared to explain to the host supervisor the purpose of the visit and what aspects of the branch or subsidiary it would wish to explore;

  • (iii) The host supervisor should be able to obtain an undertaking from the home supervisor that information obtained in the course of the visit will be used for specific and supervisory purposes and, to the maximum extent possible under applicable laws, will not be passed to third parties without the host supervisors’ prior consent…. ;

  • (iv) The host supervisor should identify to the home supervisor any areas where access to information is normally restricted (e.g. information on individual customers), and the home supervisor should indicate where exceptions are needed;

  • (v) The host supervisor should have the option, but not the duty, to accompany the home supervisor during the inspections;

  • (vi) Where relevant, the host supervisor should advise the home supervisor of procedures necessary to comply with local/host country legislation and, where necessary or appropriate, assist in ensuring that these procedures are correctly followed to expedite the examination.

Annex B

Effective consolidated supervision

1. Under the first of the four Minimum Standards, it is required that all international banks be supervised by a home country authority that capably performs consolidated supervision. The purpose of this Annex, and in particular the checklist in paragraphs 6 and 7 below, is to provide examples of some of the principles and factors that could be taken into account in making a judgement about effective consolidated supervision.

2. There can be no single set of criteria to determine whether or not a home supervisor is performing “effective consolidated supervision”, since supervisory techniques differ from country to country, due to institutional, historical, legal or other factors. The concepts of consolidated supervision can, however, be defined, namely as a group-wide approach to supervision whereby all the risks run by a banking group are taken into account, wherever they are booked. In other words, it is a process whereby a supervisor can satisfy himself about the totality of a banking group’s activities, which may include non-bank companies and financial affiliates, as well as direct branches and subsidiaries.

3. One of the prime reasons why consolidated supervision is critical is the risk of a damaging loss of confidence if an associated enterprise gets into difficulties. This so-called risk of contagion goes well beyond legal liability. Consolidated supervision helps protect the integrity of, and confidence in the group, both supervised and unsupervised elements. More directly, the purpose of consolidated supervision is essentially threefold:

  • - to support the principle that no banking operation, wherever located, should escape supervision altogether;

  • - to prevent double-leveraging of capital; and

  • - to ensure that all the risks incurred by a banking group, no matter where they are booked, are evaluated and controlled on a global basis.

4. It is important to draw a distinction between accounting consolidation, which is a mechanical process, and the concept of consolidated supervision, which is qualitative as well as quantitative. The drawing up of consolidated accounts facilitates consolidated supervision but is not necessarily sufficient. Consolidated accounting may, for example, be inappropriate when the nature of the business or the nature of the risks are markedly different, but that does not mean that the risks should be ignored. Moreover, some risks need to be monitored at local levels too. Liquidity concerns, for one, can be considered on a market-by-market (or currency-by-currency) basis, though a group liquidity spectrum would need to include at least the main funding centres. Market risk is another risk that the supervisor may decide should not necessarily be consolidated: that decision would depend on whether the bank manages its market risks centrally or regionally. Moreover, if a bank is operating in jurisdictions subject to controls on capital flows, offsetting of market (and other) risks through consolidation would not necessarily be prudent.

5. In reaching a decision as to the effectiveness of the consolidated supervision conducted by a home supervisor, the host supervisor will also need to take account of his own supervisory capabilities. If he has limited resources, greater demands will be placed on the home supervisor than if host supervision is strong. The host also has to judge the extent to which its supervision complements that of the home supervisor, or whether there are potential gaps. Accordingly, one host supervisor may decide that a given country is conducting effective consolidated supervision, whereas another host supervisor with different capabilities may decide that it is not. Nonetheless, there are certain common factors on which host supervisors will base their decisions. The checklist below is designed to assist in that decision-making process.

Checklist of principles for effective consolidated supervision
A. Powers to exercise global oversight

6. Does the home country supervisor have adequate powers to enable it to obtain the information needed to exercise consolidated supervision, for example:

  • - does the bank in question have its own routine for collecting and validating financial information from all its foreign affiliates, as well as for evaluating and controlling its risks on a global basis?

  • - does the home supervisor receive regular financial information relating both to the whole of the group, and to the material entities in the group (including the head office) individually?

  • - is the home supervisor able to verify that information (e.g. through inspection, auditors’ reports or information received from the host authority)?

  • - is there access to information on intra-group transactions, not only with downward affiliates but also if appropriate with sister companies or non-bank affiliates?

  • - does the home supervisor have the power to prohibit corporate structures that deliberately impede consolidated supervision?

B. Exercise of consolidated supervision

7. Which of the following procedures does the home country supervisor have in place to demonstrate its ability to capably perform consolidated supervision:

  • - adequate control of authorisation, both at the entry stage and on changes of ownership?

  • - adequate prudential standards for capital, credit concentrations, asset quality (i.e. provisioning or classification requirements), liquidity, market risk, management controls, etc?

  • - off-site capability, i.e. systems for statistical reporting of risks on a consolidated basis and the ability to verify or to have the reports verified?

  • - the capability to inspect or examine entities in foreign locations?

  • - arrangements for a frequent dialogue with the management of the supervised entity?

  • - a track record of taking effective remedial action when problems arise?

Annex C

Offshore group of banking supervisors on-site examination checklist

1. What number, types of banks etc. are licensed in the jurisdiction? Is there any differentiation in the type of banking licence issued, or the conditions imposed and, if so, why? What legislation is in place, when was it last updated, and does it provide for the Basle Committee’s minimum standards to be met?

2. What resources are available to the supervisory authority, with regard to the background and experience of the supervisory team, and what training programme is in place?

3. What are the requirements which banks/banking groups have to fulfil in order to become authorised in the jurisdiction? What measures are in place to ensure that banks/banking groups are managed and controlled by fit and proper persons?

4. What is the process of authorisation - what objective criteria and what type of background checks are used? What arrangements are in place to ensure the approval of the home supervisor? What regular links are there with other supervisory authorities?

5. What steps are taken to ensure that banks/banking groups are subject to effective consolidated supervision?

6. What financial and prudential information is collected from banks/banking groups in the jurisdiction, and how frequently is the information collected? By what means is the reliability of this information confirmed?

7. Are on-site inspections of banks/banking groups undertaken? If not, what are the alternative arrangements? If so, who carries them out, what is their scope and what is their frequency? Is the home supervisory authority informed of examination findings?

8. What measures are taken to supervise the overseas operations of any banks/banking groups for which the Supervisory Authority is the home supervisor? Are financial conglomerates allowed? If so, what are the arrangements for supervising the operations of non-bank subsidiaries?

9. What limits are applied with regard to the extent to which a bank or banking group can lend to:

  • (a) any one customer (including any arrangements for treating groups of borrowers as one risk);

  • (b) companies or persons connected with the bank/banking group itself; and

  • (c) particular sectors (e.g. real estate)?

10. What rules are in place to monitor:

  • (a) solvency;

  • (b) asset quality;

  • (c) country risk exposure;

  • (d) liquidity control systems;

  • (e) foreign exchange positions;

  • (f) off-balance-sheet activity;

  • (g) ownership and organisation structure;

  • (h) derivatives activities?

What is the frequency of report on each of the above?

11. What arrangements are in place to ensure that banks/banking groups maintain adequate accounting and other records, and adequate systems of control?

12. What measures and actions can be taken if the banks/banking groups in the jurisdiction fail to comply with prudential requirements or any other factors that are a cause for concern?

13. Are internal auditors from the parent bank or head office entitled to inspect the banks in the jurisdiction? Are internal auditors required to meet with/report to the host/home supervisor?

14. Are the home supervisory authorities of banks/banking groups entitled to conduct on-site inspections?

15. What powers does the supervisory authority have to provide or share information with other supervisory authorities? What kind of information may be provided or shared? What restrictions or constraints are there (if any) on the provision or sharing of information with other supervisory authorities? What statutory or other protection is available for information passed to the supervisory authorities by other authorities?

16. Have the Basle Commmittee’s capital convergence proposals been adopted?

17. What legislation, rules, etc. are in place to control money-laundering activities and to provide for the implementation of the FATF’s forty recommendations?

18. Are locally incorporated subsidiaries required to publish annual audited accounts? Are all banks subject to external audit and, if so, in what form? What is the criteria for appointing/approving external auditors and do they have to be the same as the auditors of the parent/group?

Appendix IV: European Community Documents

Appendix IV 1 EC Directive on Cross-Border Credit Transfers

Council Directive1 27 January 1997 on cross-border credit transfers (97/5/EC)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 100a thereof,

Having regard to the proposal from the Commission,2

Having regard to the opinion of the Economic and Social Committee,3

Having regard to the opinion of the European Monetary Institute,

Acting in accordance with the procedure laid down in Article 189b of the Treaty4 in the light of the joint text approved on 22 November 1996 by the Conciliation Committee,

(1) Whereas the volume of cross-border payments is growing steadily as completion of the internal market and progress towards full economic and monetary union lead to greater trade and movement of people within the Community; whereas cross-border credit transfers account for a substantial part of the volume and value of cross-border payments;

(2) Whereas it is essential for individuals and businesses, especially small and medium-sized enterprises, to be able to make credit transfers rapidly, reliably and cheaply from one part of the Community to another; whereas, in conformity with the Commission Notice on the application of the EC competition rules to cross-border credit transfers,5 greater competition in the market for cross-border credit transfers should lead to improved services and reduced prices;

(3) Whereas this Directive seeks to follow up the progress made towards completion of the internal market, in particular towards liberalization of capital movements, with a view to the implementation of economic and monetary union; whereas its provisions must apply to credit transfers in the currencies of the Member States and in ECUs;

(4) Whereas the European Parliament, in its resolution of 12 February 1993,6 called for a Council Directive to lay down rules in the area of transparency and performance of cross-border payments;

(5) Whereas the issues covered by this Directive must be dealt with separately from the systemic issues which remain under consideration within the Commission; whereas it may become necessary to make a further proposal to cover these systemic issues, particularly the problem of settlement finality;

(6) Whereas the purpose of this Directive is to improve cross-border credit transfer services and thus assist the European Monetary Institute (EMI) in its task of promoting the efficiency of cross-border payments with a view to the preparation of the third stage of economic and monetary union;

(7) Whereas, in line with the objectives set out in the second recital, this Directive should apply to any credit transfer of an amount of less than ECU 50,000;

(8) Whereas, having regard to the third paragraph of Article 3b of the Treaty, and with a view to ensuring transparency, this Directive lays down the minimum requirements needed to ensure an adequate level of customer information both before and after the execution of a cross-border credit transfer; whereas these requirements include indication of the complaints and redress procedures offered to customers, together with the arrangements for access thereto; whereas this Directive lays down minimum execution requirements, in particular in terms of performance, which institutions offering cross-border credit transfer services should adhere to, including the obligation to execute a cross-border credit transfer in accordance with the customer’s instructions; whereas this Directive fulfils the conditions deriving from the principles set out in Commission Recommendation 90/109/EEC of 14 February 1990 on the transparency of banking conditions relating to cross-border financial transactions;7 whereas this Directive is without prejudice to Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering;8

(9) Whereas this Directive should contribute to reducing the maximum time taken to execute a cross-border credit transfer and encourage those institutions which already take a very short time to do so to maintain that practice;

(10) Whereas the Commission, in the report it will submit to the European Parliament and the Council within two years of implementation of this Directive, should particularly examine the time-limit to be applied in the absence of a time limit agreed between the originator and his institution, taking into account both technical developments and the situation existing in each Member State;

(11) Whereas there should be an obligation upon institutions to refund in the event of a failure to successfully complete a credit transfer; whereas the obligation to refund imposes a contingent liability on institutions which might, in the absence of any limit, have a prejudicial effect on solvency requirements; whereas that obligation to refund should therefore be applicable up to ECU 12,500;

(12) Whereas Article 8 does not affect the general provisions of national law whereby an institution has responsibility towards the originator when a cross-border credit transfer has not been completed because of an error committed by that institution;

(13) Whereas it is necessary to distinguish, among the circumstances with which institutions involved in the execution of a cross-border credit transfer may be confronted, including circumstances relating to insolvency, those caused by force majeure; whereas for that purpose the definition of force majeure given in Article 4 (6) of Directive 90/314/EEC of 13 June 1990 on package travel, package holidays and package tours9 should be taken as a basis;

(14) Whereas there need to be adequate and effective complaints and redress procedures in the Member States for the settlement of possible disputes between customers and institutions, using existing procedures where appropriate,

HAVE ADOPTED THIS DIRECTIVE: SECTION I SCOPE AND DEFINITIONS

Article 1

Scope

The provisions of this Directive shall apply to cross-border credit transfers in the currencies of the Member States and the ECU up to the equivalent of ECU 50 000 ordered by persons other than those referred to in Article 2 (a), (b) and (c) and executed by credit institutions or other institutions.

Article 2

Definitions

For the purposes of this Directive:

  • (a) ‘credit institution’ means an institution as defined in Article 1 of Council Directive 77/780/EEC,10 and includes branches, within the meaning of the third indent of that Article and located in the Community, of credit institutions which have their head offices outside the Community and which by way of business execute cross-border credit transfers;

  • (b) ‘other institution’ means any natural or legal person, other than a credit institution, that by way of business executes cross-border credit transfers;

  • (c) ‘financial institution’ means an institution as defined in Article 4(1) of Council Regulation (EC) No 3604/93 of 13 December 1993 specifying definitions for the application of the prohibition of privileged access referred to in Article 104a of the Treaty;11

  • (d) ‘institution’ means a credit institution or other institution; for the purposes of Articles 6, 7 and 8, branches of one credit institution situated in different Member States which participate in the execution of a cross-border credit transfer shall be regarded as separate institutions;

  • (e) ‘intermediary institution’ means an institution which is neither that of the originator nor that of the beneficiary and which participates in the execution of a cross-border transfer;

  • (f) ‘cross-border credit transfer’ means a transaction carried out on the initiative of an originator via an institution of its branch in one Member State, with a view to making available an amount of money to a beneficiary at an institution or its branch in another Member State; the originator and the beneficiary may be one and the same person;

  • (g) ‘cross-border credit transfer order’ means an unconditional instruction in any form, given directly by an originator to an institution to execute a cross-border credit transfer;

  • (h) ‘originator’ means a natural or legal person that orders the making of a cross-border credit transfer to a beneficiary;

  • (i) ‘beneficiary’ means the final recipient of a cross-border credit transfer for whom the corresponding funds are made available in an account to which he has access;

  • (j) ‘customer’ means the originator or the beneficiary, as the context may require;

  • (k) ‘reference interest rate’ means an interest rate representing compensation and established in accordance with the rules laid down by the Member State in which the establishment which must pay the compensation to the customer is situated;

(1) ‘date of acceptance’ means the date of fulfilment of all the conditions required by the institution as to the execution of the cross-border credit transfer order and relating to the availability of adequate financial cover and the information required to execute that order.

SECTION II: TRANSPARENCY OF CONDITIONS FOR CROSS-BORDER CREDIT TRANSFERS

Article 3

Prior information on conditions for cross-border credit transfers

The institutions shall make available to their actual and prospective customers in writing, including where appropriate by electronic means, and in a readily comprehensible form, information on conditions for cross-border credit transfers. This information shall include at least:

— indication of the time needed, when a cross-border credit transfer order given to the institution is executed, for the funds to be credited to the account of the beneficiary’s institution; the start of that period must be clearly indicated,

— indication of the time needed, upon receipt of a cross-border credit transfer, for the funds credited to the account of the institution to be credited to the beneficiary’s account,

— the manner of calculation of any commission fees and charges payable by the customer to the institution, including where appropriate the rates,

— the value date, if any, applied by the institution,

— details of the complaint and redress procedures available to the customer and arrangements for access to them,

— indication of the reference exchange rates used.

Article 4

Information subsequent to a cross-border credit transfer

The institutions shall supply their customers, unless the latter expressly forgo this, subsequent to the execution or receipt of a cross-border credit transfer, with clear information in writing, including where appropriate by electronic means, and in a readily comprehensible form. This information shall include at least:

— a reference enabling the customer to identify the cross-border credit transfer,

— the original amount of the cross-border credit transfer,

— the amount of all charges and commission fees payable by the customer,

— the value date, if any, applied by the institution.

Where the originator has specified that the charges for the cross-border credit transfer are to be wholly or partly borne by the beneficiary, the latter shall be informed thereof by his own institution.

Where any amount has been converted, the institution which converted it shall inform its customer of the exchange rate used.

SECTION III: MINIMUM OBLIGATIONS OF INSTITUTIONS IN RESPECT OF CROSS-BORDER CREDIT TRANSFERS

Article 5

Specific undertakings by the institution

Unless it does not wish to do business with that customer, an institution must at a customer’s request, for a cross-border credit transfer with stated specifications, give an undertaking concerning the time needed for execution of the transfer and the commission fees and charges payable, apart from those relating to the exchange rate used.

Article 6

Obligations regarding time taken

1. The originator’s institution shall execute the cross-border credit transfer in question within the time limit agreed with the originator.

Where the agreed time limit is not complied with or, in the absence of any such time limit, where, at the end of the fifth banking business day following the date of acceptance of the cross-border credit transfer order, the funds have not been credited to the account of the beneficiary’s institution, the originator’s institution shall compensate the originator.

Compensation shall comprise the payment of interest calculated by applying the reference rate of interest to the amount of the cross-border credit transfer for the period from:

— the end of the agreed time limit or in the absence of any such time limit, the end of the fifth banking business day following the date of acceptance of the cross-border credit transfer order, to

— the date on which the funds are credited to the account of the beneficiary’s institution.

Similarly, where non-execution of the cross-border credit transfer within the time limit agreed or, in the absence of any such time limit, before the end of the fifth banking business day following the date of acceptance of the cross-border credit transfer is attributable to an intermediary institution, that institution shall be required to compensate the originator’s institution.

2. The beneficiary’s institution shall make the funds resulting from the cross-border credit transfer available to the beneficiary within the time limit agreed with the beneficiary.

Where the agreed time limit is not complied with or, in the absence of any such time limit, where, at the end of the banking business day following the day on which the funds were credited to the account of the beneficiary’s institution, the funds have not been credited to the beneficiary’s account, the beneficiary’s institution shall compensate the beneficiary.

Compensation shall comprise the payment of interest calculated by applying the reference rate of interest to the amount of the cross-border credit transfer for the period from:

— the end of the agreed time limit or, in the absence of any such time limit, the end of the banking business day following the day on which the funds were credited to the account of the beneficiary’s institution, to

— the date on which the funds are credited to the beneficiary’s account.

3. No compensation shall be payable pursuant to paragraphs 1 and 2 where the originator’s institution or, as the case may be, the beneficiary’s institution can establish that the delay is attributable to the originator or, as the case may be, the beneficiary.

4. Paragraphs 1, 2 and 3 shall be entirely without prejudice to the other rights of customers and institutions that have participated in the execution of a cross-border credit transfer order.

Article 7

Obligation to execute the cross-border transfer in accordance with instructions

1. The originator’s institution, any intermediary institution and the beneficiary’s institution, after the date of acceptance of the cross-border credit transfer order, shall each be obliged to execute that credit transfer for the full amount thereof unless the originator has specified that the costs of the cross-border credit transfer are to be borne wholly or partly by the beneficiary.

The first subparagraph shall be without prejudice to the possibility of the beneficiary’s institution levying a charge on the beneficiary relating to the administration of his account, in accordance with the relevant rules and customs. However, such a charge may not be used by the institution to avoid the obligations imposed by the said subparagraph.

2. Without prejudice to any other claim which may be made, where the originator’s institution or an intermediary institution has made a deduction from the amount of the cross-border credit transfer in breach of paragraph 1, the originator’s institution shall, at the originator’s request, credit, free of all deductions and at its own cost, the amount deducted to the beneficiary unless the originator requests that the amount be credited to him.

Any intermediary institution which has made a deduction in breach of paragraph 1 shall credit the amount deducted, free of all deductions and at its own cost, to the originator’s institution or, if the originator’s institution so requests, to the beneficiary of the cross-border credit transfer.

3. Where a breach of the duty to execute the cross-border credit transfer order in accordance with the originator’s instructions has been caused by the beneficiary’s institution, and without prejudice to any other claim which may be made, the beneficiary’s institution shall be liable to credit the beneficiary, at its own cost, any sum wrongly deducted.

Article 8

Obligation upon institutions to refund in the event of non-execution of transfers

1. If, after a cross-border credit transfer order has been accepted by the originator’s institution, the relevant amounts are not credited to the account of the beneficiary’s institution, and without prejudice to any other claim which may be made, the originator’s institution shall credit the originator, up to ECU 12 500, with the amount of the cross-border credit transfer plus:

— interest calculated by applying the reference interest rate to the amount of the cross-border credit transfer for the period between the date of the cross-border credit transfer order and the date of the credit, and

— the charges relating to the cross-border credit transfer paid by the originator.

These amounts shall be made available to the originator within fourteen banking business days following the date of his request, unless the funds corresponding to the cross-border credit transfer have in the mean-time been credited to the account of the beneficiary’s institution.

Such a request may not be made before expiry of the time limit agreed between the originators’ institution and the originator for the execution of the cross-border credit transfer order or, in the absence of any such time limit, before expiry of the time limit laid down in the second sub-paragraph of Article 6 (1).

Similarly, each intermediary institution which has accepted the cross-border credit transfer order owes an obligation to refund at its own cost the amount of the credit transfer, including the related costs and interest, to the institution which instructed it to carry out the order. If the cross-border credit transfer was not completed because of errors or omissions in the instructions given by that institution, the intermediary institution shall endeavour as far as possible to refund the amount of the transfer.

2. By way of derogation from paragraph 1, if the cross-border credit transfer was not completed because of its non-execution by an intermediary institution chosen by the beneficiary’s institution, the latter institution shall be obliged to make the funds available to the beneficiary up to ECU 12 500.

3. By way of derogation from paragraph 1, if the cross-border credit transfer was not completed because of an error or omission in the instructions given by the originator to his institution or because of non-execution of the cross-border credit transfer by an intermediary institution expressly chosen by the originator, the originator’s institution and the other institutions involved shall endeavour as fast as possible to refund the amount of the transfer.

Where the amount has been recovered by the originator’s institution, it shall be obliged to credit it to the originator. The institutions, including the originator’s institution, are not obliged in this case to refund the charges and interest accruing, and can deduct the costs arising from the recovery if specified.

Article 9

Situation of force majeure

Without prejudice to the provisions of Directive 91/308/EEC, institutions participating in the execution of a cross-border credit transfer order shall be released from the obligations laid down in this Directive where they can adduce reasons of force majeure, namely abnormal and unforeseeable circumstances beyond the control of the person pleading force majeure, the consequences of which would have been unavoidable despite all efforts to the contrary, which are relevant to its provisions.

Article 10

Settlement of disputes

Member States shall ensure that there are adequate and effective complaints and redress procedures for the settlement of disputes between an originator and his institution or between a beneficiary and his institution, using existing procedures where appropriate.

SECTION IV FINAL PROVISIONS

Article 11

Implementation

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 14 August 1999 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt these provisions, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such reference shall be laid down by Member States.

2. Member States shall communicate to the Commission the text of the main laws, regulations or administrative provisions which they adopt in the field governed by this Directive.

Article 12

Report to the European Parliament and the Council

No later than two years after the date of implementation of this Directive, the Commission shall submit a report to the European Parliament and the Council on the application of this Directive, accompanied where appropriate by proposals for its revision.

This report shall, in the light of the situation existing in each Member State and of the technical developments that have taken place, deal particularly with the question of the time limit set in Article 6 (1).

Article 13

Entry into force

This Directive shall enter into force on the date of its publication in the Official Journal of the European Communities.

Article 14

Addressees

This Directive is addressed to the Member States.

Done at Brussels, 27 January 1997.

For the European Parliament

The President

J.M. GIL-ROBLES

For the Council

The President

G. ZALM

Appendix IV 2 EC Directive as Regards Recognition of Contractual Netting by the Competent Authorities

Council Directive1 21 March 1996 amending Directive 89/647/EEC as regards recognition of contractual netting by the competent authorities (96/10/EC)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 57 (2) thereof,

Having regard to the proposal from the Commission,2

Having regard to the opinion of the Economic and Social Committee,3

Having regard to the opinion of the European Monetary Institute,4

Acting in accordance with the procedure laid down in Article 189b of the Treaty,5

Whereas Annex II to Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions6 lays down the treatment of off-balance-sheet items concerning interest and foreign-exchange rates in the context of the calculation of credit institutions’ capital requirements;

Whereas with a view to the smooth functioning of the internal market and in particular with a view to ensuring a level playing field Member States are obliged to strive for uniform assessment of contractual netting agreements by their competent authorities;

Whereas this Directive is in accordance with the work of an international forum of banking supervisors on the supervisory recognition of bilateral netting, in particular the possibility of calculating the own-funds requirements for certain transactions on the basis of a net rather than a gross amount provided that there are legally binding agreements which ensure that the credit risk is confined to the net amount;

Whereas the rules contemplated for the supervisory recognition of netting at the wider international level will lead to the possibility of reducing the capital requirements for internationally active credit institutions and groups of credit institutions in a wide range of non-member countries credit institutions which compete with Community credit institutions;

Whereas for credit institutions incorporated in the Member States, only an amendment of Directive 89/647/EEC can create a similar possibility for the recognition of bilateral netting by the competent authorities and thereby offer them equal conditions of competition; whereas the rules are both well balanced and appropriate for the further reinforcement of the application of prudential supervisory measures to credit institutions;

Whereas the competent authorities in the Member States should ensure that the calculation of add-ons is based on effective rather than apparent notional amounts;

Whereas, having regard to this situation, this Directive complies with the principle of subsidiarity, since the aim of this Directive can be achieved only by means of the harmonized amendment of existing Community legislation,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Annex II to Directive 89/647/EEC shall be replaced by the Annex hereto.

Article 2

Article 1 shall be without prejudice to the competent authorities’ recognition of bilateral contracts for novation concluded before the entry into force of the laws, regulations and administrative provisions necessary for the implementation of this Directive.

Article 3

1. Member States shall bring into force the laws, regulations and administrative provisions necessary for them to comply with this Directive after its entry into force and no later than 30 June 1996. They shall forthwith inform the Commission thereof.

When the Member States adopt those measures they shall contain references to this Directive or shall be accompanied by such references on the occasion of their official publication. The methods of making such references shall be laid down by the Member States.

2. The Member States shall communicate to the Commission the texts of the main provisions of national law which they adopt in the field governed by this Directive.

Article 4

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 5

This Directive is addressed to the Member States.

Done at Brussels, 21 March 1996.

For the European Parliament

The President

K. HÄNSCH

For the Council

The President

A. GAMBINO

ANNEX

ANNEX II

The Treatment of Off-Balance-Sheet Items Concerning Interest and Foreign-Exchange Rates

1. Scope and Choice of Method

Subject to the consent of their competent authorities, credit institutions may choose one of the methods set out below to measure the risks associated with the transactions listed in Annex III. Interest-rate and foreign-exchange contracts traded on recognized exchanges where they are subject to daily margin requirements and foreign-exchange contracts with an original maturity of fourteen calendar days or less are excluded.

2. Methods

Method 1: the “mark-to-market” approach

Step (a): by attaching current market values to contracts (mark to market) the current replacement cost of all contracts with positive values is obtained.

Step (b): to obtain a figure for the potential future credit exposure,7 the notional principal amounts or underlying values are multiplied by the following percentages:

TABLE 1.
article image

Step (c): the sum of the current replacement cost and the potential future credit exposure is multiplied by the risk weightings allocated to the relevant counterparties in Article 6.

Method 2: the “original exposure” approach

Step (a): the notional principal amount of each instrument is multiplied by the percentages given below:

Step (b): the original exposure thus obtained is multiplied by the risk weightings allocated to the relevant counterparties in Article 6.

3. Contractual Netting (Contracts for Novation and Other Netting Agreements)

  • (a) Types of netting that the competent authorities may recognize

For the purposes of this point 3 “counterparty” means any entity (including natural persons) that has the power to conclude a contractual netting agreement.

The competent authorities may recognize as risk-reducing the following types of contractual netting:

  • (i) bilateral contracts for novation between a credit institution and its counterparty under which mutual claims and obligations are automatically amalgamated in such a way that this novation fixes one single net amount each time novation applies and thus creates a legally binding, single new contract extinguishing former contracts;

  • (ii) other bilateral netting agreements between a credit institution and its counterparty.

  • (b) Conditions for recognition

The competent authorities may recognize contractual netting as risk-reducing only under the following conditions:

  • (i) a credit institution must have a contractual netting agreement with its counterparty which creates a single legal obligation, covering all included transactions, such that, in the event of a counterparty’s failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the credit institution would have a claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions;

  • (ii) a credit institution must have made available to the competent authorities written and reasoned legal opinions to the effect that, in the event of a legal challenge, the relevant courts and administrative authorities would, in the cases described under (i), find that the credit institution’s claims and obligations would be limited to the net sum, as described in (i), under:

  • — the law of the jurisdiction in which the counterparty is incorporated and, if a foreign branch of an undertaking is involved, also under the law of the jurisdiction in which the branch is located,

  • — the law that governs the individual transactions included, and

  • — the law that governs any contract or agreement necessary to effect the contractual netting;

  • (iii) a credit institution must have procedures in place to ensure that the legal validity of its contractual netting is kept under review in the light of possible changes in the relevant laws.

The competent authorities must be satisfied, if necessary after consulting the other competent authorities concerned, that the contractual netting is legally valid under the law of each of the relevant jurisdictions. If any of the competent authorities is not satisfied in that respect, the contractual netting agreement will not be recognized as risk-reducing for either of the counterparties.

The competent authorities may accept reasoned legal opinions drawn up by types of contractual netting.

No contract containing a provision which permits a non-defaulting counterparty to make limited payments only, or no payments at all, to the estate of the defaulter, even if the defaulter is a net creditor (a “walkaway” clause), may be recognized as risk-reducing.

(c) Effects of recognition

(i) Contracts for novation

The single net amounts fixed by contracts for novation, rather than the gross amounts involved, may be weighted. Thus, in the application of Method 1, in

— Step (a): the current replacement cost, and in

— Step (b): the notional principal amounts or underlying values

may be obtained taking account of the contract for novation. In the application of Method 2, in Step (a) the notional principal amount may be calculated taking account of the contract for novation; the percentages of Table 2 must apply.

TABLE 2.
article image

In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original or residual maturity.

  • (ii) Other netting agreements

In the application of Method 1, in Step (a) the current replacement cost for the contracts included in a netting agreement may be obtained by taking account of the current hypothetical net replacement cost which results from the agreement. In Step (b) the single net amounts may be taken into account only for forward foreign-exchange contracts and other similar contracts, in which notional principal is equivalent to cash flows, in cases where the amounts to be claimed or delivered fall due on the same value date and in the same currency.

In the application of Method 2, in Step (a)

  • — for forward foreign-exchange contracts and other similar contracts, in which notional principal is equivalent to cash flows, in cases where the amounts to be claimed or delivered fall due on the same value date and in the same currency, the notional principal amount may be calculated taking account of the netting agreement; to all these contracts Table 2 must apply,

  • — for all other contracts included in a netting agreement, the percentages applicable may be reduced as indicated in Table 3:

TABLE 3.
article image

In the case of interest-rate contracts, credit institutions may, subject to the consent of their competent authorities, choose either original or residual maturity.

Appendix V U. S. Legislation

Appendix V 1 The Right to Financial Privacy Act1

[Excerpts]2

Section 3402. Access to financial records by Government authorities prohibited; exceptions

Except as provided by section 3403(c) or (d), 3413, or 3414 of this title, no Government authority may have access to or obtain copies of, or the information contained in the financial records of any customer from a financial institution unless the financial records are reasonably described and—

  • (1) such customer has authorized such disclosure in accordance with section 3404 of this title;

  • (2) such financial records are disclosed in response to an administrative subpena or summons which meets the requirements of section 3405 of this title;

  • (3) such financial records are disclosed in response to a search warrant which meets the requirements of section 3406 of this title;

  • (4) such financial records are disclosed in response to a judicial subpena which meets the requirements of section 3407 of this title; or

  • (5) such financial records are disclosed in response to a formal written request which meets the requirements of section 3408 of this title.

Section 3403. Confidentiality of financial records

(a) Release of records by financial institutions prohibited

No financial institution, or officer, employees, or agent of a financial institution, may provide to any Government authority access to or copies of, or the information contained in, the financial records of any customer except in accordance with the provisions of this chapter.

(b) Release of records upon certification of compliance with chapter

A financial institution shall not release the financial records of a customer until the Government authority seeking such records certifies in writing to the financial institution that it has complied with the applicable provisions of this chapter.

(c) Notification to Government authority of existence of relevant information in records

Nothing in this chapter shall preclude any financial institution, or any officer, employee, or agent of a financial institution, from notifying a Government authority that such institution, or officer, employee, or agent has information which may be relevant to a possible violation of any statute or regulation. Such information may include only the name or other identifying information concerning any individual, corporation, or account involved in and the nature of any suspected illegal activity. Such information may be disclosed notwithstanding any constitution, law, or regulation of any State or political subdivision thereof to the contrary. Any financial institution, or officer, employee, or agent thereof, making a disclosure of information pursuant to this subsection, shall not be liable to the customer under any law or regulation of the United States or any constitution, law, or regulation of any State or political subdivision thereof, for such disclosure or for any failure to notify the customer of such disclosure.

(d) Release of records as incident to perfection of security interest, proving a claim in bankruptcy, collecting a debt, or proessing an application with regard to a Government loan, loan guarantee, etc.

(1) Nothing in this chapter shall preclude a financial institution, as an incident to perfecting a security interest, proving a claim in bankruptcy, or otherwise collecting on a debt owing either to the financial institution itself or in its role as a fiduciary, from providing copies of any financial record to any court or Government authority.

(2) Nothing in this chapter shall preclude a financial institution, as an incident to processing an application for assistance to a customer in the form of a Government loan, loan guaranty, or loan insurance agreement, or as an incident to processing a default on, or administering, a Government guaranteed or insured loan, from initiating contact with an appropriate Government authority for the purpose of providing any financial record necessary to permit such authority to carry out its responsibilities under a loan, loan guaranty, or loan insurance agreement.

Section 3404. Customer authorizations

(a) Statement furnished by customer to financial institution and Government authority; contents

A customer may authorize disclosure under section 3402(1) of this title if he furnishes to the financial institution and to the Government authority seeking to obtain such disclosure a signed and dated statement which—

(1) authorizes such disclosure for a period not in excess of three months;

(2) states that the customer may revoke such authorization at any time before the financial records are disclosed;

(3) identifies the financial records which are authorized to be disclosed;

(4) specifies the purposes for which, and the Government authority to which, such records may be disclosed; and

(5) states the customer’s rights under this chapter.

(b) Authorization as condition of doing business prohibited

No such authorization shall be required as a condition of doing business with any financial institution.

(c) Right of customer to access to financial institution’s record of disclosures

The customer has the right, unless the Government authority obtains a court order as provided in section 3409 of this title, to obtain a copy of the record which the financial institution shall keep of all instances in which the customer’s record is disclosed to a Government authority pursuant to this section, including the identity of the Government authority to which such disclosure is made.

Section 3409. Delayed notice

(a) Application by Government authority; findings

Upon application of the Government authority, the customer notice required under section 3404(c), 3405(2), 3406(c), 3407(2), 3408(4), or 3412(b) of this title may be delayed by order of an appropriate court if the presiding judge or magistrate finds that—

(1) the investigation being conducted is within the lawful jurisdiction of the Government authority seeking the financial records;

(2) there is reason to believe that the records being sought are relevant to a legitimate law enforcement inquiry; and

(3) there is reason to believe that such notice will result in—

  • (A) endangering life or physical safety of any person;

  • (B) flight from prosecution;

  • (C) destruction of or tampering with evidence;

  • (D) intimidation of potential witnesses; or

  • (E) otherwise seriously jeopardizing an investigation or official proceeding or unduly delaying a trial or ongoing official proceeding to the same extent as the circumstances in the preceding subparagraphs.

An application for delay must be made with reasonable specificity.

(b) Grant of delay order; duration and specifications; extensions; copy of request and notice to customer

(1) If the court makes the findings required in paragraphs (1), (2), and (3) of subsection (a) of this section, it shall enter an ex parte order granting the requested delay for a period not to exceed ninety days and an order prohibiting the financial institution from disclosing that records have been obtained or that a request for records has been made, except that, if the records have been sought by a Government authority exercising financial controls over foreign accounts in the United States under section 5(b) of the Trading With the Enemy Act [12 U.S.C. 95a, 50 App. U.S.C. 5(b)], the International Emergency Economic Powers Act (title II, Public Law 95-223) [50 U.S.C. 1701 et seq.], or section 287c of title 22, and the court finds that there is reason to believe that such notice may endanger the lives or physical safety of a customer or group of customers, or any person or group of persons associated with a customer, the court may specify that the delay be indefinite.

(2) Extensions of the delay of notice provided in paragraph (1) of up to ninety days each may be granted by the court upon application, but only in accordance with this subsection.

(3) Upon expiration of the period of delay of notification under paragraph (1) or (2), the customer shall be served with or mailed a copy of the process or request together with the following notice which shall state with reasonable specificity the nature of the law enforcement inquiry:

“Records or information concerning your transactions which are held by the financial institution named in the attached process or request were supplied to or requested by the Government authority named in the process or request on (date). Notification was withheld pursuant to a determination by the (title of court so ordering) under the Right to Financial Privacy Act of 1978 [12 U.S.C. 3401 et seq.] that such notice might (state reason).

The purpose of the investigation or official proceeding was .”.

(c) Notice requirement respecting emergency access to financial records

When access to financial records is obtained pursuant to section 3414(b) of this title (emergency access), the Government authority shall, unless a court has authorized delay of notice pursuant to subsections (a) and (b) of this section, as soon as practicable after such records are obtained serve upon the customer, or mail by registered or certified mail to his last known address, a copy of the request to the financial institution together with the following notice which shall state with reasonable specificity the nature of the law enforcement inquiry:

“Records concerning your transactions held by the financial institution named in the attached request were obtained by (agency or department) under the Right to Financial Privacy Act of 1978 [12 U.S.C. 3401 et seq.] on (date) for the following purpose: Emergency access to such records was obtained on the grounds that (state grounds).”.

(d) Preservation of memorandums, affidavits, or other papers

Any memorandum, affidavit, or other paper filed in connection with a request for delay in notification shall be preserved by the court. Upon petition by the customer to whom such records pertain, the court may order disclosure of such papers to the petitioner unless the court makes the findings required in subsection (a) of this section.

Section 3412. Use of information

(a) Transfer of financial records to other agencies or departments; certification

Financial records originally obtained pursuant to this chapter shall not be transferred to another agency or department unless the transferring agency or department certifies in writing that there is reason to believe that the records are relevant to a legitimate law enforcement inquiry within the jurisdiction of the receiving agency or department.

(b) Mailing of copy of certification and notice to customer

When financial records subject to this chapter are transferred pursuant to subsection (a) of this section, the transferring agency or department shall, within fourteen days, send to the customer a copy of the certification made pursuant to subsection (a) of this section and the following notice, which shall state the nature of the law enforcement inquiry with reasonable specificity: “Copies of, or information contained in, your financial records lawfully in possession of have been furnished to pursuant to the Right of Financial Privacy Act of 1978 [12 U.S.C. 3401 et seq.] for the following purpose: If you believe that this transfer has not been made to further a legitimate law enforcement inquiry, you may have legal rights under the Financial Privacy Act of 1978 or the Privacy Act of 1974 [5 U.S.C. 552a].”

(c) Court-ordered delays in mailing

Notwithstanding subsection (b) of this section, notice to the customer may be delayed if the transferring agency or department has obtained a court order delaying notice pursuant to section 3409(a) and (b) of this title and that order is still in effect, or if the receiving agency or department obtains a court order authorizing a delay in notice pursuant to section 3409(a) and (b) of this title. Upon the expiration of any such period of delay, the transferring agency or department shall serve to the customer the notice specified in subsection (b) of this section and the agency or department that obtained the court order authorizing a delay in notice pursuant to section 3409(a) and (b) of this title shall serve to the customer the notice specified in section 3409(b) of this title.

(d) Exchanges of examination reports by supervisory agencies; transfer of financial records to defend customer action; withholding of information

Nothing in this chapter prohibits any supervisory agency from exchanging examination reports or other information with another supervisory agency. Nothing in this chapter prohibits the transfer of a customer’s financial records needed by counsel for a Government authority to defend an action brought by the customer. Nothing in this chapter shall authorize the withholding of information by any officer or employee of a supervisory agency from a duly authorized committee or sub-committee of the Congress.

(e) Federal Financial Institutions Examination Council supervisory agencies; Securities and Exchange Commission; authorization of exchange of financial records or other information

Notwithstanding section 3401(6) of this title or any other provision of this chapter, the exchange of financial records or other information with respect to a financial institution, holding company, or any subsidiary of a depository institution or holding company, among and between the five member supervisory agencies of the Federal Financial Institutions Examination Council and the Securities and Exchange Commission is permitted.

(f) Transfer to Attorney General

(1) In general

Nothing in this chapter shall apply when financial records obtained by an agency or department of the United States are disclosed or transferred to the Attorney General or the Secretary of the Treasury upon the certification by a supervisory level official of the transferring agency or department that—

  • (A) there is reason to believe that the records may be relevant to a violation of Federal criminal law; and

  • (B) the records were obtained in the exercise of the agency’s or department’s supervisory or regulatory functions.

(2) Limitation on use

Records so transferred shall be used only for criminal investigative or prosecutive purposes, for civil actions under section 1833a of this title, or for forfeiture under sections 981 or 982 of title 18 by the Department of Justice and only for criminal investigative purposes relating to money laundering and other financial crimes by the Department of the Treasury and shall, upon completion of the investigation or prosecution (including any appeal), be returned only to the transferring agency or department. No agency or department so transferring such records shall be deemed to have waived any privilege applicable to those records under law.

Section 3413. Exceptions

(a) Disclosure of financial records not identified with particular customers

Nothing in this chapter prohibits the disclosure of any financial records or information which is not identified with or identifiable as being derived from the financial records of a particular customer.

(b) Disclosure to, or examination by, supervisory agency pursuant to exercise of supervisory, regulatory, or monetary functions with respect to financial institutions, holding companies, subsidiaries, institution-affiliated parties, or other persons

This chapter shall not apply to the examination by or disclosure to any supervisory agency of financial records or information in the exercise of its supervisory, regulatory, or monetary functions, including conservatorship or receivership functions, with respect to any financial institution, holding company, subsidiary of a financial institution or holding company, institution-affiliated party (within the meaning of section 1813(u) of this title) with respect to a financial institution, holding company, or subsidiary, or other person participating in the conduct of the affairs thereof.

(c) Disclosure pursuant to title 26

Nothing in this chapter prohibits the disclosure of financial records in accordance with procedures authorized by title 26.

(d) Disclosure pursuant to Federal statute or rule promulgated thereunder

Nothing in this chapter shall authorize the withholding of financial records or information required to be reported in accordance with any Federal statute or rule promulgated thereunder.

(e) Disclosure pursuant to Federal Rules of Criminal Procedure or comparable rules of other courts

Nothing in this chapter shall apply when financial records are sought by a Government authority under the Federal Rules of Civil or Criminal Procedure or comparable rules of other courts in connection with litigation to which the Government authority and the customer are parties.

(f) Disclosure pursuant to administrative subpoena issued by administrative law judge

Nothing in this chapter shall apply when financial records are sought by a Government authority pursuant to an administrative subpena issued by an administrative law judge in an adjudicatory proceeding subject to section 554 of title 5 and to which the Government authority and the customer are parties.

(g) Disclosure pursuant to legitimate law enforcement inquiry respecting name, address, account number, and type of account of particular customers

The notice requirements of this chapter and sections 3410 and 3412 of this title shall not apply when a Government authority by a means described in section 3402 of this title and for a legitimate law enforcement inquiry is seeking only the name, address, account number, and type of account of any customer or ascertainable group of customers associated (1) with a financial transaction or class of financial transactions, or (2) with a foreign country or subdivision thereof in the case of a Government authority exercising financial controls over foreign accounts in the United States under section 5(b) of the Trading with the Enemy Act [12 U.S.C. 95a, 50 App. U.S.C. 5(b)]; the International Emergency Economic Powers Act (title II, Public Law 95-223) [50 U.S.C. 1701 et seq.]; or section 287c of title 22.

* * * * *

(1) Crimes against financial institutions by insiders

Nothing in this chapter shall apply when any financial institution or supervisory agency provides any financial record of any officer, director, employee, or controlling shareholder (within the meaning of subparagraph (A) or (B) of section 1841(a)(2) of this title or subparagraph (A) or (B) of section 1730a(a)(2) of this title) of such institution, or of any major borrower from such institution who there is reason to believe may be acting in concert with any such officer, director, employee, or controlling shareholder, to the Attorney General of the United States, to a State law enforcement agency, or, in the case of a possible violation of subchapter II of chapter 53 of title 31, to the Secretary of the Treasury if there is reason to believe that such record is relevant to a possible violation by such person of—

(1) any law relating to crimes against financial institutions or supervisory agencies by directors, officers, employees, or controlling shareholders of, or by borrowers from, financial institutions; or

(2) any provision of subchapter II of chapter 53 of title 31 or of section 1956 or 1957 of title 18.

No supervisory agency which transfers any such record under this subsection shall be deemed to have waived any privilege applicable to that record under law.

(m) Disclosure to, or examination by, employees or agents of Board of Governors of Federal Reserve System or Federal Reserve Bank

This chapter shall not apply to the examination by or disclosure to employees or agents of the Board of Governors of the Federal Reserve System or any Federal Reserve Bank of financial records or information in the exercise of the Federal Reserve System’s authority to extend credit to the financial institutions or others.

(n) Disclosure to, or examination by, Resolution Trust Corporation or its employees or agents

This chapter shall not apply to the examination by or disclosure to the Resolution Trust Corporation or its employees or agents of financial records or information in the exercise of its conservatorship, receivership, or liquidation functions with respect to a financial institution.

(o) Disclosure to, or examination by, Federal Housing Finance Board or Federal home loan banks

This chapter shall not apply to the examination by or disclosure to the Federal Housing Finance Board or any of the Federal home loan banks of financial records or information in the exercise of the Federal Housing Finance Board’s authority to extend credit (either directly or through a Federal home loan bank) to financial institutions or others.

Section 3414. Special procedures

(a)(1) Nothing in this chapter (except sections 3415, 3417, 3418, and 3421 of this title) shall apply to the production and disclosure of financial records pursuant to requests from—

  • (A) a Government authority authorized to conduct foreign counter- or foreign positive-intelligence activities for purposes of conducting such activities; or

  • (B) the Secret Service for the purpose of conducting its protective functions (18 U.S.C. 3056; 3 U.S.C. 202, Public Law 90-331, as amended).

(2) In the instances specified in paragraph (1), the Government authority shall submit to the financial institution the certificate required in section 3403(b) of this title signed by a supervisory official of a rank designated by the head of the Government authority.

(3) No financial institution, or officer, employee, or agent of such institution, shall disclose to any person that a Government authority described in paragraph (1) has sought or obtained access to a customer’s financial records.

(4) The Government authority specified in paragraph (1) shall compile an annual tabulation of the occasions in which this section was used.

(5)(A) Financial institutions, and officers, employees, and agents thereof, shall comply with a request for a customer’s or entity’s financial records made pursuant to this subsection by the Federal Bureau of Investigation when the Director of the Federal Bureau of Investigation (or the Director’s designee) certifies in writing to the financial institution that such records are sought for foreign counterintelligence purposes and that there are specific and articulable facts giving reason to believe that the customer or entity whose records are sought is a foreign power or an agent of a foreign power as defined in section 1801 of title 50.

(B) The Federal Bureau of Investigation may disseminate information obtained pursuant to this paragraph only as provided in guidelines approved by the Attorney General for foreign intelligence collection and foreign counterintelligence investigations conducted by the Federal Bureau of Investigation, and, with respect to dissemination to an agency of the United States, only if such information is clearly relevant to the authorized responsibilities of such agency.

(C) On a semiannual basis the Attorney General shall fully inform the Permanent Select Committee on Intelligence of the House of Representatives and the Select Committee on Intelligence of the Senate concerning all requests made pursuant to this paragraph.

(D) No financial institution, or officer, employee, or agent of such institution, shall disclose to any person that the Federal Bureau of Investigation has sought or obtained access to a customer’s or entity’s financial records under this paragraph.

(b)(1) Nothing in this chapter shall prohibit a Government authority from obtaining financial records from a financial institution if the Government authority determines that delay in obtaining access to such records would create imminent danger of—

  • (A) physical injury to any person;

  • (B) serious property damage; or

  • (C) flight to avoid prosecution.

(2) In the instances specified in paragraph (1), the Government shall submit to the financial institution the certificate required in section 3403(b) of this title signed by a supervisory official of a rank designated by the head of the Government authority.

(3) Within five days of obtaining access to financial records under this subsection, the Government authority shall file with the appropriate court a signed, sworn statement of a supervisory official of a rank designated by the head of the Government authority setting forth the grounds for the emergency access. The Government authority shall thereafter comply with the notice provisions of section 3409(c) of this title.

(4) The Government authority specified in paragraph (1) shall compile an annual tabulation of the occasions in which this section was used.

Section 3417. Civil penalties

(a) Liability of agencies or departments of United States or financial institutions

Any agency or department of the United States or financial institution obtaining or disclosing financial records or information contained there in in violation of this chapter is liable to the customer to whom such records relate in an amount equal to the sum of—

(1) $100 without regard to the volume of records involved;

(2) any actual damages sustained by the customer as a result of the disclosure;

(3) such punitive damages as the court may allow, where the violation is found to have been willful or intentional; and

(4) in the case of any successful action to enforce liability under this section, the costs of the action together with reasonable attorney’s fees as determined by the court.

(b) Disciplinary action for willful or intentional violation of chapter by agents or employees of department or agency

Whenever the court determines that any agency or department of the United States has violated any provision of this chapter and the court finds that the circumstances surrounding the violation raise questions of whether an officer or employee of the department or agency acted willfully or intentionally with respect to the violation, the Director of the Office of Personnel Management shall promptly initiate a proceeding to determine whether disciplinary action is warranted against the agent or employee who was primarily responsible for the violation. The Director after investigation and consideration of the evidence submitted, shall submit his findings and recommendations to the administrative authority of the agency concerned and shall send copies of the findings and recommendations to the officer or employee or his representative. The administrative authority shall take the corrective action that the Director recommends.

(c) Good faith defense

Any financial institution or agent or employee thereof making a disclosure of financial records pursuant to this chapter in good-faith reliance upon a certificate by any Government authority or pursuant to the provisions of section 3413(1) of this title shall not be liable to the customer for such disclosure under this chapter, the constitution of any State, or any law or regulation of any State or any political subdivision of any State.

(d) Exclusive judicial remedies and sanctions

The remedies and sanctions described in this chapter shall be the only authorized judicial remedies and sanctions for violations of this chapter.

Appendix V 2 U.S. Regulations on Financial Record Keeping and Reporting of Currency and Foreign Transactions [Excerpts]1

Section 103.21 Reports by banks of suspicious transactions.

(a) General. (1) Every bank shall file with the Treasury Department, to the extent and in the manner required by this section, a report of any suspicious transaction relevant to a possible violation of law or regulation. A bank may also file with the Treasury Department by using the Suspicious Activity Report specified in paragraph (b)(l) of this section or otherwise, a report of any suspicious transaction that it believes is relevant to the possible violation of any law or regulation but whose reporting is not required by this section.

(2) A transaction requires reporting under the terms of this section if it is conducted or attempted by, at, or through the bank, it involves or aggregates at least $5,000 in funds or other assets, and the bank knows, suspects, or has reason to suspect that:

(i) The transaction involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation;

(ii) The transaction is designed to evade any requirements of this part or of any other regulations promulgated under the Bank Secrecy Act, Pub. L. 91-508, as amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5330; or

(iii) The transaction has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the bank knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.

(b) Filing procedures. (1) What to file. A suspicious transaction shall be reported by completing a Suspicious Activity Report (“SAR”), and collecting and maintaining supporting documentation as required by paragraph (d) of this section.

(2) Where to file. The SAR shall be filed with FinCEN in a central location, to be determined by FinCEN, as indicated in the instructions to the SAR.

(3) When to file. A bank is required to file a SAR no later than 30 calendar days after the date of initial detection by the bank of facts that may constitute a basis for filing a SAR. If no suspect was identified on the date of the detection of the incident requiring the filing, a bank may delay filing a SAR for an additional 30 calendar days to identify a suspect. In no case shall reporting be delayed more than 60 calendar days after the date of initial detection of a reportable transaction. In situations involving violations that require immediate attention, such as, for example, ongoing money laundering schemes, the bank shall immediately notify, by telephone, an appropriate law enforcement authority in addition to filing timely a SAR.

(c) Exceptions. A bank is not required to file a SAR for a robbery or burglary committed or attempted that is reported to appropriate law enforcement authorities, or for lost, missing, counterfeit, or stolen securities with respect to which the bank files a report pursuant to the reporting requirements of 17 CFR 240.17f-1.

(d) Retention of records. A bank shall maintain a copy of any SAR filed and the original or business record equivalent of any supporting documentation for a period of five years from the date of filing the SAR. Supporting documentation shall be identified, and maintained by the bank as such, and shall be deemed to have been filed with the SAR. A bank shall make all supporting documentation available to FinCEN and any appropriate law enforcement agencies or bank supervisory agencies upon request.

(e) Confidentiality of reports; limitation of liability. No bank or other financial institution, and no director, officer, employee, or agent of any bank or other financial institution, who reports a suspicious transaction under this part, may notify any person involved in the transaction that the transaction has been reported. Thus, any person subpoenaed or otherwise requested to disclose a SAR or the information contained in a SAR, except where such disclosure is requested by FinCEN or an appropriate law enforcement or bank supervisory agency, shall decline to produce the SAR or to provide any information that would disclose that a SAR has been prepared or filed, citing this paragraph (e) and 31 U.S.C. 5318(g)(2), and shall notify FinCEN of any such request and its response thereto. A bank, and any director, officer, employee, or agent of such bank, that makes a report pursuant to this section (whether such report is required by this section or is made voluntarily) shall be protected from liability for any disclosure contained in, or for failure to disclose the fact of such report, or both, to the full extent provided by 31 U.S.C. 5318(g)(3).

(f) Compliance. Compliance with this section shall be audited by the Department of the Treasury, through FinCEN or its delegees under the terms of the Bank Secrecy Act. Failure to satisfy the requirements of this section may be a violation of the reporting rules of the Bank Secrecy Act and of this part. Such failure may also violate provisions of Title 12 of the Code of Federal Regulations.

Section 103.22 Reports of currency transactions.

(a)(1) Each financial institution other than a casino or the Postal Service shall file a report of each deposit, withdrawal, exchange of currency or other payment or transfer, by, through, or to such financial institution which involves a transaction in currency of more than $10,000. Transactions in currency by exempt persons with banks occurring after April 30, 1996, are not subject to this requirement to the extent provided in paragraph (h) of this section. Multiple currency transactions shall be treated as a single transaction if the financial institution has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day. Deposits made at night or over a weekend or holiday shall be treated as if received on the next business day following the deposit.

(2) Each casino shall file a report of each transaction in currency, involving either cash in or cash out, of more than $10,000.

(i) Transactions in currency involving cash in include, but are not limited to:

  • (A) Purchases of chips, tokens, and plaques;

  • (B) Front money deposits;

  • (C) Safekeeping deposits;

  • (D) Payments on any form of credit, including markers and counter checks;

  • (E) Bets of currency;

  • (F) Currency received by a casino for transmittal of funds through wire transfer for a customer;

  • (G) Purchases of a casino’s check; and

  • (H) Exchanges of currency for currency, including foreign currency.

(ii) Transactions in currency involving cash out include, but are not limited to:

  • (A) Redemptions of chips, tokens, and plaques;

  • (B) Front money withdrawals;

  • (C) Safekeeping withdrawals;

  • (D) Advances on any form of credit, including markers and counter checks;

  • (E) Payments on bets, including slot jackpots;

  • (F) Payments by a casino to a customer based on receipt of funds through wire transfer for credit to a customer;

  • (G) Cashing of checks or other negotiable instruments;

  • (H) Exchanges of currency for currency, including foreign currency; and

  • (I) Reimbursements for customers’ travel and entertainment expenses by the casino.

(iii) Multiple currency transactions shall be treated as a single transaction if the casino has knowledge that they are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any gaming day. For purposes of this paragraph (a)(2), a casino shall be deemed to have the knowledge described in the preceding sentence, if: any sole proprietor, partner, officer, director, or employee of the casino, acting within the scope of his or her employment, has knowledge that such multiple currency transactions have occurred, including knowledge from examining the books, records, logs, information retained on magnetic disk, tape or other machine-readable media, or in any manual system, and similar documents and information, which the casino maintains pursuant to any law or regulation or within the ordinary course of its business, and which contain information that such multiple currency transactions have occurred.

(3) The Postal Service shall file a report of each cash purchase of postal money orders in excess of $10,000. Multiple cash purchases totaling more than $10,000 shall be treated as a single transaction if the Postal Service has knowledge that they are by or on behalf of any person during any one day.

(4) A financial institution includes all of its domestic branch offices for the purpose of this paragraph’s reporting requirements.

(b) Except as otherwise directed in writing by the Assistant Secretary (Enforcement) or the Commissioner of Internal Revenue:

(1) This section shall not require reports:

(i) Of transactions with Federal Reserve Banks or Federal Home Loan banks;

(ii) Of transactions between domestic banks; or

(iii) By nonbank financial institutions of transactions with commercial banks (however, commercial banks must report such transactions with nonbank financial institutions).

(2) A bank may exempt from the reporting requirement of paragraph (a) of this section the following:

(i) Deposits or withdrawals of currency from an existing account by an established depositor who is a United States resident and operates a retail type of business in the United States. For the purpose of this subsection, a retail type of business is a business primarily engaged in providing goods to ultimate consumers and for which the business is paid in substantial portions by currency, except that dealerships which buy or sell motor vehicles, vessels, or aircraft are not included and their transactions may not be exempted from the reporting requirements of this section.

(ii) Deposits or withdrawals of currency from an existing account by an established depositor who is a United States resident and operates a sports arena, race track, amusement park, bar, restaurant, hotel, check cashing service licensed by state or local governments, vending machine company, theater, regularly scheduled passenger carrier or any public utility.

(iii) Deposits or withdrawals, exchanges of currency or other payments and transfers by local or state governments, or the United States or any of its agencies or instrumentalities.

(iv) Withdrawals for payroll purposes from an existing account by an established depositor who is a United States resident and operates a firm that regularly withdraws more than $10,000 in order to pay its employees in currency.

(c) In each instance the transactions exempted under paragraph (b) of this section must be in amounts which the bank may reasonably conclude do not exceed amounts commensurate with the customary conduct of the lawful, domestic business of that customer, or in the case of transactions with a local or state government or the United States or any of its agencies or instrumentalities, in amounts which are customary and commensurate with the authorized activities of the agency or instrumentality. This section does not permit a bank to exempt its transactions with nonbank financial institutions (except for check cashing services licensed by state or local governments and the United States Postal Service) nor will additional exemption authority be granted for such transaction (except transactions by other check cashers).

(d) After October 27, 1986, a bank may not place any customer on its exempt list without first preparing a written statement, signed by the customer, describing the customary conduct of the lawful domestic business of that customer and a detailed statement of reasons why such person is qualified for an exemption. The statement shall include the name, address, nature of business, taxpayer identification number, and account number of the customer being exempted. The signature, including the title and position of the person signing, will attest to the accuracy of the information concerning the name, address, nature of business, and tax identification number of the customer. Immediately above the signature line, the following statement shall appear:

“The information contained above is true and correct to the best of my knowledge and belief. I understand that this information will be read and relied upon by the Government.”

The bank shall indicate in this statement whether the exemption covers withdrawals, deposits, or both, as well as the dollar limit of the exemption for both deposits and withdrawals. The bank also shall indicate whether the exemption is limited to certain types of deposits and withdrawals (e.g., withdrawals for payroll purposes). In each instance, the exempted transactions must be in amounts that the bank may reasonably conclude do not exceed amounts commensurate with the customary conduct of the lawful domestic business of that customer. The bank is responsible for independently verifying the activity of the account and determining applicable dollar limits for exempted deposits or withdrawals. The bank must retain each statement that it prepares pursuant to this subparagraph as long as the customer is on the exempt list, and for a period of five years following removal of the customer from the bank’s exempt list.

(e) A bank may apply to the Commissioner of Internal Revenue for additional authority to grant an exemption to the reporting requirement, not otherwise permitted under paragraph (b) of this section, if the bank believes that circumstances warrant such an exemption. Such requests shall be addressed to: Chief, Currency and Banking Reports Branch, Compliance Review Group, IRS Data Center, Post Office Box 32063, Detroit, Michigan 48232, and must be accompanied by a statement of the circumstances that warrant special exemption treatment and a copy of the statement signed by the customer required by paragraph (d) of this section.

(f) A record of each exemption granted under this section and the reason therefor must be kept in a centralized list. The record shall include the names and addresses of all banks referred to in paragraph (b)(1)(ii) of this section, as well as the name, address, business, taxpayer identification number and account number of each depositor that has engaged in currency transactions which have not been reported because of the exemption provided in paragraph (b)(2) of this section. The record concerning the group of depositors exempted under the provisions of paragraph (b)(2) of this section shall also indicate whether the exemption covers withdrawals, deposits, or both, as well as the dollar limit of the exemption.

(g) Upon the request of the Assistant Secretary (Enforcement) or the Commissioner of Internal Revenue, a bank shall provide a report containing the list of the bank’s customers whose transactions have been exempted under this section and such related information as the Assistant Secretary or Commissioner shall require, including copies of the statements required in paragraph (d) of this section. The report must be provided within 15 days of the request. Any exemption may be rescinded at the discretion of the requesting official, who may require the bank to file reports required by paragraph (a) of this section with respect to future transactions of any customer whose transactions previously were exempted.

(h) No filing required by banks for transactions by exempt persons occurring after April 30, 1996—(1) Currency transactions of exempt persons with banks occurring after April 30, 1996. Notwithstanding the provisions of paragraph (a)(1) of this section, no bank is required to file a report otherwise required by paragraph (a)(1) of this section, with respect to any transaction in currency between an exempt person and a bank that is conducted after April 30, 1996.

(2) Exempt person. For purposes of this section, an exempt person is:

(i) A bank, to the extent of such bank’s domestic operations;

(ii) A department or agency of the United States, of any state, or of any political subdivision of any state;

(iii) Any entity established under the laws of the United States, of any state, or of any political subdivision of any state, or under an interstate compact between two or more states, that exercises governmental authority on behalf of the United States or any such state or political subdivision;

(iv) Any corporation whose common stock is listed on the New York Stock Exchange or the American Stock Exchange (except stock listed on the Emerging Company Marketplace of the American Stock Exchange) or whose common stock has been designated as a Nasdaq National Market Security listed on the Nasdaq Stock Market (except stock listed under the separate “Nasdaq Small-Cap Issues” heading); and

(v) Any subsidiary of any corporation described in paragraph (h)(2)(iv) of this section whose federal income tax return is filed as part of a consolidated federal income tax return with such corporation, pursuant to section 1501 of the Internal Revenue Code and the regulations promulgated thereunder, for the calendar year 1995 or for its last fiscal year ending before April 15, 1996.

(3) Designation of exempt persons. (i) A bank must designate each exempt person with whom it engages in transactions in currency, on or before the later of August 15, 1996, and the date 30 days following the first transaction in currency between such bank and such exempt person that occurs after April 30, 1996.

(ii) Designation of an exempt person shall be made by a single filing of Internal Revenue Service Form 4789, in which line 36 is marked “Designation of Exempt Person” and items 2-14 (Part I, Section A) and items 37–49 (Part III) are completed. The designation must be made separately by each bank that treats the person in question as an exempt person. (For availability, see 26 CFR 601.602.)

(iii) This designation requirement applies whether or not the particular exempt person to be designated has previously been treated as exempt from the reporting requirements of paragraph (a) of this section under the rules contained in paragraph (b) or (e) of this section.

(4) Operating rules for designating exempt persons. (i) Subject to the specific rules of this paragraph (h), a bank must take such steps to assure itself that a person is an exempt person (within the meaning of applicable provisions of paragraph (h)(2) of this section) that a reasonable and prudent bank would take to protect itself from loan or other fraud or loss based on misidentification of a person’s status.

(ii) A bank may treat a person as a governmental department, agency, or entity if the name of such person reasonably indicates that it is described in paragraph (h)(2)(ii) or (h)(2)(iii) of this section, or if such person is known generally in the community to be a State, the District of Columbia, a tribal government, a Territory or Insular Possession of the United States, or a political subdivision or a wholly-owned agency or instrumentality of any of the foregoing. An entity generally exercises governmental authority on behalf of the United States, a State, or a political subdivision, for purposes of paragraph (h)(2)(iii) of this section, only if its authorities include one or more of the powers to tax, to exercise the authority of eminent domain, or to exercise police powers with respect to matters within its jurisdiction.

(iii) In determining whether a person is described in paragraph (h)(2)(iv) of this section, a bank may rely on any New York Stock Exchange, American Stock Exchange, or Nasdaq Stock Market listing published in a newspaper of general circulation and on any commonly accepted or published stock symbol guide.

(iv) In determining whether a person is described in paragraph (h)(2)(v) of this section, a bank may rely upon any reasonably authenticated corporate officer’s certificate or any reasonably authenticated photocopy of Internal Revenue Service Form 851 (Affiliation Schedule) or the equivalent thereof for the appropriate tax year.

(5) Limitation on exemption. A transaction carried out by an exempt person as an agent for another person who is the beneficial owner of the funds that are the subject of a transaction in currency is not subject to the exemption from reporting contained in paragraph (h)(1) of this section.

(6) Effect of exemption; limitation on liability. (i) FinCEN may in the future determine by amendment to this part that the exemption contained in this paragraph (h) shall be the only basis for exempting persons described in paragraph (h)(2) of this section from the reporting requirements of paragraph (a) of this section.

(ii) No bank shall be subject to penalty under this part for failure to file a report required by paragraph (a) of this section with respect to a currency transaction by an exempt person with respect to which the requirements of this paragraph (h) have been satisfied, unless the bank:

(A) Knowingly files false or incomplete information with respect to the transaction or the customer engaging in the transaction; or

(B) Has reason to believe at the time the exemption is granted that the customer does not meet the criteria established by this paragraph (h) for treatment of the transactor as an exempt person or that the transaction is not a transaction of the exempt person.

(iii) A bank that files a report with respect to a currency transaction by an exempt person rather than treating such person as exempt shall remain subject with respect to each such report to the rules for filing reports, and the penalties for filing false or incomplete reports, that are applicable to reporting of transactions in currency by persons other than exempt persons. A bank that continues for the period permitted by paragraph (h)(6)(i) of this section to treat a person described in paragraph (h)(2) of this section as exempt from the reporting requirements of paragraph (a) of this section on a basis other than as provided in this paragraph (h) shall remain subject in full to the rules governing an exemption on such other basis and to the penalties for failing to comply with the rules governing such other exemption.

(7) Obligation to file suspicious activity reports, etc. Nothing in this paragraph (h) relieves a bank of the obligation, or alters in any way such bank’s obligation, to file a report required by § 103.21 with respect to any transaction, including, without limitation, any transaction in currency, or relieves a bank of any other reporting or recordkeeping obligation imposed by this part (except the obligation to report transactions in currency pursuant to paragraph (a) of this section to the extent provided in this paragraph (h)).

(8) Revocation. The status of any person as an exempt person under this paragraph (h) may be revoked by FinCEN by written notice, which may be provided by publication in the Federal Register in appropriate situations, on such terms as are specified in such notice. In addition, and without any action on the part of the Treasury Department:

(i) The status of a corporation as an exempt person pursuant to paragraph (h)(2)(iv) of this section ceases once such corporation ceases to be listed on the applicable stock exchange; and

(ii) The status of a subsidiary as an exempt person under paragraph (h)(2)(v) of this section ceases once such subsidiary ceases to be included in a consolidated federal income tax return of a person described in paragraph (h)(2)(iv) of this section.

Section 103.23 Reports of transportation of currency or monetary instruments.

(a) Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped, or attempts to physically transport, mail or ship, or attempts to cause to be physically transported, mailed or shipped, currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time from the United States to any place outside the United States, or into the United States from any place outside the United States, shall make a report thereof. A person is deemed to have caused such transportation, mailing or shipping when he aids, abets, counsels, commands, procures, or requests it to be done by a financial institution or any other person.

(b) Each person who receives in the U.S. currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time which have been transported, mailed, or shipped to such person from any place outside the United States with respect to which a report has not been filed under paragraph (a) of this section, whether or not required to be filed thereunder, shall make a report there of, stating the amount, the date of receipt, the form of monetary instruments, and the person from whom received.

(c) This section shall not require reports by:

(1) A Federal Reserve;

(2) A bank, a foreign bank, or a broker or dealer in securities, in respect to currency or other monetary instruments mailed or shipped through the postal service or by common carrier;

(3) A commercial bank or trust company organized under the laws of any State or of the United States with respect to overland shipments of currency or monetary instruments shipped to or received from an established customer maintaining a deposit relationship with the bank, in amounts which the bank may reasonably conclude do not exceed amounts commensurate with the customary conduct of the business, industry or profession of the customer concerned;

(4) A person who is not a citizen or resident of the United States in respect to currency or other monetary instruments mailed or shipped from abroad to a bank or broker or dealer in securities through the postal service or by common carrier;

(5) A common carrier of passengers in respect to currency or other monetary instruments in the possession of its passengers;

(6) A common carrier of goods in respect to shipments of currency or monetary instruments not declared to be such by the shipper;

(7) A travelers’ check issuer or its agent in respect to the transportation of travelers’ checks prior to their delivery to selling agents for eventual sale to the public;

(8) By a person with respect to a restrictively endorsed traveler’s check that is in the collection and reconciliation process after the traveler’s check has been negotiated;

(9) Nor by a person engaged as a business in the transportation of currency, monetary instruments and other commercial papers with respect to the transportation of currency or other monetary instruments overland between established offices of banks or brokers or dealers in securities and foreign persons.

(d) A transfer of funds through normal banking procedures which does not involve the physical transportation of currency or monetary instruments is not required to be reported by this section. This section does not require that more than one report be filed covering a particular transportation, mailing or shipping of currency or other monetary instruments with respect to which a complete and truthful report has been filed by a person. However, no person required by paragraph (a) or (b) of this section to file a report shall be excused from liability for failure to do so if, in fact, a complete and truthful report has not been filed.

* * * * *

Section 103.33 Records to be made and retained by financial institutions.

Each financial institution shall retain either the original or a microfilm or other copy or reproduction of each of the following:

(a) A record of each extension of credit in an amount in excess of $10,000, except an extension of credit secured by an interest in real property, which record shall contain the name and address of the person to whom the extension of credit is made, the amount thereof, the nature or purpose thereof, and the date thereof;

(b) A record of each advice, request, or instruction received or given regarding any transaction resulting (or intended to result and later canceled if such a record is normally made) in the transfer of currency or other monetary instruments, funds, checks, investment securities, or credit, of more than $10,000 to or from any person, account, or place outside the United States.

(c) A record of each advice, request, or instruction given to another financial institution or other person located within or without the United States, regarding a transaction intended to result in the transfer of funds, or of currency, other monetary instruments, checks, investment securities, or credit, of more than $10,000 to a person, account or place outside the United States.

(d) A record of such information for such period of time as the Secretary may require in an order issued under Section 103.26(a), not to exceed five years.

(e) Banks. Each agent, agency, branch, or office located within the United States of a bank is subject to the requirements of this paragraph (e) with respect to a funds transfer in the amount of $3,000 or more:

(1) Recordkeeping requirements. (i) For each payment order that it accepts as an originator’s bank, a bank shall obtain and retain either the original or a microfilm, other copy, or electronic record of the following information relating to the payment order:

  • (A) The name and address of the originator;

  • (B) The amount of the payment order;

  • (C) The execution date of the payment order;

  • (D) Any payment instructions received from the originator with the payment order;

  • (E) The identity of the beneficiary’s bank; and

  • (F) As many of the following items as are received with the payment order:2

    • (1) The name and address of the beneficiary;

    • (2) The account number of the beneficiary; and

    • (3) Any other specific identifier of the beneficiary.

(ii) For each payment order that it accepts as an intermediary bank, a bank shall retain either the original or a microfilm, other copy, or electronic record of the payment order.

(iii) For each payment order that it accepts as a beneficiary’s bank, a bank shall retain either the original or a microfilm, other copy, or electronic record of the payment order.

(2) Originators other than established customers. In the case of a payment order from an originator that is not an established customer, in addition to obtaining and retaining the information required in paragraph (e)(1)(i) of this section:

(i) If the payment order is made in person, prior to acceptance the originator’s bank shall verify the identity of the person placing the payment order. If it accepts the payment order, the originator’s bank shall obtain and retain a record of the name and address, the type of identification reviewed, the number of the identification document (e.g., driver’s license), as well as a record of the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof. If the originator’s bank has knowledge that the person placing the payment order is not the originator, the originator’s bank shall obtain and retain a record of the originator’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person placing the order, or a notation in the record of the lack thereof.

(ii) If the payment order accepted by the originator’s bank is not made in person, the originator’s bank shall obtain and retain a record of name and address of the person placing the payment order, as well as the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof, and a copy or record of the method of payment (e.g., check or credit card transaction) for the funds transfer. If the originator’s bank has knowledge that the person placing the payment order is not the originator, the originator’s bank shall obtain and retain a record of the originator’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person placing the order, or a notation in the record of the lack thereof.

(3) Beneficiaries other than established customers. For each payment order that it accepts as a beneficiary’s bank for a beneficiary that is not an established customer, in addition to obtaining and retaining the information required in paragraph (e)(1)(iii) of this section:

(i) if the proceeds are delivered in person to the beneficiary or its representative or agent, the beneficiary’s bank shall verify the identity of the person receiving the proceeds and shall obtain and retain a record of the name and address, the type of identification reviewed, and the number of the identification document (e.g., driver’s license), as well as a record of the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof. If the beneficiary’s bank has knowledge that the person receiving the proceeds is not the beneficiary, the beneficiary’s bank shall obtain and retain a record of the beneficiary’s name and address, as well as the beneficiary’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person receiving the proceeds, or a notation in the record of the lack thereof.

(ii) if the proceeds are delivered other than in person, the beneficiary’s bank shall retain a copy of the check or other instrument used to effect payment, or the information contained thereon, as well as the name and address of the person to which it was sent.

(4) Retrievability. The information that an originator’s bank must retain under paragraphs (e)(1)(i) and (e)(2) of this section shall be retrievable by the originator’s bank by reference to the name of the originator. If the originator is an established customer of the originator’s bank and has an account used for funds transfers, then the information also shall be retrievable by account number. The information that a beneficiary’s bank must retain under paragraphs (e)(1)(iii) and (e)(3) of this section shall be retrievable by the beneficiary’s bank by reference to the name of the beneficiary. If the beneficiary is an established customer of the beneficiary’s bank and has an account used for funds transfers, then the information also shall be retrievable by account number. This information need not be retained in any particular manner, so long as the bank is able to retrieve the information required by this paragraph, either by accessing funds transfer records directly or through reference to some other record maintained by the bank.

(5) Verification. Where verification is required under paragraphs (e)(2) and (e)(3) of this section, a bank shall verify a person’s identity by examination of a document (other than a bank signature card), preferably one that contains the person’s name, address, and photograph, that is normally acceptable by financial institutions as a means of identification when cashing checks for persons other than established customers. Verification of the identity of an individual who indicates that he or she is an alien or is not a resident of the United States may be made by passport, alien identification card, or other official document evidencing nationality or residence (e.g., a foreign driver’s license with indication of home address).

(6) Exceptions. The following funds transfers are not subject to the requirements of this section:

  • (i) Funds transfers where the originator and beneficiary are any of the following:

  • (A) A bank;

  • (B) A wholly-owned domestic subsidiary of a bank chartered in the United States;

  • (C) A broker or dealer in securities;

  • (D) A wholly-owned domestic subsidiary of a broker or dealer in securities;

  • (E) The United States;

  • (F) A state or local government; or

  • (G) A federal, state or local government agency or instrumentality; and

(ii) Funds transfers where both the originator and the beneficiary are the same person and the originator’s bank and the beneficiary’s bank are the same bank.

(f) Nonbank financial institutions. Each agent, agency, branch, or office located within the United States of a financial institution other than a bank is subject to the requirements of this paragraph (f) with respect to a transmittal of funds in the amount of $3,000 or more:

(1) Recordkeeping requirements. (i) For each transmittal order that it accepts as a transmitter’s financial institution, a financial institution shall obtain and retain either the original or a microfilm, other copy, or electronic record of the following information relating to the transmittal order:

  • (A) The name and address of the transmittor;

  • (B) The amount of the transmittal order;

  • (C) The execution date of the transmittal order;

  • (D) Any payment instructions received from the transmittor with the transmittal order;

  • (E) The identity of the recipient’s financial institution;

  • (F) As many of the following items as are received with the transmittal order:3

    • (1) The name and address of the recipient;

    • (2) The account number of the recipient; and

    • (3) Any other specific identifier of the recipient; and

  • (G) Any form relating to the transmittal of funds that is completed or signed by the person placing the transmittal order.

(ii) For each transmittal order that it accepts as an intermediary financial institution, a financial institution shall retain either the original or a microfilm, other copy, or electronic record of the transmittal order.

(iii) For each transmittal order that it accepts as a recipient’s financial institution, a financial institution shall retain either the original or a microfilm, other copy, or electronic record of the transmittal order.

(2) Transmittors other than established customers. In the case of a transmittal order from a transmittor that is not an established customer, in addition to obtaining and retaining the information required in paragraph (f)(1)(i) of this section:

(i) If the transmittal order is made in person, prior to acceptance the transmittor’s financial institution shall verify the identity of the person placing the transmittal order. If it accepts the transmittal order, the transmittor’s financial institution shall obtain and retain a record of the name and address, the type of identification reviewed, and the number of the identification document (e.g., driver’s license), as well as a record of the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof. If the transmittor’s financial institution has knowledge that the person placing the transmittal order is not the transmittor, the transmittor’s financial institution shall obtain and retain a record of the transmittor’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person placing the order, or a notation in the record of the lack thereof.

(ii) If the transmittal order accepted by the transmittor’s financial institution is not made in person, the transmittor’s financial institution shall obtain and retain a record of the name and address of the person placing the transmittal order, as well as the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof, and a copy or record of the method of payment (e.g., check or credit card transaction) for the transmittal of funds. If the transmittor’s financial institution has knowledge that the person placing the transmittal order is not the transmittor, the transmittor’s financial institution shall obtain and retain a record of the transmittor’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person placing the order, or a notation in the record the lack thereof.

(3) Recipients other than established customers. For each transmittal order that it accepts as a recipient’s financial institution for a recipient that is not an established customer, in addition to obtaining and retaining the information required in paragraph (f)(1)(iii) of this section:

(i) If the proceeds are delivered in person to the recipient or its representative or agent, the recipient’s financial institution shall verify the identity of the person receiving the proceeds and shall obtain and retain a record of the name and address, the type of identification reviewed, and the number of the identification document (e.g., driver’s license), as well as a record of the person’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, or a notation in the record of the lack thereof. If the recipient’s financial institution has knowledge that the person receiving the proceeds is not the recipient, the recipient’s financial institution shall obtain and retain a record of the recipient’s name and address, as well as the recipient’s taxpayer identification number (e.g., social security or employer identification number) or, if none, alien identification number or passport number and country of issuance, if known by the person receiving the proceeds, or a notation in the record of the lack thereof.

(ii) If the proceeds are delivered other than in person, the recipient’s financial institution shall retain a copy of the check or other instrument used to effect payment, or the information contained thereon, as well as the name and address of the person to which it was sent.

(4) Retrievability. The information that a transmittor’s financial institution must retain under paragraphs (f)(1)(i) and (f)(2) of this section shall be retrievable by the transmittor’s financial institution by reference to the name of the transmittor. If the transmittor is an established customer of the transmittor’s financial institution and has an account used for transmittals of funds, then the information also shall be retrievable by account number. The information that a recipient’s financial institution must retain under paragraphs (f)(1)(iii) and (f)(3) of this section shall be retrievable by the recipient’s financial institution by reference to the name of the recipient. If the recipient is an established customer of the recipient’s financial institution and has an account used for transmittals of funds, then the information also shall be retrievable by account number. This information need not be retained in any particular manner, so long as the financial institution is able to retrieve the information required by this paragraph, either by accessing transmittal of funds records directly or through reference to some other record maintained by the financial institution.

(5) Verification. Where verification is required under paragraphs (f)(2) and (f)(3) of this section, a financial institution shall verify a person’s identity by examination of a document (other than a customer signature card), preferably one that contains the person’s name, address, and photograph, that is normally acceptable by financial institutions as a means of identification when cashing checks for persons other than established customers. Verification of the identity of an individual who indicates that he or she is an alien or is not a resident of the United States may be made by passport, alien identification card, or other official document evidencing nationality or residence (e.g., a foreign driver’s license with indication of home address).

(6) Exceptions. The following transmittals of funds are not subject to the requirements of this section:

(i) Transmittals of funds where the transmittor and the recipient are any of the following:

  • (A) A bank;

  • (B) A wholly-owned domestic subsidiary of a bank chartered in the United States;

  • (C) A broker or dealer in securities;

  • (D) A wholly-owned domestic subsidiary of a broker or dealer in securities;

  • (E) The United States;

  • (F) A state or local government; or

  • (G) A federal, state or local government agency or instrumentality; and

(ii) Transmittals of funds where both the transmittor and the recipient are the same person and the transmittor’s financial institution and the recipient’s financial institution are the same broker or dealer in securities.

(g) Any transmittor’s financial institution or intermediary financial institution located within the United States shall include in any transmittal order for a transmittal of funds in the amount of $3,000 or more, information as required in this paragraph (g):

(1) A transmittor’s financial institution shall include in a transmittal order, at the time it is sent to a receiving financial institution, the following information:

(i) The name and, if the payment is ordered from an account, the account number of the transmittor;

(ii) The address of the transmittor, except for a transmittal order through Fedwire until such time as the bank that sends the order to the Federal Reserve Bank completes its conversion to the expanded Fedwire format;

(iii) The amount of the transmittal order;

(iv) The execution date of the transmittal order;

(v) The identity of the recipient’s financial institution;

(vi) As many of the following items as are received with the transmittal order:4

  • (A) The name and address of the recipient;

  • (B) The account number of the recipient;

  • (C) Any other specific identifier of the recipient; and

(vii) Either the name and address or numerical identifier of the transmittor’s financial institution.

(2) A receiving financial institution that acts as an intermediary financial institution, if it accepts a transmittal order, shall include in a corresponding transmittal order at the time it is sent to the next receiving financial institution, the following information, if received from the sender:

(i) The name and the account number of the transmittor;

(ii) The address of the transmittor, except for a transmittal order through Fedwire until such time as the bank that sends the order to the Federal Reserve Bank completes its conversion to the expanded Fedwire format;

(iii) The amount of the transmittal order;

(iv) The execution date of the transmittal order;

(v) The identity of the recipient’s financial institution;

(vi) As many of the following items as are received with the transmittal order:5

  • (A) The name and address of the recipient;

  • (B) The account number of the recipient;

  • (C) Any other specific identifier of the recipient; and

(vii) Either the name and address or numerical identifier of the transmittor’s financial institution.

(3) Safe harbor for transmittals of funds prior to conversion to the expanded Fedwire message format. The following provisions apply to transmittals of funds effected through the Federal Reserve’s Fedwire funds transfer system or otherwise by a financial institution before the bank that sends the order to the Federal Reserve Bank or otherwise completes its conversion to the expanded Fedwire message format.

(i) Transmittor’s financial institution. A transmittor’s financial institution will be deemed to be in compliance with the provisions of paragraph (g)(1) of this section if it:

  • (A) Includes in the transmittal order, at the time it is sent to the receiving financial institution, the information specified in paragraphs (g)(1)(iii) through (v), and the information specified in paragraph (g)(1)(vi) of this section to the extent that such information has been received by the financial institution, and

  • (B) Provides the information specified in paragraphs (g)(1)(i), (ii) and (vii) of this section to a financial institution that acted as an intermediary financial institution or recipient’s financial institution in connection with the transmittal order, within a reasonable time after any such financial institution makes a request therefor in connection with the requesting financial institution’s receipt of a lawful request for such information from a federal, state, or local law enforcement or financial regulatory agency, or in connection with the requesting financial institution’s own Bank Secrecy Act compliance program.

(ii) Intermediary financial institution. An intermediary financial institution will be deemed to be in compliance with the provisions of paragraph (g)(2) of this section if it:

  • (A) Includes in the transmittal order, at the time it is sent to the receiving financial institution, the information specified in paragraphs (g)(2)(iii) through (g)(2)(vi) of this section, to the extent that such information has been received by the intermediary financial institution; and

  • (B) Provides the information specified in paragraphs (g)(2)(i), (ii) and (vii) of this section, to the extent that such information has been received by the intermediary financial institution, to a financial institution that acted as an intermediary financial institution or recipient’s financial institution in connection with the transmittal order, within a reasonable time after any such financial institution makes a request therefor in connection with the requesting financial institution’s receipt of a lawful request for such information from a federal, state, or local law enforcement or regulatory agency, or in connection with the requesting financial institution’s own Bank Secrecy Act compliance program.

(iii) Obligation of requesting financial institution. Any information requested under paragraph (g)(3)(i)(B) or (g)(3)(ii)(B) of this section shall be treated by the requesting institution, once received, as if it had been included in the transmittal order to which such information relates.

(4) Exceptions. The requirements of this paragraph (g) shall not apply to transmittals of funds that are listed in paragraph (e)(6) or (f)(6) of this section.

* * * * *

Section 103.43 Availability of information.

(a) The Secretary may within his discretion disclose information reported under this part for any reason consistent with the purposes of the Bank Secrecy Act, including those set forth in paragraphs (b) through (d) of this section.

(b) The Secretary may make any information set forth in any report received pursuant to this part available to another agency of the United States, to an agency of a state or local government or to an agency of a foreign government, upon the request of the head of such department or agency made in writing and stating the particular information desired, the criminal, tax or regulatory purpose for which the information is sought, and the official need for the information.

(c) The Secretary may make any information set forth in any report received pursuant to this part available to the Congress, or any committee or subcommittee thereof, upon a written request stating the particular information desired, the criminal, tax or regulatory purpose for which the information is sought, and the official need for the information.

(d) The Secretary may make any information set forth in any report received pursuant to this part available to any other department or agency of the United States that is a member of the Intelligence Community, as defined by Executive Order 12333 or any succeeding executive order, upon the request of the head of such department or agency made in writing and stating the particular information desired, the national security matter with which the information is sought and the official need therefor.

(e) Any information made available under this section to other department or agencies of the United States, any state or local government, or any foreign government shall be received by them in confidence, and shall not be disclosed to any person except for official purposes relating to the investigation, proceeding or matter in connection with which the information is sought.

(f) The Secretary may require that a state or local government department or agency requesting information under paragraph (b) of this section pay fees to reimburse the Department of the Treasury for costs incidental to such disclosure. The amount of such fees will be set in accordance with the statute on fees for government services, 31 U.S.C. 9701.

Notes

Introduction (Effros)

1.

Maastricht Treaty, Article 105.2.

2.

This paper is based in part on the introduction prepared by the author for Payment Systems of the World, R. Effros (ed.) (Oceana: 1994).

3.

Chief among these are the Conventions providing for (i) Uniform Law on Bills of Exchange and Promissory Notes, and (ii) Uniform Law for Cheques set forth with annexes and protocol in League of Nations Treaty Series, Vol. 143 (1933-34). These Conventions are hereinafter called the Geneva Conventions.

4.

E.P. Ellinger, The Giro System and Electronic Transfers of Funds, Lloyd’s Mar. & Com. L.Q. 178 (May 1986). For the most part, these systems have in the past involved the physical movement of paper.

5.

See Robert C. Effros, A Banker’s Primer on the Law of Electronic Funds Transfers, 105 Banking Law Journal 510 (1988) published by Warren Gorham & Lamont, from which certain portions of the following material are drawn.

6.

See generally, Sue Ganske Graziano and Selma Fatma Baharoglu, Automated Teller Machines: Boon or Bane, 91 Com. L.J. 45.1 (1986).

7.

15 U.S.C. § 1601 et seq. (1996).

8.

12 C.F.R. part 226 (1997).

9.

15 U.S.C. § 1643 (a)(1) (1996); 12 C.F.R. § 226.12 (b) (1997).

10.

12 C.F.R. § 226.12 (c)(3)(i) (1997).

11.

12 C.F.R. § 226.13 (1997).

12.

15 U.S.C. § 1642 (1996); 12 C.F.R. § 226.12(a) (1997).

13.

12 C.F.R. § 226.5(b) (1997).

14.

15 U.S.C. §§ 1693-1693r (1996). The implementing regulation is Regulation E, 12 C.F.R. § 205.1 (1997).

15.

15 U.S.C. § 1693i(a) (1996); 12 C.F.R. § 205.5(b) (1997).

16.

15 U.S.C. § 1693c(a); 12 C.F.R. § 205.7(b) (1997).

17.

15 U.S.C. § 1693d(a) (1996); 12 C.F.R. § 205.9 (1997).

18.

15 U.S.C. § 1693d(c) (1996).

19.

12 C.F.R. § 205.10(c) (1997).

20.

15 U.S.C. § 1693(f) (1996); 12 C.F.R. § 205.11 (1997).

21.

See 15 U.S.C. § 1693a(6)(b) (1996); 12 C.F.R. § 205.3(b) (1997).

22.

Commission Recommendation of 8 December 1987 on a European Code relating to Electronic Payment (87/598/EEC), O.J. No. L365/72, 24 December 1987.

23.

Commission Recommendation of 17 November 1988 concerning payment systems and in particular the relationship between cardholder and card issuer (88/590/EEC), O.J. No. L317/55, 24 November 1988.

24.

See generally, R. Cranston, 66 Australian Law Journal 225 (April 1992).

25.

Commission Recommendation of 30 July 1997 concerning transactions by electronic payment instruments and in particular the relationship between issuer and holder (97/489/EC), O.J. No. L208 2/8/1997 P. 0052.

26.

It should be noted that electronic cash can also be stored on individual personal computers.

27.

Report to the Congress on the Application of the Electronic Fund Transfer Act to Electronic Stored-Value Products (March 1997).

28.

See generally, Walter A. Effross, Putting the Cards Before the Purse?: Distinctions, Differences and Dilemmas in the Regulation of Stored Value Card Systems, 65 University of Missouri-Kansas City Law Review 319 (Spring 1997).

29.

General Counsel’s Opinion No. 8; Stored Value Cards and Other Electronic Payment Systems, 61 Fed. Reg. 40,490 (August 2, 1996).

30.

Office of the Comptroller of the Currency [OCC] Bulletin 96-48, Stored Value Systems: Information for Bankers and Examiners (September 1996).

31.

A Commercial Lawyer’s Take on the Electronic Purse; An Analysis of Commercial Law Issues Associated with Stored-Value Cards and Electronic Money, a report of the Task Force on Stored-Value Cards, 52 Business Lawyer 653 (1997).

32.

12 C.F.R. § 210.25 (1997). Operating circulars of the Federal Reserve banks are also relevant.

33.

See 12 C.F.R. § 210.25(b)(1) (1997).

34.

See generally, Carl Felsenfeld, The Compatibility of the UNCITRAL Model Law on International Credit Transfers with Article 4A of the UCC, 60 Fordham Law Review, S53 (1992).

35.

In practice, the beneficiary bank’s liability to its beneficiary is governed by the Federal Reserve Regulation CC, which sets a time when funds must be made available (12 C.F.R. Subsection 229.10-12). UCC Article 4A also provides for the recovery of consequential damages from a receiving bank to the extent that they are expressly provided for in a written agreement (Section 4A-305(c) and (d)). According to the UNCITRAL Model Law, consequential damages may arise under local law if a bank has improperly executed a payment order or failed to execute it either with the specific intent to cause losses or recklessly with the actual knowledge that losses are likely to result (Article 18).

36.

However, it would apparently require only minor amendments to Article I to permit the UNCITRAL Model Law to govern national transfers.

37.

Commission Recommendation of 14 February 1990 on the transparency of banking conditions relating to cross-border financial transactions (90/109/EEC), O.J. No. L067, 15 March 1990 P. 0039.

38.

Amended Proposal for a European Parliament and Council Directive on EU credit transfers, O.J. No. C360, 17 December 1994 P. 0013.

39.

Directive of the European Parliament and of the Council of 27 January 1997 on cross-border credit transfers (97/5/EC), O.J. No. L042.

40.

Id. Art. 1.

41.

Id. Art. 3.

42.

Id. Art. 4.

43.

Id. Art. 6, paragraph 1.

44.

Id. Art. 6, paragraph 2.

45.

Id.

46.

UNCITRAL Model Law On International Credit Transfers, November 25, 1992, 23 UNCITRAL Yearbook 413 (1992), Art. 19(2). The UNCITRAL Model Law is reprinted in 2 Current Legal Issues Affecting Central Banks 312 (Robert C. Effros ed., 1994).

47.

Id. Art. 14.

48.

Id. Art. 16.

49.

Id. Art. 12(5).

50.

Commission Recommendation, supra note 37, Art. 8, paragraph 1.

51.

Id.

52.

Id. Art. 6, paragraph 1.

53.

Id. Art. 6, paragraph 2.

54.

UNCITRAL Model Law, supra note 45, Art. 12.

55.

Federal Deposit Insurance Corporation Improvement Act of 1991, Title IV, Subtitle A, Public Law No. 102-242, 105 Stat. 2236 (1991).

56.

See, e.g., U.C.C. §§ 1-102(3) and 3-310(b).

57.

See, e.g., U.C.C. § 4A-501(a).

58.

Consolidated Payment Cards Act, etc. (Consolidated Act No. 811 of September 12th, 1994).

59.

See J. Mitchell, Electronic Banking and the Consumer, the European Dimension, pp. 16-17, Policy Studies Institute (1988).

60.

Arthur Lenhoff, Contracts of Adhesion and Freedom of Contract, 36 Tul. L. R. 481 (1962), cited in Andrew Burgess, Consumer Adhesion Contracts and Unfair Terms: A Critique of Current Theory and a Suggestion, 15 Anglo-American Law Review at p. 257 (1986).

61.

See generally, Andrew Burgess, Consumer Adhesion Contracts and Unfair Terms: A Critique of Current Theory and a Suggestion, 15 Anglo-American Law Review 255 (1986).

Chapter 1A, “Special Drawing Rights” (Gianviti)

1.

See International Monetary Fund, Articles of Agreement (1993).

2.

International Monetary Fund, By-Laws, Rules and Regulations, Rule O-1 at 48 (51st issue, 1996).

3.

Articles of Agreement, supra note 1, Art. VIII, § 7 and Art. XXII.

4.

See International Monetary Fund, Report of the Executive Board to the Board of Governors on the Proposed Fourth Amendment of the Articles of Agreement of the International Monetary Fund (agreed to on September 19, 1997), reprinted herein as Appendix I(1); see also IMF Executive Board Agrees SDR Allocation Proposal, Press Release No. 97/43 (September 20, 1997).

5.

Articles of Agreement, supra note 1, Art. XXVIII; see International Monetary Fund, IMF Board of Governors Approves SDR Amendment, Press Release No. 97/45 (September 23, 1997).

Chapter 1B, “On Being a Lawyer in the International Monetary Fund” (Holder)

1.

International Monetary Fund, Articles of Agreement (April 1993).

2.

Id. Art. II, § 2.

3.

Agreement Between the United Nations and the International Monetary Fund, November 15, 1947, reprinted in Selected Decisions and Selected Documents of the International Monetary Fund 641 (22nd issue, 1997).

4.

Articles of Agreement, supra note 1, Art. VIII, §§ 2 and 3.

5.

Id. Art. XIV, §§ 1 and 2.

6.

Id. Art. XV, § 1.

7.

On September 23, 1997, the Board of Governors of the Fund adopted a resolution approving a proposal of the Executive Board for amending the Fund’s Articles to allow for a special one-time allocation of SDRs so as to equalize members’ ratios of cumulative allocations to their Ninth Review quotas at approximately 29.32 percent. See International Monetary Fund, Report of the Executive Board to the Board of Governors on the Proposed Fourth Amendment of the Articles of Agreement of the International Monetary Fund (agreed to on September 19, 1997), reprinted herein as Appendix I(1); see also International Monetary Fund, IMF Executive Board Agrees SDR Allocation Proposal, Press Release No. 97/43 (September 20, 1997). In order to enter into force, the amendment will require acceptance by three-fifths of the members of the Fund, having 85 percent of the total voting power. See Articles of Agreement, supra note 1, Art. XXVIII; International Monetary Fund, IMF Board of Governors Approves SDR Amendment, Press Release No. 97/45 (September 23, 1997).

8.

See Articles of Agreement, supra note 1, Art. V, § 2(b).

9.

Id. Art. XIV, § 1.

10.

Id. Art. IX.

11.

United Nations Convention on the Privileges and Immunities of the Specialized Agencies, November 21, 1947, reprinted in Selected Decisions and Selected Documents of the International Monetary Fund, supra note 3, at 606.

12.

See Selected Decisions and Selected Documents of the International Monetary Fund, supra note 3, at 510 et seq.; International Monetary Fund, By-Laws, Rules and Regulations 1-18 (51st issue, 1996) (setting forth the By-Laws).

13.

See Selected Decisions and Selected Documents of the International Monetary Fund, supra note 3, at 1 et seq.; By-Laws, Rules and Regulations, supra note 11, at 19 et seq. (setting forth the Rules and Regulations).

14.

See supra note 10.

15.

Vienna Convention on the Law of Treaties, done in Vienna on May 23, 1969 and entered into force on January 27, 1980, 1155 United Nations Treaty Series 331.

16.

Agreement Between the United Nations and the International Monetary Fund, supra note 3, Art. VIII.

Chapter 2, “The World Bank in the Nineties” (Shihata)

1.

This paper updates the author’s Introduction of his book, Ibrahim F.I. Shihata, The World Bank in a Changing World (vol. 2, 1995).

2.

The World Bank Group of institutions consists of the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), the International Development Association (IDA), the International Centre for Settlement of Investment Disputes (ICSID), and the Multilateral Investment Guarantee Agency (MIGA). In this chapter, the term World Bank or Bank covers both the IBRD and IDA, unless the context indicates that it covers the IBRD only.

3.

The World Bank, Global Economic Prospects and the Developing Countries (1995) (quoted material appears on the back cover).

4.

Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, April 15, 1994, reprinted in The Results of the Uruguay Round of Multilateral Trade Negotiations (1994).

5.

Marrakesh Agreement Establishing the World Trade Organization, in Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations, supra note 4.

6.

The World Bank, 1 World Debt Tables 1996 at 7 (Table 1.1).

7.

Id.

8.

Id.

9.

Id. Developing countries are defined by the Bank for the purpose of the above statistics to include all low- and middle-income economies with a 1994 per capita gross national product of less than $8,956, a definition that applied to 150 countries. Id. at 52.

10.

The World Bank, Annual Financial Report FY1995, SecM95-871, at 4, 6.

11.

Id.; see also The World Bank, Annual Report 1995 at 36.

12.

See The World Bank, 1 Annual Report on Portfolio Performance-FY1995, R95-207, paragraph 1.10 (1995). Bank portfolio is defined in this context to include “(i) all loans with revised closing dates after July 1, 1994 and a positive undisbursed balance at the beginning of the fiscal year, and (ii) all loans approved during FY1995.” Id. Statistical Appendix.

13.

See International Bank for Reconstruction and Development, Articles of Agreement, Art. I (as amended effective Feb. 16, 1989).

14.

Id. Art. III, § 4(ii).

15.

Id. Art. III, § 4(i).

16.

For the circumstances surrounding the creation of MIGA, see generally Ibrahim F.I. Shihata, Multilateral Investment Guarantee Agency and Foreign Investment (1988).

17.

The World Bank, World Development Report 1991 at iii and 1-2.

18.

The World Bank, Advancing Social Development at x (1995) [hereinafter Advancing Social Development].

19.

1 World Debt Tables, supra note 6, at 17 (Table 1.4).

20.

Articles of Agreement, supra note 13, Art. I.

21.

Advancing Social Development, supra note 18, at xi; Annual Report 1995, supra note 11, at 18.

22.

Advancing Social Development, supra note 18, at xi.

23.

Annual Report 1995, supra note 11, at 18.

24.

See id.

25.

Advancing Social Development, supra note 18, at xii.

26.

For details see Shihata, supra note 1, chapter 6 (“The World Bank and Non-Governmental Organizations”); see also Advancing Social Development, supra note 18.

27.

Lawrence H. Summers, Speech at the Overseas Development Council’s Annual Meeting (October 11, 1994).

28.

For a more detailed explanation, see Ibrahim F.I. Shihata, 1 The World Bank in a Changing World 53-96 (“The World Bank and ‘Governance’ Issues in Its Borrowing Members”) (1991).

29.

The World Bank, Sub-Saharan Africa: From Crisis to Sustainable Growth: A Long-Term Perspective Study (1989).

30.

Memorandum regarding Issues of “Governance” in Borrowing Members: The Extent of their Relevance under the Bank’s Articles of Agreement, SecM91-31 (February 5, 1991).

31.

For details, see Shihata, supra note 1, at 553-578; Shihata, supra note 28, at 97-134.

32.

See Shihata, supra note 1, at chapters 1, 5, and 17; Shihata, supra note 28, chapter 4.

33.

See Andrés Rigo, Developments at the International Bank for Reconstruction and Development: The Restructuring of the Global Environment Facility, in 4 Current Legal Issues Affecting Central Banks 29 (Robert C. Effros ed., 1997).

34.

John A. Dixon and Andrew Steer, The World Bank and the Environment: A Fourfold Agenda, in Making Development Sustainable: From Concepts to Action 25, 27 (Ismail Sergeldin and Andrew Steer eds., 1994); Shihata, supra note 1, chapter 5.

35.

1 World Debt Tables 1996, supra note 6, at 30 and 55. Developing countries’ debt stood at $1.5 trillion in 1990. Id. at 31 (Table 2.3). This debt stood at $639 billion in 1980 and $69 billion in 1970. The World Bank, 1 World Debt Tables 1990-91 at 12 (Table 1) (1990); International Bank for Reconstruction and Development, World Debt Tables, Report No. EC-167-72, at 1 (Table 1) (1973). However, the definition of these countries has also changed.

36.

See 1 World Debt Tables 1996, supra note 6, at 33 (Box 2.2).

37.

The International Monetary Fund and the World Bank, Multilateral Debt of the Heavily Indebted Poor Countries 5 (Chart 1) (1995).

38.

Id. at 7. “Heavily indebted poor countries” include 41 countries, of which 32 are defined as “severely indebted low-income countries.” Id. at 1 and 4 (Table 1).

39.

For example, the United Kingdom presented a proposal for a clear exit strategy for the poorest countries with regard to multilateral debt through more concessional resources or greater concessionality, during the 1994 meeting of the Commonwealth Finance Ministers and the Fall 1994 meeting of the Development Committee.

40.

See, e.g., The Commission on Global Governance, Our Global Neighbourhood: The Report of the Commission on Global Governance 201-203, 343 (1995).

41.

See The World Bank, Learning from the Past, Embracing the Future (1994), reprinted in Shihata, supra note 1, Appendix I at 607.

42.

See Bank Procedure (BP) 17.50: Disclosure of Operational Information (1993), reprinted in Shihata, supra note 1, Appendix IV(B) at 721.

43.

For details of this initiative, see Ibrahim F.I. Shihata, The World Bank Inspection Panel (1994). The resolution establishing the panel is reprinted as Appendix III(A) of Shihata, supra note 1, at 647.

44.

See Portfolio Management Task Force, The World Bank, Effective Implementation: Key to Development Impact, R92-195 (November 3, 1992) [hereinafter Wapenhans Report].

45.

See Operations Policy Department, The World Bank, Portfolio Management: Next Steps, A Program of Action (July 22, 1993), summarized in The World Bank, Getting Results: The World Bank’s Agenda for Improving Development Effectiveness (1993).

46.

Other important recommendations of the Wapenhans Report, supra note 44, which have since been implemented, include introducing the concept of “country portfolio performance management,” allowing for country portfolio restructuring (including the reallocation of undisbursed loan balances), improving the quality of projects entering the portfolio, enhancing supervision during implementation and evaluation after project completion, making the country portfolio the unit of managerial accountability, strengthening the financial accountability system, and ensuring continuous emphasis on portfolio performance management through various measures. See id.

47.

See Development Committee, Task Force on Multilateral Development Banks, Serving a Changing World (March 15, 1996).

48.

This is Abdlatif Al-Hamad, Director-General and Chairman of the Arab Fund for Economic and Social Development. Mr. Al-Hamad was previously Minister of Finance of Kuwait and in his capacity as Bank Governor chaired the Bank’s Board of Governors in 1982/83. For over 20 years, he was Director-General of the Kuwait Fund for Arab Economic Development and IDA Deputy for Kuwait.

49.

Serving a Changing World, supra note 47, at xii.

50.

Id. at x.

51.

Report of the Ad Hoc Committee on Board Procedures, R92-103, approved on June 23, 1992. Mr. Naim was the Executive Director who chaired the Committee.

52.

Report of the Ad Hoc Committee on Review of Board Committees, R94-66, IDA/R94-66, and IFC/R94-74, approved on May 31, 1994. Mrs. Maelhum was the Executive Director who chaired the Committee.

53.

Net resource flows (long-term) to developing countries totaled an estimated $231.3 billion in 1995 ($64.2 billion in official development finance and $167.1 billion in private flows). See 1 World Debt Tables 1996, supra note 6, at 3 (Table 1). Total net disbursements of the World Bank totaled $6.102 billion in fiscal year 1995 (consisting of $897 million for the IBRD and $5.205 billion for IDA). Annual Report 1995, supra note 11, at 12. The decline in the IBRD’s net disbursements is due in large part to the borrowers’ repayments of large amounts of quick-disbursing loans and to prepayment of loans made in earlier years. The total gross disbursement of the IBRD in fiscal year 1995 totaled $12.672 billion. Id. at 12 and 37.

54.

See Learning from the Past, Embracing the Future, supra note 41, Appendix I at 607, 609-610.

55.

Notably, the draft agreement establishing the Middle East Bank for Economic Cooperation and Development, circulated by the U.S. government on February 24, 1995, wisely combines the varied activities carried out by the IBRD, the IFC, and MIGA in the authorized operations under its provisions.

56.

See, e.g., George P. Shultz, Economics in Action: Ideas, Institutions, Policies, 85 American Economic Review 1 (1995). In this lecture, Mr. Shultz suggested that “The overlapping activities of the Bank and Fund, the change in the traditional mission of the IMF, and the need to use scarce resources carefully all argue for a merger of these two organizations.” Id. at 5. A more realistic approach may require elimination of “overlapping activities” and ensure that each of these two organizations strictly observes the purposes for which it was created as these are stipulated in their respective Articles of Agreement.

57.

See supra note 4.

58.

See International Monetary Fund, IMF Executive Board Approves the Special Data Dissemination Standard, Press Release No. 96/18 (April 16, 1996).

59.

Bretton Woods Commission, Bretton Woods: Looking to the Future A-8 (1994).

Chapter 3, “Developments at the International Finance Corporation” (Aizawa)

1.

The author gratefully acknowledges guidance provided by Ms. Jennifer Sullivan, Deputy General Counsel of the International Finance Corporation (IFC).

2.

The World Bank Group consists of the International Bank for Reconstruction and Development (known as the World Bank), established in 1945; the International Development Association (since 1960); the Multilateral Investment Guarantee Agency (since 1988); and the IFC (since 1956).

3.

International Finance Corporation, Annual Report 1995 at 3.

4.

Id. at 6.

5.

Id.

6.

Id. at 9.

7.

Id. at 7.

8.

Id. at 12, 67-69.

9.

Id. at 12.

10.

Id. at 58.

11.

Id. at 13, 99.

12.

Id. at 14.

13.

Id. at 8.

14.

Id.

15.

Id. at 38, 42.

16.

Id. at 36, 42.

17.

Id. at 86.

18.

Id. at 7.

19.

Id. at 80.

20.

Id. at 24, 30.

21.

Id. at 9.

22.

Id. at 11.

23.

Id.

24.

Id. at 25-26.

25.

Id. at 27.

26.

Id.

27.

Id. at 39.

28.

Id. at 84.

29.

Id. at 83.

30.

The Internet address for the operational documents available in the World Bank InfoShop is: www.worldbank.org/html/pic/PIC.html.

31.

Annual Report 1995, supra note 3, at 85.

32.

Id.

33.

Id.

34.

Id.

35.

Id. at 86-87.

36.

Id. at 87.

37.

Id. at 86.

38.

See Andrés Rigo, Developments at the International Bank for Reconstruction and Development: The Restructuring of the Global Environment Facility, in 4 Current Legal Issues Affecting Central Banks 29 (Robert C. Effros ed., 1997).

39.

Annual Report 1995, supra note 3, at 86.

Chapter 4, “Foreign Exchange Settlement Risk” (Tibbals Davy and Poulos)

1.

This paper was presented by Elizabeth Tibbals Davy; only her biography appears in the biographical sketches.

2.

Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries, Bank for International Settlements, Settlement Risk in Foreign Exchange Transactions (March 1996) [hereinafter the Report]. The Report’s executive summary is reprinted herein as Appendix II (5).

The Group of Ten comprises Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.

3.

Group of Experts on Payment Systems of the Central Banks of the Group of Ten Countries, Bank for International Settlements, Report on Netting Schemes (1989).

4.

Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries, Bank for International Settlements, Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries (November 1990) [hereinafter Lamfalussy Report]. The Lamfalussy standards, as the minimum standards are commonly known, are reprinted in 4 Current Legal Issues Affecting Central Banks 797 (Robert C. Effros ed., 1997).

5.

Id.

6.

Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries, Bank for International Settlements, Central Bank Payment and Settlement Services with Respect to Cross-Border and Multi-Currency Transactions (1993) [hereinafter Noël Report].

7.

Report, supra note 2, at 33.

8.

Id.

9.

Id.

10.

Id.

11.

Id.

12.

Id. at 34.

13.

Id. at 35.

14.

See id at 11.

15.

Id.

16.

See id.

17.

Id. at 11-12.

18.

Id. at 12.

19.

Id.

20.

Id.

21.

Id. at 12-13.

22.

Id. at 13.

23.

Id.

24.

Id. at 14.

25.

Id.

26.

Id.

27.

See id. at 2, 18.

28.

Id. at 18-20.

29.

Id. at 20 (footnote omitted).

30.

See id. at 21.

31.

See id.

32.

The New York Foreign Exchange Committee, Reducing Foreign Exchange Settlement Risk (October 1994), reprinted in part as Appendix II (6).

33.

Id. at 23-32.

34.

Report, supra note 2, at 21.

35.

Id.

36.

Id.

37.

Id. at 22.

38.

Id. (quoting the Noël Report, supra note 6).

39.

Id..

40.

Id. at 27.

41.

See id. at 15, note 9 (stating “FXNET is a limited partnership owned by the UK subsidiaries of 12 major banks. It is a decentralised system in which participants use common software provided by Quotron Foreign Exchange.”).

42.

See id.

43.

The Foreign Exchange Committee and The British Bankers’ Association, International Foreign Exchange Master Agreement (IFEMA) (November 1993), reprinted in 4 Current Legal Issues Affecting Central Banks, supra note 4, at 683.

44.

The Report defines “obligation netting” as “the legally binding netting of amounts due in the same currency for settlement on the same day under two or more trades.” Report, supra note 2, at 64.

45.

Id. at 16 (endnote added).

46.

The Multinet International Bank did not become operational in 1996; however, it began operations in 1997.

47.

Report, supra note 2, at 16 (endnote added).

48.

Id. at 16, note 13.

49.

Id. at 16-17.

50.

Id. at 17.

51.

Id. at 28.

52.

See id.

53.

Id. at 29.

54.

Id.

55.

Id. at 29-30.

56.

Id. at 31.

57.

Id.

58.

See id. at 8-9.

59.

UNCITRAL Model Law on International Credit Transfers, November 25, 1992, 23 UNCITRAL Yearbook 413 (1992), reprinted in 2 Current Legal Issues Affecting Central Banks 312 (Robert C. Effros ed., 1994).

60.

Uniform Commercial Code [U.C.C.] Article 4A (“Funds Transfers”) (1989), reprinted in 1 Current Legal Issues Affecting Central Banks 515 (Robert C. Effros ed., 1992).

It should be noted however that the EC Directive on Cross-Border Credit Transfers is to be implemented by all EU member states by August 14, 1999. Council Directive 97/5 of 27 January 1997 on Cross-Border Credit Transfers, 1997 Official Journal of the European Communities [O.J.] (L 43) 25, reprinted herein as Appendix IV (1).

61.

U.C.C. § 4A-507; UNCITRAL Model Law, supra note 59, note * (Art. Y).

62.

U.C.C. § 4A-507.

63.

Id. § 4A-507(c).

64.

Id. § 4A-507(e).

65.

Id. § 4A-507(a)(1).

66.

Id. § 4A-105(a)(2).

67.

Report, supra note 2, at 63.

68.

It is important to distinguish finality from mere irrevocability. Saying that a transfer is irrevocable means that the originator no longer has the legal right to cancel the payment order. A payment does not become final until the processing that is conducted by the relevant payments system is complete.

69.

U.C.C. § 4A-104(a).

70.

Id. § 4A-211(c).

71.

See In re Koreag, Contrôle et Révision SA, 961 F.2d 341 (2d Cir. 1992), cert. denied, 113 S.Ct. 188 (1992).

72.

Draft Proposal for a European Parliament and Council Directive on Settlement Finality and Collateral Security (undated); see European Commission, Payment Systems: Commission Proposes Directive on Settlement Finality and Collateral Security, IP/96/467 (June 4, 1996).

73.

Draft Proposal for a European Parliament and Council Directive on Settlement Finality and Collateral Security, supra note 69, Art. 3.

74.

See Report, supra note 2, at 24.

75.

Federal Deposit Insurance Corporation Improvement Act of 1991, Public Law No. 102-242, § 401 et seq., 105 Stat. 2236 (1991).

76.

Id. §§ 402-404.

77.

Id. §§ 403(a) and 404(a).

78.

Id. §402(14).

79.

Id.

80.

Id. § 402(9).

81.

12 C.F.R. §231.3 (1995).

82.

Id.

83.

Lamfalussy Report, supra note 4.

84.

Loi du 22 mars 1993, Art. 157, cited in Legal Opinions on the Enforceability of the Termination and Close-Out Netting Provisions of the 1992 ISDA Master Agreement (May 1994); see also Philip R. Wood, Title Finance, Derivatives, Securitisations, Set-off and Netting 165 et seq. (1995).

85.

See Wood, supra note 84, at 165 (citing Bankruptcy Act, § 65.1(7)-(9) (as of 1992)).

86.

Loi no. 93-1444 du 31 décembre 1993, Arts. 4 and 8.

87.

Insolvenzordnung vom 5. Oktober 1994, § 104, Bundesgesetzblatt I S. 2866; see also Wood, supra note 84, at 165 (citing Bankruptcy Act of 1879, § 18 and Second Financial Markets Promotion Act 1994, § 15(1)).

88.

See Wood, supra note 84, at 165 (citing Bankruptcy Act, § 38); see also Legal Opinions on the Enforceability of the Termination and Close-Out Netting Provisions of the 1992 ISDA Master Agreement, supra note 81.

89.

Law of 1995:318 amending the Law of 1991:980 on Trade with Financial Instruments.

90.

Bundesgesetz über Schuldbetreibung und Konkurs, Art. 211 bis.

91.

Companies Act, 1989, Chapter 40, Part VII and Schedule 21 (Parts II and III).

92.

See supra note 75; see also 11 U.S.C. §§ 101, 362, 555, 556 (1994); 12 U.S.C. § 1821(e)(8) (1994).

93.

A current account is an account in which reciprocal debts and claims are merged and offset or novated either on a continuing basis, that is, as soon as they are entered into, or at agreed periodic intervals.

94.

Philip R. Wood, Principles of International Insolvency 13-3 at 228 (1995).

95.

The Convention on Insolvency Proceedings (the Convention) was opened for signatures from November 23, 1995 to May 23, 1996. Convention, Art. 49(2).

96.

Proposal for a Council Directive on the Coordination of Laws, Regulations, and Administrative Provisions Relating to the Reorganization and the Winding-Up of Credit Institutions and Deposit-Guarantee Schemes, 1985 O.J. (C 365) 55, as amended, 1988 O.J. (C 36) 1 [hereinafter Winding-Up Directive].

97.

Convention, supra note 95, Art. 49; see UK: Politics This Week—Going Mad, The Economist, May 25, 1996 (noting the United Kingdom refused to sign the EU Bankruptcy Convention).

98.

Convention, supra note 95, Art. 3(1); Winding-Up Directive, supra note 96, Art. 4.

99.

Convention, supra note 95, Arts. 3(2) and 27.

100.

Id. Art. 2(h).

101.

Id. Art. 3(3).

102.

Id. Art. 1(1).

103.

Id. Art. 5.

104.

Id. Art. 6.

105.

Id. Art. 7.

106.

Id. Art. 9.

107.

Id. Art. 10.

108.

Id. Art. 14.

109.

Article 6 provides:

1. The opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor’s claim.

2. Paragraph 1 shall not preclude the actions for voidness, voidability or unenforceability laid down in Article 4(2)(m).

Id. Art. 6.

110.

Winding-Up Directive, supra note 96, Art. 1.

111.

See letter from Nikolaus Bömcke to Legal Committee and Banking Supervision Committee at 2 (August 23, 1995).

112.

See, e.g., 11 U.S.C. § 362 (1994) (regarding the automatic stay in the U.S. Bankruptcy Code).

113.

11 U.S.C. § 362(b)(6), (7), and (17).

114.

Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Public Law No. 101-73, § 212, 103 Stat. 183, 222 (1989) (amending 12 U.S.C. § 1821).

115.

12 U.S.C. § 1821(e)(8)(D)(i) (1994).

116.

Definition of Qualified Financial Contracts, 60 Federal Register 66,863 (1995) (to be codified at 12 Code of Federal Regulations part 360).

117.

12 U.S.C. § 1821(e)(8)(A) (1994).

118.

See 11 U.S.C. § 109 (1994).

119.

Id. § 362.

120.

Id. § 362(b).

121.

Id. § 362(b)(6), (7), and (17).

122.

Id.

123.

Randall D. Guynn, Modernizing Securities Ownership, Transfer and Pledging Laws 5 (paper presented at the Annual Meeting of the International Bar Association, October 13, 1994).

124.

Id.

125.

Id. at 9.

126.

U.C.C. Revised Article 8: Investment Securities (1995).

127.

See Guynn, supra note 123, at 43-45.

128.

See id. at 11-12.

129.

Report, supra note 2, at 2, 32.

130.

Id.

Chapter 4, Comment (Sims and Steigerwald)

1.

Committee on Payment and Settlement Systems of the Central Banks of the Group of Ten Countries, Bank of International Settlements, Settlement Risk in Foreign Exchange Transactions (March 1996) [hereinafter Report].

2.

Id. at 64.

3.

Id. at 63.

4.

Id. at 64.

5.

Id. at 63.

6.

Id. at 18 et seq.

7.

Id. at 51 (Appendix 2). The recommendations of the Foreign Exchange Committee are reprinted herein as Appendix II (1).

8.

Id. at 18 et seq.

9.

Id. at 63 (Appendix 4).

10.

Id. at 64.

11.

Id.

12.

See Basle Committee on Banking Supervision, Report on International Convergence of Capital Measurement and Capital Standards Annex 3 (July 1988), reprinted in 1 Current Legal Issues Affecting Central Banks 487, 512 (Robert C. Effros ed., 1992).

However, the risk-based capital rules set out in the Basle Capital Accord of 1988 do not take account of payments netting. Basle Committee on Banking Supervision, Basle Capital Accord: Treatment of Potential Exposure for Off-Balance Sheet items Annex at note 6 (April 1995), reprinted in 4 Current Legal Issues Affecting Central Banks 799, 802 note 6 (Robert C. Effros ed., 1997).

13.

Report, supra note 1, at 64.

14.

The Exchange Clearing House, Limited, based in London, is for the netting of spot and forward foreign exchange obligations.

15.

A group of banks based in Canada and the United States propose to establish a foreign exchange clearing house to provide multilateral netting and settlement of spot and forward foreign exchange transactions. The Multinet clearing house would operate as a bank and would be owned by its member banks. The banks in the Multinet project currently net their mutual transactions on a bilateral basis (the VALUNET arrangement). Report, supra note 1, at 16 (note 12).

16.

Id. at 32 (setting forth the “next steps” that can be taken by individual banks, industry groups, and central banks).

17.

British Bankers’ Association and The Foreign Exchange Committee, International Foreign Exchange Master Agreement (IFEMA) (November 1993), reprinted in 4 Current Legal Issues Affecting Central Banks, supra note 12, at 683; see Financial Markets Lawyers Group, Legal Opinions on the Enforceability of the Termination and Close-Out Netting Provisions of IFEMA (December 1995).

18.

The British Bankers’ Association and The Foreign Exchange Committee, International Currency Options Market (ICOM) Master Agreement and Guide (April 1992). The ICOM Master Agreement is reprinted in 4 Current Legal Issues Affecting Central Banks, supra note 12, at 701.

19.

International Swap Dealers Association, ISDA Master Agreement (1992), reprinted in 4 Current Legal Issues Affecting Central Banks, supra note 12, at 718.

20.

Report, supra note 1, at 63.

21.

Financial Markets Lawyers Group, supra note 17.

22.

Federal Deposit Insurance Corporation Improvement Act of 1991, Public Law No. 102-242, § 404(a), 105 Stat. 2236 (1991) [hereinafter FDICIA].

23.

“FXNET is a limited partnership owned by the UK subsidiaries of 12 major banks.” Report, supra note 1, at 15 (note 9).

24.

Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries 26 et seq. (November 1990). The Lamfalussy standards, as the standards set forth in this report are commonly known, are reprinted in 4 Current Legal Issues Affecting Central Banks, supra note 12, at 797.

25.

FDICIA, supra note 22, §§ 401 et seq.

26.

Id. §§ 403(a), 404(a). Some regulators and legal experts disagree that FDICIA supersedes bankruptcy law in all respects. See FDIC Policy Statement, 59 Federal Register 37726, 37730 (1994).

27.

12 U.S.C. § 1821(e)(8)(A) (1994) (applicable to insured banks); 11 U.S.C. § 362 (1994) (applicable to corporate entities).

28.

Id.

29.

12 U.S.C. § 1821(e)(8)(D)(iv) (1994); 11 U.S.C. § 101(25) (1994).

30.

Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries, supra note 24, at 26. Standard IV provides “[m]ultilateral netting systems should, at a minimum, be capable of ensuring the timely completion of daily settlements in the event of an inability to settle by the participant with the largest single net-debit position.” Id.

31.

Uniform Commercial Code § 9-203 (“Attachment and Enforceability of Security Interest; Proceeds; Formal Requisites”) (1990).

32.

See id. § 9-303 (“When Security Interest Is Perfected; Continuity of Perfection”).

33.

See 11 U.S.C. § 101(54) (1994) (defining “transfer” as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption”).

34.

See 11 U.S.C. § 547 (1994); Insolvency Act, 1986, Chapter 45, § 239 (U.K.).

35.

See 11 U.S.C. § 548(a)(2) (1994); Insolvency Act, 1986, Chapter 45, § 238 (U.K.).

36.

See 11 U.S.C. § 548(a)(1) (1994).

37.

See id. § 362.

38.

See John P. Emert, The Significance of the International Foreign Exchange Master Agreement (IFEMA), in 4 Current Legal Issues Affecting Central Banks, supra note 12, at 441; Raj Bhala, Comment, in 4 Current Legal Issues Affecting Central Banks, supra, at 458.

39.

FDICIA, supra note 22, §§ 403, 404.

40.

Report, supra note 1, at 63-64.

41.

See 11 U.S.C. § 547; Insolvency Act, 1986, Chapter 45, § 239 (U.K.).

42.

See 11 U.S.C. § 548(a)(2); Insolvency Act, 1986, Chapter 45, § 238 (U.K.).

43.

See 11 U.S.C. § 362.

44.

See supra the text accompanying note 40.

45.

Uniform Commercial Code § 2-201 (1990). A proposed revision of Article 2 of the Uniform Commercial Code would repeal the statute of frauds. However, a motion to repeal the statue of frauds for the sale of goods was defeated at the 1997 annual meeting of the American Law Institute.

46.

See The Foreign Exchange Committee, Reducing Foreign Exchange Settlement Risk 5 (1994), reprinted in part as Appendix II (6).

47.

See supra note 24.

48.

Reducing Foreign Exchange Settlement Risk, supra note 46, at 5.

49.

IFEMA, supra note 17.

50.

Financial Markets Lawyers Group, supra note 17.

51.

Id.

52.

FDICIA, supra note 22.

53.

See Financial Markets Lawyers Group, supra note 17, England; see also Companies Act, 1989, Chapter 40, Part VII and Schedule 21 (Parts II and III).

54.

The Multinet International Bank did begin operations in 1997 as anticipated.

55.

See supra note 24.

Chapter 5, “Cross-Border Electronic Banking: Perspectives on Systemic Risk and Sovereignty” (Bhala)

1.

I would like to thank Mr. Ramsey Taylor, William and Mary Law School, Class of 1996, for his excellent research assistance.

2.

Of course, these are not the only challenges raised by cross-border electronic banking. For example, has such banking caused commercial banks to become obsolete? In other words, is the traditional commercial bank franchise, whose value was based on its ability to do what no other institution could do—namely, take deposits and make loans, a dinosaur? After all, technology makes further disintermediation away from banks possible. Consider the payments system. Traditionally, a central bank was the core of this system, and the system was the exclusive province of banks. Now, companies that have nothing to do with a central bank, such as Microsoft, can offer customers the ability to make electronic payments.

3.

See Adam Smith, The Wealth of Nations Book IV, Chapter I (1776).

4.

The two public policy concerns noted above are by no means exhaustive. For instance, another important matter is protecting the “small person,” that is, the ordinary retail bank customer. He or she needs protection from the risks associated with electronic technology. For example, the customer’s deposits and investments must be protected from the risk of fraud perpetrated by electronic pirates.

5.

See generally Jeffrey B. Ritter, Defining International Electronic Commerce, 13 Northwestern Journal of International Law & Business 3 (1992) (discussing the uses of electronic technologies in international commerce).

6.

See Raj Bhala, A Pragmatic Strategy for the Scope of Sales Law, the Statute of Frauds, and the Global Currency Bazaar, 72 Denver University Law Review 1, 16-18 (1994).

7.

Amelia H. Boss, The Emerging Law of International Electronic Commerce, 6 Temple International and Comparative Law Journal 293, 295, note 5 (1992).

8.

See Paul Todd, Dematerialisation of International Trade Instruments, in Cross-Border Electronic Banking 105 (Joseph J. Norton, Chris Reed, and Ian Walden eds., 1995).

9.

Boss, supra note 7, at 294 (using similar language to define electronic data interchange).

10.

The War of the Wires, The Economist, May 11, 1996, at 59, 60.

11.

See Ernest T. Patrikis, Thomas C. Baxter, Jr., and Raj Bhala, Wire Transfers 173-177 (1993).

12.

With respect to turnover volume in the foreign exchange market, see Bank for International Settlements, Central Bank Survey of Foreign Exchange Market Activity in April 1995: Preliminary Global Findings, Press Communiqué (October 24, 1995). After adjusting for double counting, the Bank for International Settlements estimates that the average daily turnover of spot, forward, and swap contracts is $1.230 trillion. This figure excludes currency options. See also Big, The Economist, September 23, 1995, at 63 (discussing the estimates). The Bank for International Settlements’ previous survey of trading volumes in the foreign exchange market yielded similar results, though a comparison of the two sets of results indicates the market has continued to grow in size at an impressive rate. See Monetary and Economic Department, Bank for International Settlements, Central Bank Survey of Foreign Exchange Market Activity in April 1992 at 1, 5, and 6, Table I (March 1993) (noting gross average daily turnover of approximately $1 trillion, including trading in all over-the-counter instruments, namely, spots, forwards, and derivatives (options and currency swaps) as well as exchange-traded derivatives (options and futures), but excluding cross-currency interest rate swaps).

13.

See Frances Williams, WTO Predicts Robust Trade Growth, Despite Slowdown, Financial Times, March 28, 1996, at 14.

14.

See Raj Bhala, The Inverted Pyramid of Wire Transfer Law, 82 Kentucky Law Journal 347 (1993); Paying for the Deal: An Analysis of Wire Transfer Law and International Financial Market Interest Groups, 42 University of Kansas Law Review 667 (1994).

15.

Euroclear is a clearinghouse that was set up to settle eurobond trades, but it has come to handle all types of international securities. See Margaret Morris, Settlement and Clearing: A Tale of Gallant Bond Rivals, Financial Times, June 10, 1996, at 6.

16.

See Ernest Patrikis, Delivery Against Payment, 4 Curr