Current Legal Issues Affecting Central Banks, Volume V

Afterword to Chapters 4 and 5

Robert Effros
Published Date:
May 1998
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Chapters 4 and 5 on foreign exchange settlement risk and cross-border electronic payments raise an interesting issue. Do these transactions involve (i) a delivery against payment, or (ii) a payment against payment? For example, assume that a person purchased apples with dollars instead of a foreign currency. Apples are a commodity and, as such, they get delivered rather than paid. This purchase, therefore, involves a delivery of apples against payment in dollars. However, what if a person buys francs instead of apples? Does he or she have a delivery of francs against payment in dollars or a payment of francs against payment of dollars? The answer is significant because it will lead to the application of one of two different legal regimes.

One of the interesting facets of U.S. law is that francs, at least in some U.S. courts, are considered to be a commodity, while dollars are not.1 Some courts view trading dollars for francs as a transaction governed by Article 2 of the Uniform Commercial Code (UCC) covering the sale of goods. Thus, if a party pays dollars into an account and its counterparty fails before it can deliver the francs, the party who performed can void the contract and recoup the dollars.2

Assume, however, that the transaction involves trading yen for francs. Is this a delivery against payment or a delivery against delivery—essentially, a barter transaction? These examples show the absurdity of conceptualizing a foreign exchange transaction as a “delivery” or a “payment” because, depending on the type of foreign exchange involved in the transaction, a different legal rule may apply to determine whether the contract has been performed. Why should courts view francs or yen as a commodity, but not dollars?

Arguably, the appropriate way to think about a foreign exchange transaction is to consider it an exchange of bank credit, even though it is bank credit denominated in different currencies. The exchange, therefore, is not francs for dollars, but bank credit denominated in francs for bank credit denominated in dollars, or bank credit denominated in yen for bank credit denominated in francs. As such, one law would apply to all foreign transactions regardless of the currency involved. In the United States, Article 4A of the UCC would apply and, internationally, possibly a law based on the UNCITRAL Model Law on International Credit Transfers might govern the transaction.3

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