I stayed up until 3 a.m. writing a technical note on payment methods in international trade. It was requested by an investment fund.
Not even the people at the fund—all of whom are excellent professionals—were familiar with the regulations governing SBLCs (Standby Letters of Credit).
What is an SBLC?
An SBLC is similar to a performance bond. The importer asks a bank to issue the instrument in favor of a foreign seller. The instrument serves as a guarantee of payment.
It is not regulated by any Brazilian law, but follows regulations set by the International Chamber of Commerce.
The Key Question
Is an SBLC valid in Brazil?
Atypical credit instruments can also be used to enforce payments.
The International Chamber of Commerce rules governing SBLCs are contained in two documents:
ISP98
UCP 600
The content of these documents is very similar to the general rules set forth in the Brazilian Civil Code for unnamed instruments of credit (those not governed by a specific law).
Therefore, SBLCs can be used in Brazil—at least in theory.
Why doesn’t the Central Bank regulate them?
Excess bank credit can distort the market.
I suspect that the Central Bank does not regulate SBLCs because they work so well that they could distort the volume of credit in circulation.
After all, if you have thousands of bank-issued administrative checks circulating in the market and being used as collateral, this would amount to an explosion of credit for companies.
It’s as if banks were suddenly acting as general guarantors.
Another reason: reluctance to apply comparative law
Our legal system was shaped by merchant peoples, such as the Portuguese and Italians.
We have a Civil Code that is perfectly suited for importing and adapting innovations in payment methods. But Brazilian law schools do not teach this subject.
The Importance of SBLCs
SBLCs generate trillions annually. Every lawyer should be familiar with this mechanism. It’s a huge market.
We’ll gradually change that. Studying the rules of the International Chamber of Commerce is just the beginning.