Expanding Export Transactions for CCC Payment Guarantees

DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

7 CFR Part 1493

Expanding Export Transactions for CCC Payment Guarantees

AGENCY: Commodity Credit Corporation (CCC), USDA.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: CCC requests comments on two options to modify the regulations

found at 7 CFR part 1493, subpart B, governing CCC's Export Credit

Guarantee Program (GSM-102) and Intermediate Export Credit Guarantee

Program (GSM-103). One option would permit CCC to guarantee payments

pursuant to sight letters of credit issued by eligible foreign banks,

which letters of credit would not include deferred payment terms. The

other option would permit CCC to guarantee payment of obligations of

eligible foreign banks arising out of transactions not involving an

export letter of credit. For example, such obligations could be created

by foreign banks providing guarantees of obligations of foreign buyers,

including, for example, drafts drawn on and accepted by such buyers.

CCC also welcomes and will consider comments or recommendations

regarding other approaches to increasing the flexibility of these

programs.

DATES: Comments are due on or before September 15, 1997.

ADDRESSES: All comments should be addressed to L.T. McElvain, Director,

CCC Operations Division, Foreign Agricultural Service, U.S. Department

of Agriculture, AG Stop 1035, Washington, DC 20250-1035; FAX (202) 720-

2949. All comments received will be available for public inspection at

the above address during regular business hours.

FOR FURTHER INFORMATION CONTACT: L.T. McElvain, Director, CCC

Operations Division, Foreign Agricultural Service, U.S. Department of

Agriculture, Stop 1035, Washington D.C., 20250-1035; Fax (202) 720-

2949; Telephone (202) 720-6211. The U.S. Department of Agriculture

(USDA) prohibits discrimination in its programs on the basis of race,

color, national origin, sex, religion, age, disability, political

beliefs, and marital or familial status. Persons with disabilities who

require alternative means for communication of program information

(braille, large print, audiotape, etc.) should contact the USDA Office

of Communications at (202) 720-5881 (voice) or (202) 720-7808 (TDD).

SUPPLEMENTARY INFORMATION:

Background

The GSM-102 and GSM-103 programs are intended to increase exports

of U.S. agricultural commodities and to serve other purposes stated in

subpart A of 7 CFR part 1493. Criteria for allocating the availability

of credit guarantees under these programs among countries and

commodities are also found in subpart. In addition, the subpart

contains certain program restrictions, including a prohibition on

making credit guarantees available in connection with sales to any

country that the Secretary of Agriculture determines cannot adequately

service the debt associated with such sales.

Since late 1980, CCC has issued payment guarantees totaling $56.7

billion (guarantee value) under the GSM-102 program. This program

covers U.S. agricultural export transactions where payments are

governed by irrevocable letters of credit issued by eligible foreign

banks, and credits are extended by U.S. exporters or financial

institutions to such foreign banks for a maximum of three years. Since

FY 1986, CCC has issued payment guarantees totaling $2.2 billion under

the GSM-103 program. In this program, which is similar to the GSM-102

program, the credit periods are for not less than three, but no more

than 10, years.

The regulations for the GSM-102 and 103 programs at 7 CFR part 1493

were specifically designed to assist export transactions having at

least two characteristics: (1) they are financed through foreign bank

letters of credit, and (2) the foreign bank makes payment on deferred

terms (credit terms being provided for either in the letter of credit

or a related obligation). Under the regulations as currently written,

export transactions that lack either one of these characteristics are

not eligible for GSM-102 or 103 payment guarantees. For example,

transactions involving payment by sight letters of credit with no

related credit obligation (i.e., no credit extended to the issuing

foreign bank) are not eligible. Neither are other forms of collections

involving acceptances or other forms of financial documents handled by

U.S. banks that are also guaranteed by a foreign bank. Such collections

may be subject to the Uniform Rules for Collections (International

Chamber of Commerce (ICC) Publication 522), in contrast to

existing GSM-102/103 transactions which must involve letters of credit

subject to the Uniform Customs and Practice for Documentary Credits

(ICC Publication 500).

To enable CCC to better evaluate whether to modify 7 CFR part 1493

to permit the GSM-102 and 103 programs to include a greater range of

transactions for which CCC would assume foreign bank risk, it was

decided to seek the views of program participants and others through

this advance notice of proposed rulemaking.

Options

Option 1. Amend regulations to permit CCC to issue payment

guarantees covering sight letter of credit transactions (with no credit

extended to the foreign bank issuing the letter of credit).

This option would require a revision of 7 CFR 1493.10.

Specifically, 7 CFR 1493.10(b) provides that CCC will consider

applications for payment guarantees only in connection with export

sales where the payment will be made in one of two ways:

(1) An irrevocable foreign bank letter of credit, issued in favor

of the exporter, specifically stating the deferred payment terms under

which the foreign bank is obligated to make payments; or

(2) An irrevocable foreign bank letter of credit, issued in favor

of the exporter, that is supported by a related obligation specifically

stating the deferred payment terms under which the foreign bank is

obligated to pay.

To implement this option, it would be necessary to delete the

requirement under (1) above that the letter of credit state deferred

payment terms. Other conforming changes would have to be made to

various parts of the regulations.

[[Page 43676]]

Possible Benefits of This Option

1. Might facilitate additional export transactions without

increasing CCC's multi-year credit exposure to a country at a time when

such exposure is approaching the maximum exposure established by CCC.

Since payment would be due at sight, CCC's exposure would be reduced

more quickly than in a transaction calling for deferred payment. As a

result, more transactions could be done with a country which was

nearing its CCC-established credit limitations.

2. Might increase the number of export transactions where U.S.

financial institutions could reduce their letter of credit confirmation

fees because of the availability of CCC's guarantee.

Possible Disadvantages of This Option

1. Might be of interest to foreign buyers and U.S. banks and

exporters only when the risk of default by the issuing foreign bank is

considered high and U.S. banks are unwilling to confirm letters of

credit or are willing to do so only at very high fees. The rate of

defaults and, therefore, CCC's costs, might be high.

2. Might duplicate insurance or guarantee coverage available from

private sector firms or other U.S. Government agencies.

3. Might displace cash export sales of U.S. agricultural

commodities since no credit is necessary to make the transactions

workable.

Option 2. Amend regulations to permit CCC to guarantee payment of

eligible foreign bank obligations in transactions calling for deferred

payment but not involving an irrevocable letter of credit.

One type of transaction under this option could involve foreign

bank guarantees of financial instruments, including, for example,

drafts drawn on, and accepted by, foreign buyers. However, the range of

possible types of transactions and foreign bank guarantees could be

broader than this, and commenters are urged to be as specific and

detailed as possible in proposing or opposing alternatives that might

be covered by this option. CCC is aware of a bank guarantee known as an

aval. CCC is concerned, however, that avals, although commonly used in

civil law jurisdictions, are virtually unknown in American

jurisprudence and may not be readily enforceable in the United States.

CCC is also especially interested in comments on whether it should

require, as a condition of eligibility for a guarantee, that

collections of financial and commercial documents be subject to the

Uniform Rules for Collections set forth in the International Chamber of

Commerce Publication 522'', or to other requirements. In

this connection, commenters may wish to state clearly their

understanding of the extent of the non-documentary risk that exporters

would bear in a transaction where the importer refused to accept

documents despite conformity of the documents with the collection

instruction. In such a case the CCC guarantee would not appear to apply

because the drawee would not have incurred a payment obligation to

which the foreign bank guarantee would apply. Similarly, CCC seeks

comments regarding whether it should require any specific wording or

content in the obligation that would be guaranteed by the foreign bank

or in the foreign bank's guarantee itself.

Possible Benefits of This Option

1. Might increase U.S. agricultural exports by leveraging credits

made available by the private sector.

2. New or more cost-effective export opportunities might arise by

increasing the flexibility with which export transactions could be

structured, with payment of credits still guaranteed by eligible

foreign banks.

3. Might enable or encourage participation in GSM-102 and 103

programs by additional financial institutions, resulting in a more

competitive credit environment.

Possible Disadvantage of this Option

1. Exporters might face greater problems or risks in negotiating

documents should they choose to participate in these types of

transactions.

Considerations Regarding Comments

CCC will consider a number of factors in reviewing comments and

determining whether to implement one or both of the options, or

modifications thereof.

1. GSM-102/103 Criteria. As discussed above, 7 CFR part 1493,

subpart A, contains objectives and criteria for these programs. Some of

these, such as the requirement that countries to which credits are to

be extended must be ``creditworthy'', are mandated by statute.

Commenters should familiarize themselves with subpart A and include a

discussion of relevant regulatory provisions in their comments. They

should particularly address the issue of whether transactions pursuant

to the proposed options would more likely be in addition to, or would

more likely displace, unassisted private sector transactions.

Commenters should bear in mind that, in considering options for

additional program flexibility, CCC does not intend to relax current

criteria that serve to manage program risk or protect the assets of

CCC.

2. Government Performance and Results Act (GPRA). In September 1997

the government-wide provisions of the GPRA will take effect. The GPRA

is a performance-based management system that is directly tied to the

budget process. Under the GPRA each federal agency must present to

Congress its goals, how it spends money and organizes its personnel to

achieve these goals, and the extent to which it achieves its goals.

Each agency must prepare a 5-year strategic plan as part of its budget

submission. To incorporate new programs or an expansion of existing

programs into this planning process, agencies must address such issues

as how benefits will be measured, why the functions or services are not

being adequately performed by the private sector, and whether the new

activities will be cost-effective. Commenters are invited to address

specifically these issues.

Signed at Washington, DC, on August 11, 1997.

Mary T. Chambliss,

Acting General Sales Manager,

Commodity Credit Corporation.

[FR Doc. 97-21670 Filed 8-14-97; 8:45 am]

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