The wording of Annex 1 (3) (a) (i) CRR (“documentary credits in which underlying SHIPMENT acts as collateral and other self-liquidating transactions”) requires the shipment (i.e. the shipped goods) as collateral, while it is not clear if this could also refer to freight papers (i.e. the underlying shipping documents) as collateral.

In certain trade finance transactions - as a consequence of the nature of the shipment and the chosen means of transport (e.g. if the borrower transports and/or trades gas or oil, which is not shipped in self-contained units, but transported in pipelines) or the fact that the borrower purchases and sells on the same delivery terms (i.e. is not involved in transportation or storage) - it is (i) not feasible to obtain the freight papers as collateral (due to the non-existence of such) and also (ii) not advisable to rely on the underlying shipment (i.e. the shipped goods as e.g. gas or oil) as collateral, since there may be (a) legal concerns by whom the gas/oil in a pipeline is owned and consequently whether e.g. a pledge or a retention of title of such gas/oil in pipelines is enforceable at all in the relevant jurisdiction and/or (b) (assuming that it can be established legally valid) factual concerns with regard to the recoverability of such security, as e.g. such gas/oil in some cases is even burnt for the production of thermal or electric energy immediately (meaning that all rights in rem will expire). In such trade finance transactions, therefore, it seems that the requirement of “documentary credits in which underlying SHIPMENT acts as collateral” cannot be fulfilled.

Considering the before mentioned, such financings are typically secured by way of assignment, assignment for security and/or pledge (depending on the governing law) of the borrower’s receivables under the sales contracts (of the goods), whereby payment under the sales contracts is to be effected to an account that is pledged in favour of the lender (i.e. L/C issuing bank) or security agent (especially in the case of a syndicate), because this is considered as the most secure way of taking collateral.

As a consequence, such method of taking collateral (as the only secure way of taking collateral) could qualify as self-liquidating transaction pursuant to Annex 1 (3) (a) (i) CRR (which term is not defined in the CRR).

A clarification of whether such transactions fulfil the condition of Annex 1 (3) (a) (i) CRR that the underlying shipment acts as collateral or that the transaction is otherwise self-liquidating would contribute to consistent application of the CRR.