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Effectiveness Date of an Amendment

Ozgur Eker (CDCS)
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Effectiveness Date of an Amendment

Letter of credit is an irrevocable and conditional payment obligation of the issuing bank.

As the letter of credit is irrevocable, its terms and conditions can not be changed without the consent of the beneficiary.

The beneficiary may find some of the terms and conditions of the credit unacceptable. Under such circumstances, the beneficiary has three options,

  • leaving the deal by not utilizing the letter of credit
  • making shipments with the original letter of credit by taking discrepancy risk
  • seeking an amendment by applying to the applicant.

Amendment in a letter of credit, a change in terms and conditions of the letter (e.g., extension of the letter of credit´s validity period, shipment deadline, etc.) usually to meet the needs of the seller. (1)

But what is the effectiveness date of an amendment?

The question comes from Vincent, who is asking a question regarding the effectiveness date of an amendment.

Here is his question as arrived by e-mail.

If the bank issues an amendment directly to the beneficiary decreasing the letter of credit amount without indicating an effective date for the amendment, is the decrease effective the date the amendment is issued or is the decrease effective the date the beneficiary agrees to the amendment.

What is your opinion, with of course no responsibility for providing such an opinion.

Regards
Vincent

Dear Vincent ,

In order to find the right answer to your question we need to look at the related part of the letter of credit rules.

Amendments are explained at article 10 in UCP 600.

UCP 600 states that “a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary.”

UCP 600 article 10 continues to clarify effectiveness date of an amendment for the issuing bank and the confirming bank as follows “an issuing bank is irrevocably bound by an amendment as of the time it issues the amendment.

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.”

On the next couple of phrases explains the position of a beneficiary against amendments.

“The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment.”

As UCP 600 clearly indicates letter of credit will remain in force as is for the beneficiary until the beneficiary communicates its acceptance of the amendment.

But how beneficiaries can communicate their acceptance to amendments. This would be a good discussion topic for a future page.

Is it allowed partial acceptance of amendments under the letter of credit rules?

References:

  1. Dictionary of International Trade, Amendment, https://www.globalnegotiator.com/

Clean on Board Notation on Bills of Lading

Ozgur Eker (CDCS)
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Clean on Board Notation on Bills of Lading

What is clean on board?

A clean transport document or a “clean on board” clause relates to the condition of the goods and/or packaging.

If, on receipt of the goods, the carrier finds that the packaging or the goods are defective, he will make a notation on the transport document to this effect to avoid being subsequently held responsible for such defect.

Hence, the document is no longer clean, and any objections or claims for damages will have to be directed to the consignor. (1)

If the word “clean” appears on a bill of lading and subsequently it has been deleted, the bill of lading will not be deemed to be claused or unclean unless it specifically bears a clause or notation declaring that the goods or packaging are defective.

Clauses or notations on the bills of lading, which expressly declare a defective condition of the goods or packaging are not acceptable by the letter of credit rules.

Clauses or notations which do not expressly declare a defective condition of the goods or packaging (e.g., “packaging may not be sufficient for the sea journey”) do not constitute a discrepancy.

However, a statement on the transport document declaring that the packaging “is not sufficient for the sea journey” would not be acceptable.

One of my reader is asking below question from Belgium. She is director of a shipping company. She would like to know more about clean on board notations on bills of lading.

We have a persistent shipper who insists to have the word ‘clean’ added before shipped on board in their B/Ls. Have tried to explain that a B/L without clauses/remarks is a clean B/L. Can you refer to a certain part on your website where I can find official explication to convince them ?

Thanks in advance.

director of XYZ Shipping Company

Dear Director,

I can suggest you to inform below UCP 600 article to your shipper.

UCP 600 – Article 27

Clean Transport Document

A bank will only accept a clean transport document. A clean transport document is one bearing no clause or notation expressly declaring a defective condition of the goods or their packaging. The word “clean” need not appear on a transport document, even if a credit has a requirement for that transport document to be “clean on board”.

UCP 600 defines below documents as transport documents :

  • Transport Document Covering at Least Two Different Modes of Transport
  • Bill of Lading
  • Non-Negotiable Sea Waybill
  • Charter Party Bill of Lading
  • Air Transport Document
  • Road, Rail or Inland Waterway Transport Documents
  • Courier Receipt, Post Receipt or Certificate of Posting

References:

  1. Documentary credits in practice, Reinhard Längerich, Second edition – 2009, Published by: Nordea, Page: 146
  2. Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:12

Complying Presentation

Ozgur Eker (CDCS)
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Complying Presentation

What is a Complying Presentation?

If issuing bank determines that the presentation is complying then the issuing bank must honor. If credit is available by sight payment you should expect to receive your funds within couple of days after the end of the document evaluation period, which is 5 banking days.

Malik from Pakistan is asking a question regarding the responsibilities of the banks against presentations of documents. Below you can find his question.

Dear Sir,

I request you to please answer the following questions for my better understanding, and also please give example if possible.

In how many days Import L/C opening bank should send the payment or discrepancies to beneficiary of Sight L/C. Some persons saying 3 days and some saying 5 days, which one is correct under UCP 600.

Dear Malik,

A nominated bank, a confirming bank and the issuing bank must determine whether presentation is complying or not maximum five banking days following the day of presentation.

This is governed under UCP 600 article 14-b as follows:

“A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying.”

There are two options available for the banks after they receive a presentation:

  • Option 1 : Determining a non-complying presentation
  • Option 2 : Determining a complying presentation

Non-Complying Presentation:

If issuing bank determines that the presentation is not complying then issuing bank may refuse to honor.

The issuing bank decides to refuse to honor, it must give a single notice to that effect to the presenter, in other terms to the beneficiary.

Once the issuing bank sends its single notice to the beneficiary within a maximum of five banking days period following the day of presentation, then its responsibility will be ended to the beneficiary under a non-complying presentation in terms of UCP 600 rules.

Complying Presentation:

If issuing bank determines that the presentation is complying, then the issuing bank must honor.

If credit is available by sight payment, you should expect to receive your funds within couple of days after the end of the 5 banking day period.

Banks in Letter of Credit

Ozgur Eker (CDCS)
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Banks in Letter of Credit

Banks play a key role in letters of credit transactions. They start and end the L/C operations.

They also decide either refusal of the documents or acceptance of the presentation. Without banks we cannot talk about any L/C transactions.

Different types of banks exist in a letter of credit transaction and each of them are functioning various roles according to the authorizations granted to them.

Issuing bank, advising bank, nominated bank, confirming bank and reimbursement bank are the main banks that exist in a standard international documentary credit payment.

On this post, you can find detailed information in regards to the banks in letters of credit, especially their roles and responsibilities.

Which Banks Involved in a Letter of Credit Transaction?

Issuing bank is the core financial institution in a documentary credit process.

At least an issuing bank must be present for the existence of an L/C payment. All other banks shall be added to the transaction as circumstances required.

For example, the issuing bank will be using an advising bank’s services to advise the letter of credit to the beneficiary.

L/C may be issued so that it is available with a nominated bank which is located in the same country as the beneficiary.

Additionally, the issuing bank may demand from the nominated bank to add its confirmation to the letter of credit.

Confirming bank can claim reimbursement from the reimbursement bank against a complying set of documents.

As I have shown above, all other banks, but the issuing bank, can be added to the letter of credit transaction, if the issuing bank needs to use that particular bank’s services.

Let me explain the banks in a letter of credit transaction one by one more in detail below.

Issuing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

issuing bank

Issuing bank is the main bank in a letter of credit transaction.

Letter of credit is opened by the issuing bank mostly on behalf of the applicant.

Rarely issuing banks open letters of credit on their own name without having been instructed by the applicants.

All other banks are acting according to the instructions and authorization that they have received from the issuing bank.

For more details please click here.

 

Advising Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Advising bank

Advising bank is the bank that advises the letter of credit to the beneficiary.

Advising bank acts at the request of the issuing bank.

In most cases advising bank and beneficiary locate at the same country which is contrary to the issuing bank.

This is why issuing banks use another bank’s services to advice the letter of credit to the beneficiaries.

Advising bank has no obligation for payment.

For more details please click here.

 

Nominated Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Nominated Bank

Nominated Bank is the bank with which the letter of credit is available.

In some situations issuing banks open letters of credit that is available with any bank in beneficiaries countries. These kind of letters of credit are known as “freely negotiable l/cs”.

Nominated bank’s payment obligation is not defined in strict terms.

Beneficiaries could get their payment from nominated banks with recourse basis.

For more details please click here.

Confirming Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Confirming Bank

Confirming bank is the bank that adds its confirmation to a letter of credit.

Confirming banks could only add their confirmation if the issuing banks authorize them to do so.

Confirming bank and nominated bank are expected to be the same bank, although it is not a necessity according to UCP 600.

Confirming bank’s payment obligation is defined in strict terms. Beneficiaries could get their payment from confirming banks without recourse basis.

For more details please click here.

Reimbursing Bank’s Roles and Responsibilities in A Documentary Credit Transaction:

Reimbursing bank

Reimbursing bank is the bank instructed or authorized to provide reimbursement to the nominated bank or confirming bank.

Reimbursing banks provide reimbursement to above mentioned banks according to the reimbursement authorization issued by the issuing bank.

Reimbursing banks are big and globally reliable financial institutions.

For more details please click here.

 

Reimbursement and Reimbursing Bank

Ozgur Eker (CDCS)
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Reimbursement and Reimbursing Bank

What Does Reimbursement Mean?

Reimbursement is defined as a compensation paid to someone for an expense.

In order to be reimbursed by another person or organisation, first of all you have to make some expenses, then you will be qualified for a reimbursement.

The same logic apply to the reimbursement as a trade finance term.

A confirming bank or a nominated bank first honors or negotiates against a complying presentation under a letter of credit and then they will be reimbursed by the reimbursing banks in accordance with the issuing banks authorization.

Reimbursing Bank:

Reimbursing bank is the bank that, at the request of the issuing bank, is authorized to pay, or accept and pay time draft under a documentary credit in accordance with UCP 600 article 13 or if incorporated, the ICC uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725). (1)

What is the Function of a Reimbursing Bank Under a Letter of Credit?

There are two possible reasons that makes a reimbursing bank necessary under a documentary credit transaction.

First reason may be that the confirming bank does not trust the issuing bank in terms of risk issues and demands more security. In this situation presence of the reimbursing bank is a requirement for the confirmation.

Without receiving a reimbursement undertaking from the reimbursing bank, the confirming bank may elect not to add its confirmation to the credit.

Note: Please keep in mind that confirmation process is a commercial decision and no bank is forced to add its confirmation to any letter of credit. Please read my article Confirmation and Confirmed Letter of Credit for more detail.

Second reason could be that the issuing bank and nominated bank (in case confirmed letter of credit confirming bank) do not have an account relationship, as a result they may be requiring a third bank’s service for the settlement.

What are the Rules Covering Bank-to-Bank Reimbursements Under Letters of Credit?

There are two options for the reimbursement rules.

Reimbursements must be governed either by URR 725 or UCP 600 article 13 for the letters of credit which are opened according to latest documentary credit rules.

  • URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits – ICC Publication No. 725: This is a small size booklet published by ICC that specifically governs the bank-to-bank reimbursements. If issuing bank would like to be the reimbursement is subject to URR 725, then it must make a reference at the swift message when issuing a letter of credit.

Bank-to-Bank Reimbursements subject to URR 725

Issuing bank put a reference to MT700 swift message under field “40E- Applicable Rules” as “UCPURR LATEST VERSION” which means that letter of credit is subject to latest version of letter of credit rules (UCP 600) and latest version of bank-to-bank reimbursements rules (URR 725).

Note: Additionally the reimbursement authorization should expressly indicate that it is subject to URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits.

  • UCP 600 Article 13: If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the UCP 600 article 13 applies.

Some important definitions from URR 725 – The Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits:

  • “Claiming bank” means a bank that honours or negotiates a credit and presents a reimbursement claim to the reimbursing bank. “Claiming bank” includes a bank authorized to present a reimbursement claim to the reimbursing bank on behalf of the bank that honours or negotiates.
  • “Issuing bank” means the bank that has issued a credit and the reimbursement authorization under that credit.
  • “Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank
  • “Reimbursement Authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.
  • “Reimbursement Undertaking” means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.
  • “Reimbursement Claim” means a request for reimbursement from the claiming bank to the reimbursing bank.

Reimbursement Transaction Under a Letter of Credit:

Reimbursement Transaction under a Letter of Credit

  1. Issuing bank issues the letter of credit and transmits it to the nominated bank via swift message.
  2. Issuing bank gives reimbursement authorization to reimbursing bank.
  3. Reimbursing bank issues its reimbursement undertaking and transmits it to the nominated bank via swift message.
  4. Nominated bank advices the letter of credit to the beneficiary. (please keep in mind that step 3 and step 4 may be change their sequence)
  5. Beneficiary presents documents to the nominated bank.
  6. Nominated bank checks the documents and negotiate upon a complying presentation.
  7. Nominated bank sends it reimbursement claim to the reimbursing bank. Reimbursing bank reimburse nominated bank according to terms and conditions of the reimbursement undertaking.
  8. Nominated bank send documents to the issuing bank.
  9. On the final stage issuing bank and reimbursing bank arrange settlement between themselves. Issuing bank gets the letter of credit amount from the applicant and releases original shipment documents.

References:

  1. The Guide to Documentary Credits” written by Garry Collyer, 3rd Edition, Page : 36)

What Does “With Recourse” and “Without Recourse” Mean in International Finance?

Ozgur Eker (CDCS)
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What Does “With Recourse” and “Without Recourse” Mean in International Finance?

Recourse means the right to claim a refund of an amount paid in connection with the negotiation of a documentary credit or the discounting of a bill of exchange. (1)

With recourse and without recourse are two terms defining whether or not the paying bank shall claim refund from the beneficiary in case it could not get reimbursement from the issuing bank.

On this post I will be answering below questions with the help of the graphic illustrations.

  • What is the meaning of with recourse term in international trade finance terminology?
  • What is the meaning of without recourse in international trade finance terminology?
  • Which banks pay with recourse and which bank pay without recourse basis?

What is the Meaning of With Recourse and Without Recourse Terms in International Trade Finance Terminology?

With recourse term defines the situation in which the paying bank will be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the nominated bank or the negotiated bank pay the letter of credit amount to the beneficiaries with recourse terms.

with recourse and without recourse

Without recourse term defines the situation in which the paying bank will not be able to claim refunds from the beneficiary in case the letter of credit documents are not paid by the issuing bank.

In general, the confirming bank pay the letter of credit amount to the beneficiaries without recourse terms.

Important Note: The nominated bank may also pay to the beneficiary against discrepant documents with recourse basis.

These types of payments should be covered with a formal indemnity.

References:

Documentary Credits, Nordea Trade Finance, Page: 305

Confirming Bank

Ozgur Eker (CDCS)
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Confirming Bank

If you would like to export your goods to one of the high risk countries and you would like to eliminate default risk of the importer’s bank, then you may seek to have your letter of credit confirmed by one of the prime banks.

Confirmation is a security tool, which is develop to reduce exporters risks in letters of credit transactions.

In theory, an exporter should be able to get his money from the confirming bank against a complying presentation.

However, in real life, in some cases even the confirming banks do not pay the credit amount to the exporters, until they have been reimbursed by the issuing banks. (For further information regarding confirming banks behavior, even if the presentation is complying, please read my article titled : Confirmed L/C at Sight.)

On this post I will try to explain you one of the most frequently used term in international letter of credit transactions: Confirming Bank.

Here are the headlines of the article:

  • What is a confirming bank?
  • What are the responsibilities of the confirming bank?
  • Which UCP 600 article regulates the confirming banks responsibilities?
  • What are the differences between the confirming bank and advising bank?
  • What are the differences between the nominated bank and confirming bank?
  • Case Study: Confirming bank’s payment responsibility when documents are presented with discrepancies.

What is a Confirming Bank?

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

confirming bank definition

What are the Responsibilities of the Confirming Bank?

According to the latest version letter of credit rules, if the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must:

  • honour, if the credit is available by sight payment, deferred payment or acceptance with the confirming bank;
  • honour, if the credit is available by sight payment with another nominated bank and that nominated bank does not pay;
  • honour, if the credit is available by deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
  • honour, if the credit is available by acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
  • honour, if the credit is available by negotiation with another nominated bank and that nominated bank does not negotiate.
    negotiate, without recourse, if the credit is available by negotiation with the confirming bank.

confirming bank responsibilities

Which UCP 600 Articles Regulate the Confirming Bank’s Responsibilities?

UCP 600 article 8 defines the roles and responsibilities of the confirming bank. Additionally confirming bank’s liabilities have been described in numerous articles under UCP 600.

What are the Differences Between the Confirming Bank and the Advising Bank?

The advising bank has no payment obligations under the letter of credit rules. The advising bank has two main responsibilities: authenticating incoming letters of credit and transmitting them to the beneficiaries as a whole, intact.

Additionally, an advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.

On the other hand the confirming bank has to pay the letter of credit amount to the beneficiary against a complying presentation, even if nominated bank or issuing bank refrain to pay.

In case the credit is issued that is available by negotiation with the confirming bank, then the confirming bank must negotiate, without recourse.

What are the Differences Between the Nominated Bank and the Confirming Bank?

First of all, please kindly be noted that according to the letter of credit rules it is possible that the nominated bank and the confirming bank could be different banks.

But in practice a bank would not add its confirmation to the letter of credit, if it is not available with itself.

As per the letter of credit rules, the confirming bank has clear payment obligations. If the presentation is complying, then the confirming bank must honor.

It is a very straight forward definition.

But nominated banks may or may not pay against complying presentations. If they do not, then either the confirming bank or the issuing bank must pay.

discrepant documents and the confirming bank

Query:

A German exporter ships 2 containers of process pumps to an importer located in Libya. Due to the internal turmoil in Libya, the issuing bank face difficulties to honor the presentation.

The letter of credit was confirmed by another bank in UK, but due to the discrepancies found on the documents the confirming bank refrain to pay the L/C amount.

The exporter explains the situation and asks the following question: “We think that a confirmed letter of credit means that the confirming bank gives his definitive undertaking in addition to that of the issuing bank, provided that the stipulated documents are presented to the confirming bank and that the terms and conditions of the documentary credit are complied with, either to pay at sight, or to accept drafts and to pay them at their maturity, or to pay on a determinable date if there is a deferred payment.”

But what happens;

1-) if documents are presented with discrepancies to the confirming bank, and the confirming bank notifies advice of refusal to the beneficiary/presenter in regards of the discrepancies, does the definitive undertaking of confirming bank cease to exist?

2-) if these documents are sent to issuing bank on an approval basis and the discrepancies are waived, does the confirming bank have to pay with its resources (or accept drafts or incur a deferred payment undertaking), or does it have to wait until it receives the funds from the issuing bank and then pay the beneficiary?

Analysis of the Case Study:

A confirmation of a letter of credit is, as you indicated, an undertaking from a bank in addition to the undertaking provided by the issuing bank. The UCP 600 states that the undertaking (confirmation) is subject to presentation of complying documents under the letter of credit.

Where documents are presented to the confirming bank, within the validity of their undertaking, and found to be discrepant, and the confirming bank provides a notice of refusal in accordance with the UCP, its undertaking would no longer exist in respect of that presentation (subject to the beneficiary being unable to correct the discrepancy(ies) within the credit timelines).

If the documents, on instructions of the beneficiary, are subsequently sent to the issuing bank on an approval basis and the discrepancies are waived, the confirming bank has no obligation to make payment unless it has indicated its willingness to do so at the time of providing its notice of refusal.

The presentation of discrepant documents to the confirming bank would end its obligation under the credit unless it has stated otherwise, and the fact that the issuing bank accepts a waiver of discrepancies would not further obligate the confirming bank. (Source:Official Opinion R520 / TA543 rev2)

Can the Confirming Bank Cancel Its Confirmation by Himself?

The confirming bank could not cancel its confirmation by himself, because the confirmation is an irrevocable undertaking of the confirming bank against the beneficiary of the letter of credit and another nominated bank, if it exists.

A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit unless,

  • the beneficiary will not be making presentation withing the allowed time frame as stated in the credit, or
  • the beneficiary presented discrepant documents and could not remove discrepancy within the presentation period, or
  • the beneficiary is confirmed by a written statement with the confirming bank that the beneficiary will not be utilizing the letter of credit.

Must the Confirming Bank and the Beneficiary Locate in the Same Country?

Usually the confirming bank and the beneficiary are located within the same country, but there is no governing rule in the letter of credit rules that is forcing these two parties must be located in the same country.

As a result the beneficiary and the confirming bank may be located in different countries.

In practice, German banks confirm the credits issued in African countries such as Ethiopia, Nigeria, etc. for Non-German beneficiaries. The same structure applies for the French banks for the letters of credit issued in Senegal, Morocco, Algeria etc.

Does a Confirming Bank Must Add Its Confirmation to a Letter of Credit?

Adding a confirmation to a letter of credit is a commercial decision for the confirming bank.

As a result a confirming bank may or may not be adding its confirmation to a given letter of credit, based on solely its own decision.

But if the confirming bank decides to confirm, it will be irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit.

What Happens When a Confirmed Letter of Credit is Amended?

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment.

A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice.

What Does Silent Confirmation Mean?

Under normal conditions, the confirming bank could add its confirmation to a letter of credit upon the issuing bank’s authorization or request.

If the confirming bank adds its confirmation to the credit without any request from the issuing bank, then this procedure will be called as a silent confirmation or unauthorized confirmation.

It is worth mentioning that silent confirmation is not covered under letter of credit rules.

Confirming banks pay letter of credit amount to the beneficiaries without recourse basis. Do you want to know more about without recourse term? Please click here for more information.

Nominated Bank

Ozgur Eker (CDCS)
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Nominated Bank

Nominated bank is another important yet not well understood term in international letter of credit transactions.

May be the biggest contribution of this lack of understanding comes from the blur definitions of its roles and responsibilities comparing to the confirming bank, advising bank or issuing bank under the letter of credit rules.

On this post I will try to explain you one of the most challenging term in international letter of credit transactions: Nominated Bank.

Here are the headlines of the article:

  • What is a nominated bank?
  • What are the responsibilities of the nominated bank?
  • Which UCP 600 article regulates the nominated banks responsibilities?
  • What are the differences between the nominated bank and the advising bank?
  • What are the differences between the nominated bank and the confirming bank?

What is a Nominated Bank?

Nominated Bank means the bank with which the letter of credit is available or any bank in the case of a credit available with any bank.

nominated bank definition

What are the Responsibilities of the Nominated Bank?

According to the letter of credit rules a letter of credit must state the bank with which it is available.

Alternatively, it is possible to open a letter of credit to be available with any bank. These kinds of letters of credit are known as “freely negotiable letters of credit”.

The bank with which the letter of credit is available is defined as a nominated bank.

UCP 600 defines the responsibilities of a nominated bank in two main categories:

  • Payment Responsibility
  • Acceptance of Presentation Responsibility

nominated bank's responsibilities

Payment Responsibility:

Provided that the stipulated documents are presented to the nominated bank and that they constitute a complying presentation, the nominated bank should honor if the credit is available by sight payment, deferred payment or acceptance with a nominated bank.

Alternatively, the nominated bank can negotiate the complying presentation if letter of credit is available by negotiation with the nominated bank.

But it is worth mentioning that unless a nominated bank is the confirming bank, an authorization to honor or negotiate does not impose any obligation on that nominated bank to honor or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.

In daily practice, nominated banks rarely pay to the beneficiaries against the complying presentation.

What they commonly do is just to receive the documents from the beneficiaries and send them to the issuing banks by demanding reimbursement either from the issuing bank or reimbursing bank.

They transfer the letter of credit amount, which they have received from one of these two banks to the beneficiaries.

Acceptance of Presentation Responsibility:

If a letter of credit is available with a nominated bank, then the authorized nominated bank should accept the presentation of the beneficiary.

Once again please kindly keep in mind that the acceptance of presentation does not give any payment obligation to the nominated bank.

By presenting documents to a bank in their own country, beneficiaries could complete their presentations faster. This is one of the biggest advantages of using a nominated bank for the beneficiaries.

advantages of using a nominated bank

Case Study: Presentation of Documents Where the Letter of credit is Available with the Issuing Bank

mt 700 letter of credit example available with issuing bank

———————————- Analysis of the Example ————————————-

The letter of credit is available with the issuing bank in Germany. The beneficiary is located in Hong Kong.

The beneficiary has to collect all required documents and complete the presentation within 21 days after the date of shipment.

21 days of presentation period includes express courier transit time between Hong Kong and Germany.

The problem with such a letter of credit structure is that in case the issuing bank finds discrepancies on the documents, it would be almost impossible for the beneficiary to correct the documents and re-submit the corrected documents for a timely presentation.

On below figure you can see the difference between letter of credit which is available with the issuing bank and the nominated bank.

letter of credit available with the issuing bank or the nominated bank

Which UCP 600 Article Regulate the Nominated Bank’s Responsibilities?

UCP 600 article 12 defines the roles and responsibilities of the nominated bank. Additionally nominated bank’s liabilities have been described in numerous articles under UCP 600.

What are the Differences Between the Nominated Bank and the Advising Bank?

The advising bank has no payment obligations under the letter of credit rules.

The advising bank has two main responsibilities: authenticating incoming letters of credit and transmitting them to the beneficiaries as a whole, intact.

Additionally, an advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.

On the other hand the nominated bank is the bank with which the letter of credit is available, as a result the letter of credit expires at the counters of nominated bank.

Furthermore the issuing bank authorizes the nominated bank to honor or negotiate the complying documents that are presented to them.

What are the Differences Between the Nominated Bank and the Confirming Bank?

First of all, please kindly be noted that according to the letter of credit rules it is possible that the nominated bank and the confirming bank could be different banks.

But in practice a bank would not add its confirmation to the letter of credit, if it is not available with itself.

As per letter of credit rules the confirming bank has clear payment obligations.

If the presentation is complying, then the confirming bank must honor. It is a very straight forward definition.

But nominated banks may or may not pay against the complying presentations. If they do not, then either confirming bank or issuing bank must pay.

Case Study: Negotiation of a draft by a nominated bank, which is drawn under a letter of credit

negotiation

Negotiation under letters of credit is an old “habit” which was invented long before even the first version of the UCP existed.

I am told that negotiation was used by London merchant bankers when UK exporters shipped goods covered by credits issued in Hong Kong or Shanghai.

At that time, credits were (normally) not advised through a bank (in London), and there was no nominated bank.

The presentation of documents was to be made at the counters of the issuing bank, which, after it examined and approved the documents, transferred the relevant amount to the beneficiary.

That took a long time. To assist the exporter – and of course to make money – the merchant banks offered to negotiate the documents. They discounted the bill of exchange, mostly with recourse. (“Negotiation” seen to be no benefit to beneficiaries, Reinhard Längerich, DCInsight Vol. 10 No.2 April – June 2004)

UCP 600 defines negotiation as follows:

  • “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.”

I would like to show an example of the negotiation of a draft which is drawn under a letter of credit with the face value of EUR 100.000,00 as illustrated below.

bill of exchange negotiation

ABN AMRO Bank is the nominated bank.

The beneficiary endorses the draft to ABN AMRO Bank, and ABN AMRO Bank discounts the draft by paying to the beneficiary EUR 95.000,00.

The transfer of the funds from the ABN AMRO Bank to the beneficiary constitutes a negotiation.

ABN AMRO Bank presents the draft and other letter of credit documents to the Issuing Bank.

If Issuing Bank determines that the presentation is complying, then the issuing bank must pay EUR 100.000,00 to ABN AMRO Bank.

If ABN AMRO Bank could not get the face value of the draft from the Issuing Bank, then ABN AMRO Bank may go back to Beneficiary to recover its EUR 95.000,00 payment.

ABN AMRO Bank, which is the nominated bank, discounts and pays the discounted letter of credit amount to the beneficiary with recourse basis. Do you want to know more about with recourse term? Please click here for more information.

Advising Bank

Ozgur Eker (CDCS)
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Advising Bank

Advising Bank is the bank that advises the letter of credit to the beneficiary. Advising banks act upon the request of issuing banks.

Generally, advising banks are located in the same country as beneficiaries. That is why issuing banks need their services.

Letters of credit are transmitted between banks via an online platform called Swift.

Swift platform is secure and fast, but it is expensive. That is why most of the exporters and importers do not have an access to the Swift platform.

In today’s international trade world, letters of credit are transmitted from issuing bank to the advising bank via swift platform and afterwards advising banks advise the credits to the beneficiaries other means of telecommunication such as email attachments of .tif or .html files. (1)

On this post I will try to explain you one of the most important concepts in letters of credit: Advising Bank.

Here are the headlines of the article:

  • What is an advising bank?
  • Why an issuing bank need to use another bank’s services in order to advise the letter of credit to the exporter?
  • What are the roles and responsibilities of the advising bank in a letter of credit transaction?
  • What are the differences between the nominated bank and advising bank?
  • How advising banks authenticate letters of credit before advising them to the beneficiaries?

What is an Advising Bank?

An advising bank means the bank that advises the letter of credit to the exporter at the request of the issuing bank.

An advising bank acts upon the issuing bank’s request to advise the letter of credit to the beneficiary.

Why an Issuing Bank Needs to Use an Advising Bank’s Services in Order to Advise the Letter of Credit to the Exporter?

An issuing bank needs to utilize an advising bank’s services just for practical reasons.

Exporters and importers are generally located in different countries in international business transactions.

In order to open a letter of credit, the importer applies to his bank which is located in his own country.

Once the letter of credit is issued, it must be conveyed to the exporter.

60-70 years ago issuing banks used to write down letters of credit on their corporate letterhead papers, signed and sent them to the beneficiaries via postal services.

As technology advances, first, tested telex messages replaced the paper form of the letters of credit. Later on authenticated swift messages replaced both tested telex and paper form of the letters of credit.

At the moment the vast majority of letters of credit issued by secure online swift platform.

MT 700 Swift message statistics
Letter of credit issuance statistics via Swift platform. MT 700 Swift message statistics.

The Swift platform is used by banks and big corporations. Most of the small and medium size manufacturing companies and importers do not have an access to the swift platform.

As a result issuing banks have to use advising banks’ services when advising the letters of credit to the beneficiaries.

Advising banks and the beneficiaries are located at the same country.

Usually the advising bank has a business relationship with the exporter, because the exporter informs his advising bank preferences to the importer during the negotiation phase of the transaction with the help of the sales contracts or proforma invoices.

advising bank roles and responsibilities

What are the Roles and Responsibilities of the Advising Bank in a Letter of Credit Transaction?

  • A letter of credit can be advised to an exporter via an advising bank.
  • According to the letter of credit rules, the advising bank has no payment responsibility against the exporter as long as the advising bank is not a confirming bank.
  • The advising bank advises the letter of credit and any amendment without any undertaking to honour or negotiate.
  • Advising bank has two main responsibilities against the beneficiary. Firstly, the advising bank must signify that it has satisfied itself as to the apparent authenticity of the letter of credit or amendment. Secondly, the advising bank must ensure that the advice of the letter of credit accurately reflects the terms and conditions of the credit or amendment received from the issuing bank.

letter of credit advising process

  • It is also possible to use the services of another bank (“second advising bank”) to advise the letter of credit and any amendment to the beneficiary. According to the letter of credit rules first advising bank’s and second advising bank’s responsibilities are the same against to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.
  • Issuing banks must advise the letter of credit and subsequent amendments to the beneficiary through the same advising bank. For example, if the letter of credit advised to the beneficiary by the Advising Bank A in country Y, subsequent amendments must be advised to the beneficiary by the same bank.

advising letter of credit amendments

  • If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.
  • If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.

Can The Issuing Bank Advice the Letter of Credit to the Beneficiary Straightforward Without Using an Advising Bank’s Services?

According to the current letter of credit rules advising bank acts as an agent on behalf of the issuing bank.

As a result the issuing bank may choose to transmit the letter of credit to the beneficiary himself.

This would be the case especially in domestic letters of credit, where both the applicant and beneficiary are the customers of the issuing bank.

issuing bank advises the letter of credit

Which UCP 600 Articles Regulate the Advising Bank’s Responsibilities?

UCP 600 article 9 defines the roles and responsibilities of the advising bank.

Advising Bank’s Liabilities have been described in article 7 under UCP 500 which was the previous set of rules for the international letters of credit.

What are the Differences Between the Nominated Bank and the Advising Bank?

Nominated Bank

  • Nominated bank is the bank with which the letter of credit is available as a result letter of credit expires at the counters of nominated bank.
  • An issuing bank authorizes a nominated bank to honor or negotiate the complying documents that are presented to the nominated bank.

Advising Bank

  • Advising bank has no connection with the letter of credit availability or the place of letter of credit expiry.
  • Advising bank has no connection with the payment of the letter of credit unless it is a nominated or confirming bank.

How Does an Advising Banks Authenticate the Letter of Credit Before Advising It to the Beneficiary?

  • Letters of credit received by SWIFT platform: Swift messages are authenticated message types and they need no further controls for authentication.
  • Letters of credit received by paper format: The signatures on the letter of credit must belong to the issuing bank’s official representatives. In order to verify this advising bank must check the signatures with specimen signatures held at the bank.

Case Study: How to define the advising bank’s responsibility in respect of “advice accurately reflects the terms and conditions of the credit or amendment received”?

lc advising bank responsibility

Answer: Sub-article 9 (b) for the advising bank and sub-article 9 (c) for the second advising bank, recognize the responsibility of such banks to ensure that all the details of a credit or amendment are advised to the beneficiary.

It can happen that when photocopying a credit or amendment that has been received, part of the message is not copied due to the folding of the document to accommodate the photocopier.

The rules require the bank to ensure that all the details of a credit or amendment that are relevant to the beneficiary are sent to the beneficiary.

There may be information that appears in a credit or amendment that is between the two banks e.g., financing requests, interest details or bank account numbers etc. that are of no concern to a beneficiary. These may be conveyed to a beneficiary or deleted from the advice that is sent to the beneficiary.

This question replied by Gary Collyer during the XXV Latin American Foreign Trade Congress – CLACE, Guatemala, June 3-5, 2009.
Source: http://www.felaban.com/archivos/memoria_anual09
/gary_0506_3.ppt

Field 57a: ‘Advise Through’ Bank

This field identifies the bank, if different from the Receiver, through which the documentary credit is to be advised/confirmed to the beneficiary.

According to current letter of credit rules, an advising bank may utilize the services of another bank (“second advising bank”) to advise the credit and any amendment to the beneficiary.

A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto.

If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.

Example 1: “Advise Through” Bank
57D: `Advise Through` Bank -Name&Addr
MEESNL2A

Example 2: “Advise Through” Bank
57A: ‘Advise Through’ Bank – Identifier Code
DENITRIS

Example 3: “Advise Through” Bank
57A: ‘Advise Through’ Bank – Identifier Code
ISBKTRIS

References:

  1. Advising Bank, www.advancedontrade.com, Retrieved: 31.May.2018

Issuing Bank

Ozgur Eker (CDCS)
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Issuing Bank

Letter of credit is opened and finalized by the issuing bank.

The issuing bank is the institution that gives ultimate irrevocable and conditional payment guarantee to the beneficiary.

All other banks are acting according to the instructions and authorization that they have received from the issuing bank.

For example, an advising bank advises the letter of credit to the beneficiary as per the instructions that have been received from the issuing bank.

An advising bank transmits the letter of credit to the beneficiary in the capacity of the advising bank.

Similarly a confirming bank, nominated bank and reimbursement bank are all acting as per the issuing bank’s instructions and authorization.

On this post I will try to explain you one of the most important concepts in letters of credit: Issuing Bank. Here are the headlines of the article:

  • What is an issuing bank?
  • What are the responsibilities of the issuing bank?
  • Which UCP 600 article regulates the issuing banks responsibilities?
  • How does an issuing bank open a letter of credit?
  • What are the main features of a well structured letter of credit?

What is an Issuing Bank?

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

issuing bank definition and responsibilities

What are The Responsibilities of the Issuing Bank?

The issuing bank is the ultimate payer of the letter of credit.

Even if other banks do not pay to the beneficiary against a complying presentation, the issuing bank must pay the letter of credit amount.

This role of the issuing bank clearly defined under UCP 600.

Let us have a look at the issuing bank’s payment liabilities under the letter of credit rules with different availability options.

Letter of credit is available either by the nominated or issuing bank:

Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honor if the credit is available by:

  1. sight payment, deferred payment or acceptance with the issuing bank;
  2. sight payment with a nominated bank and that nominated bank does not pay;
  3. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
  4. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
  5. negotiation with a nominated bank and that nominated bank does not negotiate.

The issuing bank’s responsibilities will be effective as soon as letter of credit issued.

As a result an issuing bank is irrevocably bound to honor a complying presentation as of the time it issues the credit.

Issuing bank’s responsibilities

The issuing bank must reimburse the nominated bank which honored or negotiated a complying presentation and forwarded the documents to the issuing bank.

The reimbursement under the letter of credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank pays the credit amount to the beneficiary before the maturity date.

An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

Which UCP 600 Articles Regulate the Issuing Bank’s Responsibilities?

UCP 600 article 7 defines the roles and responsibilities of the issuing bank.

The issuing bank’s liabilities have been described in article 9 under UCP 500, which was the previous set of rules for the international letters of credit.

How Does an Issuing Bank Open a Letter of Credit?

I have already covered the topic “How to open a letter of credit?” from the importers perspective.

Today I would like to explain the letter of credit issuance process from the issuing bank’s point of view.

Opening a letter of credit is a commercial decision. Banks issue letters of credit in order to make profit.

An issuing bank charges letter of credit fees from the applicant against services it offers and risks it takes.

letter of credit compliance

Issuing banks evaluate letter of credit applications mainly in two categories:

  • Compliance with the issuing bank’s policies
  • Correctness of the instructions of the applicant

Letter of Credit Application’s Compliance with the Issuing Bank’s Policies: During the letter of credit issuance process, the issuing bank must ensure himself that he complies with national law and international regulations.

As a result the letter of credit’s application compliance must be checked against the issuing bank’s letter of credit issuance policies.

Some of the important points that must be controlled at this stage can be summarized as bellows:

  1. Is there any requirement of import licenses or import approvals?
  2. Is letter of credit application complying with the government requirements?
  3. Is letter of credit application complying with the central bank requirements?
  4. Is letter of credit application complying with anti money laundering regulations?
  5. Is letter of credit application complying with international sanction regulations?
  6. Is there any fraud risk in terms of applicant and the beneficiary of the letter of credit?

Correctness of the instructions of the applicant: Documentary credit, when issued, carries the name of the issuing bank along with its reputation. As a result issuing banks must ensure that the letter of credit is defect free.

ISBP 745 correctly states that “Many of the problems that arise at the document examination stage could be avoided or resolved by the respective parties through careful attention to detail in the credit or amendment application and issuance of the credit or any amendment thereto.”

In order to be make sure that the letter of credit does not contain errors the issuing bank must discuss with the applicant over the letter of credit structure.

The discussion would be covering below points:

well structured letter of credit

  • Work-ability of the Letter of Credit: The letter of credit must be workable for the beneficiary, which means that the beneficiary could make the presentation and get paid against complying documents without being dependent on any other factor.
    • Example: Letter of credit should not contain a joker clause.
    • Example: Letter of credit should not state a wrong incoterms.
  • Documentary Conditions: All conditions in a letter of credit must be linked to a document to indicate compliance with the condition. UCP 600 states that “If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.”
    • Example: Letter of credit should not contain a non-documentary condition.
  • Clear Definitions, Plain Structure: A letter of credit should not contain ambiguous terms and abbreviations that may have different meanings. Additionally, a letter of credit must be precise. Issuing bank should discourage applicants to include excessive details in the letter of credit.
    • Example: Virgules (i.e., slash marks “/”) may result in different meanings and should not be used as a substitute for a word. If, nevertheless, a virgule is used and no context is apparent, this will allow the use of one or more of the options. For example, a condition in a credit stating “Pink/Brown/Green” with no further clarification will mean only Pink or only Brown or only Green or any combination of them.

Case Study: Examples of bad banking practices incorporated by issuing banks when issuing a letter of credit 

bad banking practices

Example 1: The photocopy of bill of lading will be accepted by us as presented except if not complying with the next two conditions:

1. in case of sea transport, the transport document must indicate IMO ship number of carrying vessel.

2. shipment by a shipping co and/or by ship under sanctions US/EU/UN are forbidden.”

Example 2: Documents must be presented not later than 10 calendar days after credit issuance date

Example 3: 100 percent of commercial invoice value is payable at 30 days from applicant’s authorized representative’s signature on required documents.

Example 4: One original bill of lading consigned to order and blank endorsed to be sent directly to the applicant. Courier receipt to be presented along with the shipping document.

Example 5: Claim must be submitted to us not later than 14 calendar days after expiry date.

Example 6: Negotiating bank must certify that documents were correct on first presentation.

Example 7: Documents must be correct on first presentation. Correction of documents is not permitted.

Example 8: Provided documents on first presentation are in strict conformity with the L/C terms, you are authorized to reimburse yourselves with the reimbursing bank.

Clauses specified above represent bad practice, and issuing banks should refrain from including such terms and conditions in their credit.

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