Nominated Bank

Presentation – Parties to the Letter of Credit

Ozgur Eker (CDCS) Presentation 28 January 20198 February 2019Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Presentation, Reimbursing Bank

Issuing Bank

Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf.
Letter of credit is issuing bank’s payment promise against a complying presentation.
Most of the time issuing issuing banks receive receive the conditions conditions of the letters of credit from applicants through LC Application Forms.
Once an issuing bank opens an LC it undertakes to honor a complying presentation of the beneficiary without recourse.

Applicant

Applicant is the buyer of the underlying transaction.
Applicant is the party on whose behalf the letter of credit is issued.
Applicants complete Letter of Credit Application Forms to pass the details details of the letter of credit to issuing issuing banks via online forms or hard copy.
Once letter of credit is issued applicant removes from the lc equation in terms of payment obligation. Issuing banks must honor complying presentations independently and irrevocably.

Beneficiary

Beneficiary is the seller of the underlying transaction.
Beneficiary is the party in whose favor the letter of credit is issued.
Beneficiary ships the goods as required by the letter of credit and presents presents documents documents as indicated indicated.
Beneficiary will gets its money from the issuing bank as long as it complies with the letter of credit conditions.
Beneficiaries prove their compliance to the letter of credit conditions by making complying presentations to the banks.

Advising Bank

Advising bank is the bank that passes letter of credit to the beneficiary. UCP 600 describes advising bank as « the bank that advises the credit at the request of the issuing bank»
Advising banks mostly located on the same country with the beneficiaries.
Advising banks have very limited responsibilities against beneficiaries. Their main responsibility is to advise the credit to the beneficiaries.
They have no payment obligation unless they are also the confirming bank.

Nominated bank is the bank with which the credit is available.
Most of the time nominated banks are also the advising banks.
Nominated banks may honor a complying presentation. But their payment responsibility is not obvious. If they choose not to honor a complying presentation, there is no penalty mechanism defined in the letter of credit rules, UCP 600, for such an activity

Confirming Bank

Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
Most of the time a confirming bank is also the advising bank and the nominated bank.
Confirming Confirming bank provides provides beneficiary beneficiary an additional payment guarantee separate from the issuing bank’s payment obligation.
Confirming banks are located on the same country as beneficiaries so they will eliminate country risk of the issuing banks.

Reimbursing Bank

Reimbursing Bank : Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Banks in Letter of Credit

Ozgur Eker (CDCS) Advising Bank, Banks, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank 5 June 20187 April 2019Advising Bank, Banks, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

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 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 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 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 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 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.

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

Ozgur Eker (CDCS) Banks, Confirming Bank, How to Work With a Letter of Credit, Letter of Credit Basics, Nominated Bank 2 June 20187 April 2019Confirmation, Confirming Bank, Discounting a Letter of Credit, Negotiation, Nominated Bank, With Recource, Without Recource

What does "with recourse" and "without recourse" mean in international letter of credit transaction?

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.

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

Nominated Bank

Ozgur Eker (CDCS) Banks, Nominated Bank, Nominated Bank 1 June 201818 April 2021Banks, 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.

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

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.

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

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 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.

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.

Parties to Letters of Credit

Ozgur Eker (CDCS) Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Letter of Credit Basics, Letter of Credit Parties, Nominated Bank, Reimbursing Bank 16 January 201810 February 2025Advising Bank, Applicant, Beneficiary, Confirming Bank, Issuing Bank, Nominated Bank, Reimbursing Bank

This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.