Guide to Documentary credits- Definitions
Guide to Documentary credits- Definitions? Learning objectives In this study text,reference is made repeatedly to different terms that are associated with documentary credits and the type(s) of role that a bank may undertake. This chapter provides the definitions that should be applied whenever such terms or roles are mentioned. This chàpter also provides a shórtinirodJction to the roles and responsibilities of the entities that participate in a documentary credit. By the end of this chapter, you should be able to: describe the main responsibilities of an applicant and beneficiary identify the types of role performed by banks ¡n a documentary credit and the banks’ main respónsibilities; and define the more common term is used in a documentary credit or UCP 600
4.1 Roles and responsibilities of parties involved in a documentary credit
This section outlines the type of role that can be performed by a bank and its main responsibilities ¡n that capacity. It also outlines the main responsibility of the beneficiary.
It should be noted that a documentary credit could consist of only two parties: an issuing bank and a beneficiary.
4.1.1 Issuing bank (or opening bank)
UCP 600, article 2, defines an ‘issuing bank’ as follows.
Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.
An issuing bank issues its documentary credit in favour of a beneficiary. In so doing, it incorporates its irrevocable and independent undertaking to honour – that is, to pay, to accept a draft and pay at maturity, or to incur a deferred payment uñdertaking and pay at maturity – provided that:
• all documents, as stipulated in the documentary credit, are presented;
• the beneficiary has complied with all of the terms and conditions of the
An irrevocable undertaking is enforceable against an issuing bank even if an applicant is unable or unwilling to reimburse it.
It should be noted from the UCP definition that, albeit in rare circumstances, an issuing bank could have two roles in a single transaction: one as the applicant of the documentary credit; and one as its issuing bank.
The role of the issuing bank, when reviewing the applicant’s application for išsuance of a documentary credit and the issuance of that documentary credit, is detailed n Chapters 6 and 7.
4.1.2 Beneficiary (or seller, or exporter)
UCP 600, article 2, defines a ‘beneficiary’ as follows.
Beneficiary means the party in whose favour a credit is issued.
Following shipment or dispatch of the goods, or when the required service or performance has been provided, the beneficiary will issue, collate and present the stipulated documents to the issùing bank, a confirming bank
(if any), or a nominated bank for honour or negotiation.
The various interactions of the beneficiary are handled in a number of the chapters of this study text. .
4.1.3 Advising bank
UCP 600, article 2, defines an ‘advising bank’ as follows.
Roles and responsibilities of parties involved in a documentary credit
Advising bank means the bank that advises the credit at the request of the issuing bank.
For a cross-border transaction, an issuing bank will usually electronically transmit or send, a documentary credit to a bank in the beneficiary’s country with which it maintains a correspondent banking relationship, requesting that bank to advise it to the beneficiary.
The transmission of a documentary credit to an advising bank is normally completed by the use of a Society for Worldwide Interbank Financial Telecommunication (SWIFT) MT700 message, but it could also be accomplished by telex, fax, email or letter, depending upon the arrangements that are in place between the two banks.
The requirements and role of an advising bank, when advising a credit, are detailed in Chapter 9.
4.1.4 Confirming bank
UCP 600, article 2, defines a ‘confirming bank’ as follows.
Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.
A bank that adds its confirmation to a documentary credit, upon the authorization or request of an issuing bank, provides a beneficiary with an additional irrevocable and independent undertaking that is separate from
that of the issuing bank. .
It is common for a confirming bank to act in the capacity of advising bank and nominated bank, but this is not an absolute requirement of UCP 600.
The requirements of a bank, when adding confirmation to a credit, are detailed in Chapter 10.
4.1.5 Nominated bank
UCP 600, article 2, defines a ‘nominated bank’ as follows.
Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.
An issuing bank, at the request of an applicant, or even as a matter of its own internal policy, may make a documentary credit available for payment, acceptance, deferred payment or negotiation with a named bank. This bank will usually be located in the country of the beneficiary. Alternatively, a documentary credit may indicate that it is available with any bank: but this is also usually restricted, by reference in the documentary credit, to an
expiry place (that is, a city or country), in which event it will be available with any bank located in that place.
A bank that agrees to act on a nomination of an issuing bank to pay, accept, incur a deferred payment undertaking or negotiate will be known as a nominated bank.
It should be noted that a documentary credit could be made available with the issuing bank only. In this case, there is no nominated bank and the beneficiary will be required to ensure the delivery of the stipulated documents to the issuing bank no later than the expiry date and the latest date of presentation.
A named nominated bank usually, but not necessarily, will also be an advising bank.
The role of a nominated bank is detailed in Chapter 16.
4.2 Applicant (or buyer, or importer)
UCP 600, article 2, defines an ‘applicant’ as follows.
Applicant means the party on whose request the credit is issued.
It should be noted that although an applicant is responsible for completing an application form to issue, or to amend, a documentary credit, it is not a party to that documentary credit.
The use of the term ‘party’ in the definition of the applicant is not intended to imply that an applicant is a party to a documentary credit. It is used to reflect the concept that ‘applicant’ can mean an entity other than the
bank’s actual customer. In this regard, it should be noted that:
• the interaction between an applicant and its bank prior to the issuance of a documentary credit is outside the scope of UCP 600; and
• following the issuance of a documentary credit, an applicant may subsequently, request an amendment to its terms and conditions, or provide a waiver of discrepancies that have been identified by the issuing bank. An issuing bank is under no obligation to accept or take note of such request or waiver.
These issues are covered in more detail in Chapters 6 and 18.
4.3 Other roles performed by banks
4.3.1 Reimbursing bank
UCP 600, sub-article 13(a), describes a ‘reimbursing bank’ as the bank a documentary credit upon which the nominated bank (the ‘claiming bank’) may claim in respect of any honor or negotiation that it has efected to the beneficiary.
Bank-to-bank reimbursements are covered in more detail in Chapter 22.
4.3.2 Second advising bank
UCP 600. sub-article 9(c). describes a ‘second advising bank’ as a bank utilized by the advising bank to advise the credit or any amendment to the beneficiary.
A second advising bank may also be named in the documentary credit. In this event, it is likely that the named bank will be the beneficiary’s banker and that the beneficiary will have previously requested the applicant to
route the documentary credit through its bank. However, the issuing bank may not have been in a correspondent banking relationship with that bank, so it may have advised it through its own branch or another correspondent
for further routing through the named bank.
4.3.3 Transferring bank
UCP 600, sub-article 38(b), defines a ‘transferring bank’ as follows.
Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank.
The issuance and handling of a transferable credit are covered in more detail in Chapter 19.
4.4 Terms used in documentary credits and/or UCP 600
4.4.1 UCP 600, Banking day
UCP 600, article 2, defines banking day’ as follows.
Banking day means a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.
An important aspect of this definition lies in the use of the word ‘regularly’. For example, if a bank is regularly open Monday to Friday, and also opens on a Saturday, but only to perform general banking services, Saturday is
not considered a banking day for UCP purposes. If, however, the same bank were open on Saturday for a half or full day to perform the handling of documentary credits, either would count as a banking day.
4.4.2 Complying presentation
UCP 600, article 2, defines ‘complying presentation’ as follows.
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.
It should be noted that the reference to ‘international standard banking practice’ does not refer exclusively to the ICC publication of the same name (ICC Publication No. 745, or ISBP 745). The phrase clearly encompasses
the practices described in that publication, but it also extends to other practices as determined by the ICC in its official opinions and DOCDEX decisions, and to established procedures that may apply between two or
more countries and which can be equally described as representing such practice.
UCP 600, article 2, defines ‘confirmation’ as follows.
Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.
Terms used in documentary credits and/or UCP 600
- Confirmation is added at either the request or the authorisation of the issuing bank.
A request is an instruction in the documentary credit for a bank, usually the advising bank, to add confirmation – by the use of words such as ‘Confirm’ or ‘Add your confirmation’.
- An authorisation is an instruction to add confirmation upon a specific request of the beneficiary — by the use of the words ‘May add’.
4.4.4 (Documentary) Credit
UCP 600, article 2, in the context of an irrevocable undertaking, defines ‘credit’ as follows.
Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honor a complying presentation.
UCP 600, sub-article 4(a), highlights the separateness of the documentary credit from the sales contract. The autonomy of the documentary credit is paramount, and is a topic covered in Chapters 6 and 7.
UCP 600, article 2, defines ‘honour’ as follows.
Honour means: a. to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
The term honour therefore encompasses these three types of settlement.
UCP 600, article 2, 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.
A documentary credit that is available by negotiation is the most common form of issuance today.
Both honour arid negotiation are covered in more detail in Chapter 1 7 of this study text.
UCP 600, article 2, defines ‘presentation’ as follows.
Presentation means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.
The definition contemplates two different uses of the term: the first part
of the definition refers to the actual delivery of the documents to the bank;
the second part refers to documents that have already been delivered and
are in the bank’s possession.
UCP 600, article 2, defines ‘presenter’ as follows.
Presenter means a beneficiary, bank or other party that makes a presentation.
The definition of presenter is most relevant in the context of UCP 600, article 16, and the need for a refusal notice to be sent to the presenter. The presenter may or may not be the beneficiary of the documentary credit.
Multiple Choice Questions(MCQ):
1. It is possible for an issuing bank to also be an applicant.’ Is this statement true or false?
B. False .
The correct answer is A. It can be the case that the issuing bank will be the applicant under a standby letter of credit.
2. ‘A documentary credit is always advised by the use of the SWIFT MT700.’ Is this statement true or false?
The correct answer is B. A documentary credit can be advised by any method that provides for its authentication — that is, including by letter, telex, fax or email.
3. ‘An applicant is a party to a documentary credit.’ Is this statement true or false?
The correct answer is B. The applicant is not a party to the credit. Any instruction that it provides after the issuance of the credit, such as a request for an amendment or a waiver of discrepancies, is subject to the consent of the issuing bank.
4. Which of the following is true of a second advising bank?
A. A second advising bank is utilised by the advising bank to advise a
credit to the beneficiary.
B. A second advising bank is named in the credit to advise the credit
to the beneficiary.
C. Either of the above.
The correct answer is C. A second advising bank can be named in the documentary credit or be selected by the advising bank.
5. Which of the following is not a form of honour’?
B. Deferred payment
The correct answer is C. The definition of ‘honour’ is composed of payment, acceptance and deferred payment.
Guide to Documentary credits- Definitions??
Guide to Documentary Credits by Gary Collyer, Chapter- Two, page # 31-38