CDCS Training Materials-The role of the nominated bank
This chapter describes the role and responsibilities of a nominated bank. By the end of this chapter, you should be able to: ◆◆ describe the concept of a bank ‘acting on its nomination’; and ◆◆ understand what it means to be a nominated bank.
16.1 What is a ‘nominated bank’?
As discussed in previous chapters, and in simple terms, a documentary credit constitutes an irrevocable undertaking of an issuing bank to honour
– that is, to pay at sight, to accept a draft drawn on it and pay at maturity or to incur a deferred payment undertaking and pay at maturity – when a complying presentation is made to it.
A beneficiary – rather than being required to make a presentation directly to an issuing bank, which in most cases will be located in a different country or region – will generally prefer the option of being able to present its documents to a local or preferred bank for honour or negotiation.
It may be that an issuing bank will permit a beneficiary to present its documents to a bank in its country or region with the view that such bank will act as a trusted intermediary between the two parties.
It may also be that a beneficiary will request such local or preferred bank only to examine its documents before they are sent to the issuing bank, so that any discrepancies can be corrected conveniently and with minimal delay, without requesting such bank to honour or negotiate, or to request such bank to honour or negotiate only when the issuing bank has taken up the documents.
As can be inferred by its title, a ‘nominated bank’ can fulfil these requirements – that is, it is a bank nominated by the issuing bank in its documentary credit, which may offer to honour or negotiate a complying presentation that the beneficiary makes. It may also be a bank that merely receives the documents from the beneficiary to facilitate presentation within the expiry date and presentation period.
To this extent, 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.
It should be noted that even though a bank may be named in the documentary credit as the nominated bank, unless such bank is also the confirming bank, it is under no obligation to act on that nomination.
Even if it does agree to act, it may impose its own conditions for doing so, which may include a right of recourse to the beneficiary in the event that the issuing bank does not reimburse it according to the terms and conditions of the documentary credit. The circumstance under which recourse is available is covered in Chapter 17.
A nominated bank may be described in the context of a single (named) bank or as ‘any bank’ – that is, in the case of the latter, the beneficiary will have a choice of bank with which it may present its documents. This allows the situation in which presentations under the same documentary credit can be presented to different banks.
It is important to note the context in which a nominated bank is referred to in UCP 600. For example, UCP 600, sub-article 6(a), provides as follows.
a. A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank.
In this context, reference to ‘nominated bank’ is in respect of an indication in the documentary credit of the bank, other than the issuing bank, with which it may possibly be available for honour or negotiation.
However, in UCP 600, sub-article 14(a), we see the first reference to a ‘nominated bank acting on its nomination’.
a. A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.
This sub-article is describing the responsibilities of the nominated bank once it has decided to act on the nomination to honour or negotiate.
16.1.1 UCP 600 articles that relate directly to a nominated bank
As noted in section 16.1, UCP 600, sub-article 6(a), indicates that a credit must state the bank with which it is available or whether it is available with any bank. A credit that is available with a nominated bank is also available with the issuing bank, meaning that the beneficiary may choose to by-pass a local or preferred bank – that is, the nominated bank – and present its documents to the issuing bank directly.
UCP 600, articles 7 and 8, require an issuing bank or confirming bank to honour (and, in the case of a confirming bank, to negotiate) when a nominated bank or another nominated bank does not honour or negotiate between the time at which it determines that a complying presentation has been made and the date on which payment is due under the documentary credit.
This rule reflects the circumstances under which a bank that is nominated to honour or negotiate decides not to do so (or the beneficiary does not request honour or negotiation), or where the nominated bank has initially acted on its nomination by accepting a draft drawn on it, or by incurring a deferred payment undertaking, or by agreeing to advance funds on a future date under a documentary credit available by negotiation, but fails to pay on the maturity date.
In the context of financing under a documentary credit, UCP600, sub-article 12(b), provides as follows.
b. By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.
This issue will be covered further in Chapter 17.