Documentary credit practice is not without problems. Some LCs are unfortunately incorrectly issued in relation to the UCP 600’s provisions on availability.
A few examples are as follows:
Available with … By …
ANY BANK IN ____
BY NEGOTIATION
Drafts At: 21 DAYS FROM BL DATE
Drawee: NEGOTIATING BANK
Mistakes:
- A credit with a nominated bank by negotiation should not require drafts drawn on the nominated bank. Negotiation involves purchasing drafts drawn on a bank other than the nominated bank and/or documents under a complying presentation. The drawee must be a bank other than the “negotiating bank.”
- If drafts are to be drawn on the nominated bank, the credit should be available with the nominated bank by acceptance instead of by negotiation.
Available with … By …
ANY BANK IN ___
BY ACCEPTANCE
Drafts At: 120 DAYS FROM BL DATE
Drawee: XYZ BANK (Issuing Bank)
Mistakes:
- A credit with a nominated bank by acceptance should not require drafts drawn on the issuing bank or another bank. The nominated bank cannot accept a draft drawn on another bank. Drafts must be drawn on the accepting bank, which is the nominated bank.
- If the issuing bank serves as the drawee, the credit should be available with the nominated bank by negotiation instead of by acceptance. If the nominated bank serves as the drawee, the credit should be available with the nominated bank by acceptance instead of by negotiation.
Available with … By …
XYZ BANK (Confirming Bank)
BY NEGOTIATION
Drafts At: 60 DAYS FROM BL DATE
Drawee: XYZ BANK (Confirming Bank)
Mistakes:
- A credit with a confirming bank by negotiation should not require drafts drawn on the confirming bank. Negotiation involves purchasing drafts drawn on a bank other than the nominated bank. (A confirming bank qualifies as a nominated bank.)
- The confirming bank itself sometimes makes this mistake when requiring applicants to draw drafts on it for a negotiation LC.
- When applicants draw tenor drafts on the confirming bank, the credit must be available with the confirming bank by acceptance instead of “by negotiation”.
Available with … By …
ABC BANK
BY PAYMENT
Drafts At: SIGHT
Mistakes:
- A credit available by sight payment does not need to include drafts. Confirming banks sometimes make this mistake when they require applicants to draw drafts on them for a negotiation LC.
- When another bank serves as the drawee, the credit must be available with the nominated bank by negotiation instead of “by payment”.
- When applicants draw drafts from another bank, the credit must be available with the nominated bank by negotiation instead of “by payment”.
- A credit available by sight payment does not require drafts.
References
- International Chamber of Commerce (ICC) – www.iccwbo.org
- UCP 600 Guidelines – www.tradefinance.training
More information about UCP 600 and SWIFT Codes are available.
