Mark Abrams

Mark heads up the trade finance offering at TFG where his team focuses on bringing in alternative structured finance to international trading companies.

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Contents

Parties Involved

Several distinct entities can be parties to a documentary credit. Some must be present, while others are optional and only added to meet certain goals or requirements for the specific interaction. This chapter highlights the possible parties in documentary credits.

The Applicant

The applicant is usually the buyer of the goods who requests (or applies to) the issuing bank to issue a documentary credit on its behalf.

In its application, the applicant details the documents required under the documentary credit along with applicable terms and conditions. Even though the applicant initiates the request, it is not a party to the documentary credit since a credit is a bank undertaking.

The Issuing Bank

The issuing bank issues the documentary credit as per the applicant’s request.

The issuing bank irrevocably undertakes to pay the beneficiary upon receipt of the necessary documents as determined by the terms and conditions of the documentary credit.

The Beneficiary

The beneficiary is the party in whose favour the documentary credit is issued. It is generally the seller in an international trade transaction.

The Confirming Bank

A confirming bank can provide an irrevocable undertaking – in addition to that of the issuing bank – to honour the documentary credit.

This means that it agrees to pay at sight, or to incur a deferred payment undertaking, or to accept a bill of exchange (depending on the availability of the credit) on receipt of compliant documents as stipulated in the documentary credit’s terms and conditions.

The Advising Bank

An advising bank receives the documentary credit from the issuing bank and advises the beneficiary on establishing its authenticity.

By advising the documentary credit, the advising bank verifies that the documentary credit is authentic and provides assurance that the advice accurately reflects the terms and conditions of the documentary credit as received. Unless the advising bank has confirmed the documentary credit, it assumes no further liability or responsibility.

The Nominated Bank

The issuing bank can authorise another bank, called the nominated bank, to pay a presenter at sight, to accept a bill of exchange, or to incur a deferred payment undertaking to pay at maturity.

Nomination by the issuing bank only imposes obligations on the nominated bank if it has confirmed the documentary credit or expressly agreed and communicated to the beneficiary that it will act on its nomination.

The Reimbursing Bank

The reimbursing bank is another party – usually the issuing bank’s correspondent bank, with which the issuing bank maintains an account in the currency of the documentary credit.

The documentary credit will stipulate the name of the reimbursing bank on which the nominated bank or the confirming bank (then known as “claiming bank”) should make a reimbursement claim.

The issuing bank authorises the reimbursing bank to honour a reimbursement claim from the claiming bank. The reimbursement authorisation is often subject to the ICC Uniform Rules for Bank-to-Bank Reimbursements under Documentary Credits (URR 725). If not so indicated in the credit, reimbursement is subject to UCP 600 article 13 (Bank-to-Bank Reimbursement Arrangements).

The Transferring Bank

In some cases, the beneficiary is an intermediary trader that sources the goods from another supplier and may request its buyer to arrange a transferable documentary credit. The issuing bank would then nominate a transferring bank to transfer the documentary credit.

The beneficiary (“first beneficiary”) will request the transferring bank to transfer the documentary credit in whole or in part to its own supplier (i.e., “second beneficiary”).

For a transfer to occur, the documentary credit must explicitly state that it is transferable.

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