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- A letter of credit available by acceptance is an undertaking that is honoured by accepting a bill of exchange (or draft) drawn by the beneficiary and paying at maturity.
- These are known as acceptance credits.
- When available with a nominated bank, the draft is to be drawn on the nominated bank.
The acceptance credit differs from credits available by other forms by being the only type of credit which obligatorily stipulates that drafts are to be drawn.
The other methods of availability are:
- Sight payment: a drawing is honoured by paying at sight.
- Deferred payment: a drawing is honoured by incurring a deferred payment undertaking and paying at maturity.
- Negotiation: a nominated bank may negotiate by purchasing drafts drawn on another bank and/or documents by advancing or agreeing to advance funds to the beneficiary on or before the due date for reimbursement.
UCP 600 requires that an LC must state whether it is available by sight payment, deferred payment, acceptance or negotiation.
By authorising a nominated bank to honour or negotiate, the issuing bank undertakes to reimburse the nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.
Although LCs available by sight payment and negotiation may call for drafts, these types of LCs can be issued without calling for drafts. Deferred payment credits have traditionally been issued for the avoidance of drafts.
Availability by acceptance should be the exception, not the norm
An LC is first and foremost the issuing bank’s undertaking to honour a complying presentation. It follows that drafts, if any, should be for the issuing bank to honour. With this in mind, if an issuing bank did not know that a nominated bank (NB) wanted drafts to be drawn on the NB, why would it make its LC available with the nominated bank by acceptance?
Drafts should not be required under LCs unless there is an arrangement with the nominated bank to honour by way of acceptance.
Whilst there is no requirement for it do so, the issuing bank might wish to enquire of the applicant the reason for its application for an LC available by acceptance.
It might well be that the beneficiary requested an acceptance credit, and this presumably so because the nominated bank to which the beneficiary intends to present documents has indicated that it wants drafts drawn on the NB.
Some confirming banks stipulate that drafts must be drawn on the confirming bank. When this is the case, the correct method of availability of the LC is acceptance with the confirming bank.
It would not be correct for a confirming bank to negotiate drafts drawn on itself, given that UCP 600’s definition of negotiation relates to drafts drawn on a bank other than the nominated bank. The definition of negotiation does not necessitate drafts, because it states that negotiation means the purchase of drafts and/or documents, i.e. the purchase can be of documents without including drafts.
In 2019, the International Chamber of Commerce published a guidance paper on the use of drafts under documentary credits. The paper shows how successive revisions of UCP have progressively diminished the relevance of drafts in LCs. The gist of its recommendations was that drafts should not be called for in LCs and that deferred payment credits should be the preferred alternative to acceptance credits unless there were specific commercial, regulatory, or legal reasons to create an acceptance under the LC.
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It ought to be noted that whilst an acceptance credit calls for drafts, the issuing bank’s undertaking to honour a complying presentation does not depend on whether drafts have been accepted. This is because UCP 600 is clear that if a complying presentation has been made to a nominated bank and the nominated bank does not accept a draft drawn on it or does not pay after having accepted such a draft, the issuing bank must honour it.
There is no provision in UCP 600 requiring the beneficiary to redraw drafts on the issuing bank if the nominated bank does not accept drafts drawn on the NB. Hence, even when an LC is available by acceptance, payment by the issuing bank for a complying presentation does not require that drafts be accepted.
Given the case that even in an acceptance credit, the issuing bank’s undertaking to honour a complying presentation stands regardless of whether drafts have been accepted, the question is: Why call for drafts at all? All in all, rather than standard practice, acceptance credits should be viewed as the exception.