07 CDCS Chapter7 PDF

7
Issuing a documentary credit
Learning objectives
In the context of this chapter, the words ‘customer’ and ‘applicant’
are interchangeable and reflect the status pre-issuance (customer) and
post-issuance (applicant).
This chapter describes the process performed by a bank from the time
of its receipt of an application form, as completed by its customer,
until a documentary credit is sent to an advising or confirming bank,
or the beneficiary directly, using SWIFT, telex or paper as the mode of
transmission.
By the end of this chapter, you should be able to understand:
the process of determining whether a documentary credit

application form has been completed in a manner that is acceptable
to the bank, in terms of its content, bank policy and regulatory
requirements, and determining that the transaction falls within the
availability and terms of a credit facility granted to a customer;
the risks associated with the issuance of a documentary credit;
the choice between an advising bank or a confirming bank to

deliver a documentary credit to a named beneficiary; and
that there is a need to ensure, among all other terms and conditions,
that the form of availability and location of the place of expiry is
commensurate to the settlement and reimbursement instructions
that will be provided to a nominated bank, if any.
© The London Institute of Banking & Finance 2017 81

7: Issuing a documentary credit
7.1 Pre-issuance considerations

Before even looking at the content of a documentary credit application form,
bank staff should be aware, and have an understanding, of various aspects
of documentary credit practice. These aspects include an understanding of
the risks that an issuing bank faces when issuing a documentary credit, the
extent of the undertaking contained in a documentary credit and as detailed
in UCP 600, article 7, and the need for the separation of the underlying
sale contract, proforma invoice, etc, from the terms and conditions of a
documentary credit.
7.1.1 The risks applicable to an issuing bank

The risks faced by a bank that is willing to issue a documentary credit can
be broadly summarised as follows.
Applicant risk – the applicant may be unable to reimburse the bank

for any payment or reimbursement that it is required to make in respect
of a presentation that complies with the terms and conditions of the
documentary credit, or in respect of a presentation under which the
applicant had previously issued a waiver of discrepancies and that
waiver was acceptable to the bank.
Financial crime – the transaction may be used to facilitate criminal

activity (that is, money laundering, fraud against the bank and / or other
entities, terrorist financing, etc).
Errors in conveying the requirements of the customer – if the

advice of the documentary credit or amendment that the beneficiary
receives differs from the content of the application form that the
customer completed, the issuing bank is bound to the beneficiary in
terms of the credit as issued. This is irrespective of any inability of
the issuing bank to obtain reimbursement from the applicant, who may
refuse to reimburse the bank because of the failure to fully incorporate
its instructions.
It may be noted that UCP 600, article 35, provides as follows.
A bank assumes no liability or responsibility for the consequences

arising out of delay, loss in transit, mutilation or other errors arising in
the transmission of any messages or delivery of letters or documents,
when such messages, letters or documents are transmitted or sent
according to the requirements stated in the credit, or when the bank
may have taken the initiative in the choice of the delivery service in the
absence of such instructions in the credit.
[…]
82 © The London Institute of Banking & Finance 2017

Pre-issuance considerations
However, such ‘errors’ refer to a SWIFT or telex advice of a documentary

credit or amendment being mutilated between the sending and receiving
of the message, and do not include any errors made by an issuing bank
in rekeying the data that its customer has provided.
Errors in document examination or a failure to follow the

requirements of UCP 600, article 16, when refusing documents
– an issuing bank may make an error in determining the status of
the documents, by considering the documents to be compliant when
there is a clear and undeniable discrepancy. In these circumstances,
an issuing bank may find that the applicant will withdraw or cancel its
authorisation for the bank to obtain reimbursement from its account(s).
Similarly, if an issuing bank determines that the documents are

discrepant, but it issues a refusal notice that is not in conformity with
the requirements of UCP 600, article 16, it may find itself precluded
from claiming that the documents are discrepant. As a result, it will
be required to honour what will be discrepant documents, and once
again will find itself in the hands of the applicant as to whether it may
be reimbursed for the settlement made to the nominated bank or
beneficiary.
The topic of refusal notices and preclusion is discussed further in Chapter

18.
7.1.2 The application of UCP 600, article 7

UCP 600, article 7, outlines the scope of the undertaking of an issuing
bank.
a. Provided that the stipulated documents are presented to the

nominated bank or to the issuing bank and that they constitute a
complying presentation, the issuing bank must honour if the credit is
available by:
i. sight payment, deferred payment or acceptance with the issuing

bank;
ii. sight payment with a nominated bank and that nominated bank
does not pay;
iii. deferred payment with a nominated bank and that nominated bank
does not incur its deferred payment undertaking or, having incurred
its deferred payment undertaking, does not pay at maturity;
iv. acceptance with a nominated bank and that nominated bank does
not accept a draft drawn on it or, having accepted a draft drawn on
it, does not pay at maturity;

v. negotiation with a nominated bank and that nominated bank does
not negotiate.
b. An issuing bank is irrevocably bound to honour as of the time it

issues the credit.
c. An issuing bank undertakes to reimburse a nominated bank that

has honoured or negotiated a complying presentation and forwarded
the documents to the issuing bank. Reimbursement for the amount of a
complying presentation under a credit available by acceptance or deferred
payment is due at maturity, whether or not the nominated bank prepaid or
purchased before maturity. An issuing bank’s undertaking to reimburse a
nominated bank is independent of the issuing bank’s undertaking to the
beneficiary.
An issuing bank is therefore irrevocably bound to honour a complying

presentation that is made to it, or to a nominated bank, as of the time
it issues a documentary credit. It is consequently imperative that the
documentary credit is vetted thoroughly before it is issued, because any
attempt by the issuing bank to correct an anomaly or error in its content,
by means of a subsequent communication, can be considered to be an
amendment, which will be subject to the consent of the beneficiary and a
confirming bank, if any.
However, if an error or omission were of such a nature that, without the

subsequent communication, the documentary credit would not be in a
workable form for the beneficiary, or any nominated or confirming bank,
it would not be an amendment, but would form an integral part of the
documentary credit issued in favour of the beneficiary.
UCP 600, sub-article 6(a), provides as follows.
a. … A credit available with a nominated bank is also available with the
issuing bank.
UCP 600, sub-article 6(d)(ii), adds the following.
ii. … A place for presentation other than that of the issuing bank is in
addition to the place of the issuing bank.
UCP 600, sub-article 7(a)(i)–(v), indicates that an issuing bank will honour
(pay, accept a draft or incur a deferred payment undertaking) when a
documentary credit is available with the issuing bank. It also indicates that
it will honour when a documentary credit is available with a nominated bank
and that bank does not act on its nomination at the time of presentation
to it of complying documents, or it does not pay on the maturity date – a
draft that it has accepted, or a deferred payment undertaking that it has

Pre-issuance considerations
incurred, or it fails to advance funds on that date when it had agreed to

negotiate.
Primarily, an issuing bank provides an undertaking to a beneficiary to

honour a complying presentation. UCP 600 also reflects the obligation of
an issuing bank when a nominated bank has acted on its nomination and
honoured or negotiated, and is expecting to be reimbursed according to
the terms and conditions of the documentary credit. This undertaking to
reimburse and the independent undertaking that is given to a beneficiary
is reflected in UCP 600 sub-article 7(c).
c. An issuing bank undertakes to reimburse a nominated bank that

has honoured or negotiated a complying presentation and forwarded
the documents to the issuing bank. Reimbursement for the amount of a
complying presentation under a credit available by acceptance or deferred
payment is due at maturity, whether or not the nominated bank prepaid or
purchased before maturity. An issuing bank’s undertaking to reimburse a
nominated bank is independent of the issuing bank’s undertaking to the
beneficiary.
7.1.3 The autonomy of a documentary credit

As discussed in Chapter 6, the autonomy of a documentary credit is of
paramount importance for any issuing bank.
Issuing banks, as well as any other participating banks, have no concern

with any conditions or agreements made between a buyer and seller in a
sale contract, proforma invoice, etc, if such conditions or agreements are
not adequately reflected within the documentary credit application form
and the documentary credit itself, or unless they are incorporated into the
documentary credit as a result of an amendment to it – that is, should
the beneficiary (seller) find upon receipt of the documentary credit that its
terms and conditions are not as previously agreed.
The whole concept of the autonomy of a documentary credit is adequately

summed up by the content of UCP 600, article 5.
Banks deal with documents and not with goods, services or performance
to which the documents may relate.
The opening sentences of UCP 600, sub-article 4(a), are also relevant.
a. A credit by its nature is a separate transaction from the sale or other
contract on which it may be based. Banks are in no way concerned with or
bound by such contract, even if any reference whatsoever to it is included
in the credit. …

Banks are not concerned with the content of any underlying sale contract,
proforma invoice, etc, do not require sight of a copy of that document other
than for internal bank policy or regulatory requirements, and do not expect
an applicant to raise issues concerning the acceptability of documents if
specific conditions of the sale contract, proforma invoice, etc, have not
been adequately reflected within the documentary credit application form.
7.2 Pre-issuance requirements
7.2.1 Receipt of the completed documentary

credit application form
ISBP 745, ‘Preliminary Considerations’, paragraphs (iii)–(vii), place a

responsibility on a customer to provide clear instructions to issue or amend
a documentary credit and to understand the impact of certain provisions
of UCP 600.
Bank staff will be regularly called upon to discuss details of the application
with a customer. Often, the information shown on the documentary credit
application is not consistent with the documentation requested or is lacking
in content or detail. The review of an application form should be completed
so as to draw the attention of a customer to any such issues.
As mentioned in Chapter 6, application forms for the issuance of a

documentary credit are generally delivered to the bank by mail (paper),
telex, email or fax, or through a bank’s own front-end electronic system
with the customer. Irrespective of the method of receipt, a bank must satisfy
itself with regard to the authenticity of the application. The procedures for
examining and approving an application form vary from bank to bank, but
it is reasonable to assume that these will include the bank’s own internal
operational procedures.
When using front-end systems, banks often take a proactive role in

establishing some basic wording for certain documents and conditions.
This can include standard conditions for an invoice, insurance and transport
documents. However, the data to be completed should be no different
whether the application form is in hard copy or electronic form.
When a customer has a preferred form of words for a documentary credit,

either for one or more different suppliers or type of transaction, the bank
or customer can usually create templates that avoid the need for a whole
application form to be completed each time. The customer selects the
appropriate template for the beneficiary or type of transaction, completes
the remaining fields and submits it to the bank.

Pre-issuance requirements
Some of the detailed checking procedures undertaken by a bank may be

eliminated if the correct data, clauses and wording are stored with the
customer. When a bank’s electronic system receives the application for
issuance, and, subject to the bank’s verification procedures, it can prepare
the documentary credit in a form that is ready for approval, authentication
and dispatch by SWIFT, telex, mail or courier.
There are two important aspects to be borne in mind:
the security connected with the use of the electronic system at the
customer’s premises is a major consideration, subject to individual
arrangements and documentation between each bank and its customer;
and
there is a danger that an unintended addition or deletion at either the

customer’s or the bank’s end may go through undetected.
Once the documentary credit application is received, one or more of the

following tasks are usually performed at the outset and will vary depending
on the mode of delivery of the application form:
recording and noting the time of receipt;
allocating a unique reference number;
determining the authenticity of the application;
checking the customer facility availability;
updating the bank’s liabilities;
updating the customer liabilities;
blocking funds / taking marginal deposits, if appropriate; and / or
recovering charges.
Each bank will have its own operational guidelines and requirements.
7.2.2 Reviewing the documentary credit

application form against an agreed
credit facility
It is expected that prior to a customer completing a documentary credit
application form it will already have an agreed credit facility in place. A

credit facility will establish the maximum value of documentary credits that
may be outstanding at any one time.
Any utilisation appearing against the facility amount may include an amount
for which documentary credits have been issued, but no presentation
has been made. It may also include a remaining amount under one or
more documentary credit(s) for which a partial drawing has already been
made and / or an amount in respect of payments due at a future date
where a complying presentation has been made or where the applicant
had provided an acceptable waiver when discrepancies were found in
documents presented under a documentary credit.
For a new transaction, bank staff must determine the maximum amount
that may be drawn under the documentary credit, taking into account any
tolerance that may be applicable, to assess whether or not there is sufficient
availability within the unutilised portion of the facility. If the documentary
credit is to be issued in a currency other than that of the facility, bank staff
will need to apply the applicable internal conversion rate to assess whether
the transaction may be accommodated.
In addition to the amount, the facility will also have an expiry date – that
is, a date upon which the bank will consider whether to renew the facility
on the same terms and conditions, or to provide increased or reduced
facilities, or to cancel it. The facility must be valid at the time of reviewing
the documentary credit application form, otherwise reference should be
made to the appropriate relationship manager and / or internal department
for approval.
Finally, the settlement terms indicated in a documentary credit application

form must fall within the agreed parameters. For example, a facility will
always accommodate a documentary credit that is available on a sight
basis. However, a documentary credit that is available at a future date,
such as 120 days after the date of shipment, must fall within the maximum
agreed period. Most banks will provide facilities with payment terms of up
to 180 days’ sight, or 180 days after the date of shipment or another event,
or after the date of another document, such as an invoice date.
In addition to these provisions, bank staff must follow internal policies and
procedures relating to the recording of a liability against a facility and the
internal approval process that may apply – that is, who must, or is allowed
to, approve the issuance of a documentary credit.
It should be noted that even though a facility may be in place, there is no

obligation for a bank to utilise any sufficient remaining balance to issue
a documentary credit or to approve a transaction that may go beyond an
agreed limit.

Reviewing the content of a documentary credit application form
7.2.3 Reviewing a documentary credit

application form against bank policy
and regulatory requirements
Internal operational guidelines must be fully understood and applied to
ensure that the issuance and any amendment of a documentary credit are
in compliance with such guidelines.
Particular note must be taken of the following aspects:
the nature of the goods or type of underlying transaction, for example

most banks have policies with regard to the handling of documentary
credits covering armaments, explosives, drugs, dual-use goods, etc;
the requirement, if any, for import licences and approvals;
compliance with other government or central bank requirements,

including compliance to any sanction regulation to which the bank is
subject;
identification of transactions that fall outside the usual course of

business for a customer; and
the inherent potential for fraud, for example knowledge or lack

of knowledge of the proposed beneficiary, particularly when the
documentary credit amount is large.
It should not be forgotten that a documentary credit, when issued, carries

the name of the issuing bank and bears its irrevocable undertaking
to the beneficiary, and is independent of all considerations outside the
documentary credit. As a result, all applications should be examined to
make sure that they comply with the issuing bank’s internal operational
guidelines and applicable regulatory requirements.
7.3 Reviewing the content of a

documentary credit application form
Fundamentally, an issuing bank is required to follow its customer’s
instructions to the extent that the bank is in agreement and the content is
not in breach of any regulatory requirements.

7.3.1 Error correction by a customer

If a customer has corrected its instructions, before or after discussion with
the issuing bank, such correction should be authenticated by the initials
or signature of the customer’s authorised signatory (or signatories). Where
such a correction is made subsequent to an application sent electronically,
it is preferable to have a separate message confirming the correction.
Any correction or alteration made by the issuing bank as a result of

discussions on the telephone should similarly be confirmed in a separate
message.
7.3.2 Types of settlement

UCP 600, sub-article 6(b), requires as follows.
b. A credit must state whether it is available by sight payment, deferred

payment, acceptance or negotiation.
In UCP 600, article 2, sight payment, deferred payment and acceptance are
mentioned in the context of the definition of ‘Honour’. An act of ‘honour’ is
deemed to be final as far as the beneficiary or presenter of the documents
is concerned.
It is often the case that a bank will be required to guide its customer in
choosing the correct or appropriate method of settlement. It is also true
to say that some banks have difficulty in understanding the fundamental
differences that apply to each of the four settlement types.
It should be noted that a customer and a proposed beneficiary may have

different views on how a documentary credit should be payable. These
issues should be resolved by clear and unambiguous language in the sale
contract, proforma invoice, etc. For example, an indication of a requirement
for ‘settlement by documentary credit available at sight’ could mean a
documentary credit that is available by sight payment or sight negotiation.
Similarly, a requirement for a documentary credit ‘payable 90 days after
the date of shipment’ could mean a documentary credit that is available by
deferred payment, acceptance or negotiation.
A documentary credit may be made available by honour (payment,

acceptance or deferred payment) or negotiation with a named nominated
bank or any bank, or be made available by honour (payment, acceptance
or deferred payment) with the issuing bank only. It should be noted that a
documentary credit that is available with a named nominated bank or any
bank is also available with the issuing bank.

Even though an issuing bank may issue a documentary credit that is

available with a named nominated bank or any bank, a nominated bank
is under no obligation to honour or negotiate. A bank that has added its
confirmation to a documentary credit will be required to honour or negotiate
if a complying presentation is made to it or to another nominated bank and
that other nominated bank does not honour or negotiate. An issuing bank
is liable in terms of its undertaking, to honour at sight or at maturity.
UCP 600, sub-article 12(a), offers the following guidance to a nominated

bank.
a. Unless a nominated bank is the confirming bank, an authorization to

honour or negotiate does not impose any obligation on that nominated
bank to honour or negotiate, except when expressly agreed to by that
nominated bank and so communicated to the beneficiary.
7.3.2.1 Sight payment

When a documentary credit is issued available by ‘sight payment’, it
means that settlement is due once a nominated bank or issuing bank has
determined that the documents comply. Because payment is intended to
be immediate, the documentary credit should indicate that the nominated
bank is authorised to claim reimbursement at the time of payment to the
beneficiary by debiting an account of the issuing bank that is held with
them, or by claiming reimbursement from a named reimbursing bank, or
by claiming reimbursement from the issuing bank, by sending a SWIFT
message with details of where the issuing bank is to remit the covering
funds.
A sight payment documentary credit may or may not require drafts to be

presented. Because drafts may attract stamp duty in some countries, a
documentary credit may be issued without a requirement for a draft. In
most cases, a draft should not be necessary for this type of settlement.
It should be noted that the requirement for a draft is usually a pre-printed

condition on an issuing bank’s documentary credit application form and
not a requirement that is usually indicated by a customer. Whether or not a
draft is required is therefore within the control of each issuing bank.
Because settlement by payment falls under the definition of ‘honour’, any

payment should be effected without recourse to the beneficiary, unless the
nominated bank and beneficiary enter into a recourse agreement. Recourse
is discussed in Chapter 17.
Given a choice, a beneficiary that requires payment on a sight basis would

be well advised to specifically indicate in its sale contract, proforma invoice,

etc, that the documentary credit is to be available with a nominated bank

(which may be its own bank) by ‘sight payment’.
7.3.2.2 Deferred payment

When a documentary credit is issued available by ‘deferred payment’, it
means that:
payment is not immediate;
payment is at a time in the future, determinable in accordance with the

terms and conditions of the documentary credit; and
presentation of a draft is not required.
The date for payment, as defined in a documentary credit, will usually fall
within a specific period after the date of shipment, or a specific period after
the date of presentation or another defined event or date.
For a documentary credit that is available by deferred payment, the

reimbursement instruction should indicate that a nominated bank is
authorised to claim reimbursement, on the due date, by debiting an
account of the issuing bank that is held with the nominated bank, or by
claiming reimbursement from a named reimbursing bank, or by claiming
reimbursement from the issuing bank, by sending a SWIFT message with
details of where the issuing bank is to remit the covering funds, or by
instructing the issuing bank, at the time of sending the documents to the
issuing bank, to remit funds to the correspondent of the nominated bank.
Because settlement by deferred payment falls under the definition of

‘honour’, the issuance of a deferred payment undertaking is made without
recourse to the beneficiary. Recourse is discussed in Chapter 17.
Documentary credits available by deferred payment provide a means by

which the beneficiary may be able to obtain finance by requesting the
issuer of the deferred payment undertaking to prepay it.
UCP 600, sub-article 12(b), offers the following guidance.
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 position prevails unless there is wording to the contrary in the

documentary credit.

7.3.2.3 Acceptance
When a documentary credit is issued available by ‘acceptance’, it means
that:
payment is not immediate;
payment is at a time in the future, determinable in accordance with the

terms and conditions of the documentary credit; and
presentation of a draft is required.
The date for payment, as defined in a documentary credit, will usually fall
within a specific period after the date of shipment, or a specific period after
the date of presentation or another defined event or date.
For a documentary credit that is available by acceptance, the reimbursement

instruction should indicate that a nominated bank is authorised to claim
reimbursement, on the due date, by debiting an account of the issuing
bank that is held with the nominated bank, or by claiming reimbursement
from a named reimbursing bank, or by claiming reimbursement from the
issuing bank, by sending a SWIFT message with details of where the issuing
bank is to remit the covering funds, or by instructing the issuing bank, at
the time of sending the documents to the issuing bank, to remit funds to
the correspondent of the nominated bank.
Because settlement by acceptance falls under the definition of ‘honour’, the

acceptance of a draft is made without recourse to the beneficiary. Recourse
is discussed in Chapter 17.
Documentary credits available by acceptance provide a means by which

the beneficiary may be able to obtain finance by discounting the accepted
draft with the bank that accepted it, or with any other bank or financial
institution of its choice.
Recall that UCP 600, 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.
Although this sub-article makes reference to the purchase of a draft, the

bill of exchange laws or regulations that apply to the nominated bank will
usually cover such an act and a nominated bank need not rely exclusively
on the content of the sub-article when looking to purchase a draft.

7.3.2.4 Negotiation
Negotiation is defined in UCP 600, article 2, 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.
When a documentary credit is issued available by ‘negotiation’, it means

that:
an advance may or may not be made immediately by a nominated bank;
drafts may or may not be required for presentation; and
settlement, if the documentary credit is not negotiated earlier, is made

on receipt of documents by the issuing bank (sight) or the maturity date
of the draft (usance).
When a draft is required, it is to be drawn on the issuing bank or reimbursing

bank.
For a documentary credit that is available by negotiation on a sight basis,

the reimbursement instruction should be that the issuing bank will remit
proceeds in accordance with the instructions of the nominated bank upon
its receipt of a complying presentation.
This position is stated in ICC Opinion R666, which includes the following
in its conclusion to an enquiry concerning a credit available by sight
negotiation:
A letter of credit stated to be available with a nominated bank, by

negotiation, should not include any reference to claiming reimbursement
from a reimbursing bank or, indeed, any reference to the debiting of
the issuing bank’s account held with the nominated bank. This form of
structure is a payment letter of credit. A negotiation letter of credit should
specify that the nominated bank is to send the documents to the issuing
bank and, upon the issuing bank’s ascertaining that it complies with the
terms and conditions of the credit, the issuing bank will reimburse in
accordance with the instructions of the negotiating bank.
For a documentary credit that is available by negotiation on a future date

(usance) basis, the reimbursement instruction should indicate that a
nominated bank is authorised to claim reimbursement, on the due date,
by debiting an account of the issuing bank that is held with the nominated
bank, or by claiming reimbursement from a named reimbursing bank, or by

claiming reimbursement from the issuing bank, by sending a SWIFT message

with details of where the issuing bank is to remit the covering funds, or
by instructing the issuing bank to remit funds to the correspondent of the
nominated bank at the time of sending the documents to the issuing bank.
In the case of an unconfirmed documentary credit, a nominated bank will

normally negotiate on a with recourse basis to the beneficiary. A confirming
bank negotiates without recourse to the beneficiary. Recourse is discussed
in Chapter 17.
Documentary credits available by negotiation provide a means by which

the beneficiary may be able to obtain finance by requesting the nominated
bank to negotiate – that is, to provide an advance of the proceeds earlier
than the date that settlement or reimbursement is due from the issuing
bank, or to agree to effect settlement on such date.
7.3.3 The place and date of expiry

In addition to determining the manner by which settlement will be made and
with whom the documentary credit is to be made available, it is important
to align such conditions with the place at which the documentary credit
will expire.
The position adopted by UCP 600, article 6, is that the place of expiry and
that of the bank(s) with which the documentary credit is available will be
the same. Any deviation from this structure can have a significant impact
on a nominated bank or confirming bank, and ultimately on the beneficiary.
For example, a documentary credit that expires at the counters of the issuing
bank, but is available with a nominated bank by payment, acceptance,
deferred payment or negotiation does not provide for the expiry date to be
a latest date for presentation of documents to that nominated bank by, or
on behalf of, the beneficiary, as described in UCP 600, sub-article 6(d)(i).
i. A credit must state an expiry date for presentation. An expiry date
stated for honour or negotiation will be deemed to be an expiry date for
presentation.
An expiry date that applies at the counters of the issuing bank requires
that the issuing bank must receive the documents no later than that expiry
date, subject to UCP 600, sub-article 29(a), not being applicable.
a. If the expiry date of a credit or the last day for presentation falls on
a day when the bank to which presentation is to be made is closed for
reasons other than those referred to in article 36, the expiry date or the
last day for presentation, as the case may be, will be extended to the first
following banking day.

It also requires that the documents must be presented to the issuing bank
within the applicable presentation period.
As another example, a documentary credit that expires in the country of

the beneficiary, but which is available only with the issuing bank, allows
for the beneficiary to present its documents to any bank in its country on
or before the expiry date. There is no nominated bank, and the issuing
bank is the only bank authorised to pay, accept a draft or incur a deferred
payment undertaking. Provided complying documents are presented to a
bank in the beneficiary’s country no later than the expiry date, the issuing
bank will be required to honour that presentation even if received by them
after the expirty date.
7.3.4 Inoperative documentary credits

It should be noted that there might be occasions when it is necessary for
a documentary credit to be issued as ‘inoperative’ or ‘non-operative’. In
these circumstances, the required practice is that the issuing bank clearly
indicates in the documentary credit the action that is to occur to make the
credit operative.
Examples of clauses that have the effect of making a documentary credit

inoperative include:
‘this documentary credit will become operative only upon the issuance
of an amendment indicating that an import licence has been issued’; or
‘this documentary credit will become operative upon your [or the issuing
bank’s] receipt of a performance guarantee in the following form … ’
7.3.5 The workability of a documentary credit

Examination of the application form and close liaison with the customer at
this stage is key to the success of the entire documentary credit transaction.
Many of the problems that arise when documents are presented can be
avoided if bank staff pay attention to detail and can anticipate problems
that may occur before the documentary credit is issued.
To understand the items to be reviewed, examples of the fields of a

documentary credit application form are referred to in each of the following
sections, with some indications of any incorrect instructions.

7.3.5.1 Applicant and beneficiary details

The applicant and beneficiary details are important with regard to how
documents will be made out (in the name of the applicant, or where the
applicant is to be shown as the consignee or notify party on a transport
document) and for the correct delivery of the documentary credit to the
beneficiary.
P Applicant name and address Beneficiary name and address O
European Dinner Service Gmbh Dinner World Inc

French Strasse 26 New York, USA
FRANKFURT
Germany
In this example, the details provided for the beneficiary would not be
sufficient to ensure delivery of the documentary credit by an advising or
confirming bank.
If necessary, other details such as phone or fax numbers may be included.
7.3.5.2 Documentary credit amount and tolerance, if

any
Currency and amount Tolerance
USD215,050.00 Plus / minus %

The customer has indicated that the amount of the documentary credit
is to be USD215,050.00. This amount should agree with any calculation
that would apply to quantity × unit price, as may be shown in the goods
description.
In section 7.3.5.5, for example, it will be seen that a quantity of 2,530 sets
of dinner services have been ordered at a unit price of USD85 each. This
calculation equals the amount of the documentary credit (2,530 × USD85
= USD215,050).
It may be that the amount of a documentary credit is to be subject to a

‘tolerance’. A tolerance is used when it may not be possible to ship an
exact quantity of goods, for example 100MT, and a beneficiary may require
the option of shipping goods to a value above or below that figure. By
inserting the percentage that will apply, the amount that may be drawn will
fall between the upper and lower limits. When a tolerance is applied to an
amount and the goods description includes a quantity of goods, it is likely
that the quantity should also be stated to be subject to the same tolerance.
Similarly, if there is to be a tolerance to be applied against any stated unit
price(s), specific reference to the tolerance should be shown against each
unit price.

It should be noted that stating a tolerance against the amount of the

documentary credit does not automatically apply it to the quantity or unit
price, if any, and vice-versa.
UCP 600, article 30, provides rules regarding the interpretation of terms
and the application of tolerances.
a. The words “about” or “approximately” used in connection with the

amount of the credit or the quantity or the unit price stated in the credit
are to be construed as allowing a tolerance not to exceed 10% more or
10% less than the amount, the quantity or the unit price to which they
refer.
b. A tolerance not to exceed 5% more or 5% less than the quantity of the
goods is allowed, provided the credit does not state the quantity in terms
of a stipulated number of packing units or individual items and the total
amount of the drawings does not exceed the amount of the credit.
c. Even when partial shipments are not allowed, a tolerance not to
exceed 5% less than the amount of the credit is allowed, provided that the
quantity of the goods, if stated in the credit, is shipped in full and a unit
price, if stated in the credit, is not reduced or that sub-article 30 (b) is
not applicable. This tolerance does not apply when the credit stipulates a
specific tolerance or uses the expressions referred to in sub-article 30 (a).
7.3.5.3 Partial shipments and transhipment

Whether partial shipments are to be allowed or not will often depend on
the type and / or quantity of goods that are being shipped and the needs
of the applicant. Allowing partial shipments offers greater flexibility to a
beneficiary when multiple goods are to be shipped or dispatched.
Because it is more than likely that transhipment will occur when goods
are shipped in a container, or even in airfreight where airlines often do
not cover the complete journey via one aircraft, transhipment should be
allowed. A customer should be referred to the transhipment provisions that
appear in UCP 600, articles 19, 20, 21, 23 and 24, if a transport document,
as indicated in the heading of one of these articles, is to be presented
under the documentary credit.
7.3.5.4 Shipment routing and latest shipment date or

period
The documentary credit application form should mirror the requirements
for Field 44A, E, F and B of the SWIFT MT700 message. In so doing, it will
simplify the process of identifying the appropriate transport document.

For example, completion of three or four of the fields will always mean
that a multimodal transport document should be presented. The required
transport document should match the applicable Incoterm that has been
agreed upon in the sale contract, proforma invoice, etc (see Chapter 5).
Shipment from / to
Place of taking in charge / Dispatch from / Place of receipt:
Port of loading / Airport of departure: Any USA port
Port of discharge / Airport of destination: Hamburg
Place of final destination / For transportation to / Place of delivery:
Latest shipment date:
9 June 20XX
In this example, the goods are being shipped on a port-to-port basis, and a
bill of lading or non-negotiable sea waybill should be the chosen transport
document (or a charter party bill of lading, if a bulk cargo is being shipped).
If no latest shipment date is stated, the latest shipment date will default
to the expiry date of the credit. It may be that a customer will indicate a
shipment period or schedule instead of a latest shipment date (see section
7.3.5.16).
7.3.5.5 Goods description

It is not unusual for a customer to provide an excessive level of detail in
respect of the goods description. While some will insist that an itemised
breakdown of goods is included in the documentary credit, others are
prepared (following discussion with the bank) to accept a more general
description, supported by a certification in the invoice such as ‘We certify
that goods are in accordance with order number xx’, or ‘We certify goods
are in accordance with proforma invoice number xx dated xx’. Wherever
possible, a bank should encourage a customer to adopt a more general
description.
This was covered in UCP 500, sub-article 5(a), which stated that banks
should ‘discourage any attempt to include excessive detail’. Although
there is no equivalent clause in UCP 600, sub-article 4(b) does make the
following statement.
b. An issuing bank should discourage any attempt by the applicant to

include, as an integral part of the credit, copies of the underlying contract,
proforma invoice and the like.

A customer should be advised that its protection lies not in a lengthy goods
description, but the documents that are requested to be presented, and the
degree and type of data content to appear therein.
Description of goods and / or services and / or performance:
2,530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER

SET (EACH SET CONSISTING OF 5 X DINNER PLATES, 5 X SIDE PLATES,
5 X SAUCERS, 5 X CUPS, 5 X SOUP PLATES, 5 X DESERT DISHES) AS PER
PROFORMA INVOICE NO. DW67295 DATED JANUARY 20, 20XX CFR
HAMBURG INCOTERMS 2010
For this example, the goods description could remain as stated, or be

shortened as follows.
2,530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER SET
CFR HAMBURG INCOTERMS 2010
This could be accompanied by a requirement that the invoice certify that

the goods are ‘as per proforma invoice no. DW67295, dated January 20,
20XX’.
7.3.5.6 Documents required

The documents required is one of the most important areas of the
application form as far as a customer is concerned, in terms of whether
the detail given is either sufficiently comprehensive or too limited in name
and content. The content of the documents may provide the only form of
security to a customer that the goods ordered are those that are received.
An application form will usually include the issuing bank’s pre-printed

wording requiring the creation of documents such as a commercial invoice,
packing list, weight list, insurance document and transport document.
An issuing bank may, as part of the credit facility agreement, require that
the goods are consigned to it, or to its order, and this will be reflected in
the pre-printed wording. The customer will be required to indicate whether
the transport document is to be marked ‘freight prepaid’ or ‘freight payable
at destination’, in accordance with the agreed Incoterm.
Once a transport document has been selected (most banks will offer a
choice of some, or all, from among bill of lading, air waybill, multimodal
transport document or truck consignment note), a customer should ensure
that it is the most appropriate document for the routing that has been
chosen. It may be that a documentary credit application form does not
provide for the appropriate transport document, for example a multimodal
transport document, in which case the customer should separately indicate
this requirement rather than select, for example, a bill of lading as the
closest form of document.

If there is a requirement for the presentation of an insurance document, the

risks to be covered should be clearly expressed. Most documentary credit
application forms will include some basic reference to the usual clauses
that are applicable, but it is for the applicant to indicate whether these
clauses – that is, Institute Cargo Clauses (A), (B), or (C), War Risks, Strikes
Risks, etc – are appropriate, or whether different or additional clauses are
necessary, based upon local requirements or requirements that are specific
to the nature of the goods being imported.
A customer should be advised against requesting insurance cover on an ‘all

risks’ basis. Observe the content of UCP 600, sub-article 28(h), which
indicates that, in such a circumstance, an insurance document indicating
any all risks coverage will be acceptable, even if there are stated exclusions.
h. When a credit requires insurance against “all risks” and an insurance
document is presented containing any “all risks” notation or clause,
whether or not bearing the heading “all risks”, the insurance document
will be accepted without regard to any risks stated to be excluded.
If the customer is to arrange insurance cover, the issuing bank may wish
to see evidence, or at least receive the customer’s confirmation, that
adequate insurance cover is in place. As part of the credit facility renewal
process, banks will often require sight of the insurance policy that the
customer has taken out to ensure that the cover is commensurate to the
documentary credits that are being issued, in particular, in terms of the
maximum amount of coverage that is available in the event of a claim.
UCP 600, article 28, contains some important sub-articles that address the
minimum insured amount, risks to be covered or that can be excluded, and
the use of terms that indicate less than the full amount of a claim will be
honoured.
For documents such as inspection certificates or analysis certificates, a

customer should give careful thought to indicating either a specific name
of an issuer for the document or the type of issuer, avoiding the use of
terminology such as ‘first class’, ‘well known’, ‘qualified’, ‘independent’,
‘official’, ‘competent’ or ‘local’, which will permit the issuance by any
entity except the beneficiary (UCP 600, article 3). The requirements for
such documents should indicate the basis under which any inspection or
analysis is to occur – that is, the standard that is required or that the goods
are to meet minimum (stated) specifications.
7.3.5.7 Additional conditions

There may be additional conditions that will apply to a documentary credit.
For example, if the customer is responsible for insuring the goods, the
customer will check the box against that requirement.

In a documentary credit, an issuing bank will often add its own conditions
that apply to the transaction, such as details of any discrepancy fee or a
sanctions clause.
Banks should avoid inserting data in this field that is directly linked to
one of the documents in the ‘documents required’ field, such as providing
details for the packing of the goods when the documents required field
merely mentions ‘Packing list’. In other words, a requirement for a specific
document, by title, should be followed by the data that is to appear thereon
and not be given as separate requirements. This will avoid the potential for
a non-documentary condition (see section 7.3.5.12).
7.3.5.8 Charges under the documentary credit

The customer will indicate who is responsible for the costs in its country
and those that are incurred outside its country. The usual split is that the
applicant will bear the costs of the issuing bank and the beneficiary, all
other costs.
7.3.5.9 Period for presentation

The ‘period for presentation’ is the period of time after the date of
shipment within which the documents are to be presented to a nominated
bank or issuing bank. In the absence of any specific period, the default of
21 calendar days under UCP 600, sub-article 14(c), will apply.
A customer should insert a period that is commensurate with the time that
will be taken for the carriage of the goods, the urgency to gain possession
of the documents and the type of goods that are being shipped. A period
of 21 calendar days may not be appropriate in all cases.
Although there is no specific rule in this respect, it is common for the latest
shipment date plus the presentation period to equal the expiry date. For
example, if the latest shipment date were 9 June 20XX and the presentation
period were 21 days, the expiry date would be 30 June 20XX.
7.3.5.10 Confirmation instructions

If the proposed beneficiary has requested that the documentary credit be
confirmed by a bank local to it, or a bank of its choice, the instructions
will appear here. An instruction stating ‘Confirm’ is a request for the
advising bank to add its confirmation. An instruction stating ‘May add’ is
an authorisation for the advising bank to add its confirmation, if requested
to do so by the beneficiary, and is usually subject to the beneficiary paying
the confirmation fee in advance.

An instruction stating ‘Without’ means that the documentary credit is to be

advised without the confirmation of the advising bank.
7.3.5.11 Bank-to-bank instructions

Bank-to-bank instructions do not form part of the standard application form
but is a key field in the documentary credit. The issuing bank will complete
this field with instructions regarding the disposal of the documents and
instructions regarding reimbursement. If there is a reimbursing bank, the
name will be indicated in Field 53a of the SWIFT MT700 message.
If the documentary credit is to be advised through a second advising bank,

this information will be stated in Field 57a.
7.3.5.12 The need for conditions to be applied to

documents
Any condition that is not associated with a document to be presented under
a documentary credit should be identified. If such conditions are found, they
should be rectified, in liaison with the customer, before the documentary
credit is issued. Rectification is achieved by requesting a document to be
presented that will indicate compliance with the condition, or for compliance
to be indicated in a document already listed for presentation.
These are generally referred to as ‘non-documentary conditions’. UCP

600, sub-article 14(h), explains why a customer should be encouraged
to act in this way and provide details of the document that is to evidence
compliance with the condition.
h. If a credit contains a condition without stipulating the document to

indicate compliance with the condition, banks will deem such condition
as not stated and will disregard it.
7.3.5.13 Ambiguous issuers of documents and lack of

precise data content
If an application form uses terms that are covered in UCP 600, article 3,
bank staff should explain to the customer the interpretation(s) that will be
applied unless more detail is provided as to their intentions.

For the purpose of these rules:
Where applicable, words in the singular include the plural and in the
plural include the singular.
A credit is irrevocable even if there is no indication to that effect.
A document may be signed by handwriting, facsimile signature, perforated

signature, stamp, symbol or any other mechanical or electronic method
of authentication.
A requirement for a document to be legalized, visaed, certified or similar

will be satisfied by any signature, mark, stamp or label on the document
which appears to satisfy that requirement.
Branches of a bank in different countries are considered to be separate

banks.
Terms such as “first class”, “well known”, “qualified”, “independent”,

“official”, “competent” or “local” used to describe the issuer of a document
allow any issuer except the beneficiary to issue that document.
Unless required to be used in a document, words such as “prompt”,

“immediately” or “as soon as possible” will be disregarded.
The expression “on or about” or similar will be interpreted as a stipulation

that an event is to occur during a period of five calendar days before
until five calendar days after the specified date, both start and end dates
included.
The words “to”, “until”, “till”, “from” and “between” when used to determine
a period of shipment include the date or dates mentioned, and the words
“before” and “after” exclude the date mentioned.
The words “from” and “after” when used to determine a maturity date
exclude the date mentioned.
The terms “first half” and “second half” of a month shall be construed
respectively as the 1st to the 15th and the 16th to the last day of the
month, all dates inclusive.
The terms “beginning”, “middle” and “end” of a month shall be construed

respectively as the 1st to the 10th, the 11th to the 20th and the 21st to
the last day of the month, all dates inclusive.

7.3.5.14 Absence of the name of an issuer and / or the

absence of any data content
UCP 600, sub-article 14(f), indicates as follows.
f. If a credit requires presentation of a document other than a transport

document, insurance document or commercial invoice, without stipulating
by whom the document is to be issued or its data content, banks will accept
the document as presented if its content appears to fulfil the function of
the required document and otherwise complies with sub-article 14 (d).
A customer should be advised to complete the documentary credit

application form, wherever possible, with details of an issuer of a required
document and the data content that is to appear within that document. This
is particularly relevant when a documentary credit requires the presentation
of an inspection certificate, analysis certificate, etc – that is, a document
that has significant value to a customer in providing an assessment of the
quality of the goods that are being shipped or dispatched.
7.3.5.15 Acceptable clauses regarding the condition of

goods on a transport document
To those without specialist knowledge of a particular industry, certain
clauses in transport documents might suggest that a carrier, master,
owner or charterer, or their respective agents, have received the goods in
a defective or unacceptable condition. An example of this may be a clause
such as ‘atmospheric rust’ shown on a bill of lading covering a shipment
of iron bars. In fact, this clause would give no cause for concern to those
involved in the trade, because it is an acceptable status for such goods.
When a customer is engaged in a commodity that is often shipped with

acceptable clauses relating to its condition, the acceptance of certain
clauses that may appear on the transport document should be obtained.
These clauses should then be referenced in the documentary credit. Such
clauses will modify the effect of the rule quoted in UCP 600, article 27.
A bank will only accept a clean transport document. A clean transport

document is one bearing no clause or notation expressly declaring a
defective condition of the goods or their packaging. …
7.3.5.16 Instalment shipments

If an application form requires the documentary credit to stipulate that
shipment of goods should be made in accordance with a stated instalment
schedule, the exact needs with regard to delivery of the goods should be

ascertained. This will ensure that the documentary credit, when issued,
accurately reflects these needs – particularly in respect of partial shipments
and the continued availability of the documentary credit in the event of
failure by the beneficiary to adhere to the instalment schedule. This is
covered in UCP 600, article 32.
If a drawing or shipment by instalments within given periods is stipulated

in the credit and any instalment is not drawn or shipped within the period
allowed for that instalment, the credit ceases to be available for that and
any subsequent instalment.
It should be noted that this article applies only when a documentary credit
indicates a series of given periods, as opposed to a sequence of latest
shipment dates. A given period has a start and an end date, and the dates
of each period should not overlap.
The matter is also covered in ISBP 745, paragraph C15.
7.3.5.17 Transferable credits

If an application form requires that the documentary credit is to be
transferable, the customer should be made aware of the content of UCP
600, article 38. The definition of transferable credit is contained in UCP
600, sub-article 38(b).
b. For the purpose of this article:
Transferable credit means a credit that specifically states it is “transferable”.

A transferable credit may be made available in whole or in part to another
beneficiary (“second beneficiary”) at the request of the beneficiary (“first
beneficiary”).
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.
Transferred credit means a credit that has been made available by the
transferring bank to a second beneficiary.
Transferable credits are covered in Chapter 19.

7.3.5.18 Abbreviations
If an application form indicates abbreviated terms, or uses any form of
non-standard lettering or numbering, such as horizontal or vertical lines,
virgules ( / ) or mathematical symbols, commas, etc, the customer’s
intention should be obtained, unless this is absolutely clear. Additionally,
consideration should be given to how such non-standard markings would
appear when incorporated into the text of the credit, particularly if issued
in SWIFT or telex formats.
ISBP 745, paragraph A2(a) and (b), provide a definition of the use of
the virgule (also known as the solidus or the forward slash) and commas,
respectively.
A2) a. Virgules (i.e., slash marks “/”) may result in different meanings
and should not be used as a substitute for a word. If, nevertheless,
a virgule is used and no context is apparent, this will allow the use
of one or more of the options. For example, a condition in a credit
stating “Red/Black/Blue” with no further clarification will mean only
Red or only Black or only Blue or any combination of them.
b. The use of a comma when indicating a range of data in a credit such
as ports of loading or discharge or countries of origin, may result
in different meanings and should not be used as a substitute for a
word. If, nevertheless, a comma is used and no context is apparent,
this will allow the use of one or more of the options. For example,
when a credit allows partial shipment and indicates the port of
loading information as “Hamburg, Rotterdam, Antwerp” with no
further clarification, this will mean only Hamburg or only Rotterdam
or only Antwerp or any combination of them.
7.3.5.19 Ambiguous terminology

The terms defined in ISBP 745, paragraph A19 (‘shipping documents’,
‘stale documents acceptable’, ‘third-party documents acceptable’, ‘third-
party documents not acceptable’, ‘exporting country’, ‘shipping company’
and ‘documents acceptable as presented’) are not defined in UCP 600. If
an application form uses these terms, a customer should be warned that
it bears the risk of any ambiguity in its instructions (ISBP 745, ‘Preliminary
Considerations’, paragraph (v)). The customer should be encouraged to
use different or more definitive terminology that provides clarity as to its
meaning. If the customer insists on using the stated terms, it should be
advised that the meaning applied would be that provided under ISBP 745,
paragraph A19.

7.3.5.20 Documents to be issued or countersigned by

an applicant
A customer will sometimes attempt to keep control of the payment process
by making it a condition of a documentary credit that it issue or sign one
or more of the stipulated documents. The beneficiary and the customer
may have both agreed to such a condition(s), and for this reason it is of
no concern of the banks. However, two provisions attempt to reinforce
the unacceptability of this practice and emphasise the consideration that
should be made by the beneficiary.
ISP98, rule 4.10, provides as follows.
A standby should not specify that a required document be issued,

signed, or counter-signed by the applicant. However, if the standby
includes such a requirement, the issuer may not waive the requirement
and is not responsible for the applicant’s withholding of the document
or signature.
ISBP 745, ‘Preliminary Considerations’, paragraph (vii), similarly

provides the following.
vii. A credit or any amendment thereto should not require presentation

of a document that is to be issued, signed or countersigned by the
applicant. If, nevertheless, a credit or amendment is issued including
such a requirement, the beneficiary should consider the appropriateness
of such a requirement and determine its ability to comply with it, or seek
a suitable amendment.
Wherever possible, an issuing bank should resist any requirement for a

document to be issued or signed by an applicant unless it knows that the
requirement has been agreed with the beneficiary.
7.4 Selecting an advising bank and / or a

confirming bank
Wherever possible, banks use their own branches, associate offices
or preferred correspondent banks to advise a documentary credit to a
beneficiary. The reasons are that:
arrangements already exist for authentication of messages; and

Selecting an advising bank and / or a confirming bank
the lines of communication are well established, which enables the

speedy resolution of any problems that may arise.
If the application form indicates an advising bank that does not fall within
these parameters, the issuing bank will choose a routing in terms of its
own operational guidelines under advice to, and with the consent of, the
customer.
An application form will usually include the name and location of an

advising bank when a proposed beneficiary has indicated a preference for
the bank through which the documentary credit is to be advised and the
documents to be presented.
If the chosen bank of the beneficiary is not a correspondent of the issuing

bank, the credit may still be routed through that bank by means of the
advising bank sending it to that bank. The bank of the beneficiary will be
known as a ‘second advising bank’.
UCP 600, sub-articles 37(a) and (b), act as a disclaimer when an issuing
bank transmits instructions to another bank.
a. A bank utilizing the services of another bank for the purpose of giving
effect to the instructions of the applicant does so for the account and at
the risk of the applicant.
b. An issuing bank or advising bank assumes no liability or responsibility

should the instructions it transmits to another bank not be carried out,
even if it has taken the initiative in the choice of that other bank.
The advising of a documentary credit, and the role of an advising bank and
a second advising bank, are covered in Chapter 9.
It can be that a beneficiary will require the confirmation of the credit by

a bank local to it. Like an advising bank, the issuing bank must be in a
correspondent banking relationship with a bank that will be asked to add
confirmation and have a credit facility in place to allow that confirmation
to occur.
The establishment of a credit facility in the name of the issuing bank,

confirmation of a documentary credit and the role of a confirming bank are
covered in Chapter 10.

7.5
Documentary requirements for a
domestic or local documentary credit
A domestic or local documentary credit will usually require minimal
documents. In most cases, this will consist of a commercial invoice and a
delivery note or receipt.
For a local transaction, it is common for the applicant to be required to sign

for the goods, and this will be evidenced on a delivery note or receipt that
is issued by the beneficiary or the applicant.
7.6 The issuance of a pre-advice of a

documentary credit
A preliminary advice of a documentary credit, sometimes known as ‘brief
details’ or a ‘pre-advice’, is very much a declining practice. Such advices
were designed to provide early notice to a beneficiary that a documentary
credit had been issued and that full details, in letter form, were being
forwarded by airmail or courier. UCP 600, sub-article 11(b), clearly sets
out the issuing bank’s position if such a preliminary advice has been given.
b. A preliminary advice of the issuance of a credit or amendment (“pre-

advice”) shall only be sent if the issuing bank is prepared to issue the
operative credit or amendment. An issuing bank that sends a pre-advice
is irrevocably committed to issue the operative credit or amendment,
without delay, in terms not inconsistent with the pre-advice.
With the widespread use of the SWIFT MT700 message, the issuance of
documentary credits in letter form is rapidly declining, and remains
prevalent only for local or domestic transactions in which the applicant and
beneficiary are located in the same country.
7.7 Preparing a documentary credit

When bank staff have completed their internal procedures and processed
the application form, the actual documentary credit is ready to be prepared.
If the application data is already captured in an electronic system, the bank

staff need only complete the additional data fields required in order to
produce the documentary credit. If, however, the application form is received
by either mail or telex, it is usually necessary for all of the instructions to

Transmitting a documentary credit
be keyed into the issuing bank’s system. In addition to the details supplied
by the customer, the issuing bank will include reimbursement instructions
and any other bank-to-bank information, such as how documents are to be
forwarded and whether the advising bank or another bank is requested or
authorised to add its confirmation before sending the documentary credit
to the beneficiary.
The application for issuance and the actual documentary credit, as issued,
must match and be in accordance with the instructions of the customer,
and it is the responsibility of the issuing bank to ensure that this is the case
before transmitting or sending the documentary credit to an advising bank
or the beneficiary.
7.8 Transmitting a documentary credit

Recall that UCP 600, sub-article 7(b), provides as follows.
b. An issuing bank is irrevocably bound to honour as of the time it

issues the credit.
Once the documentary credit is prepared and the issuing bank’s internal
release procedures are completed, the credit will be transmitted by SWIFT
or telex, or delivered by mail or courier, to an advising bank or directly to
the beneficiary. A copy of the transmitted documentary credit will be made
available to the customer in hard copy or electronic form, together with the
issuing bank’s advice of charges, if applicable.
The applicant should be encouraged to read the documentary credit

carefully, to ensure that it matches its instructions. If it does not, the
applicant should advise the issuing bank without delay. However, and as
stated earlier in this chapter, if it does not match the instructions, any
attempt to rectify the error may be considered an amendment that is
subject to the consent of the beneficiary and the confirming bank, if any
(see section 7.1.2).
The vast majority of documentary credits are issued in SWIFT MT700 format,
and the transmitted details are considered to be the operative credit. It is
extremely rare for issuing banks to prepare a mail confirmation if details of
the documentary credit have been transmitted in full.
Figure 7.1 illustrates a process for issuing a documentary credit. In the

example provided, there is not only an advising bank, but also a second
advising bank (see section 7.4). The process for issuing amendments is
identical, other than that the applicable SWIFT message type is MT707,
instead of MT700.

Figure 7.1 Information flow chart
50
☞
Applicant ABC Company
Vienna
BANK
Sender S CIB Bank

(issuing bank)
MT700
BANK
Receiver R ICC Bank

(advising bank)
BANK
‘Advise through’ IFSA Bank

57a
bank
Amdam
Company
Beneficiary Amsterdam
58
Source: SWIFT

Transmitting a documentary credit
MT700 is the SWIFT message type generally used to convey the details of
a documentary credit to an advising bank, with or without a request or
authorisation for confirmation to be added. An MT799 message may also
be used when a formatted message, such as the MT700, is not appropriate.
Both of these SWIFT message types are authenticated messages.
An MT199 is authenticated, but it is free format and can be used for

anything, while an MT999 is an unauthenticated message type. A message
establishing a documentary credit by telex must be authenticated, and
often the issuing bank will have testing arrangements with the advising
bank. If such direct testing arrangements do not exist, the issuing bank will
send the message to a correspondent bank that has testing arrangements,
with a request to pass on the documentary credit authenticated between
such correspondent bank and the advising bank.
If the documentary credit is sent in hard copy form, the signature(s)

appearing thereon can be authenticated against specimens held with the
advising bank.
The issuing bank should not send a telex to the advising bank and its
correspondent with a request to the advising bank to verify the test with
the correspondent.
UCP 600, article 1, requires that the text of a documentary credit make
express reference to the rules to which it is subject.
The Uniform Customs and Practice for Documentary Credits, 2007

Revision, ICC Publication no. 600 (“UCP”) are rules that apply to any
documentary credit (“credit”) (including, to the extent to which they may
be applicable, any standby letter of credit) when the text of the credit
expressly indicates that it is subject to these rules. They are binding on
all parties thereto unless expressly modified or excluded by the credit.
To accommodate this, SWIFT has created the following code words to be

used in Field 40E of the MT7 message series.
For UCP 600: ‘UCPLATESTVERSION’
For eUCP: ‘EUCPLATESTVERSION’
For UCP 600 and URR 725: ‘UCPURRLATESTVERSION’
For eUCP and URR 725: ‘EUCPURRLATESTVERSION’
For documentary credits issued by telex or mail, the documentary credit

is to indicate ‘Subject to UCP 600’ or ‘Subject to the Uniform Customs and
Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600’,
or words of similar effect.

Figure 7.2 illustrates an MT700 message, based on some of the data and
examples discussed throughout this chapter.
Figure 7.2 Example of an MT700 message

LOC:XX0015 INSWFT MSG-700 TRN:B0000-1000
{1:C02FUENXITWAXXX8395461056}
{2:81630765539623GHQULITXNCAX918400337629618469261B}
****************************************
FROM: FINANCING BANK, FRANKFURT, GERMANY
27: Sequence of Total

1/1
40A: Form of Documentary Credit

IRREVOCABLE
20: Documentary Credit Number

00/PP/1278
31C: Date of Issue

XX0331
40E: Applicable Rules

UCPLATESTVERSION
31D: Date and Place of Expiry

XX0630 USA
50: Applicant
EUROPEAN DINNER SERVICE GMBH
FRENCH STRASSE 26, FRANKFURT, GERMANY
59: Beneficiary
DINNER WORLD INC
295 EAST 750TH STREET, NEW YORK 001001, USA
32B: Currency Code, Amount

USD215050,00
41a: Available With ..By..

MANHATTAN TRADE FINANCE BANK, NEW YORK BY NEGOTIATION
42C: Drafts at…

SIGHT
42a: Drawee
ISSUING BANK
43P: Partial Shipments

ALLOWED
43T: Transhipment
ALLOWED
44E: Port of Loading/Airport of Departure

ANY USA PORT
44F: Port of Discharge/Airport of Destination

HAMBURG
44C: Latest Date of Shipment

XX0609
45A: Description of Goods and/or Services

2530 SETS ‘NEW YORK’ BRAND DINNER SERVICES @ USD85.00 PER SET (EACH SET CONSISTING OF 5 X DINNER
PLATES, 5 X SIDE PLATES, 5 X SAUCERS, 5 X CUPS, 5 X SOUP PLATES, 5 X DESERT DISHES) AS PER PROFORMA
INVOICE NO. DW67295 DATED JANUARY 20, 20XX CFR HAMBURG INCOTERMS 2010
46A: Documents Required

+COMMERCIAL INVOICE IN ONE ORIGINAL AND 3 COPIES
+PACKING LIST IN ONE ORIGINAL AND 3 COPIES
+FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING ISSUED TO ORDER OF FINANCING BANK MARKED NOTIFY
APPLICANT AND FREIGHT PAID
+CERTIFICATE OF ORIGIN ISSUED BY NEW YORK CHAMBER OF COMMERCE INDICATING THAT THE GOODS ORIGINATED IN
USA
+SHIPMENT ADVICE ADDRESSED TO THE APPLICANT GIVING DETAILS OF SHIPMENT: INCLUDING NAME OF THE VESSEL,
DATE OF SHIPMENT, QUANTITY OF GOODS SHIPPED AND THEIR VALUE. THE SHIPMENT ADVICE IS TO BE ACCOMPANIED
BY A COPY OF A COURIER RECEIPT INDICATING THAT THE ADVICE WAS SENT BY COURIER SERVICE, TO THE
APPLICANT, NO LATER THAN 5 WORKING DAYS AFTER THE DATE OF SHIPMENT
+PRE-SHIPMENT INSPECTION CERTIFICATE ISSUED BY CREATIVE INSPECTION SERVICES INDICATING THAT THE GOODS
ARE BRAND NEW, FULLY MEET THE SPECIFICATIONS AS GIVEN TO THEM BY THE APPLICANT AND HAVE BEEN PACKED IN
PACKAGING SUITABLE FOR THEIR CARRIAGE TO HAMBURG PORT.
Continues overleaf

Questions
47A: Additional Conditions

+A DISCREPANCY FEE OF USD75 WILL BE DEDUCTED FROM THE PROCEEDS
FOR EACH SET OF DOCUMENTS PRESENTED WITH DISCREPANCIES
+INSURANCE WILL BE COVERED BY THE APPLICANT
71B: Charges
ALL CHARGES OUTSIDE GERMANY ARE FOR ACCOUNT OF THE BENEFICIARY
48: Period for Presentation

21
49: Confirmation Instructions

WITHOUT
78: Instructions to the Paying/Accepting/Negotiating Bank

DOCUMENTS MUST BE SENT TO US IN ONE LOT BY COURIER SERVICE. UPON RECEIPT OF DOCUMENTS THAT WE DETERMINE
COMPLY WITH THE TERMS AND CONDITIONS OF THIS CREDIT, WE SHALL EFFECT SETTLEMENT IN ACCORDANCE WITH YOUR
INSTRUCTIONS.
-} {5:MAC:00011100} {CHK:Y452FQ8273D9}
Questions
1. When a documentary credit is available with the issuing bank, which

type of settlement is not appropriate?
A. Payment
B. Deferred payment
C. Acceptance
D. Negotiation
2. For a documentary credit that is available with a nominated bank by

sight payment, which of the following reimbursement conditions would
not be appropriate?
A. ‘Please debit our account held with you.’
B. ‘ We will remit proceeds in accordance with your instructions upon

receipt of complying documents.’
C. ‘Please claim reimbursement from ZZZ Bank, New York.’
D. ‘ We will remit proceeds in accordance with your instructions upon

receipt of a SWIFT message confirming that you have received a
complying presentation.’

3. ‘There must always be a gap of 21 calendar days between the latest

shipment date and the expiry date.’ Is this statement true or false?
A. True
B. False
4. For which of the following settlement types must a draft be required for
presentation?
A. Payment
B. Deferred payment
C. Acceptance
D. Negotiation
5. A credit facility will usually cover which of the following?
i. The maximum amount that may be outstanding
ii. The period for which the facility will be available
iii. Whether partial shipments or drawings may be allowed
iv. The maximum usance period for any documentary credit
A. i and iv
B. i, iii and iv
C. ii, iii and iv
D. i, ii and iv
E. All of them

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7

Issuing a documentary credit

By the end of this chapter, you should be able to understand:

 the process of determining whether a documentary credit

 the risks associated with the issuance of a documentary credit;

 the choice between an advising bank or a confirming bank to

© The London Institute of Banking & Finance 2017 81

7.1 Pre-issuance considerations

7.1.1 The risks applicable to an issuing bank

 Applicant risk – the applicant may be unable to reimburse the bank

 Financial crime – the transaction may be used to facilitate criminal

 Errors in conveying the requirements of the customer – if the

A bank assumes no liability or responsibility for the consequences

82 © The London Institute of Banking & Finance 2017

However, such ‘errors’ refer to a SWIFT or telex advice of a documentary

 Errors in document examination or a failure to follow the

Similarly, if an issuing bank determines that the documents are

The topic of refusal notices and preclusion is discussed further in Chapter

7.1.2 The application of UCP 600, article 7

a. Provided that the stipulated documents are presented to the

i. sight payment, deferred payment or acceptance with the issuing

© The London Institute of Banking & Finance 2017 83

b. An issuing bank is irrevocably bound to honour as of the time it

c. An issuing bank undertakes to reimburse a nominated bank that

An issuing bank is therefore irrevocably bound to honour a complying

However, if an error or omission were of such a nature that, without the

UCP 600, sub-article 6(a), provides as follows.

UCP 600, sub-article 6(d)(ii), adds the following.

84 © The London Institute of Banking & Finance 2017

incurred, or it fails to advance funds on that date when it had agreed to

Primarily, an issuing bank provides an undertaking to a beneficiary to

c. An issuing bank undertakes to reimburse a nominated bank that

7.1.3 The autonomy of a documentary credit

Issuing banks, as well as any other participating banks, have no concern

The whole concept of the autonomy of a documentary credit is adequately

© The London Institute of Banking & Finance 2017 85

7.2 Pre-issuance requirements

7.2.1 Receipt of the completed documentary

ISBP 745, ‘Preliminary Considerations’, paragraphs (iii)–(vii), place a

As mentioned in Chapter 6, application forms for the issuance of a

When using front-end systems, banks often take a proactive role in

When a customer has a preferred form of words for a documentary credit,

86 © The London Institute of Banking & Finance 2017

Some of the detailed checking procedures undertaken by a bank may be

There are two important aspects to be borne in mind:

 there is a danger that an unintended addition or deletion at either the

Once the documentary credit application is received, one or more of the

 recording and noting the time of receipt;

 allocating a unique reference number;

 determining the authenticity of the application;

 checking the customer facility availability;

 updating the bank’s liabilities;

 updating the customer liabilities;

 blocking funds / taking marginal deposits, if appropriate; and / or

7.2.2 Reviewing the documentary credit

© The London Institute of Banking & Finance 2017 87

Finally, the settlement terms indicated in a documentary credit application

It should be noted that even though a facility may be in place, there is no

88 © The London Institute of Banking & Finance 2017

the process of determining whether a documentary credit

the risks associated with the issuance of a documentary credit;

the choice between an advising bank or a confirming bank to

Applicant risk – the applicant may be unable to reimburse the bank

Financial crime – the transaction may be used to facilitate criminal

Errors in conveying the requirements of the customer – if the

Errors in document examination or a failure to follow the

there is a danger that an unintended addition or deletion at either the

recording and noting the time of receipt;

allocating a unique reference number;

determining the authenticity of the application;

checking the customer facility availability;

updating the bank’s liabilities;

updating the customer liabilities;

blocking funds / taking marginal deposits, if appropriate; and / or

the nature of the goods or type of underlying transaction, for example

the requirement, if any, for import licences and approvals;

compliance with other government or central bank requirements,

identification of transactions that fall outside the usual course of

the inherent potential for fraud, for example knowledge or lack

payment is not immediate;

payment is at a time in the future, determinable in accordance with the

presentation of a draft is not required.

payment is not immediate;

payment is at a time in the future, determinable in accordance with the

presentation of a draft is required.

an advance may or may not be made immediately by a nominated bank;

drafts may or may not be required for presentation; and

settlement, if the documentary credit is not negotiated earlier, is made