Presentation is loading. Please wait.

Presentation is loading. Please wait.

2 nd Lecture. Letter of Credit (L/C) 1. L/C Operation (1)General Theory of L/C (2)Basic Factors of L/C (3)Parties Concerned with L/C Transaction (4)Variety.

Similar presentations

Presentation on theme: "2 nd Lecture. Letter of Credit (L/C) 1. L/C Operation (1)General Theory of L/C (2)Basic Factors of L/C (3)Parties Concerned with L/C Transaction (4)Variety."— Presentation transcript:

1 2 nd Lecture. Letter of Credit (L/C) 1. L/C Operation (1)General Theory of L/C (2)Basic Factors of L/C (3)Parties Concerned with L/C Transaction (4)Variety of L/C 2. Reading L/C (1)Variety of L/C Related SWIFT Messages (2)Composition of MT 700(L/C Establishment)

2 2 1. L/C Operation (1) General Theory of L/C 2 nd Lecture. Letter of Credit Meaning of L/C -Settlement method used in order to devise fluent international business transaction by hardening credibility of both importer and exporter through mediation of banks with publicity -Letter of commitment of conditional payment: According to importers instruction, issuing bank opens L/C. Exporter submits documents stated on L/C and the documents are exchanged with export money, and at last, importer can claim imported goods. ExporterImporter Bank Bigger, Safer, and more Fluent Transaction Submit DocumentOpen L/C Payment settlement Utility of L/C -Can manufacture and gather goods regardless of credibility of importer -Can receive all the money at his bank as soon as he submits transport documents after shipment -Can benefit from trading finance before shipment, based on L/C -Exporter can safely start manufacturing by receiving irrevocable L/C -Can import regardless of his own credibility -Can pay after confirming that the goods are actually shipped through documents -Has same effect as import fund financing and can commit credit transaction -Can claim goods on the date he wishes to Exporter - Can pass the risk and costs to importer - Obtain security rights on goods on-board -Payment will definitely be settled by issuing bank once the document it buys from exporter matches conditions of L/C -Negotiating bank can ask money directly from exporter once the documents go bankrupt Importer Issuing Bank Negotiating Bank

3 3 L/C Principle of Independence Once L/C is opened, L/C is totally independent from sales contract and other contracts it is based upon. If L/C is opened, sales contract becomes totally unrelated with L/C and does not have any binding power - If there is inconsistency between sales contract and L/C, process through L/C - Even when sales contract is canceled, L/C transaction is still valid L/C is independent from issuing contract between importer and issuing bank - Applicant cannot plea against issuing contract for the payment by L/C - Neither can Beneficiary Principle of Abstraction Everyone concerned with L/C proceeds transaction with abstract documents, not the real goods All concerned people transact according to documents, not the real goods, services or other financial liabilities related to the documents. Concept to protect negotiating bank that purchases transport documents related to L/C because banks do not have information and experience in real good transaction Independence from Sales Contract Independence from L/C Issuing Contract Limits of L/C Disadvantage for Importer Importer L/C Disadvantage for Exporter Even when the submitted documents match the conditions of L/C, if they were written out upon forgery or fraud, issuing bank exceptionally stop redemption of L/C according to judgment of court Injunction: Ruled out when importer directly gives proof to court that proves that the contract document is forgery or fraud. May it be in discord with independent abstraction of L/C and immunity clause of bank however, it is approved in international precedents This whole rule conflicts with the biggest characteristic of L/C, the independent abstraction, and can shrivel L/C transaction so they are approved very restrictively Fraud Rule Exporter L/C Importer L/C Importer. Transaction by Documents Basic Concept of Trading Activation

4 4 Basic Factors Composition of L/C Banks undertaking to reimburse Documents required Indication whether Revocable or Irrevocable Expiration Date How and Where to use L/C Time of Document Presentation Matters Related to L/C itself Related to Bill of Exchange Related to Shipment Related to Product Details Related to Documents Other Specially Mentioned Matters (2)Basic Factors of L/C Parties Concerned to L/C Exporter who benefits from L/C transaction. Called Consigner for consigning goods Called Drawer for being publisher of bill of exchange Bank that issues L/C Where L/C can be used, designated by issuing bank Confirmation: A definite undertaking of the confirming Bank, in addition to that of the issuing Bank, to honour or negotiate a complying presentation Accepts bill of exchange when the L/C is acceptance L/C and pays money on maturity date Takes care of inter-bank settlement if reimbursement L/C is used Applicant (Buyer, Importer, Consignee) Generally importer. Often called Consignee because he consigns goods Negotiating Bank (Negotiating Bank) L/C Issuing Bank(Issuing Bank) Nominated Bank Advising Bank Gives notification of L/C Confirming Bank Bank added by request from issuing bank that double-confirms the documents Purchases transport document and pays money for it Paying Bank In charge of payment in deferred L/C transaction Accepting Bank Reimbursing Bank Beneficiary (Seller, Exporter, Consignor, Drawer) (3)Parties Concerned to L/C Duty of Concerned Parties in L/C Transaction Importer and Exporter Importer -Duty of L/C Publication -Duty of Payment Exporter -Duty of Delivering Doods, -Duty to Follow L/C Conditions

5 5 Issuing Bank and Applicant Issuing Bank -Duty to Follow Instruction -Duty to Open L/C -Duty to examine Documents Applicant -Duty to Reimburse -Duty to Pay Commission to Reimburseing Bank and Take Risks -Duty to Follow Foreign Custom and Legislation Issuing Bank and Beneficiary Issuing Bank -Duty to Make Payment Beneficiary -Duty to present Documents and Bills of Exchange Matching to Conditions of L/C Positions of Each Party Involved in L/C Transaction Position of Advising Bank Advising Bank Relationship with Issuing Bank Relationship with Beneficiary Relationship with Applicant Relationship with Negotiating Bank Entrusted by Issuing Bank : Duty of delivering L/C safely and correctly L/C - Has to be very careful about sincerity of L/C No duties or legal binding Do not have any duties unless it confirms L/C Advising Bank does not have to pay, undertake nor purchase unless it is confirming bank. Positions of Paying, Accepting, and Negotiating Banks Paying, Accepting, Negotiating Banks Relationship with Issuing Bank Relationship with Beneficiary Nominated Bank approved by issuing bank hasrights to undertake, purchase, or pay for the L/C but it is rights not duty If a bank undertook, purchased, or paid for the documents matching L/C conditions, the bank can ask for C.O.D. to issuing bank Paying, Accepting, Negotiating banks can ask money directly to beneficiary (4) Variety of L/C L/CL/C Classified by Presented Documents Documentary L/C Non-Documentary L/C -Clean L/C: used in transaction of labor or service, not merchandises, Does not include transport document -Standby L/C: used in guaranty of banks such as contract payment guarantee. Does not include transport document Classified by Publication Method Telex L/C SWIFT L/C Mail L/C SWIFT: Society for Worldwide Interbank Financial Telecommunication Classified by Settlement Period Sight L/C Usance L/C - Shippers Usance L/C - Bankers Usance L/C(Domestic Usance L/C) Mixed Payment L/C Installment Payment L/C Red-clause L/C

6 6 SWIFT : Society for Worldwide Interbank Financial Telecommunication which is a sytstem that has been organized in order to rapidly, and precisely settle with international payment through exchange bank. It is a NPO with members of major banks of Europe and North America and has been established in May The headquarter is located in Brussels. 2. Reading L/C (1) Variety of L/C Related SWIFT Messages Message TypeMessage Type NameUsage (Purpose) 700 / 701 Issue of Documentary CreditUsed in L/C publication 705 Pre-Advice of a Documentary CreditNotifying Beneficiary about preliminary information before opening L/C 707 Amendment to a Documentary CreditAmendment of L/C conditions 710 / 711 Advice of a Third Banks Documentary Credit Used when Advising Bank notifies the third Advising Bank about L/C 720 / 721 Transfer of a Documentary CreditUsed in case of L/C negotiation 730 AcknowledgementAdvising Bank notifies Issuing bank about receiving L/C 732 Advice of DischargeIssuing bank or Negotiating Bank notifies each other about receiving defected documents 734 Advice of RefusalUsed when issuing bank notifies Negotiating Bank about defects of documents 740 Authorisation to ReimburseUsed when issuing bank asks reimbursement bank for reimbursing authorization 742 Reimbursement ClaimUsed When negotiating bank asks reimbursement bank for money 747 Amendment to an Authorisation to Reimburse Used when issuing bank changes reimbursement bank 750 Advice of DiscrepancyNegotiating bank notifies discrepancy to issuing bank 752 Authorisation to Pay, Accept or Negotiate Accepting negotiation of MT Advice of Payment /Acceptance/negotiation Negotiating bank notifies purchase of healthy documents to issuing bank 756 Advice of Reimbursement or PaymentUsed when issuing bank notifies negotiating bank about settlement 797 Free Format MessageFree format message, used in other not-standardized matters. (2)MT 700(L/C ) StatusTagField NameContent / Options M27Sequence of Total1n / 1n M40AForm of Documentary Credit24x M20Documentary Credit Number16x O23Reference to Pre-Advice16x O31CDate of Issue6n6n M40EApplicable Rules30x[/35x] M31DDate and Place of Expiry6n29x O51aApplicant BankA or D

7 7 StatusTagField NameContent / Options M50Applicant4*35x M59Beneficiary[/34x], 4*35x M32BCurrency Code, Amount3a15number O39APercentage Credit Amount Tolerance2n / 2n M41aAvailable With.... By....A or D O42CDrafts at.....3*35x O42aDraweeA or D O42MMixed Payment Details4*35x O42PDeferred Payment Details4*35x Example1. ::700 Issue of Documentary Credit :27 Sequence of Total:1/2 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number: OD :31C Date of Issue: :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry: AT HOCHIMINH CITY :50 Applicant: ABC Co. :59 Beneficiary: XYZ Co. :32B Currency Code and Amount:USD100000,00 :41D Available With... By...:ADVISING BANK BY MIXED PYMT :42M Mixed Payment Details: PLS SEE 46B :44C Latest Date of Shipment: :45A Description of Goods and/or Services: COMMODITY: +TREATED WATER PUMP STATION PIPE WORKS : USD 50, ERECTION : USD 50, TOTAL AMOUNT: USD100, CIF HOCHIMINH CITY DESCRIPTION GOODS, SPECIFICATION,PRICES AND OTHER DETAILS AS PER CONTRACT NO.A/97/ICB/3 PACKAGE IV DATED 15/04/99 :47A Additional Conditions: +REIMBURSEMENT UNDER THIS L/C (IF ANY) IS SUBJECT TO THE ADB'S ''COMMITMENT LETTER (C/L) TO REIMBURSE''ISSUED BY THE ASIAN DEVELOPMENT BANK. +ONE COPY SET OF DOCUMENTS REQUIRED FOR OPENING BANK'S FILE +ACCEPTANCE OF ANY DISCREPANCY(IES) IN ANY PRESENTATION OF DOCUMENTS BY US DOES NOT IMPLY OR CONSTITUTE ANY AMENDMENT(S) TO THIS L/C FOR THE PURPOSE OF ANY FUTURE DRAWING(S) The Rest is Omitted

8 8 Example2. ::700 Issue of Documentary Credit :27 Sequence of Total:1/1 :40A Form of Documentary Credit: IRREVOCABLE :20 Documentary Credit Number:ILCC :31C Date of Issue: :40E Applicable Rules: UCP LATEST VERSION :31D Date and Place of Expiry:070725KOREA :50 Applicant: ABC CO. CALGARY, ALBERTA :59 Beneficiary: XYZ CO. SEOUL, KOREA :32B Currency Code and Amount:USD :41D Available With... By...:CIBC BY ACCEPTANCE :42C Drafts at...:45 DAYS FROM BILL OF LADING :42D Drawee: CIBC TRADE FINANCE CENTRE CALGARY, ALBERTA :43P Partial Shipments: ALLOWED :43T Transshipment: ALLOWED :44A Place of Taking in Charge /Dispatch from../ Place of Receipt :SEOUL, KOREA :44B Place of Final Destination/ For Transportation to/ Place of Delivery: EDMONTON, ALBERTA :44C Latest Date of Shipment: :45A Description of Goods and/or Services: CARBON STEEL FLANGES :46A Documents Required: INSURANCE POLICY/CERTIFICATE ALL ORIGINALS ISSUED MUST BE PRESENTED – COVERING ALL RISKS - PAYABLE IN NEGOTIABLE FORM FOR 110 PERCENT OF INVOICE VALUE COMMERCIAL INVOICE IN TRIPLICATE CANADA CUSTOMS INVOICE IN TRIPLICATE BENEFICIARY SIGNED STATEMENT THAT ONE SET OF NEGOTIABLE DOCUMENTS HAVE BEEN AIRMAILED TO THE APPLICANT WITHIN 10 DAYS AFTER SHIPMENT. FULL SET OF CLEAN MULTIMODAL (COMBINED) TRANSPORT BILL(S) OF LADING TO SHIPPERS ORDER BLANK ENDORSED MARKED NOTIFY WFFFITTINGS AND FREIGHT PRE-PAID The Rest is Omitted ::707 DOCUMENTARY CREDIT AMENDMENT :20 Sender's Reference:M06H7112NU00064 :21 Receiver's Reference: NONREF :31C Date of Issue: :30 Date of Amendment: :26E Number of Amendment:01 :59 Beneficiary (Before this Amendment): SHANGHAI JIN HANG INTERNATIONAL TRADING CO., :32B Increase of Documentary Credit Amount:USD5738,10 :34B New Credit Amount After Amendment:USD59648,20 :44C Latest Date of Shipment: :72 Sender to Receiver Information: ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED The Rest is Omitted Example3. ::740 Authorization to Reimburse :20 Documentary Credit Number:M EU00057 :31D Date and Place of Expiry:990721IN U.S.A. :32B Credit Amount:USD :41A Available With... By...:KOEXUS6S BY NEGOTIATION :42C Drafts at...:2 YEARS FROM B/L DATE :42A Drawee:SEAFUS66 :71A Reimbursing Bank's Charges:CLM :72 Sender to Receiver Information: + THIS IS SUBJECT TO ICC URR525. KOREA EXCHANGE BANK, SEATTLE BANKER'S USANCE Example4.

Download ppt "2 nd Lecture. Letter of Credit (L/C) 1. L/C Operation (1)General Theory of L/C (2)Basic Factors of L/C (3)Parties Concerned with L/C Transaction (4)Variety."

Similar presentations

Ads by Google