1. 2nd 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. 2nd Lecture. Letter of Credit
1. L/C Operation
(1) General Theory of L/C
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 importer’s 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.
Bank
Submit Document
Open L/C
Payment
settlement
Exporter
Importer
Bigger, Safer, and more Fluent Transaction
Utility of L/C
Exporter
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
Importer
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
Issuing Bank
- Can pass the risk and costs to importer
- Obtain security rights on goods on-board
Negotiating Bank
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

3. Principle of Independence
L/C 특성
Principle of Independence
Once L/C is opened, L/C is totally independent from sales contract and other contracts it is based upon .
Independence from
Sales Contract
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
Independence from L/C
Issuing Contract
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
Transaction by
Documents
All concerned people transact according to documents, not the real goods, services or other financial liabilities related to the documents .
Basic Concept of
Trading Activation
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
Limits of L/C
Disadvantage for
Importer
Exporter이 L/C 거래의 추상성을 악용하여 대금 지급 요구 시 Importer은 L/C 대금을 지급을 해야 하므로 Importer이 요구하는 상품을 반드시 수입할 수 있다는 보장이 되지 않음.
Disadvantage for
Exporter
Importer이 L/C 거래의 추상성을 악용하여 서류상의 사소한 오류를 트집잡아 지급을 거절하거나 가격할인을 요구하는 한계점 존재
※Fraud Rule
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

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

5. (4) Variety of L/C 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
Beneficiary
-Duty to present Documents and Bills of Exchange Matching to Conditions of L/C
-Duty to Make Payment
Positions of Each Party Involved in L/C Transaction
○Position of Advising Bank
Entrusted by Issuing Bank
: Duty of delivering L/C safely and correctly
Relationship with Issuing Bank
 Advising Bank does not have to pay, undertake nor purchase unless it is confirming bank.
Relationship with Beneficiary
 No duties or legal binding
Advising Bank
Relationship with Applicant
 L/C - Has to be very careful about sincerity of L/C
Relationship with Negotiating Bank
 Do not have any duties unless it confirms L/C
Nominated Bank approved by issuing bank has ‘rights’ 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
○Positions of Paying, Accepting, and Negotiating Banks
Relationship with Issuing Bank
Paying, Accepting, Negotiating Banks
Relationship with Beneficiary
Paying, Accepting, Negotiating banks can ask money directly to beneficiary
(4) Variety of L/C
L/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
- Shipper’s Usance L/C
- Banker’s Usance L/C(Domestic Usance L/C)
Mixed Payment L/C
Installment Payment L/C
Red-clause L/C

6. 2. Reading L/C (1) Variety of L/C Related SWIFT Messages
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 Type
Message Type Name
Usage (Purpose)
700 / 701
Issue of Documentary Credit
Used in L/C publication
705
Pre-Advice of a Documentary Credit
Notifying Beneficiary about preliminary information before opening L/C
707
Amendment to a Documentary Credit
Amendment of L/C conditions
710 / 711
Advice of a Third Bank’s Documentary Credit
Used when Advising Bank notifies the third Advising Bank about L/C
720 / 721
Transfer of a Documentary Credit
Used in case of L/C negotiation
730
Acknowledgement
Advising Bank notifies Issuing bank about receiving L/C
732
Advice of Discharge
Issuing bank or Negotiating Bank notifies each other about receiving defected documents
734
Advice of Refusal
Used when issuing bank notifies Negotiating Bank about defects of documents
740
Authorisation to Reimburse
Used when issuing bank asks reimbursement bank for reimbursing authorization
742
Reimbursement Claim
Used 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 Discrepancy
Negotiating bank notifies discrepancy to issuing bank
752
Authorisation to Pay, Accept or Negotiate
Accepting negotiation of MT 750
754
Advice of Payment /Acceptance/negotiation
Negotiating bank notifies purchase of healthy documents to issuing bank
756
Advice of Reimbursement or Payment
Used when issuing bank notifies negotiating bank about settlement
797
Free Format Message
Free format message, used in other not-standardized matters.
(2)MT 700(L/C개설)의 구성
Status
Tag
Field Name
Content / Options M 27
Sequence of Total
1n / 1n
40A
Form of Documentary Credit
24x 20
Documentary Credit Number
16x O 23
Reference to Pre-Advice
31C
Date of Issue 6n
40E
Applicable Rules
30x[/35x]
31D
Date and Place of Expiry
6n29x
51a
Applicant Bank
A or D

7. Example1. Status Tag Field Name Content / Options50
Applicant
4*35x 59
Beneficiary
[/34x], 4*35x
32B
Currency Code, Amount
3a15number O
39A
Percentage Credit Amount Tolerance
2n / 2n
41a
Available With .... By ....
A or D
42C
Drafts at .....
3*35x
42a
Drawee
42M
Mixed Payment Details
42P
Deferred Payment Details
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:070703
: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:080305
:45A Description of Goods and/or Services: COMMODITY:
+TREATED WATER PUMP STATION PIPE WORKS : USD 50,000.00
+ERECTION : USD 50,000.00
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. Example2. Example3. Example4. ::707 DOCUMENTARY CREDIT AMENDMENT
::700 Issue of Documentary Credit
:27 Sequence of Total:1/1
:40A Form of Documentary Credit: IRREVOCABLE
:20 Documentary Credit Number:ILCC500381
:31C Date of Issue:070702
: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:070715
: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
Example3.
::707 DOCUMENTARY CREDIT AMENDMENT
:20 Sender's Reference:M06H7112NU00064
:21 Receiver's Reference: NONREF
:31C Date of Issue:011212
:30 Date of Amendment:011231
: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:020122
:72 Sender to Receiver Information:
ALL OTHER TERMS AND CONDITIONS
REMAIN UNCHANGED.
----- The Rest is Omitted
Example4.
::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