letter of credit electronic presentation

• What is Letter of Credit

Electronic Letters of Credit

What is an Electronic Letter of Credit?

An electronic letter of credit can be defined as a letter of credit transaction, which is carried out entirely on electronic means of communication and issued according to the rules, such as an eUCP, which are allowing electronic presentations.

Introduction: The information technology revolution and advancements in the international maritime business have changed the way of doing business in cross border trade.

We have been enjoying a new type of international business thanks to the advancements in both logistics and communication sectors.

Importers can easily subscribe to www.alibaba.com in order to find a reliable supplier who will offer good quality goods with competitive prices.

By signing a sales contract or preparing a simple proforma invoice the importer and exporter can determine the delivery term and the payment method.

After arranging the transportation and taking care of the insurance and custom clearance, the operational side of the deal is completed.

You can order any kind of goods internationally by online means without knowing who your supplier is or another party that has been participating in that particular export import business.

Everything could be handled by electronic means of communication fast and secure.

Preliminary Works: In order to make international letters of credit more compatible to this challenging electronic business environment, the ICC Banking Commission started to work on electronic letters of credit rules in year 2000.

The aim of the ICC Banking Commission Working Group, which consisting of experts in the UCP, electronic trade, legal issues and related industries, such as transport was to carry out the documentary credits rules into electronic environments where electronic presentations are possible without the need of any paper based documents.

Rules:   (eUCP) : In year 2002, the Banking Commission created supplementary rules to UCP 500 which, enabled the presentation of electronic records alone or in combination with paper documents.

The supplementary rules are known as the “ Supplement to the Uniform Customs and Practice for Documentary Credits for Electronic Presentation ” or simply “ eUCP “.

eUCP came into effect on 01.April.2002.

• Revision of the eUCP: UCP 500 revised in year 2007 and UCP 600 replaced the previous version of the letters of credit rules.

Along with UCP 500 revision ICC banking commission made necessary amendments on the eUCP rules.

As a result in year 2007 eUCP V1.1 Supplement to UCP 600 replaced the older version of eUCP which was known as eUCP V1 Supplement to UCP 500.

Let us have a look at the electronic letter of credit rules in detail.

eUCP V1.1 Supplement to UCP 600: UCP 600 contains within its text the 12 Articles of the eUCP, ICC’s supplement to the UCP governing presentation of documents in electronic or part-electronic form.

When you are buying UCP 600 from the ICC bookstore, you will also be buying supplementary eUCP rules as well.

How Electronic Letters of Credit Work?

Under electronic letters of credit all letters of credit parties such as the beneficiary , applicant , issuing bank , advising bank and confirming bank must be connected to the same secure online platform which enables electronic presentations and electronic document examinations.

GlobalTrade Corporation and The Bolero Ecosystem are top two companies throughout the world offering secure multi-bank platforms.

Step By Step Electronic Letter of Credit Transaction Process

• Electronic letter of credit transaction starts with the signature of the sales contract between the exporter and the importer through secure online platform.
• The applicant (importer) applies to the issuing bank for opening an electronic letter of credit which should be subject to latest version of eUCP rules.
• The issuing bank issues its electronic letter of credit and send the credit to the advising bank through multi-bank platform.
• The beneficiary (exporter) of the electronic letter of credit receives the authenticated copy of the e-credit through the secure online multi-bank platform.
• At the same time the applicant (importer) applies to the transport company, to make sure that an electronic bill of lading will be issued instead of a regular paper based bill of lading.
• The beneficiary make the electronic presentation to the advising bank. Electronic presentation contains electronic documents including digitally signed e-bill of lading.
• Advising bank checks the documents. If documents require no correction then advising bank make the electronic presentation to the issuing bank.
• Issuing bank checks the documents. If documents are found to be complying then issuing banks issuing bank honors its letter of credit.
• Issuing bank sends e-documents to the applicant.

Benefits of the Electronic Letters of Credit:

Cost Reduction Through Operational Efficiency: Traditional paper documents have much higher operational costs comparing to the electronic documentation. You can benefit from costs indicated below by leaving paper documents behind and converting into electronic letter of credit presentations,

• International courier costs: In each set of documents you submit to your bank under a paper based letter of credit, you should be paying between 75 USD-100 USD. You could save this amount with electronic L/Cs.
• Domestic Document Gathering Costs: Most of the export and import documents are created quite far away from the manufacturing companies, as production plants are located away from the city centers, where the land prices are low. Some documents are created at the custom offices which are located just inside the port of discharge. Collecting different paper based documents from different locations may cost considerable amount of money, especially when the exporters are racing for a timely presentation under the letters of credit.

Financial Advantages: Financial gains as a result of using electronic letters of credit could be sum up under below points.

• Reaching to the Payments Faster via Online Presentations: Under paper based presentations, the beneficiaries could collect all required letters of credit documents within 4-5 days after the date of shipment. Documents could reach to the issuing banks or confirming banks via expedited courier services between 3-7 days under normal conditions. (You should always think about strikes and holiday periods also extreme conditions where air traffic is severely affected such as eruptions of Eyjafjallajökull volcano in Iceland resulting at least 20 countries closed their airspace to commercial jet traffic for a period of week between 14–20 April.2010.). In conclusion, it is fair to expect under an at sight letter of credit, which allows paper based presentations, the beneficiary could reach to the payment within 12-20 days after the date of shipment. On the other hand, the beneficiary may be able to reach to the payment under an electronic letter of credit, which available by at sight within 3-4 days after the date of shipment.

Benefits of Reduced Risk Levels: Electronic letters of credit could eliminate or at least reduce various risks of the exporters, importers as defined below.

• Electronic Documents can be corrected easily which makes them less risky in terms of refusals by the issuing banks: Corrections on electronic documents is easier and faster than paper based documents. As a result exporters’ presentation refusal risks reduced significantly. According to ICC data %70 of presentations have been refused by issuing banks on 1st presentation. Electronic presentation could reduce these rejection figures considerably.
• Demurrage charges
• Risk and costs associated with issuance of a Letter of Indemnity

Case Study:

First end-to-end fully electronic letter of credit presentation Bolero has announced the first fully electronic presentation into mainland China of documents under a Letter of Credit, using the Bolero platform. This is the latest in a series of major milestone achieved by the participants in this transaction. The electronic presentation related to a shipment of manganese ore from Australia to China. As a fully end-to-end electronic presentation including the Bolero eBL (electronic bill of lading), all parties were connected to the Bolero platform. BHP Billiton was the exporter and beneficiary of the Letter of Credit; the customer and applicant was Sichuan Emei Ferroalloy I/E Co., Ltd. and ANZ bank acted as the advising bank, with China CITIC Bank acting as the first ever Chinese ePresentation receiving bank. The shipping company was “K” Line Pte Ltd. The Letter of Credit was issued under eUCP and all documents required under this Letter of Credit, including the bill of lading, were presented electronically using the Bolero platform, supported by the unique Bolero legal rule-book. A number of electronic presentations using Bolero have been undertaken elsewhere in Asia, but it is particularly significant to be able to prove acceptance in mainland China, a key export market for the resource industry. Being the first end-to-end electronic presentation into China, this also achieved a number of significant milestones: the first eBL into China with resultant cargo release and customs clearance, the first local Chinese Bank receiving a fully electronic presentation and the first Chinese corporate customer receiving an electronic presentation and surrender of an eBL. In this transaction, the customer, Sichuan Emei Ferroalloy I/E Co., Ltd., applied to China CITIC Bank for a Letter of Credit (L/C) to be issued under eUCP with BHP Billiton as the beneficiary. The L/C was advised to BHP Billiton using the Bolero export L/C management solution. The Bill of Lading was created on Bolero and made available to BHP Billiton to include in their electronic presentation. BHP Billiton did a fully electronic presentation of all documents required under the L/C to ANZ bank. Following confirmation of compliance by ANZ bank, the electronic presentation was then forwarded over Bolero to the issuing bank, China CITIC Bank, and subsequently forwarded over Bolero to the customer, Sichuan Emei who surrendered the eBL to “K” Line. This program proved the ability to drive the presentation end-to-end through to being promptly honoured and paid by the issuing bank.

Special Thanks: 

• Special thanks to Tom Rahder from www.bolero.net for his great contribution to this article.

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• Letter of Credit Basics

UCP 600 on Letters of Credit: Key Changes and Implications

The Uniform Customs and Practice for Documentary Credits, commonly known as UCP 600, is a set of guidelines governing the use of letters of credit in international trade. These rules are issued by the International Chamber of Commerce (ICC) and apply to over 175 countries worldwide. The UCP 600 is designed to ensure that letters of credit are issued and used in a consistent and fair manner, providing clarity and certainty to all parties involved in a transaction.

Over the years, the UCP 600 has undergone several revisions to keep up with changing business practices and technological advancements. The most recent update was in 2007, and since then, there have been several changes to the rules that have significant implications for businesses that use letters of credit. This article will explore some of the key changes to the UCP 600 and their implications for international trade.

Understanding UCP 600

UCP 600, also known as the Uniform Customs and Practice for Documentary Credits, is a set of rules established by the International Chamber of Commerce (ICC) to govern the issuance and use of letters of credit (LCs) worldwide. The UCP 600 is the latest revision of the UCP rules, which were first introduced in 1933.

The UCP 600 is a crucial document for international trade as it provides a standard set of rules that govern the use of LCs. The UCP 600 consists of 39 articles that outline the roles and responsibilities of the parties involved in an LC transaction, including the banks, the buyer, and the seller.

One of the key changes introduced in the UCP 600 is the clarification of the definitions of key terms used in LC transactions. This is particularly important as it helps to avoid any misunderstandings between the parties involved in an LC transaction. The UCP 600 also includes provisions that address electronic documents, which have become increasingly common in international trade.

The UCP 600 is widely used in international trade, with over 175 countries adopting the rules. It is estimated that the UCP 600 governs around $1 trillion USD of trade per year. The UCP 600 has been praised for its ability to provide clarity and standardization in LC transactions, which has helped to facilitate international trade.

Overall, the UCP 600 is a crucial document for international trade that provides a standard set of rules that govern the use of LCs. Its widespread adoption and use have helped to facilitate international trade by providing clarity and standardization in LC transactions.

Key Changes from UCP 500 to UCP 600

The Uniform Customs and Practice for Documentary Credits (UCP) is a set of guidelines for banks and corporations to follow when dealing with letters of credit. UCP 500 was the previous version of these guidelines, and it was replaced by UCP 600 in 2007. UCP 600 made a number of key changes to the previous version, which are summarized below:

1. Electronic Documents

UCP 600 recognized the use of electronic documents for the first time. This meant that banks could accept electronic documents as a substitute for paper documents, as long as they met certain requirements. This change was significant because it allowed for faster and more efficient processing of letters of credit.

2. Transport Documents

UCP 600 introduced new rules for transport documents. Under UCP 500, transport documents were required to be "clean," meaning that they did not show any signs of damage or other issues. UCP 600 allowed for "unclean" transport documents to be accepted under certain circumstances, which made it easier for shippers to comply with the rules.

3. Insurance Documents

UCP 600 also made changes to the rules governing insurance documents. Under UCP 500, insurance documents were required to be issued by an insurance company. UCP 600 allowed for insurance documents to be issued by other parties, such as brokers or agents, as long as they met certain requirements.

4. Amendments

UCP 600 made changes to the rules governing amendments to letters of credit. Under UCP 500, any amendment to a letter of credit had to be agreed upon by all parties involved. UCP 600 allowed for amendments to be made without the agreement of all parties, as long as they did not prejudice the beneficiary.

5. Discrepancies

UCP 600 introduced new rules for dealing with discrepancies in documents. Under UCP 500, any discrepancy in a document could result in the rejection of the entire letter of credit. UCP 600 allowed for minor discrepancies to be overlooked, as long as they did not prejudice the beneficiary.

Implications of UCP 600 Rules

The introduction of the UCP 600 rules brought significant changes to the letter of credit (LC) business. These changes have implications for all parties involved in LC transactions. Below are some of the implications of UCP 600 rules:

Interpretation

The UCP 600 rules have clearer wording, which reduces ambiguity and differences in interpretation. This is a significant improvement from the previous version of the rules. With clearer wording, parties involved in LC transactions can now better understand their obligations and responsibilities.

Strict Compliance

One of the most significant changes in the UCP 600 rules is the requirement for strict compliance. Under the UCP 600 rules, banks must ensure that all documents presented under an LC comply strictly with the terms and conditions of the LC. Failure to comply with the UCP 600 rules can lead to the rejection of documents and the non-payment of the beneficiary.

The UCP 600 rules are widely accepted and used in international trade. The rules provide a standard set of guidelines for banks issuing LCs. This standardization has helped to reduce discrepancies in LC transactions and has made it easier for parties involved in LC transactions to understand their obligations and responsibilities.

The UCP 600 rules have implications for the liability of banks involved in LC transactions. Under the rules, banks are liable for errors and omissions in the LC and for the documents presented under the LC. This liability extends to all parties involved in the LC transaction, including the beneficiary and the applicant.

Role of Banks in Letters of Credit

Letters of Credit (LC) are financial instruments issued by banks that help companies finance trade. Banks play a crucial role in the LC process, and different banks perform different functions in the process.

The issuing bank is the bank that issues the LC on behalf of the applicant (buyer). It is responsible for verifying the authenticity of the LC application, and ensuring that the LC conditions are met. The issuing bank may also act as the nominated bank or advising bank, depending on the LC terms.

The nominated bank is the bank that is nominated in the LC as the bank that will make payment to the beneficiary (seller). The nominated bank may be the same as the issuing bank or a different bank altogether. The nominated bank is responsible for verifying the documents presented by the beneficiary, and ensuring that they conform to the LC terms.

The advising bank is the bank that advises the beneficiary of the LC. It is responsible for authenticating the LC and ensuring that it is not fraudulent. The advising bank may also confirm the LC, which means that it adds its own guarantee to the LC, thereby reducing the risk for the beneficiary.

The confirming bank is the bank that adds its own guarantee to the LC, in addition to that of the issuing bank. The confirming bank may be the same as the advising bank or a different bank altogether. The confirming bank reduces the risk for the beneficiary by providing an additional layer of protection.

Presentation and Examination of Documents

One of the key aspects of UCP 600 is the presentation and examination of documents. Under UCP 600, the seller must present the documents required by the letter of credit to the issuing bank or another nominated bank. These documents must be presented in accordance with the terms and conditions of the letter of credit, as well as the applicable provisions of UCP 600 and international standard banking practice.

The bank then examines the documents to determine whether they comply with the requirements of the letter of credit. If the bank determines that the documents are compliant, it will honor the letter of credit and pay the seller. If the documents are not compliant, the bank will issue a notice of refusal to the seller, indicating the discrepancies in the documents.

It is important to note that the bank's examination of documents is a "reasonable examination" and not a "detailed examination." This means that the bank is not required to examine each document in detail, but rather to examine them on a "on their face" basis.

If the documents are found to be discrepant, the seller has the option to cure the discrepancies or request that the buyer waive them. If the seller is unable to cure the discrepancies or obtain a waiver from the buyer, the bank will not honor the letter of credit and the seller will not receive payment.

Documentary Credits and Goods in International Trade

Documentary credits, also known as letters of credit, are financial instruments used in international trade transactions. They are issued by banks to guarantee payment to the seller of goods, provided that the seller presents the required documents in accordance with the terms and conditions of the credit.

Goods are at the center of international trade transactions and are often the subject of documentary credits. The seller of the goods relies on the documentary credit to ensure payment, while the buyer relies on it to ensure that the goods are shipped and delivered as agreed.

The UCP 600 is a set of rules that governs the use of documentary credits in international trade transactions. The UCP 600 provides a standard set of rules that are recognized and accepted by banks and traders worldwide. The UCP 600 has been adopted by most major trading nations and is widely used in international trade finance.

Under the UCP 600, the seller of goods must present the required documents to the bank within a specified time frame. The bank will then examine the documents to ensure that they comply with the terms and conditions of the credit. If the documents are in order, the bank will release payment to the seller.

Letters of Credit and Contracts

Letters of Credit (LCs) are financial instruments that are widely used in international trade to facilitate the payment process between buyers and sellers. LCs are standalone contracts that are separate from the sale contract, and banks are concerned only with the LC contract, not the sale contract. This means that money is raised on the documents, not on delivery of the goods.

The Uniform Customs and Practice for Documentary Credits (UCP) is the rule governing the Documentary credits. It was established by the International Chamber of Commerce (ICC) to mitigate the doubts caused by individual countries promoting their own national rules on documentary credit practice. The objective, since attained, was to create a set of rules that would be universally accepted and applied by banks and other financial institutions around the world.

The UCP 600 is the latest version of the UCP, and it governs the use of LCs and other documentary credits. The UCP 600 defines the roles and responsibilities of the various parties involved in the LC transaction, including the applicant, the beneficiary, the issuing bank, the advising bank, and the confirming bank. It also sets out the various documents that must be presented by the beneficiary to the issuing bank in order to receive payment under the LC.

The UCP 600 provides clear guidelines on the use of LCs in relation to contracts. It stipulates that an LC must be issued in accordance with the terms and conditions of the underlying contract. This means that the LC must accurately reflect the terms and conditions of the sale contract between the buyer and the seller. In addition, the UCP 600 requires that the documents presented under the LC must be consistent with the terms and conditions of the LC and the underlying contract.

The UCP 600 also provides guidance on the use of documentary letters of credit and standby letters of credit. Documentary letters of credit are used in trade transactions to ensure that the seller receives payment once the goods have been shipped. Standby letters of credit are used to provide a guarantee of payment to a seller in the event that the buyer fails to meet its payment obligations under the sale contract.

UCP 600 and Transport

Transport documents play a crucial role in the successful completion of a letter of credit transaction. The UCP 600 has made some key changes that impact the use of transport documents in the process.

One of the most significant changes in the UCP 600 is the requirement for transport documents to include an on-board notation. This notation serves as proof that the goods have been loaded onto the vessel and are in transit. If the transport document does not contain an on-board notation, banks may refuse to accept it as a complying document under the letter of credit.

Another change in the UCP 600 is the acceptance of electronic transport documents. While electronic documents have been used in the past, the UCP 600 now provides specific guidelines on their use. To be considered a complying document, electronic transport documents must meet the same requirements as paper documents and must be issued and signed by a party acceptable to the issuing bank.

The UCP 600 also provides guidance on the use of bills of lading. Banks may now accept bills of lading that contain an indication that they are "original" or "copy" bills of lading. This change allows for greater flexibility in the use of bills of lading and makes it easier for banks to accept them as complying documents.

It is important to note that the UCP 600 does not prescribe a specific form of transport document. Instead, it provides guidelines for the content and presentation of transport documents. Banks must ensure that the transport documents presented under the letter of credit comply with the UCP 600 and are consistent with the terms of the letter of credit.

Compliance and Non-Compliance in UCP 600

UCP 600 emphasizes the importance of strict compliance and the need for documents to comply with the terms and conditions of the letter of credit. This is to ensure that the bank is not obliged to pay if the documents presented do not meet the requirements of the letter of credit.

A complying presentation is one that is in strict compliance with the terms and conditions of the letter of credit. Banks are only obligated to pay when the presentation of documents is compliant with the terms and conditions of the letter of credit.

Non-compliance, on the other hand, refers to the presentation of documents that do not strictly comply with the terms and conditions of the letter of credit. Banks are not obligated to pay in such cases.

UCP 600 also allows for waivers of discrepancies. A waiver is a voluntary relinquishment of a right or claim. Banks may waive discrepancies if they choose to do so. However, they are not obliged to do so.

It is important to note that UCP 600 does not provide for substantial compliance. Documents must strictly comply with the terms and conditions of the letter of credit. Any deviation from the terms and conditions of the letter of credit, no matter how small, may result in non-compliance and the bank is not obligated to pay.

Role of Insurance in UCP 600

Insurance plays a crucial role in UCP 600, which provides guidance on how to handle the risks associated with international trade. The UCP 600 rules require that the insurance policy should cover the entire shipment process, from loading to unloading, and should be in effect from the time the goods leave the seller's warehouse until they reach the buyer's premises.

The UCP 600 rules also state that the insurance policy must be issued by a reputable insurance company and be in accordance with the requirements of the country of the seller. The insurance policy should be made out in the name of the beneficiary of the letter of credit, which is usually the seller, and should be presented to the issuing bank together with the other documents required under the letter of credit.

In addition, the UCP 600 rules require that the insurance policy should be free of any clauses that would limit the liability of the insurance company or that would require the beneficiary of the letter of credit to take any action before the insurance company would pay out on a claim.

It is important to note that the UCP 600 rules do not specify the type of insurance policy that should be used. However, it is recommended that the insurance policy should be a comprehensive policy that covers all risks associated with the shipment, including loss or damage due to fire, theft, or other perils.

UCP 600 and Electronic Developments

UCP 600 has been updated to reflect the latest technological developments in the field of international trade finance. As a result, the UCP 600 now includes provisions for the use of electronic communications in the processing of letters of credit.

One of the most significant developments is the introduction of the eUCP, which is a supplement to the UCP 600 that provides guidance on the presentation of electronic documents under documentary letters of credit. The eUCP rules are not a revision of UCP 600, but rather a supplement to it. They provide guidance on the presentation of electronic documents that are equivalent to paper documents under documentary letters of credit.

The eUCP rules include provisions for the use of electronic records, electronic signatures, and other electronic means of communication. They also provide guidance on the use of electronic documents in the context of letters of credit, including the requirements for electronic documents to be considered as original documents.

Buyer-Seller Relationship in UCP 600

The UCP 600 is a set of rules that govern the use of letters of credit in international trade. It establishes the roles and responsibilities of the buyer and seller in a letter of credit transaction. Under UCP 600, the buyer is responsible for opening a letter of credit in favor of the seller. The seller, in turn, is responsible for shipping the goods and presenting the required documents to the bank.

The buyer and seller relationship under UCP 600 is based on trust and mutual understanding. The buyer relies on the seller to provide the goods as per the agreed terms and conditions. The seller, on the other hand, relies on the buyer to make payment as per the letter of credit terms.

The UCP 600 provides a framework for the buyer and seller to establish a clear understanding of their respective roles and responsibilities. It specifies the documents that the seller must present to the bank to receive payment. These documents include the commercial invoice, bill of lading, and certificate of origin, among others.

The UCP 600 also specifies the time limits for the presentation of the documents. The seller must present the documents within a specified time frame to receive payment. The buyer's bank will examine the documents to ensure that they comply with the terms of the letter of credit.

UCP 600 and the Future

UCP 600 has been widely accepted and used in international trade since its inception in 2007. However, as trade continues to evolve, it is important to consider how the UCP 600 rules may need to be updated to reflect these changes.

One potential area of focus for future revisions of UCP 600 is the use of electronic documents. While the current version of UCP 600 does allow for electronic documents, there may be a need for more specific guidance on how these documents should be handled and what types of electronic documents are acceptable.

Another area of potential focus is the role of technology in the issuance and management of letters of credit. As technology continues to advance, there may be opportunities to streamline the process of issuing and managing letters of credit, reducing the time and costs associated with these transactions.

It is also worth considering how UCP 600 may need to be revised to reflect changes in global trade patterns. For example, the rise of e-commerce has led to an increase in cross-border transactions involving smaller businesses. UCP 600 may need to be updated to reflect the needs of these businesses, such as by providing more flexible rules for smaller transactions or by providing guidance on how to handle disputes between smaller businesses.

Finally, it is worth noting that there have been discussions about the potential development of UCP 700, which would be an updated version of UCP 600. However, it is unclear at this time whether such a revision will be necessary or when it might occur.

Frequently Asked Questions

What is the letter of credit under ucp 600.

A letter of credit under UCP 600 is a payment mechanism used in international trade. It is a written undertaking by a bank (issuing bank) given to the seller (beneficiary) at the request of the buyer (applicant) to pay a certain amount of money against the presentation of specified documents, provided that the terms and conditions of the letter of credit are complied with.

How is credit treated under UCP 600?

Credit under UCP 600 is treated as a separate and independent transaction from the underlying contract between the buyer and the seller. The issuing bank is only concerned with the documents presented to it and not with the underlying goods or services. The bank's obligation to pay is conditional upon the presentation of documents that comply with the terms and conditions of the letter of credit.

What is Article 27 of the UCP 600?

Article 27 of the UCP 600 deals with the discrepancies in the documents presented under the letter of credit. It provides that the issuing bank has a reasonable time to examine the documents, and if there are any discrepancies, it must give notice to the presenter. The presenter then has the opportunity to correct the discrepancies or waive them.

What is Article 26 of the UCP 600?

Article 26 of the UCP 600 deals with the presentation of documents under the letter of credit. It provides that the documents must be presented in accordance with the terms and conditions of the letter of credit, and within the stipulated time. The documents must also be in the required number of copies and be of the type specified in the letter of credit.

How many articles are in UCP 600?

UCP 600 has 39 articles that cover various aspects of the letter of credit, including its definition, obligations and liabilities of the parties, examination of documents, discrepancies, and transfer and assignment.

What are the key changes and implications of UCP 600 on Letters of Credit?

UCP 600 introduced several key changes to the rules governing letters of credit. These changes include the requirement for documents to be presented in an electronic format, the reduction in the number of banking days for examination of documents, and the introduction of the concept of "original documents". The implications of these changes are that they have made the process of handling letters of credit faster, more efficient, and more secure.

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Evolving the Letter of Credit in the digital age

Is the Letter of Credit’s position as the go-to instrument for trade finance at threat of being disrupted, or can it morph itself into the product of the future, asks Samuel Mathew, global head of documentary trade, product management and transaction banking at Standard Chartered Bank.

Trade is a key component of global GDPs and trade finance is the lubricant that keeps the trade engine humming. According to the latest ICC Trade Survey , trade grew twice as fast as GDP before the global financial crisis, while in recent years it has been more in line with GDP growth.

Availability of trade risk mitigation and trade finance is a critical enabler of global trade in goods and services. In the ICC survey, Boston Consulting Group forecasts trade finance revenues to touch $48bn in the next three years.

Banks have traditionally played a critical part in keeping this engine of growth running perfectly, providing participants a range of solutions primarily around:

• Bridging the ‘trust’ deficit by being an independent third-party facilitator
• Providing risk mitigation
• Funding the working capital gaps by being a liquidity provider
• Settlement of transactions

The classic bank instrument which provides all of these services is the Letter of Credit, which revolutionized trade finance when it was born in medieval Europe and helped bring about the global trade order as we know it.

However, the primary strength of a Letter of Credit – the presence of a clear set of governing rules and precedents which clearly set out the roles and responsibilities of each party – is also its Achilles’ heel, as each party evidences performance through paper-based documents which result in manual paper-based processing, high operating costs and slow transaction delivery time for banks.

The products and services of tomorrow will be increasingly digital in nature with multiple parties across countries providing key data inputs at various stages of the cycle. In the past few years, cost and efficiency targets, as well as improvements in technology and analytics, have seen the emergence of non-bank intermediated trade, i.e. fintech and platform-driven open account trade and supply chain finance.

The products and services of tomorrow will be increasingly digital in nature with multiple parties across countries providing key data inputs at various stages of the cycle

Eliminating paper-based processes across the transaction initiation, evidencing supplier performance/shipment and settlement stages will be crucial to digitizing Letter of Credit-based trade flows.

So, is the Letter of Credit’s position as the go-to instrument for trade finance at threat of being disrupted?

The rest of this article explores this question and argues that the Letter of Credit is well positioned to morph itself into a product of the future. A new trade paradigm will emerge: combining the security and risk mitigation features of Letters of Credit with the cost and speed of open account and the visibility of a distributed ledger mechanism. In this new world, banks could be the super highways that facilitate this new trade risk mitigation and settlement mechanism across geographies.

However, before we get there, a few key issues around interoperability, electronic title transfer and legal enforceability need to be addressed before the industry can expect to see large-scale adoption.

According to the ICC, an estimated four billion pages of documents currently circulate in documentary trade. However, global Letter of Credit volumes have remained flat or fallen in the preceding years as counterparties gradually move away from Letters of Credit to open a/c trade.

As the world moves to increasingly data-driven trade and performance risk management, the billion-dollar question is: are the alternative platforms/procure to pay networks and technologies such as distributed ledger able to address the risks and requirements in any cross-border trade, in an efficient and scalable manner?

The Letter of Credit’s evolution will be powered by a few key trends which are occurring in the digital trade space today. Some of the notable ones are as below:

Digitization of goods title

The emergence of truly digitized title documents – electronic bills of lading, electronic warehouse receipts, electronic airway bills – has been a driver for early adopters as they seek to digitize their trade flows. However, in the absence of a universal set of rules on what comprises an electronic title document, this has been championed by closed-end ecosystems such as Bolero and essDocs, which provide a contractual mechanism to transfer title electronically.

In response to this gap and to address the current ‘digital island’ approach, we are now seeing progress towards a unifying set of rules to power this transition, such as:

• UNCITRAL Model law on Electronic Transferable Records adopted in July 2017
• ICC working groups looking to agree on a common set of standards for electronic title documents

The emergence of Distributed Ledger Technology (DLT):

The DLT revolution is a key driver which provides the necessary framework for designing and delivering the new products and solutions of the future, leveraging on the trends above and combining those with the salient features of the technology such as security, immutability and self-executing smart contracts.

However, the point to note is that Distributed Ledger Technology is simply that – technology. Though it provides a framework for trusted intermediaries to conduct business more efficiently, we do not foresee a transition wherein the role and obligation of banks can be replaced by a bunch of nodes which operate without regulatory scrutiny. Like any technology, we believe the onus is on the banks to leverage this architecture to deliver new solutions for their clients.

Bank/industry consortiums

Another key trend is the increasing cognizance among banks and other industry players – both global and regional – that they need to evolve to continue facilitating trade. As evidence of this changing dynamic, we have seen an emergence of trade consortiums, comprising banks and technology providers, which are looking to build an infrastructure layer leveraging emergent technologies to allow banks to design and deliver products of the future.

The last time we saw such concerted efforts from banks was in the payments space in the 1970s, and that resulted in the creation of SWIFT, which revolutionized the world of cash management and interbank communications.

The last time we saw such concerted efforts from banks was in the payments space in the 1970s, and that resulted in the creation of SWIFT

The core tenet of these trade consortiums – such as Marco Polo, Wilson, WeTrade or Voltron – is unification of trade through an open architecture even though their stated objectives and technology stacks may be divergent as of now. It is these attempts which will provide the required underlying brickwork to enable digitally initiated and accomplished trade transactions.

Data emerging as the new oil of B2B

The ongoing digital revolution has further put the spotlight on the unrivalled power of data-based analytics in achieving not only efficiency and dynamic risk management but pure business growth for all players in the trade ecosystem. Furthermore, we are increasingly seeing more and more regulators and government bodies join the digital revolution, which further provides a fillip to the ongoing digitization push – the EDPMS/IDPMS regime in India being a good example of a government using the power of data to ensure compliance with regulations.

In such an environment, the bulk of the participants in the trade cycle have a clear digitization strategy and/or a digitization roadmap to access the data underlying their business. This ranges from:

• Standard ERP systems to track procurement to payment cycles
• Internal treasury management systems for risk management and on-the-fly liquidity management
• Dynamic data solutions interlinked with Internet of Things-based devices to enable geo-location and quality assurance of goods and services
• Leveraging AI to automate banking roles such as document checking and identifying discrepancies

This internal retooling will allow parties to access data pools which will form the basis of digital interactions in the new economy.

Universal connectivity

The past few years have seen the emergence of many ‘digital islands’ – which aim to solve the problem of a lack of universal connectivity standards by creating trading ecosystems wherein each party simply needs to connect to a central infrastructure and post that can seamlessly transact with any other party in the ecosystem.

However, in the face of many such competing ecosystems, the need for unification is still relevant and this has resulted in the increasing focus on using APIs as well as attempts at interoperable distributed ledgers and adoption of Global Legal Entity Identifiers (GLEIDs).

Here’s what a potential ideal digital trade transaction flow could look like in future:

• Buyers and sellers agree on the necessary terms and conditions for a commercial trade on an online sourcing/front-end platform powered and delivered by their trade bank or by an online marketplace
• Buyers and sellers agree on and select the necessary counterparties who will need to provide relevant data to evidence performance under the agreed contract e.g. logistics provider, insurance, quality inspection, chamber of commerce etc.
• Title of goods will be controlled via digital title docs such as electronic bills of lading which are already prevalent, and status of the shipment will be available to all relevant parties linked to the transaction
• Banks may or may not be required as an independent third party to transfer digital title of goods/services in exchange for performance. This could be achieved through the translation of the above into a self-executing SMART contract which clearly specifies the data streams and sources which need to be available for the performance to be deemed complete and the buyer (or bank’s) payment obligation to crystallize
• Risk mitigation is provided by the platform and the SMART contract defining the obligations of the counterparties
• AI-based algorithms then use the data elements to auto-match the information from the data sets to the SMART contract requirements and once matched, would cause an execution of the SMART contract to crystallize the obligation/liability of the relevant parties in the chain
• Final settlement could happen via the banking channels and fiat currencies or using cryptocurrencies on the ledger without the need for a banking system

Issues to be addressed before large-scale adoption

Linking the above flow to the earlier key benefits provided by a Letter of Credit in the current world, here are the questions that need to be addressed before we see any serious adoption of digital alternatives to Letters of Credit:

• Large-scale adoption of the UNCITRAL model law for electronic title documents /transfers
• What happens when something goes wrong in this digital SMART contract-based transaction? E-laws vs. contract laws; does the affected party sue all the nodes in the chain? How do you challenge a SMART contract in a court of law? Will standard SMART contract/e-rules develop globally and be adopted by countries similar to the evolution of UCP rules?
• Who owns the data? Who is responsible for the accuracy of data provided digitally for such SMART contract-based execution? Is it the data provider or is there any obligation on the infrastructure provider? Pan country data confidentiality rules need to evolve to enable client and transaction data sharing between counterparties
• Will there be a universally acceptable global legal entity identifier/certificate to uniquely identify counterparties across different cloud and DLT platforms? Will this allow passporting between these platforms as the current closed loop digital islands are not sustainable or scalable with different contracts, standards and sign-on processes
• Who is responsible for ensuring compliance with the law of the land? As an infrastructure provider, are the banks still liable for AML/Sanctions compliance when they are simply providing the connectivity layer for corporates but not financing the underlying transactions?
• Finally, who will be responsible for constructing the common open standard which is required for allowing unification in this space?

The eventual answers to these questions will determine both the scope and pace of transformation which will engulf the world of trade finance and morphing of the Letter of Credit into viable digital alternatives. These may then provide the same or better level of control of title of goods, counterparty risk mitigation, settlement and financing, and at the same time deliver these much more efficiently across cost, space and time.

A new era for trade?

In summary, we live in exciting times when different families of technologies are coming together to redefine business models across sectors – the so-called Fourth Industrial Revolution or Industry 4.0.

It’s no longer a question of whether change will come, but rather how fast it will arrive. The future is all about data and data-based risk mitigation and financing. The paper-based performance evidencing, as well the good old Letter of Credit may be disrupted eventually. However, the industry needs to collectively solve the key questions raised above (and more).

Only then will alternative scalable digital solutions emerge to address client primary needs – control of cross-border title of goods, risk mitigation, settlements, etc. with a fully developed legal framework that makes it much simpler and more efficient to do business.

Letters of Credit may eventually dwindle but the underlying benefits they provide will live on in the digital paradigm in a different avatar which is yet to come into being.

Samuel Mathew is global head of documentary trade, product management and transaction banking at Standard Chartered Bank .

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Home » Blog » Facilitating a Letter of Credit Transaction with WaveBL’s New Structured Bank Presentation

Facilitating a Letter of Credit Transaction with WaveBL’s New Structured Bank Presentation

• April 2, 2024
• Shana Vernon

Did you know that a typical trade transaction involves up to 27 documents and can take up to 2-3 months to process?

Despite the digital nature of LC processes managed on SWIFT, document presentation still relies on physical couriering. This frustrating physical presentation is a significant bottleneck in global trade, hindering growth, innovation and low LC adoption rates. At one point, efficiency in trade finance operations was simply advantageous for growth. Now, it’s essential in order for businesses to thrive.

In this post, we’ll compare the traditional paper-based letter of credit presentation process with WaveBL’s digital approach. Plus, we’ll discuss why trade finance efficiency matters and how WaveBL addresses the reliance on physical bank presentations in the traditional system.

Understanding Traditional Global Trade Finance

A letter of credit transaction is a financial instrument commonly used in global trade to mitigate risk for both buyers and sellers. Essentially, it involves a bank guaranteeing payment to the seller on behalf of the buyer. This arrangement provides security and trust in international trade by ensuring that payment is made only when the seller fulfills their obligations and provides the necessary documentation.

However, the traditional paper bank presentation process. Vital to managing letters of credit, can be difficult and prone to delays and errors, discouraging businesses and banks from participating in the financing of cross jurisdiction trade transactions. The need to accept eBL transformative solutions in trade finance operations is evident, and this is where digital solutions like WaveBL come into play.

Previously, without electronic bills of lading, achieving a structured bank presentation digitally was impossible. Now, with our secure technology, we’ve made this concept a reality.

To grasp the complexities of modern trade finance, let’s break down the traditional steps involved in a letter of credit transaction.

Steps of a Letter of Credit Transaction

Step One: Issuance of Letter of Credit

To initiate a letter of credit transaction, the importer (Applicant) and exporter (Beneficiary) would typically come to terms evidenced by a Proforma Invoice. Upon approval, the Issuing bank issues the letter of credit to the advising bank, guaranteeing payment for the seller, contingent on document presentation. This process is initiated on SWIFT but involves coordination between banks and customers, potentially leading to delays.

Step Two: Document Preparation and Presentation to Advising Bank

With the letter of credit in place, the seller proceeds with document preparation, including the bill of lading, commercial invoice, and packing list, all presented to the Advising Bank, which will scrutinize the documents to confirm they comply with the LC requirements. The preparation and shipment process may vary depending on the nature of the goods and shipping logistics, typically taking several days to weeks.

Step Three: Document Presentation for Bank Reviewal

Upon receipt of the documents, the advising bank meticulously scrutinizes them to ensure compliance with the terms outlined in the letter of credit. This critical review process aims to verify the authenticity and accuracy of the documents provided by the exporter. However, this stage often proves to be time-consuming and cumbersome due to various challenges associated with physical document handling.

In many cases, documents need to be sent multiple times, as inconsistencies, missing documents, or even forgery (which is impossible with digital documents) may arise. This repetitive process results in significant time and money losses, as courier services are required for each document submission.

Moreover, the reliance on physical documents introduces the risk of human error and delays. Even the smallest discrepancy can lead to additional rounds of document submissions, further prolonging the review process.

Step Four: Presentation to Issuing Bank, Payment and Document Release

Upon receipt of the documents, the issuing bank meticulously reviews them to ensure compliance with the letter of credit terms. If satisfied, the bank releases payment to the advising bank, facilitating the transfer of funds to the exporter. However, the reliance on paper-based presentations poses challenges.

Since the importer doesn’t review the documents initially, there’s a heightened risk of miscommunication and errors. Banks bear liability for any inaccuracies until this point, underscoring the importance of transitioning to digital solutions to streamline the process and reduce errors. Now that we’ve outlined the traditional process let’s explore how WaveBL’s digital solutions transform each step for enhanced efficiency and accuracy.

From eBL to Electronic Structured Bank Presentation

At WaveBL, we specialize in streamlining trade finance processes by offering a seamless collaboration platform for banks, shipping parties, and businesses. Through WaveBL, users can easily exchange electronic Bills of Lading (eBLs) and other trade documents, eliminating the need for risky and frustrating paper-based processes.

Our platform enables real-time communication and document exchange, enhancing visibility throughout the entire shipping journey. By digitizing trade documents, WaveBL ensures compliance with regulatory requirements while significantly reducing the time and resources needed for trade finance operations.

Benefits of WaveBL’s Structured Bank Presentation

Gain Access to the fastest-growing Electronic Bill of Lading platform

Receive possession of the eBL alongside all other documentary requirements in a structured authenticable bank presentation envelope

Slash the physical document handling for LoC and Collection services

• Easily integrated into trade finance banking software
• Create exportable, verifiable proof of presentation for external use
• Receive certified proof of presentation for transparency and accountability

Trusted Partner for Trade Finance

Temenos Exchange : Provides financial institutions with instant access to our secure electronic trade document platform. This integration enables banks to seamlessly manage and process electronic bills of lading, through Temenos T24 software, facilitating smoother trade finance operations.

Surecomp RIVO : Offers a platform where banks and customers can communicate and exchange documents, not including eBLs.

Join the Global Trade Finance Digitizing Revolution: Work Smarter with WaveBL

From eliminating paperwork bottlenecks to ensuring compliance and enhancing visibility, WaveBL offers innovative solutions to redefine trade finance for the digital age.

As Swift rightly puts it, “Electronic documents have the potential to make global trade more efficient, cheaper, and more secure.”

 With WaveBL’s innovative solutions, businesses can embrace the future of global trade and experience unprecedented efficiency, accuracy, and competitiveness.

Stay tuned for more insights, success stories, and updates as we navigate the future of trade together.

WaveBL – Transforming Trade, Empowering Businesses. Your Gateway to Efficient Trade

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Letters of Credit

Practical law canada practice note 4-617-3276  (approx. 28 pages), get full access to this document with practical law.

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About Practical Law

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• Increase efficiency
• Enhance productivity
• Improve response time
• Taking Security in Collateral
• Corporate Lending
• Trade Finance
• Commercial and Small Business Lending
• Substantive Law
• Standby Letters of Credit
• Commercial Letters of Credit (Documentary Credits)
• Advantages of Using Letters of Credit
• The Applicant
• The Beneficiary
• The Issuing Bank
• Confirming and Advising Banks
• Other Banks
• Underlying Agreement
• Application and Reimbursement Agreement
• The Letter of Credit
• Industry Rules
• The Autonomy of Letters of Credit
• The Doctrine of Strict Compliance
• Commonly Required Documents
• Discrepancies in the Presented Documents
• Practical Tips for Avoiding Unnecessary Delays
• 6 Letter of Credit Fees
• Transferable Credit
• Revolving Letter of Credit
• Back-to-Back Credit
• Evergreen Letters of Credit
• 8 Electronic Records in Letter of Credit Transactions

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What Is a Letter of Credit?

How a letter of credit works, types of letters of credit, example of a letter of credit.

• Applying for a Letter of Credit
• Advantages and Disadvantages
• Letter of Credit FAQs

The Bottom Line

• Personal Finance

Letter of Credit: What It Is, Examples, and How One Is Used

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Jessica Olah / Investopedia

A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade to protect buyers and sellers.

Key Takeaways

• A letter of credit is a document sent from a bank or financial institution that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
• Letters of credit are often used within the international trade industry.
• There are many different letters of credit, including one called a revolving letter of credit.
• Banks collect a fee for issuing a letter of credit.

Buyers of major purchases may need a letter of credit to assure the seller that the payment will be made. A bank issues a letter of credit to guarantee the payment to the seller, essentially assuming the responsibility of ensuring the seller is paid. A buyer must prove to the bank that they have enough assets or a sufficient line of credit to pay before the bank will guarantee the payment to the seller.

Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.

Because a letter of credit is typically a negotiable instrument , the issuing bank pays the beneficiary or any bank nominated by the beneficiary. If a letter of credit is transferable , the beneficiary may assign another entity , such as a corporate parent or a third party, the right to draw.

The International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

How Much a Letter of Credit Costs

Banks usually charge a fee for a letter of credit, which can be a percentage of the total credit they are backing. The cost of a letter of credit will vary by bank and the size of the letter of credit. For example, the bank may charge 0.75% of the amount that it's guaranteeing.

Fees can also depend on the type of letter. In an import-export situation, an unconfirmed letter of credit is less costly. A confirmed letter of credit may have higher fees attached based on the issuing bank's credit strength.

The types of letters of credit include a commercial letter of credit, a revolving letter of credit, a traveler’s letter of credit, a confirmed letter of credit, and a standby letter of credit. International trade will also sometimes use an unsecured—also called a red clause —letter of credit.

Commercial Letter of Credit

This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain limit during a specific period. It can be useful if there are frequent merchandise shipments, for example, and you don't want to redraft or edit letters of credit each time.

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts made at certain foreign banks.

Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default . The issuing bank in international transactions typically requests this arrangement.

Standby Letter of Credit

A standby letter of credit provides payment if something does not occur, which is the opposite of how other types of letters of credit are structured. So, instead of facilitating a transaction with funding, a standby letter of credit is like an insurance contract. It protects and compensates one party (the beneficiary) if the other party named in the agreement fails to perform the stated duty or meets certain service level agreements outlined in the letter of credit.

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia, and the Middle East, who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment.

How to Apply for a Letter of Credit

Letters of Credit are best prepared by trained professionals, as mistakes in the detailed documents required can lead to payment delays and fees. Due to industry variations and types of letters of credit, each may be approached differently.

Here's an import-export example.

• The importer's bank credit must satisfy the exporter and their bank. The exporter and importer complete a sales agreement.
• Using the sales agreement's terms and conditions, the importer's bank drafts the letter of credit; this letter is sent to the exporter's bank. The exporter's bank reviews the letter of credit and sends it to the exporter after approval.
• The exporter ships the goods as the letter of credit describes. Any required documentation is submitted to the exporter's bank.
• The exporter's bank reviews documentation to ensure letter of credit terms and conditions were met. If approved, the exporter's bank submits documents to the importer's bank.
• The importer's bank sends payment to the exporter's bank. The importer can now claim the goods sent.

Advantages and Disadvantages of a Letter of Credit

Obtaining letters of credit may be necessary in certain situations. However, like anything else related to banking, trade, and business, there are some pros and cons to acknowledge.

Can create security and build mutual trust for buyers and sellers in trade transactions.

Makes it easier to define the specifics of when and how transactions are to be completed between involved parties.

Letters of credit can be personalized with terms that are tailored to the circumstances of each transaction.

Can make the transfer of funds more efficient and streamlined.

Buyers typically bear the costs of obtaining a letter of credit.

Letters of credit may not cover every detail of the transaction, potentially leaving room for error.

Establishing a letter of credit may be tedious or time-consuming for all parties involved.

The terms of a letter of credit may not account for unexpected changes in the political or economic landscape.

How Does a Letter of Credit Work?

Often, in international trade, a letter of credit is used to signify that a payment will be made to the seller on time and in full, as guaranteed by a bank or financial institution. After sending a letter of credit, the bank will charge a fee, typically a percentage of the letter of credit, in addition to requiring collateral from the buyer. Among the various types of letters of credit are a revolving letter of credit, a commercial letter of credit, and a confirmed letter of credit.

What Is an Example of a Letter of Credit?

Consider an exporter in an unstable economic climate, where credit may be more difficult to obtain. A bank could offer a buyer a letter of credit, available within two business days, in which the purchase would be guaranteed by the bank's branch. Because the bank and the exporter have an existing relationship, the bank is knowledgeable of the buyer's creditworthiness , assets, and financial status. 

What Is the Difference Between a Commercial Letter of Credit and a Revolving Letter of Credit?

As one of the most common forms of letters of credit, commercial letters of credit are when the bank makes payment directly to the beneficiary or seller. Revolving letters of credit, by contrast, can be used for multiple payments within a specific time frame. Typically, these are used for businesses that have an ongoing relationship, with the time limit of the arrangement usually spanning one year.

When Does Payment Occur With a Letter of Credit?

A letter of credit is like an escrow account in that payment to the beneficiary only happens when the other party performs a specific act or meets other performance criteria spelled out in the letter of credit agreement.

Letters of credit can play an important part in trade transactions. There are different types of letters of credit that may be used, depending on the circumstances. If you need a letter of credit for a business transaction, your current bank may be the best place to begin your search. However, you may need to expand the net to include larger banks if you maintain accounts at a smaller financial institution.

International Trade Administration. " What Is a Letter of Credit? "

International Chamber of Commerce. “ Global Rules .”

Export-Import Bank of the United States. " To Confirm or Not to Confirm (Letters of Credit) ."

Cornell Law School. " 12 CFR § 208.24 - Letters of credit and acceptances. "

USAID. " Letters of Credit and Trade Finance ," p.106.

FDIC. " Off-Balance Sheet Activities ," p.2

Columbia Bank. " Letters of Credit. "

Citi. “ International Trade .”

Citi. “ Products and Services .”

International Trade Administration. " Letter of Credit. "

International Trade Administration. " Trade Finance Guide ," Page 7.

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ELECTRONIC RULES FOR LETTERS OF CREDIT ARE INTRODUCED

   New international rules that allow the presentation of electronic documents for letters of credit and documentary credits, adopted by the International Chamber of Commerce, were introduced Monday.    The rules are contained in an electronic supplement to the International Chamber of Commerce’s widely used rules on documentary credits, the UCP 500 rules. The “eUCP” electronic supplement, as it will be known, is also the first ever supplement to the documentary credit rules.       “The eUCP responds to the growing numbers of documents ' including bills of lading, certificates of origin, insurance documents, etc. ' that are being presented in electronic form,” the International Chamber of Commerce said.    The eUCP supplement accommodates presentation of electronic records alone or in combination with paper documents.    The International Chamber of Commerce’s rules on documentary credit previously had some provisions relating to electronic issues, but they were essentially written for paper documents. Documentary credit, based on the presentation of an original paper-based bill of lading, was widely seen as a slow, inefficient process.    “The supplement will govern if the parties specifically incorporate it in their credits,” the International Chamber of Commerce said. “It will apply in cases of part-electronic or all-electronic presentations.”    The 12 articles of the eUCP supplement cover a range of issues, including the format of electronic records, presentation, examination and, most controversially, corruption of an electronic record, the International Chamber of Commerce said. In the latter case, if a bank receives an electronic record that is corrupted — by a virus or some other defect — it may, at its discretion, request that the electronic record be re-presented.    Neil Chantry, of HSBC bank in London and a member of the group that drafted the supplement, believes the eUCP will be widely used, though not necessarily right away.    Chantry said that the level of transactions using the eUCP rules in the first two years will be “relatively modest.”    “After 10 years there will be virtually no paper-based trade documentation,” he predicted.    CCEWeb, an Internet-based trade facilitating firm based in Canada, quoted a senior Singaporean banker as saying that    “letters of credit issued by banks in Asia will still be subject to the UCP 500 after the implementation of eUCP from April 1, 2002 as they are not ready for the eUCP.”    “It may take time for banks as well as traders here to take part in the eUCP,” the banker said.    Bolero.net, a British electronic communications system provider, said that it has already adopted the eUCP rules.

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Passages The International Trade Blog

The hidden expiration date on every export letter of credit.

However, another date equal in importance is referred to as the last date for presentation. The presentation period—the window of time in which the exporter must present documents—is tied to the ship date as indicated in the original transport document.

Letter of Credit Presentation Period

A letter of credit includes terminology similar to “documents must be presented within 10 days after the bill of lading date but within the validity of the letter of credit.” For example, if the shipment took place on January 1, documents must be presented no later than January 11 or the expiration date if earlier. If the expiration date is January 5, documents must be presented by January 5, not the 11th.

Some letters of credit require a presentation period of seven days, some 15, etc. If the letter of credit does not state a presentation date, the exporter has 21 days according to UCP Article 14c. Exporters should be aware of this requirement and feel confident they can work within the stated time period. If not, they should request an amendment.

Why does a letter of credit include these time requirements? The importer stipulates them because a delay in presentation can create problems. When the goods arrive at the customs entry point, the importer needs the documents to clear the goods. If not cleared in a timely manner, the goods will go into storage and incur daily charges.

With a short presentation period, the importer can force the exporter to deliver the documents to the bank quickly. Once the documents enter banking channels, they will find their way to the importer in due time for customs clearance.

An alert exporter, however, must ask several key questions:

• How quickly after shipment can the documents be assembled and presented to the bank?
• Can unusual situations cause delays?
• Can the consular's signature be obtained (for a specific country) within the time limit?

Some consulates are located in distant cities and only sign documents once a week. If the appointed day for signing documents falls on a holiday, in either country involved in the transaction, then one more week must be added to the time frame. While 10, 15 or even 21 days may seem like adequate time, it can slip away quickly.

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This article was first published in December 2014 and has been updated to include current information, links and formatting.

About the Author: Roy Becker

Roy Becker was President of Roy Becker Seminars based in Centennial, Colorado. His company specialized in educating companies how to mitigate the financial risk of importing and exporting. Previous to starting the training company, Roy had over 30 years experience working in the international departments of several banks where he assisted many importers and exporters with the intricate banking needs associated with international trade.

Roy served as adjunct faculty in the International MBA programs at the University of Denver and University of Colorado in Denver. He conducted seminars at the World Trade Center Denver and The Center for Financial Training Western States, and was a guest lecturer at several Denver area Universities.

Roy retired in 2021.

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