issuing bank

URR 725 Article 2: Definitions – Detailed Explanation with Examples – CDCS Guide

by

Explanation of URR 725 Article 2 : Definitions

For the purpose of these rules, the following terms shall have the meaning specified in this article and may be used in the singular or plural as appropriate:

a. “Issuing bank” means the bank that has issued a credit and the reimbursement authorization under that credit.

Explanation: The issuing bank is the financial institution that initiates a letter of credit (LC) and provides a reimbursement authorization under that credit. This bank is responsible for ensuring that the terms of the LC are met and that the funds are available for the reimbursement to the bank that honors the credit.

Example: If Bank A issues a letter of credit for a buyer in Country X, Bank A is the issuing bank. Bank A also provides a reimbursement authorization to Bank B (the reimbursing bank) to pay the bank (the claiming bank) that presents a valid claim under the letter of credit.

b. “Reimbursing bank” means the bank instructed or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.

Explanation: The reimbursing bank is the bank that receives instructions from the issuing bank to pay the claiming bank upon receipt of a valid reimbursement claim. The reimbursing bank acts as an intermediary between the issuing bank and the claiming bank.

Example: If Bank A (the issuing bank) instructs Bank B to pay Bank C upon the presentation of a valid reimbursement claim, Bank B is the reimbursing bank.

c. “Reimbursement authorization” means an instruction or authorization, independent of the credit, issued by an issuing bank to a reimbursing bank to reimburse a claiming bank or, if so requested by the issuing bank, to accept and pay a time draft drawn on the reimbursing bank.

Explanation: A reimbursement authorization is a separate instruction from the issuing bank to the reimbursing bank, directing the latter to reimburse the claiming bank. This authorization is independent of the letter of credit and can also involve accepting and paying a time draft drawn on the reimbursing bank.

Example: Bank A issues a letter of credit and separately authorizes Bank B (the reimbursing bank) to pay Bank C (the claiming bank) upon the presentation of the required documents. This instruction from Bank A to Bank B is the reimbursement authorization.

d. “Reimbursement Amendment” means an advice from the issuing bank to a reimbursing bank stating changes to a reimbursement authorization.

Explanation: A reimbursement amendment is a notice from the issuing bank to the reimbursing bank that modifies the original reimbursement authorization. This amendment may involve changes in terms, conditions, or instructions provided earlier.

Example: If Bank A initially authorized Bank B to reimburse Bank C upon presentation of specific documents, but later needs to change the amount or conditions, Bank A will issue a reimbursement amendment to Bank B.

e. “Claiming Bank” means a bank that honours or negotiates a credit and presents a reimbursement claim to the reimbursing bank. “Claiming Bank” includes a bank authorized to present a reimbursement claim to the reimbursing bank on behalf of the bank that honours or negotiates.

Explanation: The claiming bank is the financial institution that pays or negotiates under the letter of credit and then seeks reimbursement from the reimbursing bank. This term also applies to any bank authorized to claim reimbursement on behalf of the bank that made the payment.

Example: Bank C negotiates a letter of credit and subsequently presents a reimbursement claim to Bank B (the reimbursing bank) for payment. Bank C is the claiming bank.

f. “Reimbursement Claim” means a request for reimbursement from the claiming bank to the reimbursing bank.

Explanation: A reimbursement claim is a formal request made by the claiming bank to the reimbursing bank, asking for the payment of funds as per the reimbursement authorization.

Example: After Bank C honors a letter of credit, it sends a reimbursement claim to Bank B (the reimbursing bank) to receive payment for the amount disbursed under the credit.

g. “Reimbursement undertaking” means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim, provided the terms and conditions of the reimbursement undertaking have been complied with.

Explanation: A reimbursement undertaking is an irrevocable commitment made by the reimbursing bank, at the request of the issuing bank, to honor the claiming bank’s reimbursement claim. This undertaking is independent and ensures that the claiming bank will be paid if the conditions are met.

Example: Bank B, acting as the reimbursing bank, issues a reimbursement undertaking to Bank C, promising to pay the claim made by Bank C under the letter of credit, provided all terms and conditions are fulfilled.

h. “Reimbursement undertaking amendment” means an advice from the reimbursing bank to the claiming bank named in the reimbursement authorization stating changes to a reimbursement undertaking.

Explanation: A reimbursement undertaking amendment is a notification from the reimbursing bank to the claiming bank, informing it of any changes to the original reimbursement undertaking.

Example: If Bank B (the reimbursing bank) needs to alter the terms of the reimbursement undertaking issued to Bank C (the claiming bank), Bank B will send a reimbursement undertaking amendment to Bank C.

i. For the purpose of these rules, branches of a bank in different countries are considered to be separate banks.

Explanation: Under these rules, different branches of the same bank located in various countries are treated as separate legal entities or banks.

Example: If a bank with branches in both Country X and Country Y is involved in a transaction under URR725, the branch in Country X is considered a separate bank from the branch in Country Y.

UCP600 Article 7 Explanation – CDCS Guide: Issuing Bank Undertaking

by

UCP600 Article 7 Explained

Clause (a)

Clause:
“Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:
i. sight payment, deferred payment, or acceptance with the issuing bank;
ii. sight payment with a nominated bank and that nominated bank does not pay;
iii. deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
iv. acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
v. negotiation with a nominated bank and that nominated bank does not negotiate.”

Explanation:
This clause outlines the issuing bank’s obligation to honour a letter of credit when the beneficiary presents complying documents. If the credit is available by various methods (e.g., sight payment, deferred payment, acceptance, or negotiation), the issuing bank must honour the credit under the following circumstances:

  • If the credit is available with the issuing bank itself by sight payment, deferred payment, or acceptance.
  • If the credit is available with a nominated bank but that bank fails to pay, incur a deferred payment undertaking, accept a draft, or negotiate.

In simpler terms, the issuing bank guarantees payment to the beneficiary even if the nominated bank fails to perform its duties under the letter of credit.

Example:
A company in India sells goods to a buyer in the USA under a letter of credit issued by an Indian bank. The Indian bank (issuing bank) allows the credit to be available by negotiation with a U.S. bank (nominated bank). If the U.S. bank fails to negotiate the documents (i.e., doesn’t purchase or discount the draft), the Indian bank must still honour the payment to the beneficiary in India, provided the documents comply with the credit terms.

Clause (b)

Clause:
“An issuing bank is irrevocably bound to honour as of the time it issues the credit.”

Explanation:
Once the issuing bank issues a letter of credit, it is irrevocably bound to honour the credit as long as the beneficiary presents compliant documents. This means that the issuing bank cannot revoke or cancel its obligation once the credit is issued.

Example:
If an issuing bank in Japan issues a letter of credit on behalf of a buyer in Japan for goods purchased from a supplier in China, the bank cannot withdraw its commitment once the letter of credit is issued. As long as the Chinese supplier presents the required documents as per the credit terms, the Japanese bank must honour the payment.

Clause (c)

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

Explanation:
This clause states that if a nominated bank honours or negotiates a complying presentation and sends the documents to the issuing bank, the issuing bank must reimburse the nominated bank. If the credit is available by acceptance or deferred payment, the issuing bank must pay the nominated bank at maturity, regardless of whether the nominated bank prepaid or purchased the documents before maturity. The issuing bank’s obligation to reimburse the nominated bank is independent of its obligation to pay the beneficiary.

Example:
Suppose a French bank (issuing bank) issues a letter of credit available by deferred payment with a German bank (nominated bank). The German bank honours a complying presentation and forwards the documents to the French bank. The French bank must reimburse the German bank at maturity, even if the German bank had advanced payment to the beneficiary before the maturity date. This reimbursement obligation is separate from the French bank’s obligation to the beneficiary under the credit.

UCP600 Article 15 Explanation – CDCS Guide: Complying Presentation

by

Clause a: When an issuing bank determines that a presentation is complying, it must honour.

Explanation: An issuing bank, upon receiving the documents under a letter of credit (LC), has the responsibility to check if the documents comply with the terms and conditions of the LC. If the documents are found to be in compliance, the issuing bank must honor its commitment to pay the beneficiary immediately or accept the documents and pay on due date.

Example: An exporter in India ships goods to an importer in the USA under an LC issued by an American bank. The exporter presents the required documents to the issuing bank. After examination, the bank finds all documents in compliance with the LC terms. The issuing bank then proceeds to honor the payment, transferring the funds to the exporter’s account.

Clause b: When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.

Explanation: A confirming bank adds its confirmation to an LC, providing an additional payment guarantee to the beneficiary. If the confirming bank determines that the presented documents comply with the LC terms, it must either honor or negotiate (purchase the documents) and then forward the documents to the issuing bank for reimbursement.

Example: An exporter in Germany receives an LC confirmed by a German bank. The exporter presents the documents to the confirming bank, which checks and finds them in compliance. The confirming bank pays the exporter (honours) and then forwards the documents to the issuing bank in the USA for reimbursement.

Clause c: When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.

Explanation: A nominated bank is authorized to pay, accept, or negotiate under an LC. If the nominated bank finds the documents compliant and decides to honor or negotiate, it must forward the documents to the confirming bank (if there is one) or the issuing bank.

Example: An exporter in China ships goods under an LC issued by a UK bank, with a nominated bank in China. The exporter presents the documents to the nominated bank in China. The bank reviews and finds the documents in compliance, pays the exporter, and then forwards the documents to the issuing bank in the UK for reimbursement.

UCP600 Article 37 Explanation: Disclaimer for Acts of an Instructed Party

by

Clause a:

Clause: A bank utilizing the services of another bank for the purpose of giving effect to the instructions of the applicant does so for the account and at the risk of the applicant.

Explanation: When an issuing bank uses another bank’s services to fulfill the applicant’s instructions, it does so on behalf of and at the risk of the applicant. This means any issues arising from the other bank’s actions are the applicant’s responsibility.

Example: A company in India (the applicant) applies for a letter of credit with an Indian issuing bank to pay a supplier in Germany. The Indian bank uses a German bank to advise the credit to the supplier. If the German bank fails to deliver the documents on time, causing a delay, the risk and consequences of this failure fall on the Indian company, not the Indian issuing bank.

Clause b:

Clause: An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank.

Explanation: Neither the issuing bank nor the advising bank is liable if the instructions they send to another bank are not executed, even if they chose that bank themselves.

Example: The Indian issuing bank selects a German advising bank to notify the supplier in Germany. If the German bank fails to notify the supplier, the Indian bank is not responsible for this failure, even though it chose the German bank.

Clause c:

Clause: A bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses (“charges”) incurred by that bank in connection with its instructions. If a credit states that charges are for the account of the beneficiary and charges cannot be collected or deducted from proceeds, the issuing bank remains liable for payment of charges. A credit or amendment should not stipulate that the advising to a beneficiary is conditional upon the receipt by the advising bank or second advising bank of its charges.

Explanation: The bank that instructs another bank to perform services must pay any charges incurred by that bank. If the credit specifies that charges are the beneficiary’s responsibility but cannot be collected, the issuing bank must pay. Credits should not make the beneficiary’s receipt of advice conditional on the advising bank receiving its charges.

Example: An Indian issuing bank instructs a German advising bank to notify the supplier and charges the supplier for the advising fees. If the supplier refuses to pay, the Indian bank must cover the advising fees. Additionally, the letter of credit should not state that the supplier will only be advised upon payment of the advising bank’s charges.

Clause d:

Clause: The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign laws and usages.

Explanation: The applicant must cover any obligations and responsibilities the bank faces due to foreign laws and customs.

Example: An Indian company applies for a letter of credit with an Indian bank to pay a supplier in Germany. If German laws impose additional requirements or responsibilities on the advising bank, the Indian company must indemnify the Indian bank for any resulting costs or obligations.