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Top tips; exercising choice of confirming bank
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Top tips; exercising choice of confirming bank

Posted on the 16th Jan 2015 in the category Letters of Credit

This article will explain why it is important to choose the right confirming bank and then to exercise control over which bank adds its confirmation

 

Choice of confirming bank

Once a bank has confirmed a letter of credit ("LC"), it will be that bank which will interpret whether the documents presented comply with the LC terms and conditions, and the bank that will undertake to honour and make payment to you, as the LC beneficiary

 

It is important therefore that the confirming bank is:

 

  • Of good financial standing and will be able to honour its undertaking to pay (and on a timely basis)
  • Completely independent of the buyer's bank (issuing bank) and thus independent of the actions, financial position and influence of the buyer
  • A bank that you, as the LC beneficiary, has a good working relationship with, or a bank that you wish to develop a relationship with (ideally)

Exercising control over which bank adds its confirmation

The issuing bank (buyer's bank) will determine which bank it uses to send the LC through in your country, and ordinarily therefore if you request a confirmed LC then you as the exporter will not be able to control which bank adds its confirmation

 

However, here are some top tips, which when applied, will enable you as the LC beneficiary to choose and control which bank handles the LC in your country and adds its confirmation:

 

1. Before an LC is issued, ask the buyer which bank (and country) it will use to issue the LC

2. On receipt of the proposed name (and country) of the issuing bank, check with your bank (or preferred bank) whether it can handle an LC from this issuing bank and whether (indicatively) it could add its confirmation and at what cost. (Your bank will also need the following information; amount, how long the LC will be open for i.e. expiry date and payment term). Our next top tip article will show you how to reduce LC confirmation costs

3. When you send the buyer a specimen or details ("LC proforma") of the LC that you require (see our top tip on requesting an LC), you should specify confirmation instructions (SWIFT field 49) as "MAY ADD" and availability instructions (SWIFT field 41D) as "ANY BANK BY NEGOTIATION" and details of your preferred advising bank. Please note that whilst this will not guarantee that the LC will be received by you from your chosen bank, (as the issuing bank ultimately will determine who it sends the LC to), the above instructions (if adopted by the issuing bank) will enable you to pass the LC to your chosen bank immediately on your receipt and request that bank to add its confirmation in accordance with the LC "may add" and availability with "any bank by negotiation" LC instructions - even if initially received by you from another bank

 

If you wish to receive any further information, and/or wish to receive future editions from our series "top tips on letters of credit", please email stephen@axstradefinance.co.uk or complete our enquiry form on our "Contact us" page


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