Trade Operations: Letters of Credit

“Highly knowledgeable trainer with real life experience. Comprehensive coverage of documentary processes”
Geneva, Switzerland

This 4-day course provides practical in-depth operational training on letters of credit and application of the ICC rules.

The ICC rules UCP, ISBP and URR are examined in detail and applied to the letter of credit operational cycle. The use of SWIFT message type ‘MT’ formats is identified through each stage of the operational process.

The course uses documentary examination exercises and case studies to develop the understanding of delegates in a practical and engaging way.

Training structure and methodology

Trade products: the use, operation, financial risk, and benefit profile of letters of credit are described through presentational slides, diagrams, and document examples.

Case studies & exercises: these provide an opportunity for the delegates to identify and consider the key operational aspects of letters of credit and practice their learnings. Document checking exercises are undertaken to provide practical application of the ICC rules UCP and ISBP.

Post course evaluation: this takes the form of:

  • A 40 question multiple choice questionnaire for completion by each delegate
  • 2 letter of credit document presentation checking exercises

Training objectives

By attending this interactive and practical training course, the delegates will be able to:

  • Describe the role, operation, and key aspects of letters of credit

  • Apply the UCP, ISBP and URR rules through the LC operational cycle

  • Identify the correct SWIFT message type (MT) for each stage of the LC process

  • Complete a letter of credit application form

  • Structure the terms and conditions of letters of credit to mitigate risk

  • Maximise income generation through the financing of letters of credit

PROGRAM OUTLINE: LETTERS OF CREDIT
The application of ICC rules: UCP, ISBP, URR

A detailed operational review of the application of the rules will be provided throughout the course supplemented by document checking exercises and examples.

SESSION 1

Letter of credit fundamentals

Key principles

  • What a letter of credit is:
    • Description
    • When letters of credit should be used
  • Application of ICC rule UCP 600, (UCP Art. 1):
    • Definitions (UCP Art. 2)
    • Interpretations (UCP Art. 3)
    • Appreciation of ISBP 745, URR 725:
      • Relationship between ISBP and UCP
    • Impact of governing law
  • Parties
  • Key aspects:
    • Bank liability (UCP Art. 3)
    • Irrevocable
    • Independance to the commercial contract (UCP Art. 4)
    • Conditional undertaking to honour/pay
    • Banks deal only in documents (UCP Art. 5)
    • Amendments (UCP Art. 10 a)
    • Document effectiveness: disclaimer (UCP Art. 34)
    • Force majeure (UCP Art. 36)
  • Letter of credit and documentary risk appreciation:
    • Applicant
    • Issuing bank
    • Beneficiary
    • Financier

SESSION 2

Structure of the letter of credit

  • Authorisation provided to a nominated bank:
    • Examination of documents
    • Honour a complying presentation (UCP Art. 12 a)
    • Prepayment of complying presentation (UCP Art. 12 b)
  • Availability: operation and risk implications (UCP Art. 6 a, b)
    • By sight payment
    • By acceptance:
      • Drafts (UCP Art. 6 c)
    • By deferred payment
    • By negotiation: use of ‘available with any bank’
    • By mixed payment
  • Expiry date and place (UCP Art. 6 d, e):
    • Importance and considerations
    • Extension (UCP Art. 29)
  • Confirmation: description and operation
  • Document presentation period (UCP Art. 14 c):
    • Calculation of the days allowed
    • Extension (UCP Art. 29)

CALCULATION OF THE PRESENTATION PERIOD

Construction of the transactional timeline
Calculation of the required maximum allowed presentation period for timely release of original bills of lading
Exercise                
  • Bank to bank reimbursement instructions (UCP Art. 13):
    • Claim for reimbursement
    • Reimbursement authority:
      • Authorisation to reimbursing bank (SWIFT MT 740)
    • Reimbursement undertaking
    • URR 725 overview and comparison with UCP 600

SESSION 3

Letter of credit process

  • Letter of credit working examples:
    • International commercial letter of credit
    • Domestic commercial letter of credit
  • Importance of documentation: standard for examination (UCP Art. 14):
    • ‘On their face’ (UCP Art. 14 a)
    • Timescale (UCP Art. 14 b)
    • Data (UCP Art. 14 e, f, i, j, k, l)
    • Non-documentary conditions (UCP Art. 14 h)
    • Limitations of liability: disclaimer on effectiveness of documents (UCP Art. 34)
  • Complying presentation: honour (UCP Art. 15):
    • Exceptions to the payment principle

LC CREDIT FACILITY: REQUIREMENT   

Stereophonics
Calculation of the letter of credit facility requirement for an importer
Exercise   

  • Application form (working example):
    • Completion
    • Security: pledge and terms & conditions
  • Risk implications for bank and applicant:
    • Protection the bank’s interest
    • Mitigating risk for the applicant
  • Advantages and disadvantages of letters of credit

SESSION 4

Import credit: issuing

  • Issuing bank undertaking (UCP Art. 7)
  • Raising an LC: need for an approved and available credit facility:
    • Facility limit calculation
    • Calculating LC liability value:
      • Tolerance in LC amount (UCP Art. 30)
      • Foreign currency
    • Terms of credit approval and use of cash margin
    • Compliance due diligence
    • Risk, benefit, and control features:
      • Risk implications for issuing bank and applicant
  • Structuring the terms to protect the issuing bank and applicant:
    • Availability (UCP Art. 6 a, b)
    • Expiry date (UCP Art. 6 d.i, e):
      • Calculation
      • Extension (UCP Article 29)
    • Place of expiry (UCP Art. 6 d.ii):
      • Importance and risk implications
    • Control over title documents/payment trigger
    • Goods:
      • Pre-shipment inspection
      • Bank control: bill of lading (UCP Art. 20)
      • Cargo insurance (UCP Art. 28)
    • Partial shipments/drawings (UCP Art. 31)
    • Document presentation period (UCP Art. 14 c)
    • Confirmation instructions: ‘without’, ‘confirm’, ‘may add’
  • Bank to bank reimbursement (UCP Art. 13)
  • Application form (working example):
    • Completion: technical completeness:
    • Protecting the bank’s interest
    • Security: pledge and terms & conditions
    • Insurance
  • Sight and term credits:
    • Contingent and actual bank liability
    • Timing of debit to applicant’s bank account
  • Selection criteria for choice of advising bank
  • Pre-advice (UCP Art. 11b)
  • Issuance and transmission of the LC:
    • Operative instrument (UCP Art. 11a)
    • SWIFT MT 700

COMPLETING THE LC APPLICATION FORM

Bowie Imports
Examination of an incorrectly completed import letter of credit application form
Identification of technical issues and whether it complies with the terms of credit facility approval
Exercise                        
  • Amendments: issuance (UCP Art. 10 b):
    • Transmission via the advising bank (UCP Art. 9 d)
    • Due diligence
    • Refusal to issue
    • Disregard of a time-based automatic enforcement (UCP Art. 10 f)
    • Transmission of amendment (SWIFT MT 707):
      • Operative instrument (UCP Art. 11a)

SESSION 5

Import credit: presentation of documents

  • Hours of presentation (UCP Art. 33)
  • Complying presentation: obligation to honour (UCP Art. 15 a):
    • Exceptions to the payment principle:
      • Discrepant documents
      • Fraud: indisputable evidence
      • Court order/injunction
      • AML or sanctions violation
    • Process for:
      • Payment at sight
      • Acceptance
      • Deferred payment undertaking
    • Release of documents to LC applicant
    • Timing of debit to applicant’s bank account
  • Discrepant presentation:
    • Common discrepancies
    • Refusal to honour/rejection of documents (UCP Art. 16 a, e, g):
      • Opportunity for issuing bank to avoid payment/undertaking to pay
    • Notice to the presenter (UCP Art. 16 c, d):
      • Notice of refusal; advice of discrepancies SWIFT MT 734
      • Consequences of late notice of rejection (UCP Art. 16 f)
    • Return of rejected documents (UCP Art. 16 e)
    • Claim for refund of reimbursement plus interest (UCP Art. 16 g)
    • Discrepancy waiver (UCP 16 b):
      • Decision factors in declining to seek or rejecting the applicant’s discrepancy waiver
    • Authorisation to presenting bank to honour/negotiate against listed discrepancies
    • Advice to presenting bank that discrepant documents are taken up (SWIFT MT 732)
    • Risk implications to the:
      • Issuing bank (identification & timely notification)
      • Applicant (provision of discrepancy waiver)

SWIFT MESSAGE TYPES

Matching the correct SWIFT message types to the import letter of credit operational cycle
Exercise     

SESSION 6

Import credit: structuring to mitigate risk

  • Structuring an import letter of credit: mitigation of risk:
    • Availability and place of expiry
    • Documentary requirement: control over documents and goods
    • Days allowed for presentation of documents: availability re goods arrival

STRUCTURING THE TERMS OF THE IMPORT CREDIT

Requirement to structure the terms of an import credit to mitigate risk for the applicant
Exercise     

SESSION 7

Export credit: advising

  • Role and responsibility of the advising bank (UCP Art. 9 a):
    • Apparent authenticity of the credit (UCP Art. 9 b, c):
      • Inability to authenticate (UCP Art. 9 f)
    • Compliance due diligence
  • Acknowledgement to issuing bank (SWIFT MT 730):
    • Refusal to advise (UCP Art. 9 e)
  • Transmission of the letter of credit to the beneficiary:
    • Covering letter (confirmed & unconfirmed examples)
  • Disclaimer for acts of an instructed party (UCP Art. 37)
  • Disclaimer for transmission & translation (UCP Art. 35)
  • Role and responsibilities of a nominated bank:
    • No obligation to take up nomination (unless confirming bank) (UCP Art. 12 a, c)
    • Unconfirmed credits: no financial engagement (UCP Art. 9 a)
  • Structuring the terms to protect the beneficiary:
    • Documentary requirement: control over documents and goods
    • Benefit of credits made available by negotiation with any bank
  • Confirmation: financial engagement and responsibility:
    • Risk appetite and capacity of the confirming bank:
      • Need for issuing bank & country facility limit and available capacity
    • Confirming bank undertaking and risk (UCP Art. 8 a-c)
    • Obligations of the confirming bank:
      • Honour/payment
      • Financing without recourse
    • Risk implications for the confirming bank:
      • Issuing bank and country risk
      • Documentary risk
    • Requested confirming party:
      • Use of SWIFT fields 57a and 58a
    • Use of the ‘may add’ confirmation instruction
    • Risk mitigation for the beneficiary;
      • Bank commitment to take up nominated powers
      • Issuing bank and country risk exposure
      • Documentary risk: issuing bank document rejection
      • Without recourse negotiation
    • Refusal to confirm (UCP Art. 8 d)
    • Confirmation: coverage of amendment (UCP Art. 10 b)
  • Unconfirmed credits:
    • Advising bank: no financial responsibility (UCP Art. 9a):
      • Utilising the services of another bank (UCP Art. 9 c, d)
    • Risk implications for beneficiary:
      • Documentary risk
      • Payment risk
  • Silent confirmation:
    • Third party undertaking to pay
    • Commitment to negotiate:
      • Terms, conditions and operation
  • Amendments: operation working example (UCP Art. 10 a,)
    • Due diligence
    • Acknowledgement to the issuing bank (SWIFT Mt 707)
    • Advising (UCP Art. 9 a):
      • Apparent authenticity (UCP Art. 9 b, c)
      • Unable to satisfy authenticity (UCP Art. 9 f)
      • Refusal to advise an amendment (UCP Art. 9 e)
      • Advising letter example
    • Acceptance and rejection: process (UCP Art. 10 c):
      • Partial acceptance not allowed (UCP Art. 10 e)
      • Rejection: LC terms remain unamended (UCP Art. 10 c)
      • Notification: SWIFT MT 730 (UCP Art. 10 d)

SESSION 8

Export credit: presentation of documents

  • Role and responsibility of:
    • Advising bank
    • Nominated bank (unconfirmed LC)
    • Confirming bank
  • Presentation period extension (UCP Art. 29 b)
  • Hours of presentation (UCP Art. 33)
  • Due diligence
  • Process for examination of documents:
    • Documentary (operational) risk
  • Complying presentation:
    • Nominated bank (UCP Art. 15 c)
    • Obligation to honour/pay of a confirming bank (UCP Art. 15 b):
      • Process: sight payment, acceptance, deferred payment undertaking, negotiation
      • Forwarding of documents to issuing bank  (UCP Art. 12 c, Art. 15 b, c)
      • Advice to issuing bank: SWIFT MT 754
    • Payment:
      • Due diligence: review of disposal instructions of presenter
      • Claim to reimbursing bank: SWIFT MT 742
  • Discrepant presentation (UCP Art. 16 a):
    • Common discrepancies
    • Importance of timely notice of rejection (UCP Art. 16 d)
      • Consequences of late notice (UCP Art. 16 f)
    • Lapse of confirmation
    • Return of rejected documents (UCP Art. 16 e)
    • Risk implications to the:
      • Beneficiary (delayed/non-payment)
      • Confirming bank (issuing bank rejection)
      • Negotiating bank (recovery of advance)
    • Process for handling discrepant documents:
      • ‘Cable’ to the issuing bank for authority to negotiate/pay: SWIFT MT 750
      • Corrections/document replacement and resubmission (subject to presentation limit)
      • Transmission of documents in trust to the issuing bank
      • LC amendment
  • LC unutilised: collection of charges

SWIFT MESSAGE TYPES

Matching the correct SWIFT message types to the export letter of credit operational cycle
Exercise     

SESSION 9

Export credit: structuring to mitigate risk

  • Structuring an export letter of credit to mitigate risk:
    • Availability
    • Expiry date and place
    • Importance of confirmation for the beneficiary
    • Capture of a client’s LC trade flow (use of credits available with any bank by negotiation):
      • Use and benefits of the ‘may add’ confirmation instruction
    • Control over the goods via documents of title
    • Insurance of goods
    • Document presentation period
    • Bank to bank reimbursement: credits available:
      • Only with the issuing bank
      • Available by negotiation
      • Available with the nominated bank by sight payment, acceptance or deferred payment

STRUCTURING THE TERMS OF THE EXPORT CREDIT

Requirement to structure the terms of an export credit to mitigate risk for the beneficiary
Exercise     

SESSION 10

UCP/ISBP rule requirements: document examination

General provisions

  • Application and interpretation of the rules
  • Original documents and copies (UCP Art. 17)

Documentary requirements

  • Drafts and calculation of maturity date (ISBP B)
  • Invoice (UCP Art. 18; ISBP C)
  • Transport documents (UCP Art. 19-27; ISBP D)
  • Bills of lading (UCP Art. 20, 21, 22; ISBP E, F, G)
  • Air transport documents (UCP Art. 23; ISBP H)
  • Road, rail, or inland waterway transport documents (UCP Art. 24; ISBP J)
  • Insurance document and coverage (UCP Art. 28; ISBP K)
  • Certificate of origin (ISBP L)
  • Packing list (ISBP M)
  • Weight note (ISBP N)
  • Beneficiary’s certificate (ISBP P)
  • Analysis, inspection, and other certificates (ISBP Q)

DOCUMENT CHECKING: COMPLIANCE WITH ISBP RULES

Examination of selected documents to identify whether they comply with ISBP
Case study session

SESSION 11

Financing letters of credit

Import letters of credit

  • Financing working capital using import letters of credit:
    • Usance credits
    • Usance payable at sight ‘UPAS’: maximising issuing bank income
    • Re-finance

Export letters of credit

  • Pre-shipment finance:
    • Description
    • Risk appreciation
  • Advancing funds (with recourse)
  • Discount (without recourse)
    • Description and operation;
      • Bank acceptance: negotiable endorsement
      • Deferred payment: assignment of proceeds
    • Calculation of discount/negotiation interest (working example)
  • Negotiation:
    • Description and operation
    • With recourse
    • Without recourse
    • Risk appreciation: financing implications for the negotiating bank
  • Assignment/allocation of proceeds (UCP Art. 39):
    • Description and operation
    • Letter of instruction and allocation of proceeds letter (examples)

DISCOUNT CALCULATION

Calculation of the net amount payable following a request to discount complying documents
Exercise

SESSION 12

Inbox: simulated document presentation examination

  • Examination of documents against the LC terms and applicable UCP rules

DOCUMENT PRESENTATION EXAMINATION: COMPLIANCE WITH LC & UCP RULES

Examination of a full set of documents presented under a letter of credit
Identification of discrepancies
Exercise