Topic 3 Roles and responsibilities – defining terms and conditions

Learning objectives
By the end of this topic, you should be able to:
• describe the main responsibilities of an applicant and a beneficiary;
• identify the types of roles and responsibilities performed by banks in a documentary credit;
• understand the traditional terms used in a documentary credit or UCP 600.

Introduction
In these learning materials, reference is made repeatedly to different terms that are associated with
documentary credits and the types of roles that a bank may perform. Article 2 Definitions explains
these key terms. This topic expands on these definitions and provides a short introduction to the
roles and responsibilities of the entities that participate in a documentary credit.

Key terms in context

Article 2 helps users to understand the context in which certain words that appear in a
documentary credit are to be considered when performing various roles and functions under that
credit. They also provide a short, descriptive outline of the entities involved.

You are advised to review article 2 regularly to maintain your understanding of key words and
terms that are used elsewhere in UCP 600 and in each documentary credit.

Think…
Before you start work on this topic, think about what you already know about the roles and
responsibilities involved when issuing a documentary credit. For instance:
Do you know how a documentary credit is structured?
Can you name the main responsibilities of an issuing bank?
Why, and under what circumstances, would an advising bank also be a confirming bank?
What are the differences between a nominated bank and a reimbursing bank?

3.1 Roles and responsibilities of parties involved in a documentary credit

This section outlines the type of role that can be performed by a bank and its main responsibilities in
that capacity. It also outlines the main responsibility of the beneficiary.

The most common structure of a documentary credit involves at least three parties:

• an issuing bank;
• an advising bank; and
• a beneficiary.

The advising bank could also be the confirming bank, if confirmation is authorised or requested in
the documentary credit, and a nominated bank. Each of these roles are discussed in this topic.

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It should also be noted that a documentary credit could consist of only two parties:

• an issuing bank; and

• a beneficiary.

This would most likely arise in a domestic documentary credit, eg where the issuing bank and
beneficiary are located within the same country.
3.1.1 Issuing bank (or opening bank)
Article 2 defines an ‘issuing bank’ as the bank that issues a credit at the request of an applicant or on
its own behalf.

An issuing bank issues its documentary credit in favour of a beneficiary. In so doing, it incorporates
its irrevocable and independent undertaking to honour – that is, to pay, to accept a draft and pay at
maturity, or to incur a deferred payment undertaking and pay at maturity – provided that:

• all documents, as stipulated in the documentary credit, are presented; and

• the beneficiary has complied with all of the terms and conditions of the documentary credit.

An irrevocable undertaking is enforceable against an issuing bank even if an applicant is unable or

unwilling to reimburse it. The scope of the issuing bank undertaking is covered in article 7.

It should be noted from the UCP definition that, albeit in rare circumstances, an issuing bank could
have two roles in a single transaction: one as the applicant of the documentary credit; and one as its
issuing bank.

The role of the issuing bank, when reviewing the applicant’s application for issuance of a
documentary credit and the issuance of that documentary credit, is detailed in Topic 6 and Topic 7.
3.1.2 Beneficiary (or seller or exporter)
Article 2 defines a ‘beneficiary’ as the party in whose favour a credit is issued.

Following shipment or dispatch of the goods, or when the required service or performance has been
provided, the beneficiary will issue, collate and present the stipulated documents to the issuing
bank, a confirming bank (if any), or a nominated bank for honour or negotiation.

The various interactions of the beneficiary are handled in a number of the topics in these learning
materials.
3.1.3 Advising bank
Article 2 defines an ‘advising bank’ as the bank that advises the credit at the request of the issuing
bank.

For a cross-border transaction, an issuing bank will usually electronically transmit, or send, a
documentary credit to a bank in the beneficiary’s country with which it maintains a correspondent
banking relationship, requesting that bank to advise it to the beneficiary.

The transmission of a documentary credit to an advising bank is normally completed by the use of a
Society for Worldwide Interbank Financial Telecommunication (SWIFT) MT700 message, but it could
also be accomplished by telex, fax, email or letter, depending upon the arrangements that are in

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place between the two banks.

The requirements and role of an advising bank, when advising a credit, are detailed in Topic 9 and
are covered in article 9.
3.1.4 Confirming bank
Article 2 defines a ‘confirming bank’ as the bank that adds its confirmation to a credit upon the
issuing bank’s authorization or request.

A bank that adds its confirmation to a documentary credit, upon the authorisation or request of an
issuing bank, provides a beneficiary with an additional irrevocable and independent undertaking that
is separate from that of the issuing bank. The scope of the confirming bank undertaking is covered in
article 8.

It is common for a confirming bank to also act in the role of advising bank and nominated bank, but
this is not an absolute requirement of UCP 600.

The requirements of a bank, when adding confirmation to a credit, are detailed in Topic 10.
3.1.5 Nominated bank
Article 2 defines a ‘nominated bank’ as the bank with which the credit is available or any bank in the
case of a credit available with any bank.

An issuing bank, at the request of an applicant, or even as a matter of its own internal policy, may
make a documentary credit available for payment, acceptance, deferred payment or negotiation
with a named bank.

This named bank will usually be located in the country of the beneficiary. Alternatively, a
documentary credit may indicate that it is available with any bank; however, this is also usually
restricted, by reference in the documentary credit, to an expiry place (ie a city or country), in which
event it will be available with any bank located in that place.

A bank that agrees to act on a nomination of an issuing bank to pay, accept, incur a deferred
payment undertaking or negotiate will be known as a nominated bank.

It should be noted that a documentary credit could be made available with the issuing bank only. In
this case, there is no nominated bank and the beneficiary will be required to ensure delivery of the
stipulated documents to the issuing bank no later than the expiry date and the latest date of
presentation.

A named nominated bank usually, but not necessarily, will also be an advising bank and could be a
confirming bank.

The role of a nominated bank is detailed in Topic 16.

3.2 Applicant (or buyer or importer)

Article 2 defines an ‘applicant’ as the party on whose request the credit is issued.

It should be noted that although an applicant is responsible for completing an application form to
issue, or to amend, a documentary credit, it is not a party to that documentary credit.

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The use of the term ‘party’ in the definition of applicant is not intended to imply that an applicant is
a party to a documentary credit. It is used to reflect the concept that ‘applicant’ can mean an entity
other than the bank’s actual customer. In this regard, it should be noted that:

• the interaction between an applicant and its bank prior to the issuance of a documentary
credit is outside the scope of UCP 600; and
• following the issuance of a documentary credit, an applicant may subsequently request an
amendment to its terms and conditions, or provide a waiver of discrepancies that have been
identified by the issuing bank. An issuing bank is under no obligation to accept or take note of
such request or waiver.

These issues are covered in more detail in Topic 6 and Topic 18.

3.3 Other roles performed by banks

Reimbursing bank
Sub-article 13(a) reimbursements describes a ‘reimbursing bank’ as the bank named in a
documentary credit upon which the nominated bank (the ‘claiming bank’) may claim in respect of
any honour or negotiation that it has effected to the beneficiary.

Bank-to-bank reimbursements are covered in more detail in Topic 22.

Second advising bank

Article 9, sub-article 9(c) describes a ‘second advising bank’ as a bank utilized by the advising bank to
advise the credit or any amendment to the beneficiary.

A second advising bank may also be named in the documentary credit. In this event, it is likely that
the named bank will be the beneficiary’s banker and that the beneficiary will have previously
requested the applicant to route the documentary credit through its bank. However, the issuing
bank may not be in a correspondent banking relationship with that bank, so it will advise it through
its own branch or one of its correspondent banks for further routing through the named second
advising bank.

Transferring bank
Sub-article 38(b) defines a ‘transferring bank’ as a nominated bank that transfers the credit or, in a
credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer
and that transfers the credit. An issuing bank may be a transferring bank.

The issuance and handling of a transferable credit is covered in more detail in Topic 19.

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 Check your understanding
Under what circumstances would a documentary credit be made available with the issuing bank
only?

3.4 Terms used in documentary credits and/or UCP 600

3.4.1 Banking day
Article 2 defines ‘banking day’ as a day on which a bank is regularly open at the place at which an act
subject to these rules is to be performed.

An important aspect of this definition lies in the use of the word ‘regularly’. For example, if a bank is
regularly open Monday to Friday, and also opens on a Saturday, but only to perform general banking
services, Saturday is not considered a banking day for UCP purposes. If, however, the same bank was
open on Saturday for a half or a full day to perform the handling of documentary credits, it would
count as a banking day.

3.4.2 Complying presentation

Article 2 defines ‘complying presentation’ as a presentation that is in accordance with the terms and
conditions of the credit, the applicable provisions of these rules and international standard banking
practice.

It should be noted that the reference to ‘international standard banking practice’ does not refer
exclusively to the ICC publication of the same name (ICC Publication No. 745, or ISBP 745). The
phrase clearly encompasses the practices described in that publication, but it also extends to other
practices as determined by the ICC in its official opinions and DOCDEX decisions, and to established
procedures that may apply between two or more countries and which can be equally described as
representing such practice.

3.4.3 Confirmation
Article 2 defines ‘confirmation’ as a definite undertaking of the confirming bank, in addition to that
of the issuing bank, to honour or negotiate a complying presentation.

Confirmation is added at either the request or the authorisation of the issuing bank.

• A request is an instruction in the documentary credit for a bank, usually the advising bank, to
add confirmation – by the use of words such as ‘confirm’ or ‘add your confirmation’.
• An authorisation is an instruction in the documentary credit to add confirmation upon a
specific request of the beneficiary – by the use of the words ‘may add’.

(Documentary) Credit

Credit
Article 2, in the context of an irrevocable undertaking, defines ’credit’ as any arrangement, however
named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing
bank to honour a complying presentation.

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Sub-article 4(a), highlights the separateness of a documentary credit from a sales contract. The
autonomy of the documentary credit is paramount, and is covered in Topic 6 and Topic 7.

Honour
Article 2 defines ‘honour’ as:
a. to pay at sight if the credit is available by sight payment.
b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred
payment.
c. to accept a bill of exchange (‘draft’) drawn by the beneficiary and pay at maturity if the credit is
available by acceptance.

It should be noted that the term honour encompasses three types of settlement: payment, deferred
payment and acceptance.

Negotiation

Article 2 defines ‘negotiation’ as the purchase by the nominated bank of drafts (drawn on a bank
other than the nominated bank) and/or documents under a complying presentation, by advancing or
agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement
is due to the nominated bank.

A documentary credit that is available by negotiation is the most common form of issuance today.

Both honour and negotiation are covered in more detail in Topic 17.
3.4.7 Presentation
Article 2 defines ‘presentation’ as either the delivery of documents under a credit to the issuing bank
or nominated bank or the documents so delivered.

The definition contemplates two different uses of the term: the first part of the definition refers to
the actual delivery of the documents to the bank; the second part refers to documents that have
been delivered and are in the bank’s possession.
Presenter
Article 2 defines ‘presenter’ as a beneficiary, bank or other party that makes a presentation.

The definition of presenter is most relevant in the context of article 16 when a refusal notice needs
to be sent to the presenter. The presenter may or may not be the beneficiary of the documentary
credit.

Check your understanding

What is the role of an advising bank?

Conclusion
Definitions perform an important role in any set of rules and UCP 600 is no exception.

The intent is to avoid any ambiguity in the use of the stated terms and to provide a common

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understanding for all parties to a documentary credit.

Ideally, banks should use the terms as stated in article 2 rather than any variants. For example, a
number of banks will use the term ‘negotiating bank’ either within a documentary credit or any
associated correspondence. This is despite the term ‘negotiating bank’ not appearing in UCP 600.
The correct term would be nominated bank.

Think again…
Now that you have completed this topic, how has your knowledge and understanding improved. For
instance, can you:
• explain the roles that can be performed by a bank that is operating as the intermediary between
the issuing bank and the beneficiary?
• list the banks that could be involved in the handling of a documentary credit other than the
issuing bank, advising bank, confirming bank and nominated bank?
• describe the concept of ‘international standard banking practice’?

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Test your knowledge

Use these questions to assess your learning for Topic 3.

1. It is possible for an issuing bank to also be an applicant. True or false?

a. True.
b. False.

Answer: True. It can be the case that the issuing bank will be the applicant under a standby letter of
credit. See section 3.1.1.

2. A documentary credit is always advised by the use of the SWIFT MT700. True or false?

a. True.
b. False.

Answer: False. A documentary credit can be advised by any method that provides for its
authentication – that is, including by letter, telex, fax or email.See section 3.1.3.

3. An applicant is a party to a documentary credit. True or false?

a. True
b. False

Answer: False. The applicant is not a party to the credit. Any instruction that it provides after
the issuance of the credit, such as a request for an amendment or a waiver of discrepancies, is
subject to the consent of the issuing bank. See section 3.2.

4. Which of the following is true of a second advising bank?

a. A second advising bank is used by the advising bank to advise a credit to the beneficiary.
b. A second advising bank is named in the credit to advise the credit to the beneficiary.
c. Either of the above.

Answer: C. A second advising bank can be named in the documentary credit or be selected by the
advising bank. See section 3.3.2.

5. Which of the following is not a form of ‘honour’?

a. Acceptance.
b. Deferred payment.
c. Negotiation.
d. Payment.

Answer: C. The definition of honour is composed of payment, acceptance and deferred payment. See
section 3.4.5.

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Answers
CHECK YOUR UNDERSTANDING (section 3.3)
A documentary credit would be made available with the issuing bank only where there is no
nominated bank. The beneficiary would have to ensure delivery of the stipulated documents to the
issuing bank no later than the expiry date and the latest date of presentation. See section 3.1.5.

CHECK YOUR UNDERSTANDING (section 3.4.7)

It advises the credit at the request of the issuing bank. See section 3.1.3.

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