Books

1. Introducing the Nominated Bank
   This chapter introduces the nominated bank, which might also be the advisor, and discusses the unique letter of credit roles that the nominated bank can play. It describes the nominated bank’s various functions: (1) paying; (2) accepting; (3) incurring a deferred payment obligation; and (4) negotiating. When it performs these functions, the nominated bank satisfies the obligations of the issuer, and the issuer must reimburse the nominated bank (see UCP 600 art. 7).

[Page56:]

2. The Nominated Bank’s Mandate
   For the convenience of having the credit available at a local bank, the beneficiary may ask the applicant to direct the issuer to nominate a bank local to the beneficiary to honour or negotiate the beneficiary’s draft and documents or demand for payment. When the issuer nominates a bank, it gives the nominated bank a mandate to perform one of the following functions:
1. To Pay
   When the issuer nominates a bank to pay, the beneficiary presents its draft drawn on the nominated bank and the relevant documents at the counters of the nominated bank, and the nominated bank performs the function of examining the documents to determine whether they comply with the terms and conditions of the credit. If they do, the nominated bank may honour the beneficiary’s demand or sight draft by paying the beneficiary.
2. To Accept
   When the seller/beneficiary has granted the buyer/applicant credit terms, the credit will call for a usance or time draft that is payable some time after the seller/beneficiary presents it. Under letter of credit practice, the issuer is obliged to accept the time draft drawn on the issuer, thereby creating a banker’s acceptance. When the issuer nominates its correspondent to accept, the seller/beneficiary will draw the usance (time) draft on the nominated bank. If it is satisfied that the documents comply, the nominated bank may elect to accept the draft and create the banker’s acceptance. Once the nominated bank has accepted the draft, it becomes unconditionally obligated to pay the draft at maturity, so the decision to accept will be based on acceptance of the risk of being able to obtain reimbursement from the issuer. If the nominated bank refuses to accept the draft, the issuer remains so obligated and the beneficiary is entitled to draw a second draft, this time on the issuer.
3. To Incur a Deferred Payment Obligation
   For a variety of reasons, some issuers prefer not to deal with usance drafts. Drafts may be subject to special taxes and, when accepted, create a banker’s acceptance that is subject to negotiable instrument rules. Those rules enhance the value of the draft by making it free of the issuer’s legal defences to payment, thus making it attractive to investors (see chapter XVII, section 3, which discusses banker’s acceptances). Some issuers prefer not to lose that defence and therefore do not create banker’s acceptances. For these reasons, such issuers do not undertake to honour a time draft but instead agree to incur a deferred payment obligation. The deferred payment obligation signals the bank’s undertaking to pay the holder of the obligation when it matures, i.e. when the credit period, say, 30 or 60 days, that the seller and the buyer agreed to, as incorporated in the letter of credit, has expired. By nominating a bank to incur that obligation, the issuer gives the nominated bank a mandate to issue a deferred payment undertaking and thereby intermediate the risk of collecting payment from the issuer at maturity.
   [Page57:]
4. To Negotiate
   Payment, acceptance of drafts and incurrence of a deferred payment undertaking are the three ways to honour a credit. They are carried out on behalf of the issuer and are considered “final”, meaning that the nominated bank cannot rescind its decision. Negotiation is a bit different in that it is regarded as lending funds to the seller. Under a negotiation credit, the seller/beneficiary draws its draft on the issuer, and the nominated bank is authorized to “negotiate” it. Negotiation occurs when the nominated bank takes the draft and accompanying documents and gives the seller/beneficiary value. As opposed to payment, negotiation takes the form of an advance while the funds or documents are in the banking system and is normally “with recourse” in the event [that] the issuer fails to reimburse the nominated bank. A bank nominated to pay has no recourse after it pays and will therefore not pay until it receives funds from the issuer (commonly out of an account on its own books). Some negotiation credits designate the bank at which the seller must present its draft, while others are “freely available”. Such freely available credits give the seller/beneficiary the freedom to select the bank at which it will present its draft and documents. This freedom permits the beneficiary to shop for a bank that knows the beneficiary and its business and may also be local to the beneficiary. Since the negotiating bank has recourse in the event that the issuer fails to reimburse, only a bank that knows the beneficiary is actually likely to advance funds to the beneficiary as authorized in a credit available by negotiation. The negotiating bank will sometimes negotiate with full recourse. At other times, it will negotiate without recourse for specific risks, such as the risk of discrepancies or cross-border risks.
3. The Right of Reimbursement
   When a nominated bank acts pursuant to the issuer’s mandate, it has the right to be reimbursed by the issuer (see UCP 600 art. 7(c)). Chapter XIII discusses reimbursement.

.