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Advice of Letter of Credit
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Communication by the advising bank that a letter of credit has been issued. The
primary responsibility of the advising bank is to take care in establishing the
authenticity of the credit; otherwise it is under no obligation with respect thereto.
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Amendment
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Notice from the issuing bank to the beneficiary that some specific conditions(s)
or term(s) of the credit has changed. If the credit is amplified, no acknowledgement
of acceptance by the beneficiary need be obtained; otherwise, beneficiary approval
is required.
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Applicant
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The party who applies to the bank for a letter of credit (also known as the accountee
or account party). In a commercial letter of credit the applicant is the buyer.
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Application and agreement
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Document between the applicant and the issuing bank which outlines the terms to
be incorporated in the credit and the arrangements for reimbursement for any drafts
paid.
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Assignment of Proceeds
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Request by a beneficiary to assign the proceeds of any draft honored under
a letter of credit to a third party.
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Back-to-back Credit
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A letter of credit issued with the support of another letter of credit whose proceeds
have been assigned to secure the credit. Fraught with peril, this type of credit
is seldom issued. Transferable credits are a better alternative.
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Banker’s Acceptance
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A time draft that has been honored by the bank on which it is drawn for payment
on a specific future date. After the word “accepted” is superimposed on
the face of the draft, and it is dated and signed, the draft becomes a negotiable
instrument.
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Clean Letter of Credit
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A letter of credit with no documentary requirements other than a demand for payment,
usually a draft.
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Commercial Letter of Credit
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One which functions as a vehicle for payment, usually to finance an import purchase.
Typically, commercial letters of credit are issued in freely negotiable form and
require presentation of documents which describe the commercial transaction, evidence
shipment and transfer title.
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Confirmation
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An advising bank’s undertaking to honor the issuing bank’s letter of credit
if all conditions are in compliance.
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Currency
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Paper money (banknotes) or coins issued by a government through an act of law.
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Direct Pay Letter of Credit
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One which is available for payment only at the counters of the issuing or nominated
bank.
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Discrepancy
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Lack of compliance with the documentary requirements or conditions of a letter of
credit.
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Dishonor
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Refusal to accept documents as presented on the basis of discrepancies.
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Documentary Collection
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A draft to which documents are attached, accompanied by a collection letter. Usually,
these documents include a commercial invoice and shipping documents.
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Draft
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A demand for payment.
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Drawer
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Party that draws the draft; under a letter of credit that party is the beneficiary.
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Evergreen Clause
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Special condition on which a letter of credit may be presented for payment.
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Expiry Date
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Last date on which a letter of credit may be presented for payment.
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Foreign Currency
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The currency of any foreign country which is the official medium of exchange in
circulation.
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Foreign Exchange
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The exchange or trading of one currency for another. In the US, exchange rates are
expressed in relation to the foreign currency’s value to the US dollar.
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Forward Exchange Contract
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A contract entered into for the purchase or sale of a currency on a determined future
date. The rate of exchange is fixed on the contract date.
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International Bank Account Number (IBAN)
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The standard for all retail and commercial accounts in the European Union and most
other European countries. It consists of up to 34 alphanumeric characters; two identify
the country of the account holder; two are used for check digit verification; and
the remaining characters identify the bank of the account holder and the individual
number of the account.
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Negotiation Credit
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A credit that includes an engagement by the issuing bank to any drawer, endorser,
or bona fide holder of drafts. This is most common in commercial letters of credit.
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Revolving Letter of Credit
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A credit which includes a provision for reinstating its face value after being drawn
under within a stated period of time. This kind of credit facilitates the financing
of ongoing regular purchases.
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Society for Worldwide Interbank Financial Telecommunications (S.W.I.F.T.)
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SWIFT is an industry-owned co-operative supplying secure, standardized messaging
services and interface software to over 8,100 financial institutions in 208 countries
an territories. SWIFT members include banks, broker-dealers and investment managers.
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Shipping Documents
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Those which evidence merchandise in transit, usually a bill of lading, air waybill,
or truck bill of lading. In practice, reference to these documents includes any
commercial documents required to clear customs and/or facilitate receipt and handling
of the goods (commercial invoice, certificates of origin, packing list, etc.).
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Sight Draft
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Demand for payment upon presentation.
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Spot Exchange
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Transaction of foreign exchange where the currency is available for immediate delivery.
In actual foreign exchange trading, delivery generally takes place two days after
the date of the contract.
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Standby Letter of Credit
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A documentary credit that functions as a surety or direct pay instrument that is
not intended for use as a vehicle for payment for normal commercial transactions.
In its most common usage it is issued for the express purpose of effecting payment
in the event of default of the underlying transaction.
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Straight Draft
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One that restricts negotiation of the draft to the counters of a named bank.
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Test Key
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A code used by banks to authenticate cable messages.
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Tested Telex
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A cable message that is authenticated by use of a code exchanged between the sending
and receiving banks.
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Time Draft
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Demand for payment at some time other than sight as specified by its tenor (i.e.
30 days sight; 60 days date of bill of lading).
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Transferable Credit
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One which specifically allows the beneficiary to transfer a portion of or the entire
amount of the credit to one or more second beneficiaries (transferees).
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Value Date
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The date on which a funds transfer is scheduled to take place.
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