How Should Issuance Commission Be Calculated for a Revolving LC with Declining Exposure?

Intro:

A practitioner raised a practical question regarding the appropriate method for computing issuance commission on a cumulative revolving LC, especially when the bank’s exposure changes over time. Below is the refined question and Mr. Old Man’s response.

Question 

Dear Mr. Old Man,

I would appreciate your guidance on the following:

We have a cumulative revolving LC issued for USD 100,000, valid for one year and revolving 12 times, giving a total potential exposure of USD 1.2 million.

The opening commission rate is 2% per annum.

Given that the bank’s risk exposure will decline progressively as each shipment is completed, what would be your recommended basis for calculating the issuance commission?

Best regards,

Selim Haddad

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Answer

Dear Selim,

Thank you for your question.

In practice, banks differ in how they disclose or compute issuance commissions for revolving LCs. The calculation depends mainly on each bank’s internal policy and the structure of the revolving mechanism.

Let’s assume an LC is issued for USD 100,000, revolving 12 times, with a total maximum exposure of USD 1,200,000.

1. Automatic revolving LC

If the LC reinstates automatically without any amendment, the issuance commission is typically calculated on the total maximum bank liability — in this case, USD 1,200,000.

Reason:

Although only USD 100,000 is available at any given time, the issuing bank is committed to honouring up to USD 1.2 million in aggregate over the life of the credit. Thus, the bank’s potential exposure is USD 1.2 million, and the commission is calculated accordingly.

2. Revolving by amendment

If reinstatement occurs through amendments, the issuance commission is usually calculated on the face value (USD 100,000), with additional amendment fees charged for each reinstatement.

This method can result in higher overall fees because amendment charges accumulate over the 12 cycles.

Market practice insight

In reality, many applicants do not open formal revolving LCs.

Instead, they issue a standard LC and then amend it periodically to increase quantity or amount as required — sometimes even adjusting the description of goods. This provides flexibility and allows the bank to levy amendment charges as the exposure evolves.

I hope this clarification helps.

Best regards,

Mr. Old Man