Can an Issuing Bank Prepay or Purchase Its Own Deferred Payment Undertaking?

In LC practice, UCP 600 Article 12(b) clearly permits a nominated bank that has accepted a draft or incurred a deferred payment undertaking to prepay or purchase its own undertaking.

But what about the issuing bank itself?
Can the issuing bank also prepay or purchase its own accepted draft or deferred payment undertaking before maturity?

This is an interesting question because UCP 600 is not entirely explicit on the matter, yet banking practice over the years has developed a fairly consistent understanding.

QUESTION

Dear Mr. Old Man,

Hope this mail finds you well.

I have a question requiring your expert clarification:

Can the issuing bank prepay or purchase its own accepted draft or its own deferred payment undertaking under UCP 600 sub-article 12(b)?

Thank you.

Frank

________

ANSWER

Hi Frank,

UCP 600 Article 12(b) permits a nominated bank that has accepted a draft or incurred a deferred payment undertaking to prepay or purchase its own undertaking. However, this provision does not specifically apply to the issuing bank.

Key Clarifications

• Article 12(b) refers to a nominated bank or confirming bank that has accepted a draft or incurred a deferred payment undertaking. It does not mention the issuing bank.
• UCP 600 contains no provision expressly allowing or prohibiting an issuing bank from prepaying or purchasing its own accepted draft or deferred payment undertaking.
• Nevertheless, once the issuing bank has honoured or incurred its undertaking under Article 7, it becomes irrevocably bound to pay at maturity.
• In practice, the issuing bank may, by agreement with the beneficiary, make payment prior to maturity, usually at a discount.
• Such early settlement is generally regarded as a contractual prepayment or discounting arrangement rather than a “negotiation” within the meaning of UCP 600.

Conclusion

Although UCP 600 is silent on this issue, it is generally accepted in banking practice that an issuing bank may prepay or purchase its own accepted draft or deferred payment undertaking, provided the beneficiary agrees.

In other words, while Article 12(b) does not expressly grant this right to the issuing bank, neither does UCP 600 prohibit it. The matter is therefore governed largely by banking practice and commercial agreement between the parties.

Best regards,

Mr. Old Man