DRAFTS AND NOMINATED BANK UNDER LETTERS OF CREDIT SUBJECT TO UCP 600

QUESTION

Dear Mr. Old Man,

I seek your guidance on international trade practices concerning drafts in Letters of Credit (LC) transactions:

1. Under what terms of an LC is the presentation of a draft required?

2. Clarification on the role of a Nominated Bank: If an LC is available with Bank A for negotiation, how should the nominated bank be understood in this context?

Thank you for your time and expertise.

Best regards,

TKL

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ANSWER

Hi,

1. Requirement for Drafts under LC

Under UCP 600, drafts are required for LCs available by negotiation or acceptance, while they are not required for LCs available by payment or deferred payment.

The ICC Guidance Paper on the Use of Drafts under LCs highlights that drafts are often an unnecessary source of discrepancies and are generally less relevant in modern trade finance. Their use should be discouraged unless there is a specific commercial, regulatory, or legal requirement. Furthermore, when issuing usance LCs, banks are advised to structure them as deferred payment credits rather than acceptance credits unless a banker’s acceptance is specifically needed.

2. Definition and Role of the Nominated Bank

As per UCP 600, Article 2, a Nominated Bank is the bank with which the LC is available, or in the case of an LC available with any bank, any bank willing to act on it.

If an LC states that it is available with Bank A for negotiation, Bank A is the nominated bank under the LC. However, in an LC available by negotiation, any draft (if required) should be drawn on the issuing bank or a bank other than the nominated bank.

Best regards,

Mr. Old Man