Mr Old Man Payment Q&A Drafts under Negotiation LCs Restricted to the Confirming Bank – Who Should They Be Drawn On? By Mr Old Man Posted on 5 seconds ago 4 min read 0 0 0 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr Intro: In practice, there have been cases where LCs available by negotiation with confirming banks state that drafts be drawn on the confirming bank. This does not comply with Article 2 of UCP 600. Where an LC contains such a term, should the draft be drawn on the confirming bank or the issuing bank? ______ QUESTION Dear Sir, Can you please clarify some points regarding the use of drafts under a confirmed letter of credit. If a confirmed LC contains a reimbursement clause and is available by negotiation, with negotiation restricted to the confirming bank, is it possible for the draft to be drawn on the issuing bank instead of the confirming bank? Could you also explain the different scenarios in which a draft may be drawn in such cases? Regards, Shrestha _________ ANSWER Hi Shrestha, Thank you for your question. Under UCP 600 Article 2, negotiation is defined as “the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation…”. In your case, the LC is available by negotiation and negotiation is restricted to the confirming bank (which is also the nominated negotiating bank). This means the draft must be drawn on the issuing bank, not on the confirming bank, because drawing it on the negotiating bank would contradict the definition of negotiation in UCP 600. A draft should also never be drawn on the reimbursing bank, as that bank’s role is solely to provide reimbursement to a claiming bank at the request of the issuing bank, and it has no undertaking to the beneficiary. That said, in practice, some confirming banks under negotiation credits incorrectly insist on drafts being drawn on themselves. Where this happens, beneficiaries often comply to avoid payment delays, even though it does not follow UCP 600. It is worth noting that for an LC available by payment (sight) or deferred payment, drafts are not required at all. Even for negotiation credits, the ICC Guidance Paper – The Use of Drafts (Bills of Exchange) under Documentary Credit recommends curtailing the habit of requiring sight drafts drawn on the issuing bank, confirming bank, or a paying bank unless there is a specific commercial, regulatory, or legal reason. ICC further recommends issuing usance LCs available by deferred payment rather than acceptance credits, unless there is a compelling reason to create a banker’s acceptance. I hope this clarifies the matter. Best regards, Mr. Old Man