Trade Finance Instruments and Documentary Credits
Trade finance instruments and documentary credits tests UCP 600 mechanics: which rulebook applies, what a bank must examine, and how discrepancies are handled.
The rulebooks
UCP 600 for documentary credits; eUCP 2.0 for electronic presentation; ISBP 821 for examination practice; ISP98 for standbys; URDG 758 for demand guarantees; URC 522 for collections. Banks deal in documents, not goods (UCP 600 article 5). A nominated bank has a maximum of five banking days after presentation to examine and give notice (article 14(b)); if it fails, preclusion applies and it cannot later allege discrepancies (article 16(f)).
Document rules worth memorising
A bill of lading must show shipment on board no later than the latest shipment date, be clean, and be endorsed if made out to order. Insurance cover must be at least 110% of the CIF or CIP value, in the credit currency (article 28). A 5% quantity tolerance applies only where quantity is not fixed in packing units or individual items, and never if it would breach the credit amount. About or approximately gives 10%.
Worked example
A credit reads: about 100 MT copper cathodes at USD 9,000/MT; total credit amount USD 900,000. Article 30(a) allows 10% on quantity, so 110 MT is a compliant shipment. But 110 MT at USD 9,000 is USD 990,000, above the credit amount. The presentation fails on the invoice value, not on quantity. The beneficiary must ship less or obtain an amendment.
Traps
- Confirmation is the confirming bank's own undertaking, not merely a message from the issuing bank.
- The applicant's waiver does not bind the issuing bank unless the issuing bank agrees.
- A standby is not a UCP credit; ISP98 applies.
- A credit is transferable only if expressly stated, and can normally be transferred once.