CHAPTER 37 - KEY PRE REQUISITIES AND CHECK POINTS IN TRADE TRANSACTIONS (Important)

Key things (Pre requisites) require to do Trade transactions through Banks after doing basic formalities like KYC etc.

·         Customer. (Creating Customer is the First step)

·         Accounts. (Creating all types of Bank and Customer Account )

·         Limits.  (Attaching Limits, Limit Procedure will change from Bank to Bank)

·         Collateral or Cash Collateral (Optional).

·         All Parameterization Setup in the Banking Product or Application.

·         Dependent Transactions  (Pre Event) (For Example - To do a LC Document Checking, LC Issuance should have happened, so Document Checking is dependent on Issuance)

Key Checkpoints ( Output )after Completing a Trade Transaction through Banks

·         Journal Entries or Accounting Entries for Charges, Commission, Margin, Amortization and Payment (FT)

Example for Entries - Entries for Charges and Import LC Payment (Fund Transfer)

§  Charges

Debit - Customer Account

Credit - Bank P&L Account

§  Import LC Payment

Debit - Applicant Account

Credit - Nostro Account

Debit - Mirror Account (Nostro Account)

Credit - Route the Funds (to the Beneficiary Bank)

·         Delivery - Swift Advice, Payment Advice and Customer Advice.

·         Limits - Limit Utilization (Will differ From Bank to Bank)

·         Enquiries and Reports (If required). Most Enquiries and Reports are Periodic like for a day or week Etc.)

·         Interfaces - Swift, Funds Transfer System (FTS – Within the country payment in local currency), Anti Money Laundering Check (AML), Email Alerts, SMS Alerts etc

CHAPTER 36 - DIFFERENCE BETWEEN STANDBY CREDIT AND BANK GUARANTEES

Standby credits and Bank (Demand) guarantees

·         Although it is not always easy to distinguish from the basic wording, there is a difference between a standby letter of credit and a normal demand guarantee. Demand guarantees are usually subject to the Uniform Rules for Demand Guarantees (URDG), ICC Publication No. 758. And Standby Letter of Credit is usually subject to International Standby Practices (ISP), ICC Publication No. 98. An individual will always need to check the transaction to ascertain the exact set of rules under which the instrument is, or is to be, issued (As per CDCS Textbook).

CHAPTER 35 - TYPES OF STANDBY CREDIT IN ISP

Performance Standby

Supports an obligation to perform other than to pay money, including for the purpose of covering losses arising from a default of the applicant in completion of the underlying transactions. 

Advance Payment Standby

Supports an obligation to account for an advance payment made by the beneficiary to the applicant.

Bid Bond/Tender Bond Standby

Supports an obligation of the applicant to execute a contract if the applicant is awarded a bid.

Counter Standby 

Supports the issuance of a separate standby or other undertaking by the beneficiary of the counter standby.

Financial Standby

Supports an obligation to pay money, including any instrument evidencing an obligation to repay borrowed money.

Insurance Standby

Supports an insurance or reinsurance obligation of the applicant.

Commercial Standby

Supports the obligations of an applicant to pay for goods or services in the event of non-payment by other methods.

Direct-pay standby

Where there is no Advising Bank. It is intended to be the primary means of payment, and may or may not be linked to a default in performance or payment. This is identical to Direct Pay Letter of Credit or Direct Credit or Straight Credit.

CHAPTER 34 - GENERAL - STANDBY CREDIT (ISP)

ISP98 governs the operation of Standby Credit

The Standby Credit is also known as Standby Letter of Credit; it comes from the banking legislation of the United States, which forbids US credit institutions from assuming guarantee obligations of third parties.  (Most other countries outside of the USA continue to allow bank guarantees.)  To circumvent this US banking rule, the US banks created the standby letter of credit, which is based on the uniform customs and practice (UCP) for documentary credits. Later In 1998 the International Chamber of Commerce (ICC) Created and added ISP98 (International Standby Practices 98) as the rules to guide standby letters of credit. 

The standby basically fulfills the same purpose as a bank guarantee

So a Standby can be done either through UCP or ISP, So when a Customer wants to do Standby Credit and approaches a Bank, The Bank needs to Advice or Enquire with the Customer whether they wants to issue Standby through UCP600 (Commercial Standby Letters of Credit) or Standby through ISP98 (Standby Letter of Credit)

Though standby letters of credit have similarities with commercial letters of credit and other financial instrument, there are significant differences in scope and practice. ISP98 has 89 rules specifically drafted to reflect current standby practice. UCP600 has only 1 Article and a few handful of related articles that pertains directly to standby and in UCP 600 it has several articles that if applied to standbys, cause confusion in their interpretation and application. So a new set of Rules was therefore required for this and ISP 98 fills this important gap in the market place.

·         ISP98 offers a precise and detailed framework for practitioners dealing with standby letters of credit. So it is better to use Standby through ISP, than using Standby through UCP.

·         Standby letters of credit have very similar characteristics with the Demand (Bank) Guarantees, that’s why the types of Standby Letter of Credit in ISP is very similar to Guarantees.

·         Standby letters of credit have the same structure as commercial letters of credit whereas their role is almost the same as demand guarantees.

·         Standby Credit and Bank Guarantee share the same Swift Messages

Example - Swift message for both Issue of Standby Credit and Issue of Bank Guarantee is MT760.