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.