Letter of Credit 101

CMA Webinar Series T R E A S U R Y S E R V I C E S William Hindon Vice President LC 101 + 9AM – 10AM (PST) Tuesday, January 16, 2007

Risks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Rules of the Game ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Sales Contract Buyer Issuing Bank Formal Agreement Proforma Invoice Purchase Order Exchange of Telexes CONTRACT = OFFER + ACCEPTANCE Seller

Sales Contract Provisions ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Incoterms 2000 EXW FCA FAS FOB DAF DES DEQ DDU DDP CFR CIF CPT CIP Dock of Exportation Dock of Importation Transportation to Dock Transportation to Buyer Import Duty Loading onto Vessel Ocean Freight Marine Insurance Unloading Charges Price/Shipping Terms Cost - Risk Equation Beneficiary (Seller) Applicant (Buyer)

Methods of Payment Exporter’s uncertainty increases ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Importer’s uncertainty increases

Factors to Consider ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Sales Contract Bank Cash in Advance Open Account L/C Collections Bank Signing Shipment Receipt of Documents Receipt of Goods/ Acceptance JAN FEB MAR APR MAY JUN JUL Seller Buyer

Documentary Collection ,[object Object]

[object Object],[object Object],[object Object]

Draft/Bill of Exchange TO: (TENOR) PAYEE DRAWEE (IMPORTER) EXPORTER DRAWER

Collection Cycle Draft B/L Invoice Instruction Letter (1) (1) (1) (2) (10) Seller (Drawer) Buyer (Drawee) Remitting Bank Sales Contract Collection Document Collecting Bank

Seller’s Risks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Documentary Letter of Credit ,[object Object],[object Object],[object Object],[object Object],[object Object]

Parties Involved Seller Beneficiary Exporter Buyer Applicant Importer

Applicant (Buyer) Issuing Bank Beneficiary (Seller) Sales Contract Beneficiary (Seller) Letter of Credit Applicant (Buyer) Bank Opening Bank SUBSTITUTES ITS NAME FOR THAT OF “ We the Buyer Obligate to pay Seller.” “ We the Bank Obligate to pay Seller.”

Letter of Credit Application & Security Agreement Applicant (Buyer) Sales Contract Beneficiary (Seller) Letter of Credit Opening Bank (2) L/C Application and Security Agreement (1) (3)

Issuing Bank ,[object Object],[object Object],[object Object],[object Object],[object Object],“ We Hereby Authorize You to Value on Us”

Advising Bank ,[object Object],[object Object],[object Object],[object Object],This is solely an advice of a credit issued by the above named

Advising Bank ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Confirmed vs. Unconfirmed ,[object Object],[object Object],[object Object],Confirmation

Confirming Bank ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],“ We Confirm the Credit and Thereby Undertake…”

“Silent” Confirmation ,[object Object],[object Object],[object Object]

Types of Credit ,[object Object],[object Object],[object Object]

Irrevocable vs . Revocable ,[object Object],[object Object],[object Object],[object Object]

Straight Credit ,[object Object]

Negotiable Credit ,[object Object],[object Object]

Sight Letters of Credit Payment effected immediately after presentation of conforming draft(s) and/or document(s) = $$

Time/Usance Letters of Credit Payment made at some specified time after presentation of conforming draft(s) and/or document(s) + = 2001 $$

Engagement Clauses ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Amendment ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],“ We Hereby Amend Our Letter of Credit as Follows…”

Special Letter of Credit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Discrepancies ,[object Object]

Discrepancies ,[object Object],[object Object],[object Object],Job of the Bank

Most Common Discrepancies ,[object Object],[object Object],[object Object],[object Object],[object Object]

Implications for Seller ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Implications for Buyer ,[object Object],[object Object],[object Object],[object Object]

Discrepancies ,[object Object],[object Object],[object Object],[object Object],[object Object],Beneficiary’s options:

Discrepancies ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Issuing Bank’s Options:

[object Object],[object Object],[object Object],[object Object],Reasonable Time xx 20 1 7 CONFIDENTIAL This Document can not be duplicated, re-transmitted, or circulated without the permission of JPMorganChase - Global Trade Finance Group.

Standby Letters of Credit ,[object Object]

Standby Letters of Credit ,[object Object],[object Object],[object Object]

OCC Safety and Soundness Criteria ,[object Object],[object Object],[object Object],[object Object],[object Object]

Standby Letters of Credit ,[object Object],[object Object]

Standby Letters of Credit ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Risk-based Capital Adequacy Conversion Factor Commercial L/C 20% Performance Standby 50% Financial Standby 100%

Commercial L/C Standby L/C Primary Bank of Obligation Primary Primary Payment Mechanism for Underlying Transaction Secondary Commercial Documents: Financial Documents: Invoice, Packing List Statement, Certificate of Origin Certificate, Inspection Certificates, Draft Transport Document

Letter of Credit 101

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Letter of Credit 101