International Trade

Finance
MGMT 4034

Variance LCs (Irregular

LCs)

Variance Varying the amount of goods shipped

Transferable LC:
Agent is involved who issues a new draft and
receives 10% commission
Royal bank opens an LC on CIBC and CIBC is the
go between Royal Bank and CITI Bank
Back-to-Back:
Is used when there is absolutely no trust
2 fresh LCs are issued

Variance LCs

Red Clause LC:

Say, 25% advance against LC to start a business; 25,000$ to
Global
When Global takes 25,000$, a draft must be presented along
with a commercial invoice
Then another draft is drawn up for the other 75, 000$
It is a secured indirect loan
Green Clause LC:
Used for if goods can be ready before time
Manufacturer puts goods into a neutral warehouse and then
attaches a negotiable receipt to the document, sending it to the
advising bank
If the bank is satisfied, then payment will be received

Variance LCs

Evergreen LC:
LCs issued without expiry date because shipping
dates can not be determined
It only expires at the option of the issuing bank with
30 days notice
Usance LC:
Time LC where no draft are issued because
payment terms are flexible and time is very short
But it does have an expiry date

Variance LCs

Revolving LC:
Used for Corn, Wheat, Soya(regularly)
Cumulative and Non-Cumulative
Cumulative if there is a failure of a crop for a
particular month, then the next month the missing
shipment may be attached to the shipment for the
current month
Non-Cumulative conditions are very strict, cannot
join a missed shipment with the next one
Generally lasts a year, or it could be up to 5 years
(government purchases)
It is used to cut down on LC opening charges

Accepting Documents

1.
2.
3.
4.

Assignment of proceeds Is the only clause that

the applicant has no control over
If there is an agent involved, then the agent can
only revoke (withdraw) the LC and would still
collect his/her commission
There are 4 ways to accept documents that are
discrepant:
Under reserve
On Approval
Collections Basis
Indemnity

Accepting Documents that are

Discrepant

Under Reserve or Retention is when the documents are kept in

the exporters country and the Advising bank sends a swift
message to the Issuing bank for approval
On Approval or On Collections are basically the same idea
On Approval is used by the USA and some parts of Europe
On Collection is used by Canada
Where the document (cheque) is physically sent back to the
bank to get approval that the funds are there
They send the documents that have discrepancies
Originals are needed
Issuing bank approves (RBC) because they issued the LC, then
they advice the exporter for approval (Global) for approval of
discrepancies

Accepting Documents that are

Discrepant

1.

2.

Indemnity is when the exporter gives a guarantee

to the confirming bank that if the issuing bank does
not accept the documents and refuses payment,
the exporter will refund the money and re-draw the
documents
Two activities that banks undertake when it comes
to LCs
Authority to purchase ( usually exporters country)
when a corresponding bank purchases the draft
from the exporter or beneficiary on the authority of
the Issuing bank
Issuing bank guarantees authority to pay (usually in
importing country)