LETTERS OF CREDIT

1.
2.
3.

Basic concept of L/Cs

Basic parties
Independence
principle and fraud
exception

DISCOUNTING OF
EVIDENCE OF DEBT
AND ACQUISITION OF
SECURITIES

LETTERS OF CREDIT
Engagement by a bank or other
person made at the request of a
customer that the issuer will honor
drafts or other demands for payment
upon compliance with the conditions
specified in the credit

LETTERS OF CREDIT
COMMERCIAL
Those that are involve in
the importation of goods
Beneficiary will cover if
he can show that he
performed his obligation
by submitting the tender
documents

STANDBY

Secure other obligations

including loans or the
performance of some
service like construction
of infrastructure.
The beneficiary will
prove that the obligor
failed to perform the
secured obligation

LETTERS OF CREDIT
NATURE
The only way to understand is to recognize
that it is an entity unto itself
Relationship between the beneficiary and the
issuer of a letter of credit is not strictly
contractual, because both privity and a
meeting of the minds are lacking, yet strict
compliance with its terms is an enforeable
right.

LETTERS OF CREDIT
In commercial transactions, a letter of
credit is a financial device developed by
merchants as a convenient and relatively safe
mode of dealing with sales of goods to satisfy
the seemingly irreconcilable interests of a
seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to
have control of the goods before paying.

LETTERS OF CREDIT
PARTIES IN COMMERCIAL CREDITS
1. Buyer-applicant procures the letter of credit
and obliges himself to reimburse the issuing
bank upon receipt of the documents of title
2. Issuing bank bank that issues the letter of
credit and undertakes to pay the seller upon
receipt of the tender documents and to surrender
the documents to the buyer upon reimbursement
3. Seller-beneficiary person who in compliance
with the contract of sale ships the goods to the
buyer and delivers the documents of title and
draft to the issuing bank to recover payment

LETTERS OF CREDIT
OTHER PARTIES
1. Advising [notifying] bank utilized
convey to the seller the existence of credit

to

2. Confirming bank lend credence to the letter

of credit issued by a lesser known issuing bank;
confirming bank is directly liable to pay the
seller-beneficiary
3. Paying bank bank that undertakes to encash
the drafts drwan by the exporter/seller
4. Negotiating bank discounts the draft that
was agreed to be accepted and/or paid by the
issuing bank

BUYER

SELLER

(Sterling Paper)

(CHINA)

ISSUING
BANK

CONFIRMING
BANK
(SELLERSS
BANK)

(BUYERS BANK)

Documents sent
by the seller
must be shown
to the Customs
for Sterling
Paper to receive
the goods he
bought from

PAYME
NT

Must
prepare
and send
the
documents
needed

LETTERS OF CREDIT
INDEPENDENCE PRINCIPLE
1. Contract of sale between the buyer and the
seller
2. Contract of the buyer with the issuing bank
3. Letter of credit proper

LETTERS OF CREDIT
CONTRACT OF THE BUYER AND THE ISSUING
BANK
The bank agrees to issue the letter of credit in
favor of the seller subject to reimbursement or
payment by the buyer of whatever is paid to the
seller plus proper consideration agreed upon by
the parties
CONTRACT WHICH IS THE LETTER OF CREDIT
PROPER
The bank obligates itself to pay the seller or to the
order of the seller after the presentation to the
bank of tender documents stipulated upon, which
normally includes the document of title.

LETTERS OF CREDIT
Assures the seller or the beneficiary of
prompt payment independent of any breach
of the main contract and precludes the
issuing bank from determining whether the
main contract is actually accomplished or not

LETTERS OF CREDIT
FRAUD EXCEPTION
Exists when the beneficiary, for the purpose
of drawing on the credit, fraudulently
presents to the confirming bank, documents
that contain, expressly or by implication,
material representations of fact that to his
knowledge is untrue

LETTERS OF CREDIT
MARGIN:
SEC. 105. Margin Requirements Against Letters of Credit
The Monetary Board may at any time prescribe minimum
cash margins for the opening of letter of credit, and may
relate the size of the required margin to the nature of the
transaction to be financed.

Margin deposit requirement is a BSP measure to

cut off excess currency liguidity which would
create inflationary pressure.
A collateral security given by the debtor, and is
supposed to be returned to him upon his
compliance with his secured obligation.

DISCOUNTING OF EVIDENCE OF
DEBT AND ACQUISITION OF
SECURITIES
Section 2 of GBL.
Authorizes a commercial bank to acquire
marketable bonds and other debt securities
Allows commercial bank todiscount promissory
notes, drafts, bills of exchange, and other
evidence of debt
Manual of Regulations for Banks provides that
a bank cannot....except government securities,
on a without recourse basis unless such
receivables, note, or claims are registered with
the SEC.