LETTERS OF CREDIT DISCOUNTING OF EVIDENCE OF DEBT AND ACQUISITION OF SECURITIES 1. Basic concept of L/Cs 2. Basic parties 3. Independence principle and fraud exception
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LETTERS OF CREDIT
DISCOUNTING OF EVIDENCE OF DEBT AND ACQUISITION OF SECURITIES
1. Basic concept of L/Cs2. Basic parties3. Independence
principle and fraud exception
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
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 to convey to the seller the existence of credit
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
LETTERS OF CREDIT
BUYER(Sterling Paper)
SELLER(CHINA)
CONFIRMING BANK
(SELLERS’S BANK)
ISSUING BANK
(BUYER’S BANK)
Must prepare and send the documents needed
Documents sent by the seller must be shown to the Customs for Sterling Paper to receive the goods he bought from China.
PAYMENT
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.
LETTERS OF CREDIT
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.
DISCOUNTING OF EVIDENCE OF DEBT AND ACQUISITION OF
SECURITIES
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