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ICC issue guidance paper relating to the use of drafts (bills of exchange)

05/04/2019

It has long been debated as to whether drafts serve a useful purpose in a letter of credit. Under UCP 600, the only type of availability where a draft is absolutely necessary is where a credit is available by acceptance. UCP 500 maintained a difference between acceptance and deferred payment credits i.e., accepted drafts could be financed under the applicable bill of exchange law but a bank's obligation when issuing its deferred payment undertaking was only to pay at maturity - there was no perspective of a bank prepaying its undertaking as now mentioned in UCP 600 sub-article 12 (b). UCP 600, through the content of sub-article 12 (b), has placed the acceptance and deferred payemnt credits on the same level and banks should consider issuing credits available by the latter.

The paper questions whether drafts should be called for and recognises that it is an issuing bank that will call for a draft and not the applicant. Therefore, whether a draft is needed or not is in control of the issuing bank.

The paper is a guidance document and it is left to each bank to decide how to proceed in the future.

A copy of the paper can be viewed here ICC Guidance Paper - Drafts.pdf

 

 

 


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