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Added clarity posted: Oct 4, 2022 

Rated Complexity: 10/10



The financial instrument used to pay for commodities is called a Documentary Letter of Credit (DLC). All major banks dealing in  exports and in imports will have the facilities to issue a documentary or standard letter of credit (L C), as well as other less secure forms of financing such transactions. Bills of Exchange are not used by FTNX, nor are bank guarantees, as such instruments have in house polices and rules  applying lacking a universal standard. A Standby Letter of Credit (SLC) must NEVER be used by a buyer  to pay for  imported goods.

To ensure uniformity and safe practices are apparent at all time, in all transactions conducted by FTN exporting, and USCT members, all payments made to a supplier or end buyers apply the use of a UCP 600 endorsed DLC ; that is – a DLC which supports a uniform base set of rules as administered by the ICC Paris, France. End buyers must abide with  such rules before payment is issued as such rules automatically apply once such a DLC is issued. The contract stipulates such matters intently. The UCP rules specify exactly the expectations of the buyer when paying for goods and expectations when the supplier collects upon such payments. Such said  financial instruments are expensive to issue and attract fee’s and charges by the banks acting on such, because their part to the whole process is critical to the success of the DLC application and ultimately  the supplier getting paid - for work done.

The bank issuing a DLC on behalf of its customers, is not guaranteeing payment. All banks worldwide  enacting under UCP rules will however ‘honour’ payments on the condition  certain  acts are conducted and conditions of the DLC are met, in accordance with UCP rules. This means the DLC is a conditional instrument subject to events that needs to be addressed before payment under the DLC is released to the supplier. The part of the supplier is to present to the bank of the end buyer, a whole lot of verifiable  documents ‘at sight’ as specified in the contract and offer in where once done, as sighted by the bank, without ambiguity or discrepancies, the bank will release funds to the supplier within 5 banking days. Therefore the loaded ship may still be at port of loading when the supplier is paid. If the ship sinks thereafter, then that’s a matter for issuance; the supplier does not issue a refund. The supplier  who has ‘delivered’ goods, is entitled to payment at such a time so long as all conditions of the DLC have been met.

A DLC  may be advised to a seller or supplier  carrying an irrevocable status. This means no matter the form; even if only pre advised, under UCP rules, the bank ‘must’ honour payment so long as the conditions written on the  body of the DLC is adhered with. Once a bank advises or issues a DLC it cannot be cancelled by the buyer now clarifies the meaning of  ‘irrevocable.’ The one exception to this rule is when the bank suspects ‘with clear evidence’ in hand, that fraudulent activities is apparent.

A DLC issued by a  top ranked bank of good standing does not need to be endorsed as confirmed. A large bank does not like  then idea ( as perceived by its peers) that it needs to confirm its credit . Smaller less economically viable banks  will need to have its credit confirmed by a larger  top 100 ranked bank  of the world; meaning that the larger bank is willing to bear the risk of default , if the smaller bank is financially unable to issue a DLC bearing a  very large value.

UCP Rules defines the supplier to also mean the seller ; where as FTNX defines the supplier separately to the meaning of seller.UCP rules explain the business application of a ‘buyer doing business directly  with the seller’ and has file dot describe the interactive process when a third party conjoins an active deal. In other worlds when an informed intermediary’ becomes involved in a transaction  the DLC rules become confused and ambiguous. When an end buyer issues a DLC directly to its sourced supplier; the inactions of the supplier,  is for the supplier to fully bear. Not so when a PCT becomes involved in the deal. The PCT depends on the DLC being issued as transferable. Under UCP rules, if the PCT pays for the transfer of the credit, it risks losing the transfer fee if the supplier fails to perform.The  advising Bank  gets paid up front before the DLC is transferred-protects the position of the Bank, it does not protect the position of the PCT losing its money, even  thought the PCT is acting in the position of seller. This is the aspect which is unfair and improper - as served by the very same rules that is meant to protect ‘ all parties to the deal’ from a loss that ought not to have occurred. Using the term ‘buyer and seller’ alone  is a poorly prescribed application  that needs to be redefined by the ICC so that the position and role  of the PCT in an active deal  is clearly addressed.This is where the long trading  ‘experience’ of the PCT delivers a different perspectives to the actual supporting rules being used.


A transferable  irrevocable DLC  is a DLC that can be transferred from the account of PCT  to the account of its supplier as secured from the bank of the end buyer ( buying goods ordered from the PCT acting on behalf of an undisclosed principal). 

When the ‘disclosed  principal’ is the trading basis; the UCP rules could be made to apply ‘as they are’ meaning that the supplier would pay the transfer fee for an ‘agent or representative of such.’ However 99.9 percent of PCT’s do not act in such a position. A PCT acting as a buyer and seller is not acting for a disclosed principal, it acts for an undisclosed principal. This small spur in the overall  presentation of the UCP rules  can cause huge problems, even for the informed trader. 

Since a DLC can only be transferred once. The issuance, the transfer and finally the acceptance  by the supplier within 5 banking days of receipt; the PCT  seeks the transfer fee  from the end buyer more so when the end buyer has obtained goods below market price expectation ( at a discount), or when much wanted products are sought. If the end buyer refuses to pay the transfer fee, on first call the supplier is requested to pay such a fee, from the account accepting the DLC, as a matter of added security, ensuring that the DLC is advised to the account of the supplier; the same  traceable account  from where the transfer fee was paid from. 

FTNX mostly uses the TIDLC application. If an end buyer does not what to issue a TIDLC, then a Confirmed DLC must apply, unless an ‘option’ is executed.  e.g: Typical option available here: A PCT after a year of experience could accept a non transferable IDLC if they have already secured goods under an OTP and  have a bank account with a top ranked bank, as stated further below. A very experienced PCT is able to accept a CIDLC and issues a verifiable in-house ( non bank endorsed) pre-advised DLC to the supplier in where the pre advised  status is removed once all the required documents have been collected. This is the standard set of procedures that the FTNX doctrine endorses. All other aspect outside the standard orthodox trading aspect are simply ‘options’ that the PCT can draw upon in the event that the primary aspect has become problematic; as used for purpose of saving a deal that would have otherwise failed.

The DLC attracts an availing fee, establishment fee, transfer fee, corresponding fee .etc.etc. Banks actually earns a ‘commission’ when handling a transferable DLC and therefore such financial instrument are often attached to matters of ‘big business transactions via the sales contract.’ Bank handling a DLC from a bank who has issued such a DLC is called the  ‘advising bank.’  The advising bank will not transfer the credit to the supplier until the  transfer fee has first been paid; meaning- the bank knows intently that the deal could still collapse and that it wants payment of the transfer fee upfront before it will transfer a credit; detached from the business being initiated or taking place. Banks only deal as per the expressed written terms and condition applied on the credit. Under UCP rules the banks ( all banks involved in the deal) cannot act on matters of actual goods ( and therefore the sales contract) Banks cannot get involved in matters of the commodity being sold. It can only act in matters of financial aspect “My bank want to see the sales contract’ means an ill informed trader is present. Drop shippers and other business organisation ought to take notice of this aspect, because these kind of rules take precedence in other similar internationally inspired business applications. 

A DLC is a conditional instrument a SLC is an unconditional instrument; meaning unlike a DLC, the SLC can be cashed in easily in comparison, as minimum or no conditions other than the production of I.D is needed to enable collection proceedings.To pay for goods  via the use of a SLC is an act of a  fool. 

There are rules for a UCP 600 DLC issuance as there are rules  when the DLC is collected upon as defined under latest edition of ICC  URC ( Uniform Rules of Collection) 

In Summary

  1. Unlike we have seen being stated by ill informed other online ‘One cannot cash in the DLC  and run.” The DLC is actually worthless and only becomes valuable once the conditions written on its body  have been enacted upon successfully. 
  2. The transfer fee under UCP rules states that the “beneficiary of the credit pays the transfer fee” which is an ambiguous statement  that should be changed, as the PCT has no ‘benefit’ at all until the actual transaction pertaining to ‘delivery’ is closed; meaning ‘delivery’ of the transport documents and not delivery of actual goods; as per delivery  rules used as specified under incoterms 2020. Inn fact is the PCT pays for the transfer fee from their own funds, and the supplier reneges on the deal, the PCT would lose its money and would need to served notice (or legal action) for a breach of contract  with the supplier  which is a “worst  case scenario”  that must be avoided at all times, as the end buyer will do the same to the PCT. 
  3. The position of the PCT is a much more difficult one  for this very reason as the PCT can be sued twice, on the one deal, whereas this event could occur only once, when an end buyer conducts business with the supplier directly. These and other issues means that the only reason that a lucrative commodity deal can be closed  by a PCT for a profit,  is because the PCT  is highly informed about the business of the supplier, the end buyer and his own position. An ill informed PCT cannot conduct such business safely or effectively. A PCT truely ‘earns’ its profit  for being able to work such complex deals in ensuring his supplier and end buyer remains protected at all times while ensuring its own gross profits are not compromised. 
  4. A it stands under UCP rules the ‘seller’ pays for the transfer fee, which is a highly risky and improper application for the PCT. Luckily, under the same rule the added term ‘ or as agreed upon’ allows the PCT to seek the transfer fee from the end buyer is the first premise or the supplier as an option. The PCT acting as buyer, advised the credit to the supplier, by paying for the transfer fee as secured from the end buyer ; as parties on this side of the deal “have agreed upon.”  
  5. In effect the term ‘as agreed upon’ allows other options to also apply. The PCT when seeking a quote from a supplier is looking to secure goods and price. Matters of terms and conditions are only basically prescribed at this time .The  PCT  takes the information secured from the supplier to make its own quote or offer with its own terms and conditions to its end buyer; such terms and conditions requiring such more scrutiny  on the end buyers side especially  with matters to do with the   issuance of the financial instrument.   
  6. This price of goods offered  by a supplier is only for the goods being offered at a specified delivery term; it does not account for ‘added fees and charges.’ The PCT must secure goods first. The goods are sold in where matters of contracts are then sealed. In an advanced trading scenario; if a PCT has offered a full OTP to the supplier in where all such fees are made for the account of the supplier, who then accepts such; then this is where the supplier already aware of such added expenses  can advise a proper sell price.In this case the transfer fee is not sought from the end buyer.  The  End Buyer - PCT- Supplier  routine  as applied in conjunction with incoterms delivery rules states that the ships rails  ends the responsibilities  and expenses of one party to favour the other. In effect the ships rails is place where the expenses of the supplier to the PCT ends at time of loading (completed). From this point  expenses becoming apparent at this time is for the end buyer to bear as expenses of the supplier cease once goods pass the ships rails at port of loading. This is the time that presentation documents can be cleared and presented to the bank of the end buyer via the bank of the PCT. Such a deal could take up to three months or longer  to close as such where an offer states “ we can provide  first delivery in “2 weeks or 24 hours”(as we have often seen)  denotes that an ill informed trader is apparent.   
  7. In the premise where the supplier pays the transfer fee; this premise cannot take place until the PCT has become very proficient at trading beyond the base elements found in the  doctrine. For the first year the PCT  advises an ITB to the supplier, allowing such to perform with the end buyer is a very specific manner-up front to ensure all elements of ‘security” remains intact throughout the course of the transaction.Later, when experience is in hand the PCT could produce as an option, a detailed OTP (advance trading)  for the supplier to consider  which could include notice about the transfer fee. And ITB is a casual  in-house application to get the new PCT trading sooner rather than later. The standard  trading aspect as per doctrine is to seek a quote from the supplier; a quote which  serves the PCT a price devoid  of matters to do with complex terms and conditions. 
  8. As an option, if an end buyer  protests about paying the transfer fee, thePCT could rebate the fee after is deal is closed; could be stated on the the offer.  But the perspective as it pertains to the rules can dramatically change, one the PCT is dealing with the supplier as buyer. The PCT after securing the quote earlier, could also simply  issue an offer (OTP) to the supplier noting that all transfer, added conformation fees and  the likes are payable by the supplier. Since the rules sate  that the transfer fee is payable by the beneficiary of the credit, the beneficiary here is the supplier. The supplier however may rightfully raise the price of goods offered under the quote. This is one of the reason when a PCT cannot add less than 3.0%   to the price of he goods being sold to the end buyer , as this thresh hold  must apply to cover unexpected change in price and other  ‘foreseeable’ aspects encountered  during the course of a deal including covering aspects of the LDD PG on offer. A PCT seeking  7.0% gross profit margin on the sell aspect, must correctly  presume that the net profit margin in effect will be around  4.0% is actually being sought. This aspect ensure that the PCT does not need to return to the end buyer after an offer has been accepted, because the supplier has without notice  has sought, within reason,  a higher price than first quoted. 
  9. We have seen over decades some very strange demands as it relates to payments.Until FTNX came along nobody  knew about the transfer fee, a fee which could exceed US$ 25,000  per every million dollar value applied to the advised DLC. 
  10. In essence one must only use very secure applications, when it comes to payments which includes using  a leading bank to supervise the financial side of a commodity deal. This is the safest aspect for an end buyer to ply regardless if they are dealing with an entity such as FTNX or directly with its own supplier. Demands for payment via  a deposit upfront,SLC, SWIFT, PG or even Cash are risk laden transactions that must be avoided at all times no matter how tempting the price of goods  offered may seem. Even end buyers who have dealt with a supplier for years  in where payment methods applied were less than ideal, may end up facing  legal action - the law books are full of such actions. The nature of business is such that anything less than using the safest trading and contracting aspects  must prevail at all times as small mistakes in this business usually cost large sums of money to rectify or salvage. A PCT brings skill to the table.