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Check your understanding
Does a USD10 million face amount mean the beneficiary already has USD10 million cash?
Money, Obligations and Undertakings
Simple concepts first. Proper banking terminology second.
Who owes the money?
Before looking at any instrument, identify the underlying obligation. A buyer may owe a seller. A borrower may owe a lender. A contractor may owe performance to an employer.
What does the bank promise?
An LC, SBLC or guarantee can create a bank undertaking with its own terms. The bank does not simply replace the entire commercial contract. It performs according to the instrument and the applicable rules and law.
Independent undertakings
Documentary credits, standbys and demand guarantees are generally designed to operate independently from the underlying contract. This is why the wording and required presentation matter so much.
Payment condition
A bank undertaking normally has conditions for honour. Under a documentary credit, this usually means a complying presentation of documents. Under a standby or demand guarantee, it normally means a complying demand and any required supporting documents.
Do not confuse face amount with cash in hand
A USD10 million instrument does not mean the beneficiary has received USD10 million cash. The face amount states the maximum or available undertaking, subject to the instrument terms.
Remember thisAsk two questions separately: “What does the customer owe?” and “What exactly has the bank undertaken to do?”
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