Trade Finance

Documentary credits

As a credit instrument and a means of securing and processing payments, modern world trade would be inconceivable without the documentary credit. It meets all the criteria of this role provided the terms of the credit are clear and unambiguous. However, the formal requirements are extremely stringent: the bank may only effect payment if the documents are exactly as stipulated in the credit.

Key principles:

  • By their very nature, documentary credits are an independent payment mechanism, separate from the contracts of sale or other agreements on which they may be based (see UCP 600, Art. 4).
  • Under a documentary credit transaction, the parties involved deal with documents rather than with goods, services and/or other performances to which the documents may relate (see UCP 600, Art. 5).
  • Instructions to open a documentary credit must be complete and precise. Too detailed specifications should be avoided.
    The advising bank is obliged, among other things, to verify the apparent authenticity of the documentary credit (see UCP 600, Art. 9b).
  • The banks concerned assume no liability or responsibility for the form, sufficiency, genuineness or legal effect of the documents or for the description, quantity, weight, quality, existence, etc. of the goods represented by said documents (see UCP 600, Art. 34).
  • The expiry date and place of presentation for the documents must be stipulated (see UCP 600, Art. 6).
  • Only the submission of proper documents can assure an exporter due receipt of payment.
  • A documentary credit is not only a means of effecting payment, it can also serve as a credit instrument.

Legal aspects – Global Guidelines

  • The Uniform Customs and Practice for Documentary Credits (UCP) form the basis for the processing of documentary credits. They govern the essential rights and obligations of the parties of the agreement.
  • Please note: The current UCP 600 guidelines, published by the International Chamber of Commerce, Paris, have been in force since 1 July 2007 and are well established internationally.
  • As from 1 April 2002 the eUPC (supplement to the UCP) are applicable for presentation of electronic documents.
  • Alongside the UCP 600, local legislation governing documentary credits also remains important.
  • For Switzerland, the relevant provisions of the Swiss Code of Obligations (Art. 394ff., Art. 466ff. and Art. 965ff. on securities) are legally binding when it comes to issuing orders and instructions.
  • The full provisions of UCP 600 can be found in the UBS publication «Documentary Credits and Collections».

Types of documentary credits

  • Sight payment credits
  • Acceptance credits
  • Documentary credits in transit trade
  • Deferred payment credits
  • Negotiation credits