Uniform Rules For Bank-to-bank Reimbursements Under Documentary Credits
Geralyn
In your email inquiry to Sara Kelsey of March 9, 2005, you asked whether New York state-chartered banks and branches of foreign banks have the same authority as national banks to issue letters of credit and other independent undertakings to pay against documents.
"A national bank may issue and commit to issue letters of credit and other independent undertakings within the scope of the applicable laws or rules of practice recognized by law. Under such letters of credit and other independent undertakings, the bank's obligation to honor depends upon the presentation of specified documents and not upon nondocumentary conditions or resolution of questions of law or fact at issue between the applicant and the beneficiary. A national bank may also confirm or otherwise undertake to purchase specified documents upon their presentation under another person's independent undertaking within the scope of such laws or rules."
The quoted passage in the preceding paragraph carries a footnote, which cites a list of laws and rules of practice. In your email, you offer several excerpts from the list of laws and rules of practice demonstrating the nature and variety of these transactions as they routinely occur in domestic and international commerce. I will not repeat those excerpts here, as they are extensive, but I incorporate them by reference for purposes of this response. The excerpts you quoted appear to demonstrate that "independent undertakings" are very similar, if not in some cases identical, to letters of credit, in that they are a bank's obligation to honor a commitment based on the presentation of documentary evidence. You also reference the OCC's safety and soundness considerations required to be observed by banks issuing independent undertakings, and they are very similar or identical to those that banking regulators typically look for in connection with banks' issuances of letters of credit.
It is the Department's opinion that New York state-chartered banks, as well as New York state-licensed branches and agencies of foreign banks, have the same authority as national banks, as set forth in 12 C.F.R. 7.1016, to issue letters of credit and other independent undertakings to pay against documents. Banking Law Section 96(2) authorizes state-chartered banks to issue letters of credit and Banking Law Section 96(1) generally authorizes state-chartered banks to engage in activities incidental to banking. Together, these sections would authorize the above-described activities for state-chartered banks. The powers (aside from deposit-taking) of state-licensed branches and agencies of foreign banks to engage in the business of banking, although not enumerated in detail in Banking Law Section 200, as a general rule, are interpreted by the Department to be co-extensive with those of state-chartered commercial banks.
I am writing to confirm the matters I discussed yesterday by telephone with Rosanne Notaro and Christine Tomczak and to submit a formal request to the New York State Banking Department for an answer to the following question:
Do New York state-chartered banks, including state-chartered branches of foreign banks, have the same authority as national banks to issue letters of credit and other independent undertakings to pay against documents?
To reach this ultimate question, I began my research at 12 CFR 7.7016, the OCC regulation authorizing national banks "to issue and commit to issue letters of credit and other independent undertakings within the scope of the applicable laws or rules of practice recognized by law." The regulation proceeds to describe these transactions as having the bank's obligation to honor depend solely upon the presentation of specified documents and not upon nondocumentary conditions or resolution of questions of fact or law at issue between the applicant and the beneficiary.
The quoted passage in the preceding paragraph carries a footnote, which cites a list of laws and rules of practice. In the interest of demonstrating the nature and variety of these transactions as they routinely occur in domestic and international commerce, I offer the following excerpts.
"Undertaking by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value...Letters of credits may be issued in "any form that is a record and is authenticated (i) by a signature or (ii) in accordance with the agreement of the parties or the standard practice." Emphasis added.]
"For the purposes of these Articles, the expressions "Documentary Credits(s)" and "Standby Letter(s) of Credit" (hereinafter referred to as "Credit(s)", mean any arrangement, however named or described, whereby a bank (the "Issuing Bank") acting at the request and on the instructions of a customer (the "Applicant") or on its own behalf, (i.) is to make a payment to or to the order of a third party (the "Beneficiary"), or is to accept and pay bills of exchange (Draft(s)) drawn by the Beneficiary, or (ii.) authorizes another bank to effect such payment, or to accept and pay such bills of exchange(Draft(s)), or (iii.) authorizes another bank to negotiate, against stipulated documents(s), provided that the terms and conditions of the Credit are complied with. For the purposes of these Articles, branches of a bank in different countries are considered another bank." [Emphasis added.]
Although letters of credit are not explicitly defined within the "The International Standby Practices," the description of Standby Letters of Credit , found within the "Scope and Application" section of the treatise states:
"A standby letter of credit or other similar undertaking, however named or described , whether for domestic or international use, may be made subject to these Rules by express reference to them. Additionally, the section entitled "Nature of Standby" states that "a standby is an irrevocable, independent, documentary, and binding undertaking when issued and need not so state." [Emphasis added.]
"Stand-by letters of credit provide assurance of payment in a wide variety of commercial settings ranging from backing up performance of undertakings to enhancing capital market offerings. As such, they have come to play a vital role in commerce, one which exceeds exponentially the better-known (and related) workhorse of international payments, the commercial letter of credit. In the United States , where stand-by originated, their estimated volume of approximately USD 400 billion evidences the relative efficiency and market confidence which they command." [Emphasis added.]
A separate irrevocable undertaking of the Reimbursing Bank, issued upon the authorisation or request of the Issuing Bank to the Claiming Bank named in the Reimbursement Authorisation, to honor that bank's Reimbursement Claim provided the terms and conditions of the Reimbursement Undertaking have been complied with. [Emphasis added.]
"instruction and/or authorisation, independent of the Credit, issued by an Issuing Bank to a Reimbursing Bank to reimburse a Claiming Bank, or, if so requested by the Issuing Bank, to accept and pay a time draft(s) drawn on the Reimbursing Bank." [Emphasis added.]
Next, I determined that a Federal branch is authorized to enter into these types of transactions to the same extent as a national bank. Pursuant to 12 CFR 28.13, "the operations of a foreign bank at a Federal branch or agency shall be conducted with the same rights and privileges and subject to the same duties, restrictions, penalties, liabilities, conditions, and limitations that would apply if the Federal branch or agency were a national bank operating at the same location."
Finally, I examined the standards established by the Federal Reserve Board for activities of state-chartered branches. Under Regulation K, at 12 CFR 211.29(b)(2), no application to the Fed is required "by any state branch or state agency to conduct any activity that is otherwise permissible under applicable state and federal law or regulation that: ***** (2) Is permissible for a federal branch, but the Comptroller imposes a quantitative limitation on the conduct of the activity by the federal branch." Since this provision is set within the context of activities that are not permissible for federal branches, it seems possible that an activity, such as issuance of letters of credit and other independent undertakings, that is permissible for a Federal branch may also be permissible for a state branch. The International Banking Act of 1978 presents the concept in the negative: "...a State branch or State agency may not engage in any type of activity that is not permissible for a Federal branch..." 12 USC 3105(h)(1).
However federal law may ultimately be interpreted (and I have not conducted exhaustive research into case law), I would prefer to have a clear idea of the New York State Banking Department position on the authority of its banks to engage in the activities here at issue.
As an addendum, in response to a request by Ms. Notaro and Ms. Tomczak, I also provide below the safety and soundness considerations that the OCC places upon transactions involving letters of credit and other independent undertakings, as set forth in 12 CFR 7.1016(b):
Over the years, the ICC Banking Commission has become a leading global rule-making body for the banking industry, not only producing universally accepted rules and guidelines for international banking practice, but also providing leading edge research and analysis.
Today, the majority of modern documentary credits are issued subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, 2007 Revision, commonly known as UCP 600.
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