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Guide to Transferring Documentary Credits
Basic Terminology
Can this Documentary Credit be transferred?
How can I streamline the transfer process?
What terms can I change in the original Documentary Credit when transferring?
What happens after the goods are shipped?
Basic Terminology
First beneficiary - also known as the transferor, the first beneficiary is often the intermediary party or middleman in a trade transaction. They are the beneficiary of the original DC and will transfer the DC on to the ultimate supplier.
Second beneficiary - also known as the transferee, the second beneficiary is the supplier. There can be several second beneficiaries as the middleman can divide the credits and transfer to various parties provided partial shipment is allowed.
Transferring bank - the bank that transfers the DC for the first beneficiary. A bank has to be specifically authorised in the DC to be a transferring bank.
Full transfer - sometimes known as transfer in its entirety, which means that the whole DC amount is transferred to a single second beneficiary.
Partial transfer - in this case only part of the DC value is available to the second beneficiary (or beneficiaries).
Example
Sam's Store buys widgets from Joe's Trading. Joe doesn't make the widgets himself but buys them from Happy Widget Factory. The payment for this business transaction is by way of a Transferable Documentary Credit (DC) for HKD100,000 issued for Sam's Store to Joe's Trading (first beneficiary/transferor). Joe then asks HSBC (transferring bank) to transfer the DC to Happy Widget Factory (second beneficiary/transferee) for the amount of HKD70,000 (partial transfer) and keeps the balance of HKD30,000 to cover his expenses and profit.
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Can this Documentary Credit be transferred?
When you receive a Documentary Credit (DC) that you want to transfer, check the following:
- Is the DC transferable? The credit must state that it is 'irrevocable', 'transferable' and 'subject to UCP600'.
- Is HSBC nominated as the transferring bank? For a DC that allows negotiation by any bank, The Hong Kong and Shanghai Banking Corporation Limited in Hong Kong must be specified as the transferring bank. For DCs with negotiation restricted to HSBC in Hong Kong, we are automatically the transferring bank.
- Are all terms and conditions complete and precise? Check that the terms reflect your commercial contract. Are you confident that you can meet the terms such as shipment and presentation dates?
- Is prior approval of the transferee required? For DCs issued in certain countries such as the USA, the Transferable DC must name the second beneficiaries. Please ensure the companies' names specified are correct and complete.
Considerations when transferring to multiple beneficiaries:
- Is partial shipment allowed? If the DC is to be transferred to different beneficiaries, partial shipment must be allowed under the DC.
- Is Article 32 waived? If there is a shipment schedule, the DC should state that Article 32 of UCP600 is not applicable. This article states that if a particular shipment is missed or late, then the Credit is not available for that or any subsequent shipments. If there are multiple beneficiaries, one beneficiary has no control over when another beneficiary ships and thus this article must be waived.
How can I streamline the transfer process?
DCs are usually advised by physical delivery to customers. To transfer the DC, the original DC and application form must be submitted. Options include:
- Use HSBC's Instant@dvice and DC Safe Custody services. A DC copy will be sent to you by email and we will keep the original DC for transferring. This will save you time and courier charges.
- Use Hexagon to submit your application for DC transfer. The Authorised Messages function will make your workflow paperless!
What terms can I change in the original Documentary Credit when transferring?
The following terms are the only ones you can change (as stated under UCP600 Article 38):
- Name and address of beneficiary/applicant on the credit, unless the DC already specifies who can be the second beneficiary(ies)
- Name and address of beneficiary/applicant on the documents required, unless DC specifies otherwise
- Reduce unit price and/or DC amount
- Reduce quantity of goods (if partial shipment is allowed)
- Bring forward the expiry date and latest shipment date(s), or shorten the presentation period to allow time for substitution of documents
- Increase the insurance cover (if applicable) to provide the same amount of cover stipulated in the original DC
If you change the name/address of the beneficiary, the price, the amount or the quantity of goods, this usually means that you will replace the transferee's invoice and draft with your own. If documents need to be replaced, this is referred to as a transfer with substitution of documents.
Although the above is quite restrictive, it also means that transferring DCs is a relatively straightforward transaction. To find out more about whether Transferable DCs are suitable for your business, please contact us for a consultation.
What happens after the goods are shipped?
- Transfer with substitution of documents - you are allowed to substitute invoice(s) and draft(s) only. Any other documents required to comply with the original Documentary Credit must be submitted by the transferee(s) via their banks. You must use the transport documents, insurance certificates, etc., that have been submitted by the second beneficiary.
- Transfer without substitution of documents - you do not need to take any action or present any documents to HSBC. We will use only the documents submitted by the transferee(s) via their bank(s).
Once HSBC has received all the necessary documents from you and/or the second beneficiary(ies), the documents will be sent to the Issuing Bank for approval and payment.
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