New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

George E. Pataki
Governor

Gregory V. Serio
Superintendent

The Office of General Counsel issued the following opinion on May 27, 2003, representing the position of the New York State Insurance Department.

Re: Letters of Credit & Regulation 133

Questions Presented:

1. Does a standby letter of credit comply with N.Y. Comp. Codes R. & Regs. tit. 11, pt. 79 (2003) ("Regulation 133") if it states that it is subject to the International Standby Practices (ICC Publication 590) ("ISP98") of the International Chamber of Commerce, but does not state that it is subject to and governed by the 1993 revision of the Uniform Customs and Practice for Documentary Credits (ICC Publication 500) ("UCP93") of the International Chamber of Commerce?

2. A financial institution requires the beneficiaries of its letters of credit to present the original letter of credit with its sight draft before such beneficiary may obtain funds from the institution. Does the financial institution’s requirement that the beneficiary present the original letter of credit violate Regulation 133’s required conditions for acceptable letters of credit?

Conclusions:

1. No. Standby letters of credit, which are issued pursuant to Regulation 133, must state that they are subject to and governed by the 1993 revision of the Uniform Customs and Practice for Documentary Credits.

2. Yes. Pursuant to the required conditions of Regulation 133, such institution may only require such beneficiary to present a sight draft of the original letter of credit – the institution may not compel the beneficiary to present the original letter of credit as a precondition to the release of funds.

Facts:

A financial institution ("Institution") plans to issue a standby letter of credit ("Standby Letter") pursuant to N.Y. Comp. Codes R. & Regs. tit 11, pt. 79 (2003) ("Regulation 133"). The Institution presently issues letters of credit that are subject to the International Standby Practices (ICC Publication 590) ("ISP98") of the International Chamber of Commerce, rather than the 1993 revision of the Uniform Customs and Practice for Documentary Credits (ICC Publication 500) ("UCP93") of the International Chamber of Commerce. The Institution also requires the beneficiaries of its letters of credit to present the original letters of credit and their corresponding sight drafts to the Institution as a precondition to obtaining funds.

Analysis:

N.Y. Comp. Codes R. & Regs. tit. 11, § 79.1 (2003) sets forth the definitions of terms used in Regulation 133, and provides in pertinent part:

(a) Applicant means the party who applies for and causes the bank or trust company to issue the letter of credit.

(b) Beneficiary means the insurer in favor of which the letter of credit or its confirmation is established and shall include any successor by operation of law of any named beneficiary including, without limitation, any liquidator, rehabilitator, receiver or conservator.

(c) Clean and unconditional letter of credit or clean and unconditional confirmation means a letter of credit or confirmation which:

(1) makes no reference to any other agreement, document or entity; and

(2) provides that a beneficiary need only draw a sight draft under the letter of credit or confirmation and present it to promptly obtain funds and that no other document need be presented.

N.Y. Comp. Codes R. & Regs. tit. 11, § 79.2 (2003) sets forth the required conditions for acceptable letters of credit issued pursuant to Regulation 133, and provides in pertinent part:

For a letter of credit to be acceptable, it must:

. . . .

(b) be clean and unconditional;

(c) be issued, presentable and payable at an office of the qualified bank in the United States;

. . . .

(i) state that it is subject to and governed by the Laws of the State of New York and the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500) and that, in the event of any conflict, the Laws of the State of New York will control. If the beneficiary is a foreign insurer, then such insurer's state of domicile may be substituted for New York. The letter of credit must contain a provision for an extension of time, of not less than 30 days after resumption of business, to draw against the letter of credit in the event that one or more of the occurrences described in Article 17 of Publication 500 occurs . . . .

. . . .

(k) be issued by a qualified bank.1

N.Y. Comp. Codes R. & Regs. tit. 11, § 79.4 (2003) sets forth the required conditions for acceptable letters of credit issued by unqualified banks, and provides in pertinent part:

For a letter of credit issued by a bank or trust company which is not a qualified bank to be acceptable it must, in addition to meeting the required conditions specified in section 79.2(a), (b), (d)-(h) and (j) of this Part, meet all of the following conditions:

. . . .

(d) state that it is subject to and governed by the Laws of the State of New York and the 1993 revision of the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (Publication 500) . . . .

Accordingly, all letters of credit issued pursuant to Regulation 133 must state that they are subject to and governed by the 1993 revision of the Uniform Customs and Practice for Documentary Credits, §§ 79.2(i), 79.4(d); and all letters of credit issued pursuant to Regulation 133 must be "clean and unconditional," §§ 79.2(b), 79.4, which means, in part, that the beneficiaries of such letters of credit need only present the sight draft of the letter of credit in order to "promptly obtain funds and that no other document need be presented," § 79.1(c)(2).

Therefore, the Institution’s Standby Letter must state that it is subject to and governed by the 1993 revision of the Uniform Customs and Practice for Documentary Credits, N.Y. Comp. Codes R. & Regs. tit. 11, §§ 79.2(i), 79.4(d); and the Institution may only require the beneficiary of its Standby Letter to present a sight draft of the original letter of credit, and may not compel such beneficiary to present the original letter of credit as a precondition to the release of funds, N.Y. Comp. Codes R. & Regs. tit. 11, §§ 79.2(b), 79.4.

For further information you may contact Senior Attorney Kristian Earl Lynch at the New York City Office.


1 N.Y. Comp. Codes R. & Regs. tit. 11, § 79.2(e) (2003) provides the definition of a qualified bank.