DLC MT700 vs SBLC MT760 in Physical Commodity Deals

Two instruments dominate the payment side of physical commodity contracts: the documentary letter of credit, issued by SWIFT MT700, and the standby letter of credit, issued by MT760. They are often spoken of as interchangeable. They are not. One is a payment mechanism; the other is a security for payment. Choosing the wrong one, or writing a contract that confuses them, is a common cause of failed closings.

The documentary credit: MT700

A documentary letter of credit (DLC) is an irrevocable undertaking by the issuing bank to pay the beneficiary against presentation of documents that comply with the credit's terms. It is issued by MT700 (with MT701 continuation pages and MT707 for amendments) and is governed by UCP 600, the ICC Uniform Customs and Practice for Documentary Credits, with ISBP 821 setting the examination practice.

Key features for a commodity seller:

• Payment is triggered by documents, not by the goods. Under UCP 600 Article 5, banks deal with documents, not with goods or services.
• Banks have a maximum of five banking days after presentation to determine compliance (Article 14 b).
• Typical required documents in a bulk cargo credit: commercial invoice, full set of clean on-board bills of lading (or charter party bills, Article 22), certificate of quality and quantity issued by an independent inspector, certificate of origin, packing list or ullage report, insurance document if CIF.
• The credit may be confirmed by a bank in the seller's country, adding a second payment undertaking (Article 8).
• The credit may be at sight or usance, transferable (Article 38) or revolving.

The DLC is the natural instrument when the seller wants to be paid for a specific shipment against proof of shipment, and the buyer wants to pay only when the agreed documents exist. For term contracts with monthly liftings, a revolving DLC or a series of credits is used.

The standby: MT760

A standby letter of credit (SBLC) is also an irrevocable bank undertaking, but it is drawn only if the applicant fails to perform. It is issued by MT760 (the same message type used for demand guarantees), usually subject to ISP98 (ICC Publication 590) or, less often, UCP 600. A demand guarantee under URDG 758 is the functional cousin.

In a physical deal the SBLC sits behind another payment method. The seller ships, invoices and is paid by wire transfer (MT103) within the agreed days. If the buyer does not pay, the seller presents a statement of default and the invoice to the bank and draws on the standby. The SBLC therefore secures open-account or deferred terms; it is not itself the payment.

Rule: an MT700 pays when the seller performs. An MT760 pays when the buyer does not. A contract that calls for an SBLC "payable against shipping documents" has misunderstood its own instrument.

Where MT799 and MT103 fit

MT799 is a free-format bank-to-bank message. It is used for a pre-advice of a credit, a readiness-willingness-and-ability statement, or a bank's confirmation that an account exists and is funded. It carries no payment obligation. MT103 is the single customer credit transfer, the message behind an ordinary wire. In a healthy procedure these messages appear in this order:

1. Signed sale and purchase agreement with the instrument, documents and inspection terms defined.
2. Optional MT799 pre-advice from the buyer's bank to the seller's bank.
3. Issuance of the DLC (MT700) or SBLC (MT760), often made operative by the seller's performance bond.
4. Inspection, loading, documents.
5. Payment by honour of the credit, or by MT103 with the standby as fallback.

Comparison

Practical points for institutional parties

Operative versus non-operative. Many commodity contracts provide for a credit that becomes operative upon receipt of the seller's performance bond. This is legitimate when the sequence and timing are written into the contract and both banks are named.

Issuing bank quality. The undertaking is only as good as the bank. A seller should require a credit from an acceptable bank or confirmation by one, and should check the issuing bank's SWIFT BIC and rating independently.

Document precision. Under UCP 600 the description of goods in the invoice must correspond to the credit (Article 18 c). Specifications such as "EN 590 10 ppm" or "ICUMSA 45" belong in the credit's goods description and in the inspection certificate, worded identically.

Tolerances. For bulk cargo, a quantity tolerance of plus or minus 5 % is allowed unless the credit states otherwise (Article 30 b); the price is then settled on the inspector's outturn figures.

Leasing and "monetisation". Offers to lease an SBLC or to monetise an MT760 for a fee are outside normal banking practice and are a recurring fraud pattern. A standby issued for a real trade is tied to that trade.

The choice between MT700 and MT760 is a choice about who carries performance risk and when. Decide it in the contract, name the rules, list the documents and let the banks do what they are good at.