Notification, Advising and Confirmation

Notification is the process by which the issuing bank tells the beneficiary that a standby has been issued, and advising is the process by which the advising bank delivers the standby to the beneficiary. The two words are often used together, but they are different steps. The issuing bank notifies the advising bank by sending the MT700. The advising bank advises the beneficiary by delivering the standby. The beneficiary must receive the advice before it can rely on the standby, and it must examine the advice to confirm that the terms are correct. The advising bank authenticates the standby before delivering it. It checks that the MT700 comes from the issuing bank, that the SWIFT authentication is valid, and that the message is complete. If the MT700 is received by a channel other than SWIFT, for example by telex or by letter, the advising bank must authenticate it by other means, such as a test key or a signature verification. The advising bank should not deliver a standby it cannot authenticate, because the beneficiary might rely on a forged standby. The authentication is a control, and it protects the beneficiary and the advising bank. The beneficiary, on receiving the advice, should examine the standby carefully. It should check the amount, the expiry date, the drawing conditions, the governing rules, and the name of the issuing bank. It should check that the beneficiary name is correct, that the applicant name is correct, and that the currency is correct. If any term is wrong, the beneficiary should ask the applicant to arrange an amendment immediately, before it relies on the standby. A beneficiary that accepts a standby with a wrong amount or a wrong expiry date may find that it cannot draw the full amount, or that the standby expires before it can draw. The examination should be done on receipt, not when the beneficiary needs to draw, because by then it may be too late to amend. Confirmation is the addition of a second bank payment undertaking to the standby. A beneficiary asks for confirmation when it does not trust the issuing bank, or when the issuing bank is in a country with political or transfer risk, or when the beneficiary wants to be paid by a bank in its own country. The confirming bank examines the demand and pays the beneficiary, and then claims reimbursement from the issuing bank. Confirmation costs a fee, normally a percentage per annum on the amount, and it is charged to the applicant or to the beneficiary, as agreed. The confirming bank must be authorised by the issuing bank to confirm, or it must agree to confirm without authorisation, which is called silent confirmation. Silent confirmation is a confirmation that the issuing bank does not know about, and it is a risk for the confirming bank, because the issuing bank may not reimburse it if the standby terms are not followed. The decision to confirm is a credit decision by the confirming bank. It assesses the issuing bank creditworthiness, the country risk, and the standby terms. If it confirms, it takes on the risk that the issuing bank will not reimburse it. The confirming bank therefore charges a fee that reflects the risk, and it may require collateral from the issuing bank or from the applicant. A beneficiary that asks for confirmation should understand that it costs money, and that the confirming bank may refuse if the issuing bank is weak or the country risk is high. A standby that cannot be confirmed is a standby that the beneficiary should examine carefully, because it may indicate a problem with the issuing bank. The advising bank may also be asked to confirm, and it may agree or refuse. If it agrees, it becomes the confirming bank as well as the advising bank. If it refuses, the beneficiary may ask another bank to confirm. The confirmation is added by an MT700 with field 49 stating CONFIRM, or by a separate MT799 free format message. The beneficiary should receive a clear statement that the standby is confirmed, and by which bank, because a confirmation that is not documented is not a confirmation. An SME should check the field 49 in the MT700, and should confirm that the standby advice states the confirmation explicitly. For a business analyst, the notification and advising requirement must cover the authentication, the delivery, the examination, and the confirmation. The requirement should state that the system authenticates the MT700 before advising, that it records the date the beneficiary received the advice, that it prompts the beneficiary to examine the terms, and that it records whether the standby is confirmed and by which bank. A system that cannot record a confirmation, or that cannot distinguish an advised standby from a confirmed standby, will misstate the risk to the beneficiary.