Setting up a standby letter of credit

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1. Two ways in

A standby letter of credit (SBLC) for termination liability (TL) can start with either side. The Defense Security Cooperation Agency (DSCA) may, at its discretion, invite a purchaser in writing to use one for its Foreign Military Sales program (SAMM C9.9.1.5.4.5.2.1). It invites only purchasers that meet the eligibility criteria. The invitation sets a reply date and states the amount of TL reserves the SBLC could cover, and it includes samples of the documents. What the instrument is and who may use it is covered in the standby letter of credit for termination liability.

A purchaser may also ask on its own initiative (SAMM C9.9.1.5.4.5.2.2). "However, a request does not imply DSCA acceptance" (SAMM C9.9.1.5.4.5.2.2). The purchaser may submit its own draft documents, but they are subject to revision where they vary from the prescribed formats.

2. What an application contains

Whichever way it starts, the purchaser supplies the same core information (SAMM C9.9.1.5.4.5.2.1 and SAMM C9.9.1.5.4.5.2.2). It gives the full legal name of the issuing or confirming bank proposed, and confirms the SBLC amount it wants. It provides a designation of authority signed by a ministry-level representative, and its preferred timeframe for implementation. A purchaser replying to an invitation also lists any changes it wants to the documents. The package counts as the application, and the Chief Financial Officer reviews it for a decision only when it is complete.

The manual sets the solicitation steps in order (SAMM C9.9.1.5.4.6). DSCA determines the SBLC amount from current and projected TL. An invitation goes out, or the purchaser asks to take part. DSCA then receives the reply, decides whether the purchaser meets the eligibility criteria, and decides whether the bank or banks do.

3. The decision

DSCA notifies the purchaser of approval or disapproval in writing, signed by its Chief Financial Officer (SAMM C9.9.1.5.4.7). Approval may be as provided, with no changes, or as modified, with the required modifications set out in the letter (SAMM C9.9.1.5.4.7.1). DSCA will not replace the banks the purchaser proposed, and it will not suggest alternative banks either.

A disapproval states the specific reasons (SAMM C9.9.1.5.4.7.2). It also says whether the package could be approved if altered, and the manual gives a different bank as an example of such a change.

4. The acceptance meeting

The approval letter goes to the purchaser, with a copy by certified mail to the banks at the address the purchaser gives (SAMM C9.9.1.5.4.8). It proposes a date, time and place for formal acceptance of all SBLC and confirmation documents. It asks the parties to confirm those arrangements, provide the credit numbers the banks have assigned, and supply text for the Terms and Conditions Agreement. That text includes each bank’s address for presenting a demand for payment. Informal contact by phone or email before the letter is encouraged to speed the process. Purchaser and bank officials who need to reschedule or cancel should tell DSCA at least five business days before the meeting.

Only designated officials sign (SAMM C9.9.1.5.4.9). For the government, the DSCA Director, Deputy Director or Chief Financial Officer may sign, and further delegation is not authorized. The purchaser designates its signatory at ministry level. Formal acceptance cannot occur without that designation, or if the designated official does not sign. Banks choose their own signatories, but DSCA may demand proof of their authority and withhold acceptance until it has reviewed and approved it.

5. The documents signed

Formal acceptance means signatures on three documents (SAMM C9.9.1.5.4.10). The issuing bank signs one original SBLC. Where a confirming bank is involved, it signs one original confirmation. DSCA and the purchaser sign two originals of the Terms and Conditions Agreement.

The purchaser and banks keep their documents where they choose (SAMM C9.9.1.5.4.11). On the government side, the originals are held by DSCA’s financial policy division, with copies kept by the country finance director and the general counsel’s office. The manual sets out the acceptance steps in order (SAMM C9.9.1.5.4.12). The last of them is that DSCA stores the originals and copies in the designated locations.

6. When it takes effect

The SBLC is binding when issued, and so is a confirmation (SAMM C9.9.1.5.4.13). The Terms and Conditions Agreement is implemented once all parties have signed all copies and the SBLC, and any confirmation, has been issued. DSCA must also have received any proof of authorization it asked for. At that point the notices begin.

The implementing agencies receive an email with the implementation date and the extent of TL coverage (SAMM C9.9.1.5.4.14). The email lists the affected cases, or refers generally to every case to which TL applies, and says what to do about payment schedule formats. The Defense Finance and Accounting Service is told to change how it loads payment schedule amounts into its financial system, and is kept informed of later changes to TL held in the trust fund or at the Federal Reserve Bank. The purchaser receives a letter confirming the implementation details. The manual lists the signing first, followed by these three notices (SAMM C9.9.1.5.4.15).

7. How the payment schedules change

TL applies to purchases of defense articles and services under section 21 of the Arms Export Control Act (SAMM C9.9.1.5.4.24). Without an SBLC, TL prepayments form part of what is owed on each case. With one, the SBLC can satisfy TL instead, which changes the government’s financial requirements. The case payment schedules are therefore adjusted to show the revised amount owed, which equals the advance cash needed to cover expected disbursements.

The manual prescribes the format. Each quarter shows total requirements, then termination liability, then the difference between them, labeled the government’s financial requirements (SAMM C9.9.1.5.4.24). When the Defense Finance and Accounting Service receives case documents in that format, it loads the financial requirements figures into its system in place of the total requirements (SAMM C9.9.1.5.4.24.1). That revises future forecasts and the individual quarterly amounts due.

Key terms

SBLC application	The complete package of bank names, amount, designation of authority and timeframe that DSCA reviews.
Approval as modified	An approval that depends on changes set out in DSCA’s notification letter.
Designation of authority	The ministry-level document naming who signs for the purchaser.
Terms and Conditions Agreement	The agreement between DSCA and the purchaser, signed in two originals at formal acceptance.
Confirmation	A confirming bank’s own undertaking to pay DSCA, binding when issued.

Every statement above links to the document behind it. The full source list for this piece is on the sources page.

This page describes public United States government programs for general information. It is not legal, regulatory or procurement advice, and it does not address the facts of any particular case.

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