Endorsement on Drafts

LC VIEWS - Single Window Q&A No. 35 - Feb 21, 2008

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Question from M.:
Here my query is on the drafts.
The LC calls for a “draft at 180 days from B/L date” drawn on the issuing bank, along with other commercial documents.
The Beneficiary presents the documents to the nominated bank, as per the credit terms, for negotiation along with the draft, showing following details:
Drawer: Beneficiary.
Tenor 180 days from B/L date.
Payee / Pay to the order of "the nominated bank"
Drawee Issuing bank.
On negotiation the nominated bank sends the drafts dully endorsed "to order of the issuing bank" along with other commercial documents to the issuing bank.
As a practice banks do this on sight drafts also.
My questions are:

Is this endorsement necessary, as the nominated bank is only the payee and while the drafts are drawn on the issuing bank who in turn would honour the draft.
If this practise is not correct, then what are the major scenarios where a draft needs to be endorsed and who should endorse?
Would there be any change in your answer in case of sight drafts. (Though there is no point in having a draft while the LC is available by payment).
Regards
M.

1st Response from T.O. Lee:
Theoretically speaking, without referring to some regional banking practices, there is no need to endorse the draft to the order of the issuing bank (who is in fact the drawee) if the draft has been negotiated (advance funds or agree to advance funds as per definition of negotiation in article 2 of UCP 600) by the nominated bank. For other title documents, such as the B/L, depending on how the consignee box is filled, the shipper or the nominated bank may endorse it in many ways, including to the order of the issuing bank. The main purpose is to facilitate prompt receipt of goods upon arrival by the applicant by enabling the issuing bank to have absolute control of the BL and it may release the B/L promptly to the applicant upon payment.
If the draft is endorsed to the order of the issuing bank that means the issuing bank is also a holder in due course (or endorsee) and at the same time also the drawee. This is odd and may not be allowed by some bills of exchange legislations. In case the issuing bank refuses to reimburse the nominated bank, the nominated bank can only sue the issuing bank based on UCP 600 but not also based on bills of exchange act as the nominated bank is no longer a holder in due course after such endorsement.
If one bank does an incorrect endorsement, it is a mistake; but if many banks do the same, it will become a banking practice! One example is that air waybills are often endorsed by banks even if they are not endorsable.
Best regards
T.O.Lee
2nd Response from T.O. Lee:
One good reason for the nominated negotiating bank to endorse the draft drawn on the issuing bank is to ...

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