Confused:
Hi All,
I am confused about these terms very much: I will put my questions in simple terms:
So basically there are 2 different kinds of deals:
Deal 1 is Honour:
Honour means to pay upon receiving complying presentation.
This payment can be
1) by sight = immediately
2) by deferred payment undertaking = Tenor
3) by acceptance = by accepting time drafts
q 1 ; What is the main difference between deferred payment undertaking? seems they are both tenors and beneficiary can get paid either upon maturity? or upon earlier if he is dealing with confirming / nominated bank at the cost of interest. It seems in both cases the beneficiary can opt to get paid by either paying interest to the bank to get paid or by giving a discount to the bank to sell his documents. So why 2 different terms?
Deal 2 is Negotiation:
1) Exact same questions as above q 1 + additional question of :
2) If a confirming bank has already decided to negotiate and purchase docs from beneficiary, then why pay at deferred paying undertaking or why pay at acceptance.
And can you guys enlighten us on the flow of docs for deferred paying undertaking + Acceptance. like my request above. what are the main differences? I guess, if we read about the whole flow of docs in the above 2 scenerios of DEF and Acceptance, we might be able to understand their main difference. Thanks a lot to all.
The UCP600 article 3 indicates a document may be signed by ... or any other mechanical or electronic method of authentication70-630 dumpsThe UCP600 article 3 indicates a document may be signed by ... or any other mechanical or electronic method of authentication70-640 dumpsThe UCP600 article 3 indicates a document may be signed by ... or any other mechanical or electronic method of authentication70-647 dumpsThe UCP600 article 3 indicates a document may be signed by ... or any other mechanical or electronic method of authentication70-648 dumps
Dear All,
According to article 7.a.i & b of UCP600 the responsibility of the issuing bank is limited to mcdst honour and not to negotiate.
Assume that a deffered L/C is available by negotiation with a nominated bank and that bank doesn't negotiate, could the issuing bank, in light mcdba of article 7.v., negotiate in this exceptional case?
If yes, can the negotiation be with recourse or with out recourse?
If no, itil certification please offer other solutions.
Best
Ghubshawi
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Hi Mohkahn,
I am just kidding about the confusion bit, but letter of credit bankers have their own language. Let me see if I can help you out.
Deal 1:
A deferred payment undertaking is different from a banker's acceptance based upon the action of the bank who issues either undertaking.
If the bank issues a deferred payment undertaking, they are issuing their undertaking that they will pay the beneficiary at maturity. If the bank issues a banker's acceptance, they are issuing their undertakingt that they will pay the holder of the banker's acceptance at maturity. The other caveat is that the banker's acceptance must be presented in order for the holder to get paid.
It sounds very similar, but here is where they differ. A banker's acceptance is a form of commercial paper that can be sold on the open market. So if a beneficiary wants to be paid early, they could discount it at any bank that they choose or to any party that they choose.
On the other hand, a deferred payment undertaking can not be sold on the open market. If a beneficiary wants to get paid early, they would actually have to approach a party and get a loan, where the loan would be repaid by the proceeds of the deferred payment undertaking. If the beneficiary was not paid at the maturity, they would still be responsbile for repaying the loan and they would have to pursue the issuing bank for repayment.
If the bank issuing a banker's acceptance does not pay at maturity, the holder of the banker's acceptance would have to pursue the issuer of the banker's acceptance. If the beneficiary has sold the banker's acceptance, they would not be on the hook for anything.
I would like to make one more point on the difference between the two. Since a banker's acceptance is considered commercial paper, some countries apply a tax to the banker's acceptance, so there is an additional cost that may not apply to deferred payment undertakings. So when considering which to use, this may play a part in your decision.
Deal 2:
Negotiation is the giving of value of a draft or documents before receiving reimbursement. A letter of credit will either be issued by payment, by negotiation, by acceptance or by deferred payment. You should not have a credit that is available by both negotiation and acceptance or negotiation and deferred payment, as negotiation is only done at sight.
So if a confirming bank has decided to purchase documents, they would only be documents payable at sight. If the credit is by acceptance or by payment they would either buy the accepted draft at a discount or create a loan that is due on the maturity of the deferred payment undertaking.
I hope this helps you out.
Best regards,
LC Sam
wonderful, good explaination and much sucesss in your business dealing.. regards, by all respect.. finance service
It's good to be replied to by the legends. Where is the German/Austrian guy {i forgot his name, but the 2 of you guys used to get along very well -:) }, seems he does not post very often now. I have been visiting here for 2 + years On an Off.
The confusion surrounding the whole issue mentioned above was really not letting me further my CDCS studies. anyway, thanks again and below I like to summarise what you taught me with few more questions:
ACCEPTANCE:
""The other caveat is that the banker's acceptance must be presented in order for the holder to get paid....""
1) I read somewhere that they are promissory notes, so banker's acceptance = Promissory notes? Or are they the same drafts that the beneficiary types / writes on and gives them to the bank, who then counter signs/endorses them at the back, making them / giving them the value of a promissory note/banker's acceptance? which will explain the extra cost of buying and putting stamps on them from the government?
2) So until maturity if the beneficiary has not yet sold them to another party in the open market can they be sold back to original issuer for the original value? or decreased value? Since a beneficiary can sell it for a lesser value and since if he has to keep it till the maturity, he is loosing money on the money that has not yet
been paid to him. so I am guessing that the acceptance note issued will be paid in the same value upon maturity OR minus the cost of selling it to 3rd party, if bene is in need of cash early?
3) so in the case of acceptance, the applicant of L/C or issuing bank ONLY get the flexibility of not paying at sight and perhaps thereby save little bit of interest money for the duration of the said maturity time during which they don't have to pay the bene? e.g. 30, 60, 90 days? as well as to have the flexibity of receiving and checking, even selling the goods before paying for them?
DEFERRED:
"""On the other hand, a deferred payment undertaking can not be sold............issuing bank for repayment.'""
1) So if the beneficiary wants to get paid early can he approach the bank (issuing/confirming/nominated) to get paid early in exchange for a discount, and what forces decide the percentage of this discount? or is he at the mercy of the bank's calculation? or do they normally have some sort of contract and agreement on what kind of percentage they should be working on under deferred payments?
2) I remember in "Documents sent under collection basis" our banker used to pay our company after sendig the docs and then charge us lots of interest till the day they got paid by the principal's banker. So i am guessing deferred payment undertaking is very much the same? And usually the payment will be done with recourse? but of course with the added advantage of having an L/C rather than Collection.
Thanks.
Hi mohkahn,
I am sorry for the delay in responding. I did not see your second message.
I will try to shed light on each area.
Acceptance:
1) A banker's acceptance is a promise to pay by the accepting bank. They are not actually a promissory note, but the original draft created by the benefiicar that has been stamped accepted by the accepting bank. The bank that accepts a draft creating a banker's acceptance is promising to pay the holder of the banker's acceptance at maturity.
2) The holder of the banker's acceptance can choose to hold the banker's acceptance until maturity or they can sell the banker's acceptance at a discount to another party.
If the original holder of the banker's acceptance holds the banker's acceptance until maturity, they will be paid the face value at maturity by the accepting bank.
If the original holder of the banker's acceptance sells the draft at a discount to another party, then the original holder will receive less than the face value of the draft immediately. The difference is determined by an agreement between the original holder and the buyer of the banker's acceptance. This rate is normally tied to the LIBOR or the US Fed Discount Rate (either rate plus a markup). This may be done multiple times before the banker's acceptance matures. At maturity, the accepting bank will pay the current holder of the banker's acceptance the face amount of the banker's acceptance.
This discounting process can be confusing as the accepting bank can also agree to discount the banker's acceptance. When thinking about this, it is better to separate this in your mind by thinking of the acceptance department and the discounting department at the bank.
If the banker's acceptance is presented to the accepting bank after maturity, the accepting bank is not required to pay interest above the face amount of the banker's acceptance for the excess days. Therefore it is always best to ensure that the banker's acceptance is at the accepting bank on or before the maturity date.
3) The applicant gets the flexibility of having terms with their supplier. Understand that these terms should be built into the pricing for the goods, so the applicant is paying interest to the supplier. The acceptance allows the applicant to raise funds to pay for the goods by giving them time to sell the goods.
Deferred Payment:
1) Under a deferred payment, if the beneficiary wants to get paid early, they would have to approach the bank. The bank is under no obligation to pay early.
In this case, once the beneficiary asks for early payment and the bank agrees, the bank would set up a loan that would be repaid by the proceeds of the letter of credit.
The rate charged would be the agreed rate of the loan.
2) What your banker did was not actually a deferred payment but send the documents under reserve or indemnity.
What happens in this case is as follows:
a. Your bank determines that the documents are discrepant.
b. Your bank makes a determination that the issuing bank is likely to take up the documents despite the noted discrepancies.
c. Your bank chooses to pay you funds immediately or more commonly referred to as negotiation with recourse. This means that they can come back for the funds if the doucments are not taken up.
This benefits you, as you have access to funds immediately, without having to wait on payment from the issuing bank. You are however paying interest and a premium for this service.
I hope this helps to clear up some of your questions.
Also, best of luck on the CDCS exam!
Best regards,
LC Sam
Gr8 explanation,
We are issuing Bank, Docs complied accepted to be paid on 01 Apr 2010, we have sent the swift message for our acceptance, is this message the Banker acceptance? please clarify
Hi Warlard,
What you have sent is your advice of acceptance. A banker's acceptance is created when a bill of exchange or draft is stamped accepted by the drawee and given a maturity date. The actual banker's acceptance is the modified draft.
I hope this helps out.
Best regards,
LC Sam
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