Letter of Credit Forum

Dear all

in explanation of the NEGOTIATION payment term, kindly note the following:

negotiation means the purchase of documents OR draft(drawn on another bank) by the nominated bank or by confirming bank, while an issuing bank may not negotiate because it's already undertaking to honor(sight/deferred/accept) but not negotiate.

we find that a bank which is authorized in the credit to negotiate may face certain financial risk due to purchase, so the nominated is not obliged to negotiate unless it has confirmed the credit, because a confirming bank which is authorized to negotiate can not decide not to take that financial risk.

negoatiation is devided into (TERM NEGOTIATION   or  SIGHT NEGOTIATION), but you can not tell which one of them is applicable in the L/C by just looking at the term of payment in the swift(by the way for those who do not know what the word swift stands for, it's SOCIETY WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATION), so if you want to know what kind of negotiation is meant in the credit you have to look into the reimbursement instructions at the end of the L/C , if the reimbursement was such as( we will authorize negotiating bank after we receive complying docs on our counters, this is deemed to be a sight negotiation, because the negotiating bank will purchase from his own funds and be reimbursed as soon as these complying docs reaches the issuing bank.

but if the reimbursement instructions was such as(we will reimburse nogotiating bank after 90 days (for example) from receiving complying docs on our counters or any other event occuring, this is deemed to be a term negoatiation.

it's important to note that under any negotiation term there are two financial relationships, the first is between the negotiating bank and the beneficiary ,and this relation always represents fast payment from the negotiating bank own funds to the beneficiary , while the second relationship is between the issuing bank and the negotiating bank(regarding when settlement is to be made).

in other words, sight negotiation means fast payment from the negotiating bank to beneficiary and final settlement is made when docs are received by the issuing bank(in compliance), while term negotiation means fast payment from the negotiating bank own funds to beneficiary and final settlement is made after a certain period of time elapses after a specified event like receiving docs or shipment date...etc.

who deeply understand what is written above wil notice that UCP500 was wrong in deviding negotiation into(restricted and non-restricted) ,because restriction is concerned with availablity of the credit and not with the term of payment mentioned in it. ( things are corrected in UCP600 for this reason).

another point to note, is when you issue an acceptance unconfirmed L/C available with a nominated bank and that bank chooses not to accept a draft drawn on it, so the best way to handle the case is to amend the L/C to be available by negotiation by a draft drawn on the issuing bank (instead of being drawn on the nominated bank under the acceptance payment term), so a draft under negotiation has to be drawn on a bank other than the nominated bank.

it's very important to note that any L/C available by negotiation MUST NOT include a reimbursement instructions that allows the nominated bank to debit or reimburse on the account of the issuing bank, but these instructions must only tell that nominated bank when the final settlement will be made to him. accordingly , under a non-confirmed L/C if the nomiated bank chooses not to negotiate then the beneficiary will not receive funds until his complying docs reaches the issuing bank.

many banks wrongly issue  Ls/C available by negotiation with reimbursement instruction allowing the negotiating bak to debit or reimburse on there account,,so what will be the difference in this case between sight payment L/C and negotiation L/C if both Ls/C authorize the nominated bank to collect funds and pay the beneficiary from the issuing bank funds, and where is the purchase concept here?

i hope this brief explanation about negotiation will do the job, if any colleague feels unsatisfied plz include your comment inorder to discuss.

REGARDS.