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.
term negotiation & deferred payment undertaking
wat is the difference between credit available by negotation ( term negtation as explained by Mohammed al-kelani) & credit available by deferred payment if nominated bank incurs its deferred payment undertaking & prepaiys before maturity?, i mean to say in both the instances nominated bank will get the funds at maturity. please clear this for me, thanks in anticipation.
best man missing
Dear ifrman
The best man to answer this question would be Mohammad. But since he is missing since last few weeks, I will try to help u. however all my understanding is based on Mohammad's I must say.
It seems u r missing an important point; definition of negotiating. As per UCP, Negotiation means the purchase by the nominated bank of draft (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
Negotiation is divided into -
Sight Negotiating - negotiating bank will be paid by the issuing bank as soon as they receive complying docs.
Term negotiating - negotiating bank will be paid by the issuing bank after xxx days of a complying presentation.
To me, these two types of negotiating are basically against the two types of LC; sight and deferred payment. Therefore credit available by negotiation Vs credit available by deferred payment is not a valid question.
Again if u r asking term negotiation Vs Deferred payment undertaking by nominated bank and paid before maturity; there is no differences. Later is the definition of the first one. Hope that answer the question.
Shahriar
still confused
Sir, i need to know what is the difference between
1) Deferred Payment LC available by negotiation (reimbursment after 90 days from BL date)
2) Credit available by deferred payment with 90 days from BL date and nominated bank incurs its deferred payment undertaking & prepays before maturity
I mean in both the cases reimbursment to the nominated bank will be after 90 days so what is the difference between the two since one is available by negotiation & other by deffered payment, awaiting your reply, thanks in anticipation
Deferred Payment Credit and Acceptance Credit
Dear Irfman,
I hope my postings at http://letterofcreditforum.com/node/87 http://letterofcreditforum.com/node/89
can be helpful.
Best regards,
Nguyen Huu Duc
cinflicts
Dear irfman,
Your questions are bit conflicting to me.
You are looking for
Deferred Payment LC available by negotiation and nominated bank pays before maturity.
VS
Deferred payment LC with 90 days from BL date and nominated bank incurs an undertaking and pays before maturity.
Right?
For the second case, the payment made by the nominated bank is actually a negotiation; term negotiation. The alternative possible could be that negotiation is restricted with issuing bank and the presenting bank is advancing which is outside the LC. But since the nominated bank is incurring an undertaking, it's a negotiable LC.
The fact is when the negotiating bank is getting payment is not important. The concept is negotiating bank will be paying the before receiving payment from the issuing bank. Hope that answer the question.
Shahriar
still not clear
thankyou very much for the explaination but i m still not clear so starting the query again.
case1:
41D: Available With / By : By negotiation with bank A
42P: Deferred Payment Details: 90 days after BL date
53A: Reimbursement to be made after 90 days from BL date
case2:
41D Available With / By : By Deferred Payment with bank A
42P Deferred Payment Details: 90 days after BL date
In both the cases Bank A is nominated bank (beneficary's bank), now under case2 as per article 12-b of ucp600 the nominated bank prepays the deferred payment undertaking by advancing funds to beneficary before maturity.
Now as per atricle 7-c "Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity."
Now my question is in both the scenarios, nominated bank will be reimbursed at maturity so what is the significance of term negotiation?
answer in detail
Dear irfman,
You said,
case1:
41D: Available With / By: By negotiation with bank A
42P: Deferred Payment Details: 90 days after BL date
53A: Reimbursement to be made after 90 days from BL date
case2:
41D Available With / By: By Deferred Payment with bank A
42P Deferred Payment Details: 90 days after BL date
Allow me to replace negotiation
with deferred payment in case one. Now they are exactly the same. No conflict. Lets
define deferred payment now.
Means that the exporter will get
payment after 90 days. Interest is on exporter's account if discounted. Now we
are considering a situation where the beneficiary is paid before the 90 days. Lets
see whether it is possible or not under UCP.
UCP says 12b
"By nominating a bank to accept a draft or incur
a deferred payment undertaking, an issuing bank authorizes that nominated
bank to prepay or purchase a draft accepted or a deferred payment undertaking
incurred by that nominated bank."
That means
if a bank is nominated one, it can incur a deferred payment undertaking and
eventually may purchase or discount its own undertaking. Of course it will be
charging interest to the exporter for this since it will be doing so from its
own pocket as the issuing bank will only pay at maturity. Article 7c says "Reimbursement
for the amount of a complying presentation under a credit available by acceptance
or deferred payment is due at maturity, whether or not the nominated bank
prepaid or purchased before maturity."
Now return to your negotiation
term. What is negotiation? UCP Article 2 says "Negotiation means the purchase by the nominated bank of draft
(drawn on a bank other than the nominated bank) and/or documents under a
complying presentation, by advancing or agreeing to advance funds to the
beneficiary on or before the banking day on which reimbursement is due to the
nominated bank."
If we
consider 12b in the light of article 2, we can say "By nominating a bank to
accept a draft or incur a deferred payment undertaking, an issuing bank
authorizes that nominated bank to negotiate
(prepay or purchase) a draft accepted or a deferred payment undertaking
incurred by that nominated bank."
So the
deferred LC available with bank A is in fact a deferred LC available by negotiation.
Therefore if the nominated bank incurs a deferred payment undertaking but
refused to pay before maturity, it's simply a deferred LC and if the nominated
bank purchases it, then it's a deferred LC which has been negotiated. The wording
like deferred LC available by negotiation is actually a deferred LC available
with nominated bank.
Here I tried
to answer the question from my best understanding. Dear, Nguyen Huu Duc, I followed
the links and at some points I became bit confused especially at http://www.letterofcreditforum.com/node/89#comment-209
I think
your opinion is especially good under UCP 500. please correct me if I am wrong
in interpretation in the above case.
shahriar
SWIFT Standard Category 7
Dear Friends,
are you sure to use the MT 700 properly?
It seems to me that you dont follow the SWIFT usage rules, as per book 7.
Ciao
u r right!!!
dear pan
u r right. im not a user of swift. please explain in detail and help me and irfman if im wrong. i will also appreciate if u plz help me with some links to swift manuals
Shahriar
SWIFT CD
Dear Shahriar,
Ask a friend in a bank to supply you with a CD containing the SWIFT User Handbook, the usage rules concerning L/C are in the no 7 book.
I have an hard copy dd 2001, but I checked with friends the parts that interesting me.
Let me know.
Ciao
LINK
Dear Scottie
i agree to all what you wrote here, but i still can't find a link between it and what you wrote regarding that your bank doen't distinct between payment L/C and negotiation L/C.
as my reply was all about your bank above act , and not concerning risk measurements towards countries or banks.
regards.
TRIGGER
Mohammed,
I guess you can say that the link is that I do not care if the LC is available by payment or negotiation. What matters to me is:
- Am I nominated to act under the LC (i.e. protected)
- Does the documents comply?
- Where is my risk (& how to price it); documents; banks; country; beneficiary?
- When will I receive the funds from the issuing bank?
The trigger to these two last postings was your statement that it is too risky to negotiate without recourse to the beneficiary. I do not understand that, as the evaluation of the risk is identical to evaluating whether or not to confirm or whether or not to prepay under a deferred payment LC.
Regards
Scottie
GOT it now
Dear Scotti
i realized your point of view now, what i wanted to say here is :
it's risky for a non-confirming nominated bank to negotiate due to the following reasons:
( a fraud has been made by beneficiary) or ( a complying docs were purchased by the negotaiting bank but found discrepant and rejected by the issuing bank) ( no settlement was made to the negotiating bank due to bankruptcy of the issuing bank, taking into consideration that not all nominated banks are correspondants to the all issuing banks).
there is were i think certain risks lays
regards.
Risk - 2.0
Mohammed,
I feel like ending this – as we may be going in circles :-)
I need however to comment on you “GOT it now” posting – Which takes me back to my “Risk!” posting:
Of course there is a risk that you may not get reimbursed by the issuing bank – but is there a different between an (unconfirmed) negotiable sight LC and a deferred payment LC (where you prepay) and a confirmed negotiable sight LC? The reason I am saying this is that (as far as I read it) you see an increased risk when you negotiate without recourse on an unconfirmed LC. I would not understand why?
I also need to comment on the increased risk reasons that you mention:
a fraud has been made by beneficiary
This is of course a risk – and a tricky point indeed. Fraud is outside the LC – and then everything can happen. However - to my experience a nominated bank that acts in accordance with its nomination is protected by the courts – even against fraud. Or saying it another way – the risk of fraud lies (at the outset) at the issuing bank/applicant.
It has been argued that courts would protect a confirming bank more than an un-confirming nominated bank. To me that would make no sense as sub-article 12,a open to various undertakings by a nominated bank – e.g. silent confirmations.
a complying docs were purchased by the negotiating bank but found discrepant and rejected by the issuing bank
I guess that is everyday life – the question is: is it a valid discrepancy. If “yes” then it is the risk of the nominated bank (which they have charged for) – if “no” one must fight the issuing bank with the available means.
In any case if you are working with LC then you must have faith that the parties at least follow the same rules (UCP) – otherwise you should find another way of living.
no settlement was made to the negotiating bank due to bankruptcy of the issuing bank, taking into consideration that not all nominated banks are correspondants to the all issuing banks
That is exactly the risk you charge the beneficiary for – based on your best evaluation. That is what risk is all about.
Regards
Scottie
Risk 2.1
Dear Scottie
I share quite a lot of what you said, but you shouldn't feel too save with your nomination!
Remember the Santander/Paribas Case which (maybe among others) lead to the changed wording for negotiations under UCP 600. In that case the bank didn't get their money, although the issuing bank had definitely given a notification of having taken up the Deferred-payment L/C!
So remember:
"In Love, on Sea and at Courts, you are in the hand of God!"
Best regards
Frammi
Interesting neogotiation about negotiation
Dear Scottie
first of all i would like to thank you for your interesting feed backs that enriches the subjuct.
- when a non-confirming bank negotiates, we all know that he is protected by UCP , but note that UCP only protected that negotiating bank to obtain settlement from the issuing bank, there was no mention towards recoursing on beneficiary if the settlement failed(that is a risky point that the negotiating bank must cover by obtaining the beneficiary's written undertaking to enable the negotiating bank recourse on him if settlement failed from the issuing bank).
- do we really think that banks assume holding financial risks just for charging the beneficiary with some commission? i bet no bank assumes that risk against that commission.
- in many countries the courts ordered issuings banks to stop payment to a nominated bank that negotiated under a deferred L/C because of fraudulent docs.
- what i assumed is that the issuing bank found valid diecrepancies that the negotiating bank was not able to find.
dear scottie ,plz note that our discussion is for the benefit of our colleagues who read the subjects, don't ever take in mind that one of us is trying to affect the other party way of thinking or to under estimate him.
best regards.
Boss Discussion
Dear Mohammed and Scottie
there is fun dialect among my friends, whenever something is great, we call it boss and i must say "boss discussion boss!!" im feeling that i should read the LCs i issue by me to c what acctually im doing coz i think they r such a mess. nevertheless i agree with scottie that many of us make no distinction between negotiation and payment LC. and some like me dont understand it at all. but i want to support scottie on the point that reimbursement authority certainly gives some security to nominated bank / beneficiary. in fact to me reimbursement undertaking is quite similar to confirmed LC. confirmed LC is basically to support issuing bank; beneficiary / nominated will be paid. so do the reimbursement undertaking. whenever i issue an LC with Reimbursement authority, i look for a lots of detail of the client and the country in concerned as i will be lossing one big cannon. vice versa as a nominated bank. one think i agree with frammi, if i have a clause like this, "the nominated bank must notify the issuing bank 5 banking days before claiming the reimbursement" its negotiation. coz u r prepaying atleast. anyway, thank u all of for such a BOSS Discussion. ;)
Shahriar
Dear Shahriar, I searched
Dear Shahriar,
I searched this issue in our country and I realized that nominated bank never pay the money to beneficiary without reimbursement authority and no matter it is by negotiation or payment ,
as you have mentioned in above.
Of course Mohammed lead me to do the right way but do you think bankers care about it?
Regards,
Azimpoor
Scottie's bank negotiation
Dear Scottie
i agree with you that most banks make no distinction between payment Ls/C and negotiation Ls/C, but my advice is the following:
- if a non-confirming nominated bank receives a payment L/C that includes reimbursement instructions, will that bank purchase against complying docs presented by any beneficiary and make reimbursement later on? i think any bank under such a situation will collect funds then pay the beneficiary.
- if a non-confirming bank receives negotiation L/C , will that bank negotiate and wait to be reimbursed later? without securing a recourse undertaking from beneficiary? i think it's do risky.
regards
risk!
Mohammed,
Is it riskier than prepaying under a deferred payment LC – when determining that documents do comply?
Regards
Scottie
not clear
dear scottie
i am afraid that i could not exactly understand what you meant here, can you clarify plz.
Clear now?
Mohammed,
To me banking is about risk: Identify the risk – take the risk – and charge to do so.
When you confirm a negotiation LC – you evaluate the bank and country risk – and charge the beneficiary according to that risk.
When you “negotiate” documents under a confirmed LC you must (as you have mentioned today) do so without recourse. This would most likely mean to pay the beneficiary before you are reimbursed from the issuing bank – alternatively you may wait a specified number of days – and promise to pay at that point in time.In any case you pay – or promise to do so before having received funds. You do so knowing that the issuing bank has a definite obligation to honour – and that you (acting on your nomination) is protected by the UCP 600.
When the LC is unconfirmed – and you are nominated to negotiate, the position of the issuing bank is no different – they still have the obligation to honour when complying documents are presented. Since you are nominated bank you are “protected” by the UCP 600 (e.g. in case of fraud).
According to UCP 600 sub-article 12,a the nominated (not-confirming) bank can agree the “level” of its obligation, e.g. to negotiate without recourse – i.e. to pay before being reimbursed by the issuing bank. This is as such no different from confirming the LC. You evaluate the country and bank risk – as well as when you expect to receive the funds (depending on the wording of the LC) – and you charge the beneficiary accordingly.
My reference to prepayment under deferred payments – was based on the same principles. Such act is based on a nomination from the issuing bank – which means that the nominated bank is protected by the UCP 600 – and the evaluation is based on bank, country and expected time to receive the funds (e.g. at maturity date).
Regards
Scottie
Azimpoor
Dear Azimpoor
differentiation between NEGOTIATION L/C and PAYMENT L/C is not hard to understand provided that you forget any wrong practice commonly adopted by banks.
negotiation L/C: where an issuing bank nominates another bank to NEGOTIATE, but that nominated bank is not obliged to negotiate unless it has confirmed the credit, when a bank negotiates then it purchses the complying docs or draft presented by the beneficiary from the nominated bank's own funds ,and not by collecting the money from the account of the issuing bank then pay the beneficiary(as many banks do), so that nominated bank has to bear some financial risk in making immediate payment to beneficiary then later being reimbursed by the issuing bank when docs are received(sight negotiation) or after a period of time from a certain event(term negotiation). accordingly the issuing bank must not include any reimbursement instructions in the L/C ,but it's done after the approval of the issuing bank on docs.
- PAYMENT L/C: where a nominated bank is authorized by the credit to obtain reimbursement from the account of the issuing bank when deciding that docs are compliant and before sending them to the issuing bank.
note: if a confirming bank negotiates, it does that without recourse on beneficiary because it's an undertaking bank. but when a non-confirming nominated bank negotiates the recourse issue is out of the scope of UCP ,so i advise that bank to abtain a written underking from beneficiary that the bank has the right to recourse on him if no funds were settled to the nominated bank after negotiation.
i hope things are clear now.
regards.
Stand by Lc
Dear Mohammed,
I really appriciate your kindness about my questions.
I have another question about Stand by LC & Transit LC, could you explain for me what are these kind of LC and what is their usage?
Thanks indeed.
Regrads,
Azimpoor
Standby & Transit Ls/c
Dear Azimpoor
kindly note that standby Ls/C are commonly used in USA market as a replacement to demand guarantees but might also be used in another countries . the major difference between a standby L/C and a commercial L/C is that the commercial L/C amount is always paid to beneficiary after presentation of docs evidencing shipment of goods or services, while the nature of a standby L/C is a guarantee to the beneficiary that the applicant will directly pay the beneficiary against a trade transaction between them, in other words the beneficiary ships the goods and send docs directly to applicant, then the applicant transfers funds to beneficiary , if the applicant fails to do so, the beneficiary will make a statement of default to the nominated/confirming/issuing bank requesting that payment. standby Ls/C can be issued subject to ISP98 or UCP600.(that was only a quick brief).
transit Ls/C : a type of Ls/C that might hold more than one meaning because this name is out of UCP or ISBP. an L/C can be named as such when the goods are transported from one country to another VIA a customs free port or place of destination , the B/L in connection has to bear a clause evidencing that goods are transported to another final destination through x port in transit , accordingly the goods will be unloaded to a special yard without customs then moved out again to it's final destination. or some times it can be re-exported.
regards.
Dear Mohemmed, With many
Dear Mohemmed,
With many thanks for your kind answer, but you know I thought that we use transit LC while there is no relationship between issuing bank and the beneficiary's country, so issung bank request another bank in a third country(usually in LONDON) to find a bank in beneficiary's country and advise the LC to him, so that this bank can be nominated bank in country of the seller., but you are saying entirely another definition!!
Maybe as you have told there is another meaning.
Pls clarify is if possible.
Regards,
Azimpoor
No definate meaning
Dear Azimpoor
as we said there is no definate meaning for the expression TRANSIT L/C , but it's familiar to understand that TRANSIT is related to goods and not to nomination.
it's familiar as well to issue an L/C available with a bank located in a country other than beneficiary's, but without using the expression TRANSIT L/C .
as we see, bankers use the terms they like when these terms are out of UCP or ISBP , but they are required to explain it's meaning to others when using it.
regards.
Dear Mohammed, Yes, I
Dear Mohammed,
Yes, I agree, bankers act as they would like.
Regards,
Azimpoor
Dear Mohammed, Thank you
Dear Mohammed,
Thank you very much for your information .everything is clear now but pls give me an idea that in a normal & common situation which way do you suggest to do as a beneficiary of credit?
Thanks again and best regards,
Azimpoor
AZIMPOOR
Dear AZIMPOOR
if you were a beneficiary receiving confirmed L/C available with bank (X) by NEGOTIATION, then you have the right to oblige bank (X) to purchase your presented complying docs when that bank checks them and find them in compliance.
if the L/C you received was not confirmed ,then the nominated bank is not obliged to purchase unless he agrees with you to do so. in this case if no purchase occured,then you will not be paid until docs are received by the issuing bank.
you may follow the following rule when you signing any trade contract with an importer:
if the L/C is to be issued as confirmed available with a nominated bank, then choose the payment term NEGOTIATION(|to guarantee purchase upon your request), but if the L/C is not confirmed then choose the payment term (sight payment) to guarantee the existance of reimbursement instructions enabling the nominated bank to collect funds and pay you against you complying docs,instead of waiting for those docs to received by the issuing bank before payment is made.
regards.
Great
Dear Mohammed,
Your explanation was great,
We as a beneficiary have received an un-confirmed LC which is mentioned available by negotiation but at the end of the swift there is reimbursement instruction and now I suppose according to your explanation we should receive the payment against presenting complying docs to negotiating bank and no more need to wait to reach the docs to counter of issing bank.
In fact there is no difference between this situation and available by sight payment, am I right?
I would appricaite to receive your kind reply.
Regards,
Azimpoor
JINUGU
Every single word you wrote here is correct and i agree with you 100%, i,m glad that you simply differentiate between payment L/C and negotiation L/C , not following the wrong common banking practice.
Just to add
A letter of credit that is stated to be available with a
nominated bank, by negotiation, should not include any reference to claiming
reimbursement form a reimbursing bank or, indeed, any reference to the debiting
of the issuing bank's account held with the nominated bank. This form of
structure is a payment letter of credit. A negotiation letter of credit should
specify that the nominated bank is to send the documents to the issuing bank,
and upon the issuing bank ascertaining that it complies with the terms and
conditions of the credit, the issuing bank will reimburse in accordance with
the instructions of the negotiating bank.
TA 569 ICC Opinion.
many thanks for starting
many thanks for starting such a detailed discussion about negotiotion,, can you please elaborate what you mean by
"the issuing bank will reimburse in accordance with the instructions of the negotiating bank."
please quote few instructions which negotiating bank might ask for, thanks in advance
NOT THE FEES
Dear scottie
kindly note that it's not fees that make the difference between negotiation and sight payment. fees are only a result of negoatiation or sight payment.
when the L/C is available by sight payment, then the nominated bank deserves to have nomination fees as a percentage to the credit amount, because no financial risk is beared , as he collected funds by the reimbursement instructions he already had in the credit then paid beneficiary.
negotiating bank charges are some thing different, as the negotiating bank will take his charges not only according to the credit amount but also according to the period of time between (purchasing)paying the beneficiary and being reimbursed by the issuing bank later on(sight/term)negotiation, so in term negotiation the negotiating bank will obtain higher amount of charges due to longer period of risk held.
i am familiar that most of the banks wrongly understand negotiation ,and they do not easily differentiate between negotiation and sight payment, but this practice does not change the real definition of negotiation nor make the negotiation real definition theoretical only.
UCP500 nor 600 explained in details the payment terms or their reimbursement instructions, but lots of banking commission committee opinions made that clear , besides being close to ICC meetings and discussions in this regard was very helpful.
regards.
by payment or by negotiation
Dear Mohammed,
Thanks a lot for your very complete explanation about diffrence between by payment LC and by negotiation LC, but you know I am really mixing up, is there any big difference between them, I suppose the most important thing here is difference between the time the nominataed bank should pay the payment to seller not more.. is it right??
Regards,
Azimpoor
pay or do not pay
Azimpoor,
I love your question!
Every word Mohammed has said is correct – but in practice there is minimal – often no – difference at all. In my bank we do not make this distinction any more. When the beneficiary presents complying documents we either pay without recourse or wait for the issuing bank to transfer funds.
Regards
Scottie
Hi Scottie, Yes, I do agree
Hi Scottie,
Yes, I do agree with you and because of that I asked Mohammed the diffrence between them , you know well banks treat both of them the same and I don't know whether we can change the previous wrong way or not?
Do you feel the huge difference in financial risk for nominated banks??
Regards,
Azimpoor
right or wrong
Mohammed,
I do not want to advocate for any wrong common banking practice, however if it is a “common” practice – then you can really argue whether or not it is in fact wrong.
In any case – this issue has been discussed heavily by LC experts for the last couple of decades – so it is a complex issue – which does not have only one truth. There are many “truths” out there.
I know it is not about the fees of course – but when I “negotiate” under an LC that includes a reimbursement instruction – then of course I do not add a period of time – as I would in the case where the issuing banks is to transfer the funds after receiving the documents!
To me the vital issue is that the bank that has negotiated – is protected by the UCP 600 – and in that light the reimbursement instruction does not make a difference. It may however make a difference when it comes to the banks willingness to negotiate in the first place.
I do accept what you are saying – but I wish you would not claim to hold the only truth here- there may be more than one.
I would also like to remind you that the majority of LCs handled in the world is not done by the ICC Banking Commission – it is done by real LC officers talking to the real customers – having to relate to the needs of their customers in their market. This is why it is so important that the rules are made flexible – so that the LCs can be adjusted to the specific situation. In the context the important issue is whether or not the LC is clear and precise.
Regards
Scottie
explanation
Dear scottie
thank u for your comment, i would like to inform you that when i began in this filed 18 years ago, i got confused regarding negotiation meaning all that time, untill finally i got a clear explanation for negotiation from MR. gary collyer who solved the puzzple for me.
i asked him what would make a nominated bank negotiate and deserve the negotiation fees if that bank is already authorized to reimburse(as most banks do), how can we guarantee that he might not collect funds from the issuing bank account and then pay the beneficiary even if the L/C was under negotiation.
MR. collyer then replied to me that i am missing the major point of using the term negotiation, that is negotiation Ls/C must not include reimbursement instructions otherwise there will be no difference between negotiation L/C and sight payment L/C , because the negotiation fees that a nominated bank deserves when negotiating occurs due to the financial risk beared , but when paying against a sight L/C the nominated bank deserves handling or nomination charges not negotiation chargres which depends upon the period of time the nominated bank beared due to that financial risk.
i hope this will clarify the situation
You are right, but ...
Mohammed,
Thanks. Many people have indeed argued that the difference between a ”payment LC” and a ”negotiation LC” is purely theoretical. When you argue that the difference is the fees – then this becomes even more evident … fees can be adjusted based on bilateral agreements. In any case – in real life the borderline between payment and negotiation is blurry. That being said – from the theoretical point of view I think you are quite right.
Best regards
Scottie
The LC is flexible
Mohammed,
Thank you for your detailed explanation – I am sure it is appreciated in this forum. I feel like making one comment to you: You state 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
I think one should acknowledge that the LC is a flexible instrument that is being used in a number of ways – often depending on local practices – and you many in fact see many LCs available by negotiation – that does in fact provide a reimbursement instruction. I fail to see the problem here – such may only make the nominated bank fee more “secure” and more willing to negotiate for the benefit of the beneficiary. What is interesting to me is
1) That the beneficiary received a good LC – that provides the necessary security – and supports his cash flow, and
2) That the nominated bank (in this case negotiating bank) is protected by the UCP 600 when it follows its nomination.
In any case – I do not see anything in the UCP 600 strictly prohibiting including reimbursement clauses into an LC – and should the nominated bank refuse to handle the LC based on this? I think not.
Regards
Scottie
flexibility in credits - here negotiation
I agree to your sight Scottie,
under credits there is hardly ever a total and unique truth and such instruments should allow for a maximum of flexibility and individuality.
Reimbursement instructions in the sence of bank-to-bank reimbursements can of course be made. UCP 600 specifically allows same-day-negotiations and some reimbursement clauses are stipulated like that "After receipt of a full set of credit complying documents at your counters, please debit the account no. ....... of our .... office maintained with your .... office with value five banking days after you sent to us a swift message that you have taken up documents and which amount has been taken up."
So, what is the problem with the purchase-principle?
-Each long journey starts with a small step-
Best regards
Frammi
negotiation & sight payment
Dear Mohammed al-kelaniThanks a lot .You clear me the concept of Sight payment and Negotiation Payment.For the last couple of years I also in puzzle for this two payment method.However I will be more clear if you explain the following queries which you submit on 12/31/2007 on this forum: 01. if the L/C is available only with the issuing bank, and beneficiary presented his docs directly to the issuing bank or through another bank for mailing purposes , but these docs reached the issuing bank counter after L/C validity, is that a discrepancy??? your answer was No. Then Will we call it Clean document.Please explain. 02.In explaining Payment by negotiation and Payment by Sight You mention 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 according to article 13 a. & b of UCP “If a credit states that reimbursement is to be obtained by a nominated bank ("claiming bank") claiming on another party ("reimbursing bank"), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursements in effect on the date of issuance of the credit. b. If a credit does not state that reimbursement is subject to the ICC rules for bank-to-bank reimbursements, the following apply: i. An issuing bank must provide a reimbursing bank with a reimbursement authorization that conforms with the availability stated in the credit. 03.You said that “an L/C can be issued without stipulating a nominated bank”. but according to Aricle 6(a) of UCPDC “A credit must state the bank with which it is available or whether it is available with any bank.” Please explain to clear me.zakir Best regards and again thanks for you joining in this forum
ZAKIR
Dear ZAKIR
sorry for being late to reply, as i can't figure out any more where the new comments are located in the topics.
- if docs are presented to NOMINATED/CONFIRMING/ISSUING bank DURING VALIDITY they will be checked against the L/C terms and conditions ,if they were not found in compliance then we call them discrepant docs.
but if any docs were presenteed to any of the above mentioned banks AFTER VALIDITY(regardless of being in compliance or not) ,then there is NO L/C ,and the bank that receives such docs is not obliged to reply within 5 working days.
so, we use the term discrepancy when docs not in compliance are presented to one of the above mentioned banks after validity date.
- UCP stated the reimbursement clause you mentioned ,just for those Ls/C which require reimbursement instructions, that article only clarified how to use the reimbursement instructions within an L/C ,but did not state which L/C to use it or not.
regards.