The aforesaid differentiates deferred payment LCs from sight payment LCs; however, the two are not merely opposites. Apart from deferred payment credits, non-sight payment LCs may be available by acceptance and negotiation.

Deferred payment, acceptance, and negotiation are each a separate method of LC availability defined in the Uniform Customs and Practice for Documentary Credits (UCP). They represent extant customs and practices of LC issuers and their correspondent banks that have developed over time. UCP requires that an LC state its method of availability, i.e. whether it is available by sight payment, deferred payment, acceptance or negotiation.

For payment at a future maturity, the methods of deferred payment, acceptance, and negotiation may be used. Key differences between the three methods are found in the acts of the nominated bank when they are available with a nominated bank:

• In deferred payment credits, a nominated bank honours by incurring a deferred payment undertaking (DPU) and paying at maturity. 
• In acceptance credits, a nominated bank honours by accepting a bill of exchange (draft) drawn by the beneficiary and paying at maturity. 
• In negotiation credits, a nominated bank negotiates by advancing or agreeing to advance funds to the beneficiary on or before the due date for reimbursement.

A nominated bank (NB) is a bank with whom the LC is available, apart from the issuing bank. By making its LC available with an NB, the issuing bank allows presentation to be made to the NB and undertakes to honour a complying presentation made to the NB.

Whilst an NB is not obligated to act on its nomination unless it has prior expressly agreed to do so with the beneficiary, an NB may opt to act on its nomination when it receives a presentation.

A notion exists that deferred payment credits are issued for the avoidance of drafts. In certain jurisdictions, stamp duty is levied on drafts, driving up the cost of LCs if drafts are used. Deferred payment credits are the most direct alternative to acceptance credits, given that in both of these methods, an NB honours a presentation by providing its promise to pay and paying at maturity. In an acceptance credit, this promise is by way of accepting a draft, whereas in a deferred payment credit, this promise is by way of a DPU.

However, deferred payment credits have likely been used most as an alternative to negotiation credits, rather than acceptance credits. Anecdotally, the majority of LCs available by negotiation call for drafts. Although the use of drafts is unnecessary for negotiation credits, banks have nevertheless called for it, likely a legacy practice that has not been revised even as the UCP has been revised over the decades.

Clearly, drafts can be avoided in a negotiation credit just as they are in a deferred payment credit. Hence, the avoidance of drafts is not relevant to the choice between a deferred payment credit and a negotiation credit.

For the issuing bank, its obligation to honour a complying presentation is the same regardless of the method of availability with an NB. The issuing bank must honour by paying at maturity if the NB does not honour or negotiate. (If the NB has honoured or negotiated a complying presentation, the issuing bank must reimburse the NB at maturity.)

When an LC is available with the issuing bank solely (i.e., there is no NB), the issuing bank has the option of only issuing its LC by deferred payment or acceptance unless it is a sight payment LC. A negotiation credit cannot be issued, as by its definition, negotiation is the act of an NB of advancing or agreeing to advance funds to the beneficiary prior to reimbursement by the issuing bank (or a confirming bank, if any). If it wishes to avoid drafts, it can only issue the credit available by deferred payment.

When an LC is available with an NB by deferred payment, the NB honours by incurring a DPU and paying at maturity. It is also authorised to purchase or prepay its DPU, i.e. to pay before maturity. When acting on its nomination, the NB adds its undertaking (in addition to that of the issuing bank) to pay the beneficiary. The effect is akin to a confirmation of the LC by the NB. Payment by the NB is without recourse to the beneficiary since it would be a discharge of the NB’s own obligation or liability to the beneficiary. 

When an LC is available by negotiation, the NB negotiates by advancing or agreeing to advance funds to the beneficiary ahead of the due date for reimbursement by the issuing bank. A confirming bank must negotiate without recourse. When an NB that is not a confirming bank negotiates, it need not be akin to a confirmation if bilaterally agreed with the beneficiary that the negotiation is not without recourse.

When you would issue a deferred payment LC?

The question may be asked of whether the beneficiary has an understanding, agreement, or arrangement with the nominated bank for the NB to incur a liability on the LC by issuing its own undertaking to pay the beneficiary at maturity. If the NB is not prepared to incur a DPU, it would hardly matter to the beneficiary that the LC is available by deferred payment with the NB, as the NB is not going to act on its nomination. If however the NB is prepared to incur a DPU for a complying presentation, it would make a lot of sense to the beneficiary as it would then have a payment commitment by the NB in addition to that of the issuing bank under a complying presentation. 

Flexibility in the arrangements

In regard to flexibility on the arrangements between the beneficiary and the nominated bank, availability by negotiation would appear to be the most convenient if the NB is prepared to negotiate. 

If the NB is not prepared to either honour or negotiate, its role will be simply that of providing the beneficiary with a place to make a presentation, which, if complying, binds the issuing bank: if the NB is prepared to handle the presentation. 

The choice of LC availability ought to be the beneficiary’s, rather than that of the issuing bank or applicant, subject of course to agreement of the issuing bank which takes its instructions from the applicant. 

• Noting that drafts are unnecessary for negotiation credits, the avoidance of drafts does not serve as a consideration for preferring availability by deferred payment to negotiation, from the perspectives of both the issuing bank and applicant. 
• For the beneficiary, if the NB is prepared to act on its nomination under a deferred payment credit even without confirmation, that is arguably the ideal method of availability. 
• From an issuing bank’s perspective, the method of availability does not affect its undertaking to honour a complying presentation or to reimburse an NB that has honoured or negotiated.

The post When would you issue a letter of credit available by deferred payment? appeared first on Trade Finance Global.

The acceptance credit differs from credits available by other forms by being the only type of credit which obligatorily stipulates that drafts are to be drawn.

The other methods of availability are:

• Sight payment: a drawing is honoured by paying at sight.      
• Deferred payment: a drawing is honoured by incurring a deferred payment undertaking and paying at maturity. 
• Negotiation: a nominated bank may negotiate by purchasing drafts drawn on another bank and/or documents by advancing or agreeing to advance funds to the beneficiary on or before the due date for reimbursement.

UCP 600 requires that an LC must state whether it is available by sight payment, deferred payment, acceptance or negotiation.

By authorising a nominated bank to honour or negotiate, the issuing bank undertakes to reimburse the nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.

Although LCs available by sight payment and negotiation may call for drafts, these types of LCs can be issued without calling for drafts. Deferred payment credits have traditionally been issued for the avoidance of drafts.

Availability by acceptance should be the exception, not the norm     

An LC is first and foremost the issuing bank’s undertaking to honour a complying presentation. It follows that drafts, if any, should be for the issuing bank to honour. With this in mind, if an issuing bank did not know that a nominated bank (NB) wanted drafts to be drawn on the NB, why would it make its LC available with the nominated bank by acceptance?  

Drafts should not be required under LCs unless there is an arrangement with the nominated bank to honour by way of acceptance.

Whilst there is no requirement for it do so, the issuing bank might wish to enquire of the applicant the reason for its application for an LC available by acceptance.

It might well be that the beneficiary requested an acceptance credit, and this presumably so because the nominated bank to which the beneficiary intends to present documents has indicated that it wants drafts drawn on the NB.

Some confirming banks stipulate that drafts must be drawn on the confirming bank. When this is the case, the correct method of availability of the LC is acceptance with the confirming bank. 

It would not be correct for a confirming bank to negotiate drafts drawn on itself, given that UCP 600’s definition of negotiation relates to drafts drawn on a bank other than the nominated bank. The definition of negotiation does not necessitate drafts, because it states that negotiation means the purchase of drafts and/or documents, i.e. the purchase can be of documents without including drafts.

In 2019, the International Chamber of Commerce published a guidance paper on the use of drafts under documentary credits. The paper shows how successive revisions of UCP have progressively diminished the relevance of drafts in LCs. The gist of its recommendations was that drafts should not be called for in LCs and that deferred payment credits should be the preferred alternative to acceptance credits unless there were specific commercial, regulatory, or legal reasons to create an acceptance under the LC. 

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It ought to be noted that whilst an acceptance credit calls for drafts, the issuing bank’s undertaking to honour a complying presentation does not depend on whether drafts have been accepted. This is because UCP 600 is clear that if a complying presentation has been made to a nominated bank and the nominated bank does not accept a draft drawn on it or does not pay after having accepted such a draft, the issuing bank must honour it. 

There is no provision in UCP 600 requiring the beneficiary to redraw drafts on the issuing bank if the nominated bank does not accept drafts drawn on the NB. Hence, even when an LC is available by acceptance, payment by the issuing bank for a complying presentation does not require that drafts be accepted.

Given the case that even in an acceptance credit, the issuing bank’s undertaking to honour a complying presentation stands regardless of whether drafts have been accepted, the question is: Why call for drafts at all? All in all, rather than standard practice, acceptance credits should be viewed as the exception.

The post When would you issue a letter of credit available by acceptance? appeared first on Trade Finance Global.

Likewise, no such provision is offered by the International Standard Banking Practice (ISBP) 745 either.

But despite this, partial confirmation of LCs is possible under UCP 600: 

• The rules of UCP 600 define “confirmation” as a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation. (The confirming bank is the bank that adds its confirmation to an LC upon the issuing bank’s authorisation or request.)

• Although the confirmation relates to the LC, it is a separate undertaking of the confirming bank to the beneficiary, and it is independent of the undertaking of the issuing bank to the beneficiary.

• Provided that the confirming bank does not alter what would constitute a complying presentation under the LC, the undertaking of the confirming bank need not be identical to that of the issuing bank. The confirmation can therefore be made for an amount different from that of the LC.

ITFA, on the history and development of Structured Letters of Credit

Defining best practice for partial confirmations

What is, or ought to be, the international standard banking practice for partial confirmations? 

It is worthwhile to begin our discussion by noting a ‘natural’ example of a partial confirmation. 

A partial confirmation occurs when a bank that has confirmed an LC does not confirm an amendment for an increase of the LC amount. 

Say, for instance, if an LC was originally issued for an amount of $500,000 and confirmed, and an amendment was then issued to increase the LC amount to $700,000.

The confirming bank advised the amendment without adding its confirmation, so the beneficiary now has an LC for an amount of $700,000, and a confirmation for an amount of only $500,000.

[As per UCP 600 sub-article 10(b), the confirming bank may choose to advise an amendment without extending its confirmation. 

If the confirming bank chooses not to add its confirmation to the amendment, it must inform the issuing bank without delay and inform the beneficiary that it has not added confirmation to the amendment in its advice.]

Consider a different example of partial confirmation: An LC is issued for an amount of $4 million, with a request to the advising bank to confirm. 

The advising bank has an available risk limit of $2 million for the issuing bank, and hence wishes to add confirmation of only $2 million to this LC. 

It obtains the agreement of the beneficiary on this lower amount to confirm.

The confirming bank should pay attention to how it structures a partial confirmation. It should take into account certain specifics of the LC, for example:

• Are partial shipments prohibited?
  
• Are instalment drawings or shipments provided for?

Such terms in the LC have implications on the amount that the confirming bank should honour or negotiate without recourse in a drawing. 

This is because, in cases where the LC prohibits partial shipments and does not provide for instalment drawings, only a single presentation shall be made – the confirming bank’s undertaking is to honour or negotiate without recourse on this single presentation up to its confirmation amount. 

If, however, the LC does not prohibit partial shipments or provides for instalment drawings, it will be important to be clear how the confirmation amount will be applied to different drawings under the LC. 

Taking the example of a bank confirming $2 million of a $4 million LC in this situation, does the confirming bank honour or negotiate without recourse an amount up to $2 million based on first drawing(s), or up to $2 million by applying a percentage (50%) to the amount in each drawing? 

Suppose the first drawing was for $2.5 million for a partial shipment: does the confirming bank honour or negotiate without recourse the full $2 million (its confirmation limit) in this first drawing, or does it limit it to 50% of the drawn amount, i.e. $1.25 million of the amount drawn (and 50% of each subsequent drawing until the $2 million is reached)? 

If the confirmation merely states that it is for $2 million, it will reasonably mean that the confirming bank should honour or negotiate without recourse the amount of $2 million of the first drawing(s). 

If, however, the confirmation states that it is for 50% of each drawing for a total amount not exceeding $2 million, the amount that the confirming bank honours or negotiates without recourse shall be in the stated proportion (50%) to each drawing, for a cumulative total of $2 million.

Little to no risk for confirming bank

The author is of the opinion that there is little or no increased risk to the confirming bank to honour or negotiate without recourse the amounts up to its confirmation limit based on first drawing(s). 

The risk to the confirming bank is not reduced by the proportionate approach, but could actually be slightly increased as the timeframe for reimbursement by the issuing bank is stretched out over multiple drawings.

Here we shall consider some practice questions pertaining to partial confirmations:

1. If an advising bank wishes to partially confirm an LC, must the bank inform the issuing bank?
   
   In the author’s view, the advising bank ought to, based on the principle outlined in UCP 600 sub-article 8(d):
   
   “If a bank is authorised or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.” 
   
   Partial confirmation may be construed to mean that the advising bank is not prepared to confirm the LC up to the amount authorised or requested, and hence the bank should inform the issuing bank that it is adding confirmation for a lower amount.

2. Does partial confirmation require the consent of the issuing bank?
   
   Notifying the issuing bank of the confirmation amount is sufficient, and requesting the issuing bank’s consent is unnecessary.
   
   This is because, as per sub-article 8(d), an advising bank that chooses not to add its confirmation (at all) may inform the issuing bank and advise the LC without confirmation to the beneficiary – without requiring the issuing bank’s consent to advise the LC without confirmation.
   
   By the same logic, the advising bank may inform the issuing bank that it has added confirmation for a lower amount and advise the LC accordingly to the beneficiary, without requiring the issuing bank’s consent to do so.
   
   As confirmation is for the benefit of the beneficiary, the agreement of the beneficiary to the partial confirmation is the only agreement that the confirming bank needs.
   
   
3. Are there risks to the confirming bank if it does not obtain the issuing bank’s consent for a partial confirmation?
   
   A confirming bank’s rights to reimbursement from the issuing bank is tied to its honouring or negotiating a complying presentation, as outlined in UCP 600 sub-article 7(c):
   
   “An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.”
   
   A confirming bank does not enjoy separate protection in UCP 600 – its protection is the same as that of any nominated bank, i.e. the confirming bank, as a nominated bank, is entitled to reimbursement from the issuing bank if it has honoured or negotiated a complying presentation, and forwarded the documents to the issuing bank (and is further protected by article 35 covering loss of documents in transit from the confirming bank or nominated bank to the issuing bank).
   
   As long as the confirming bank or another nominated bank has acted on its nomination pursuant to the LC and forwarded the documents to the issuing bank as instructed in the LC, the issuing bank must reimburse that bank at maturity.
   
   (This is also the case in a commitment to honour or negotiate (also known as ‘silent confirmation’ at some banks) where a nominated bank undertakes to honour or negotiate a complying presentation for LCs for which confirmation was not authorised or requested by the LC.)
   
   
4. Does the method of LC availability restrict partial confirmations?
   
   There are four methods of availability provided by UCP 600 – for a discussion of these, please refer to my article from August 2020 published by TFG.

Honouring and negotiating – the banks’ responsibilities

When adding partial confirmation, a bank should give thought to how it shall honour or negotiate without recourse up to the amount of its confirmation, taking into account the method of LC availability. 

If a draft is to be drawn on the confirming bank, the confirming bank should provide instructions in its confirmation on the amount of the draft(s) that it shall accept.

If the LC is available by deferred payment, the deferred payment undertaking of the confirming bank needs to be carefully worded to reflect the partial confirmation.

There are alternatives to partial confirmations for a bank that wishes to add its confirmation but has insufficient limits for the full amount. 

These alternatives include:

• Risk participation – The confirming bank may find another bank to participate in a portion of the confirmation amount. The confirming bank substitutes the risk of the issuing bank with that of the participating bank(s) for the amount(s) of risk the bank(s) participate in.

• Guarantee from a multilateral development bank (MDB) – MDBs like the ADB, EBRD, and IFC provide full or partial guarantees for LC confirmations. This requires the issuing bank and the confirming bank to both be participating banks in the MDB’s trade finance/facilitation programmes. The confirming bank substitutes the risk of the issuing bank with that of the MDB for the amount of the guarantee.

• Irrevocable reimbursement undertaking (IRU) from another bank – The confirming bank may request the issuing bank to arrange for an IRU and subject its LC to URR 725 as a prerequisite to adding confirmation. The confirming bank substitutes the risk of the issuing bank with that of the reimbursing bank for the amount of the IRU.

• Credit insurance – The confirming bank may purchase a policy from a credit insurer to cover part of the confirmation amount. The confirming bank may treat the credit insurance as a form of collateral, noting that payment from credit insurance is usually subject to a waiting period. 

The alternatives to partial confirmation may provide opportunity for the risk transaction to be more remunerative to the confirming bank, as the confirming bank would likely be able to retain a margin or have a skim over the costs of these risk mitigation techniques. 

That being said, providing partial confirmations is straightforward and efficient, and requires a lot less effort on the part of the confirming bank. 

However, partial confirmation requires the beneficiary to be agreeable to it, whereas the other techniques typically do not.

The post ‘Straightforward and efficient’ – Tat Yeen Yap explores partial confirmations of letters of credit appeared first on Trade Finance Global.

Documentary credits and availability

A documentary credit (“credit”, “letter of credit”, “LC”) is a bank undertaking to pay its beneficiary based on the presentation of required documents, provided that the presentation complies with the terms and conditions of the credit.

The ‘availability’ of an LC determines to whom a presentation may be made, and the acts that the bank (to whom a presentation is made) shall or may perform.

An LC may be available with a nominated bank, in addition to being available with the issuing bank.

This means that the beneficiary may ‘avail’ the credit by making a presentation to a nominated bank if one is stated on the credit.

If the LC states that it is available with “any bank”, a presentation can be made to any bank.

A complying presentation made to a nominated bank is binding on the issuing bank, and any confirming bank, which it must then honour.

The issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and that has forwarded the documents to the issuing bank.

A confirming bank incurs a similar undertaking to reimburse a nominated bank that has honoured or negotiated a complying presentation and that has forwarded the documents to the confirming bank.

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As defined in UCP 600, honour means:

• to pay at sight if the credit is available by sight payment.
• to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
• to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

Negotiation means:

• the purchase by the nominated bank of drafts (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.

The letter of credit must state whether it is available by sight payment, deferred payment, acceptance, or negotiation.

Sight payment

Payment at sight with a nominated bank means that when the nominated bank determines that a presentation made to it is complying, it will honour it by paying the beneficiary.

To be reimbursed, the nominated bank must forward the documents to the issuing bank, or confirming bank (if any).

If the nominated bank is also a confirming bank, it must pay the beneficiary at sight for a complying presentation.

Unless the nominated bank is a confirming bank, it has no obligation to pay the beneficiary at sight for a complying presentation and may forward the documents to the issuing bank (or confirming bank, if any) for payment.

Deferred payment

If a credit is available with a nominated bank by deferred payment, the nominated bank may honour it by incurring a deferred payment undertaking for a complying presentation.

By incurring a deferred payment undertaking, the nominated bank undertakes to pay the beneficiary at maturity.

The deferred payment undertaking of a nominated bank ought to be expressly communicated and the nominated bank may prepay its deferred payment undertaking if the beneficiary so requests.

To be reimbursed, the nominated bank must forward the documents to the issuing bank, or confirming bank (if any).

Although not mentioned in UCP 600, honour of a deferred payment credit by the nominated bank is logically on without recourse basis to the beneficiary.

This is regardless of whether the nominated bank is a confirming bank because by incurring a deferred payment undertaking, the nominated bank has an obligation to pay at maturity, independent of the issuing bank’s undertaking.

If the nominated bank is also a confirming bank, a deferred payment undertaking is incurred when a complying presentation is made, and the confirming bank must pay at maturity.

Acceptance

If a credit is available with a nominated bank by acceptance, the nominated bank may honour it by accepting a draft drawn on it for a complying presentation.

By accepting a draft, the nominated bank undertakes to pay the beneficiary at maturity.

Before accepting the draft, the nominated bank has to be careful to examine the presentation to determine that it is complying with the credit, as acceptance of a draft represents an unconditional and irrevocable promise by the drawee/acceptor to pay.

Having accepted a draft, the nominated bank or drawee may prepay or purchase its own accepted draft, if the beneficiary so requests.

To be reimbursed, the nominated bank must forward the documents to the issuing bank, or confirming bank (if any).

Honour of credit available by acceptance is without recourse to the beneficiary, regardless of whether the nominated bank that honoured is a confirming bank.

This is because it honours by accepting a draft drawn on itself, and thus incurs its own independent payment obligation under the draft.

If the nominated bank is also a confirming bank, a complying presentation made to it obligates the bank to honour, and it must pay at maturity.

Negotiation

If a credit is available with a nominated bank by negotiation, the nominated bank may negotiate a complying presentation.

UCP 600 has defined negotiation as the purchase of drafts and/or documents under a complying presentation.

The drafts must be drawn from a bank other than the nominated bank, and this differentiates negotiation from acceptance.

(It should be noted that drafts are not mandatory for credits available by negotiation, and the ICC has published guidance to discourage the use of drafts for documentary credits.)

Purchase is by way of the nominated bank advancing funds to the beneficiary before the date that reimbursement is due from the issuing bank.

Alternatively, the purchase may be by way of the nominated bank agreeing (in effect, undertaking) to advance funds to the beneficiary on or before the date that reimbursement is due from the issuing bank (which implies that the nominated bank ought to effect payment to the beneficiary using the nominated bank’s own funds).

To be reimbursed, the nominated bank must forward the documents to the issuing bank, or confirming bank (if any).

If the nominated bank is also a confirming bank, it must negotiate without recourse a complying presentation.

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Incorrect availabilities on documentary credits

Documentary credit practice is not without problems.

Some LCs are unfortunately incorrectly issued in relation to the UCP 600’s provisions on availability. A few examples are illustrated in the table below.

Differences between deferred payment and negotiation credits

It is often explained that the key difference between availability by deferred payment and availability by negotiation is the non-use of drafts in deferred payment credits.

This is incorrect.

Credit can be issued available by negotiation without calling for drafts, and hence, the use or non-use of drafts is not the differentiator between the two types of credit.

The key distinction for what makes a deferred payment credit is that it is honoured by incurring a deferred payment undertaking.

A nominated bank is authorised to incur a deferred payment undertaking for a complying presentation and to prepay its deferred payment undertaking.

There is no provision in UCP 600 for a bank to prepay or “discount” the deferred payment undertaking of another bank.

The nominated bank acts on its nomination by incurring a deferred payment undertaking and paying at maturity or prepaying.

In a credit available by negotiation, the nominated bank negotiates (not honours) a complying presentation by purchasing drafts (drawn on a bank other than itself) and/or the documents.

The nominated bank is authorised to advance monies or undertake (agree) to advance monies that are due at maturity from the issuing bank.

A credit available by deferred payment can either be available solely with the issuing bank or also be available with a nominated bank.

Whereas if credit is to be available by negotiation, it ought to be available with a nominated bank, as negotiation can only be performed by a bank other than the issuing bank.

Differences between acceptance and deferred payment credits

The key difference between availability by acceptance and availability by deferred payment is the use of drafts in acceptance credits.

The use and non-use of drafts is the key differentiator between these two types of credit.

An acceptance credit is honoured by the acceptance of a draft for a complying presentation.

A nominated bank is authorised to accept a draft drawn on it by the beneficiary and to prepay or purchase its own acceptance.

It does not prepay or purchase drafts drawn from another bank.

In a credit available by deferred payment, the nominated bank honours a complying presentation by incurring a deferred payment undertaking independent of a draft.

Both acceptance credits and deferred payment credits can either be available solely with the issuing bank or also be available with a nominated bank.

Where drafts drawn on a nominated bank were not accepted by the nominated bank, it is not necessary to draw drafts for the issuing bank’s acceptance, as an issuing bank must honour when a complying presentation has been made to a nominated bank.

If a nominated bank does not incur a deferred payment undertaking, it is not necessary for the issuing bank to issue a separate deferred payment undertaking, as an issuing bank must honour when a complying presentation has been made to a nominated bank.

Differences between negotiation and acceptance credits

The key difference between availability by negotiation and availability by acceptance is that in negotiation, the nominated bank is making an advance on another bank’s undertaking to honour (the issuing bank’s), whilst in acceptance, the nominated bank is providing its own independent undertaking to pay and thereby honouring.

Drafts, when used in negotiation credits, are to be drawn on a bank other than the nominated bank.

Drafts for an acceptance credit are drawn on the nominated bank.

Credit can be available by negotiation without requiring drafts, and negotiation includes the purchase of documents without drafts.

A credit available by acceptance is honoured by acceptance of a draft and payment thereof at maturity.

Negotiation is the nominated bank’s purchase of drafts (when required in a negotiation credit) drawn on another bank, whereas in an acceptance credit, purchase or prepayment by the nominated bank is on accepted drafts drawn on itself.

For a credit available by negotiation, only a nominated bank can negotiate.

An acceptance credit can be available with a nominated bank or be available solely with the issuing bank.

(Where credit is available by acceptance with the issuing bank only, drafts drawn will be on the issuing bank.)

Differences between negotiation and sight payment credits

It ought to be mentioned that sight payment can be a payment term for a credit available by negotiation.

The key difference between sight availability by negotiation and availability by sight payment is the difference between ‘negotiation’ and ‘honour’.

For a credit available by negotiation, a nominated bank that agrees to act on its nomination may advance funds when it determines that the presentation is complying, or set a date by which to advance funds according to its estimation of when reimbursement will be received.

For a credit available by sight payment, a nominated bank that agrees to act on its nomination shall pay when it determines that the presentation is complying.

A credit available by sight payment can be available solely with the issuing bank (i.e. not available with a nominated bank).

Credit cannot be available by negotiation without a nominated bank.

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Type of availability to the credit beneficiary

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The post EXPLAINED: Sight and deferred payments, acceptance and negotiation letters of credit appeared first on Trade Finance Global.