1. Drafts
    Buyers frequently exact credit terms from their sellers. In such cases, the documentary credit is not payable when the seller/beneficiary presents its documents to the nominated bank or the issuer but at some later date, say, 60 or 90 days later. One way to effect this credit arrangement is for the credit to call for the seller/beneficiary to draw a usance or time draft, i.e. a draft that is not payable for a certain period of time. The usance or time draft is not due until this period has elapsed.

  1. Honouring the Time Draft
    During this delay in payment, the seller/beneficiary can use the nominated or issuing bank’s obligation to pay at maturity as a source of funds. If the credit calls for a time draft, as in Illustration 17-1, the bank designated as the drawee of the draft honours the time draft in two stages. First, at the time of first presentment, the drawee bank honours the draft by accepting it, i.e. signing the time draft on its face and creating a banker’s acceptance. The drawee bank completes its honour of the draft (now an acceptance) when it comes due, by paying it.

  1. Banker’s Acceptances
    Because the acceptance of a strong bank is a valuable investment medium, a party seeking short-term investment vehicles may purchase the acceptance, deducting a discount (a form of interest charged in advance) usually at a rate favourable to the seller/beneficiary. It is also of considerable benefit to the investor that the acceptance is a negotiable instrument and not subject to most defences in the underlying sale transaction or even the documentary credit transaction. If the seller defrauds the buyer and ships rubbish instead of valuable computer peripherals, the acceptor must pay the innocent investor who holds the acceptance.


  1. Deferred Payment Obligations (DPOs)
    For various reasons, among them the fact that some states tax negotiable instruments, issuers sometimes decline to make their credits available against the seller/beneficiary’s draft. Instead, they issue credits that call for no draft and honour their time credits by issuing a deferred payment obligation (DPO), which is simply a communication, in a non-negotiable form, that indicates an unconditional commitment to pay when the time for payment arrives.

  1. DPOs v. Acceptances
    For most purposes, the deferred payment obligation operates as a banker’s acceptance. Although DPOs cannot be easily resold, nominated banks and, sometimes, other investors purchase them at favourable discounts. Problems arise in a few states that refuse to treat the deferred payment obligation in the same way as a negotiable instrument that is free of underlying contract defences. In addition, problems can arise if a banker’s acceptance is lost or destroyed, as a banker’s acceptance is payable by the accepting bank when the person holding it presents it physically for payment. When an acceptance is lost or destroyed, the holder of that acceptance must post a bond, an unfortunate expense, before the accepting bank will honour it. Parties dealing with banker’s acceptances and deferred payment obligations should seek counsel on the above-mentioned differences between the banker’s acceptance and the deferred payment obligation.