I am very interested in the revision of UCP so read the 2 UCP revision related articles in the Expert View section with great interest.
I very much enjoyed these articles.
The Vincent O'Brien article covers one of the toughest areas for the new revision - availability. There are certain parts of the article that I like -
- the suggested revisions remain close to existing UCP language
- the simplification of LC availability
- and, in particular, the treatment of deferred payment credits (both with and without drafts)
It is a nice work, but (and it's a big BUT) I do not think the suggested wording will satisfy the needs of banks and customers who are actively involved in the 'negotiation of documents'.
The UCP provision for 'Negotiation' is central to the provision of post export trade finance in Asia.
Without the facility of 'Negotiation' which is defined in UCP500 article 10 'Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate", the LC instrument will be incomplete.
This authorisation given to the negotiating bank -'giving of value' - which in practice means to purchase the documents by financing the customer, is an important and flexible authorisation that enables banks provide 'negotiation finance facility' to the export customer as the Issuing Bank must per article 9 A (iv) 'pay without recourse to drawers and/or bona fide holders, Draft(s) drawn by the Beneficiary and/or document(s) presented under the Credit.'
If in the future banks are not authorised to negotiate then the credit under the suggested wording may indeed become a clearer payment instrument but would not allow a local bank to provide trade finance to the customer within a very short turnaround (on lines similar to article of TO.Lee recently in DCInsight.)
UCP Revision and availability
UCP Revision and availability
Hello Umar,
I am glad that you enjoyed the article.
There is no doubt but your views reflect the views of many bankers around the World -especially bankers in the Asian markets where I agree that LC business is of paramount importance.
However, I do feel that my suggested wording (or similar) would work as It provides clear provisions of the Issuing Banks obligations to reimburse a Nominated Bank, soon/immediately after shipment and presentation of documents at 'sight' or at a later time to reflect agreed credit terms of seller and buyer 'deferred payment' (with or without drafts)
The key is the 'Nominated Bank'.
Please remember that under the existing provisions of UCP 500 a Negotiating Bank is already a 'Nominated Bank'.
Can I refer you to UCP 500 sub-article 10 (b)
"B. (i) Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the 'Nominated Bank') which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank. Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank."
So, even under existing UCP a 'Negotiating Bank' is a 'Nominated Bank'.
Under my suggested wording the optimum availability option for a bank wishing to finance exporters is to have the Credits issued by the Issuing Bank available with a Nominated Bank in the exporters country.
Then with the Issuing Banks obligation to reimburse the Nominated Bank in place (provided documents comply) you can make your decisions on bank, country and transfer risk and if positive go ahead and provide 'finance', or 'purchase' or 'negotiate' or (whatever local name you want to give it) but in real terms it is the provision of trade finance the customer.
I am glad that you enjoyed the article.
There is no doubt but your views reflect the views of many bankers around the World -especially bankers in the Asian markets where I agree that LC business is of paramount importance.
However, I do feel that my suggested wording (or similar) would work as It provides clear provisions of the Issuing Banks obligations to reimburse a Nominated Bank, soon/immediately after shipment and presentation of documents at 'sight' or at a later time to reflect agreed credit terms of seller and buyer 'deferred payment' (with or without drafts)
The key is the 'Nominated Bank'.
Please remember that under the existing provisions of UCP 500 a Negotiating Bank is already a 'Nominated Bank'.
Can I refer you to UCP 500 sub-article 10 (b)
"B. (i) Unless the Credit stipulates that it is available only with the Issuing Bank, all Credits must nominate the bank (the 'Nominated Bank') which is authorised to pay, to incur a deferred payment undertaking, to accept Draft(s) or to negotiate. In a freely negotiable Credit, any bank is a Nominated Bank. Presentation of documents must be made to the Issuing Bank or the Confirming Bank, if any, or any other Nominated Bank."
So, even under existing UCP a 'Negotiating Bank' is a 'Nominated Bank'.
Under my suggested wording the optimum availability option for a bank wishing to finance exporters is to have the Credits issued by the Issuing Bank available with a Nominated Bank in the exporters country.
Then with the Issuing Banks obligation to reimburse the Nominated Bank in place (provided documents comply) you can make your decisions on bank, country and transfer risk and if positive go ahead and provide 'finance', or 'purchase' or 'negotiate' or (whatever local name you want to give it) but in real terms it is the provision of trade finance the customer.
UCP Revision and availability
Thank you for the response but you are missing the key point I was making, but perhaps I did not make myself clear.
Under the raditional 'Negotiation Credit' as provided in UCP, the LC when issued available by negotiation authorises or allows a Negotiating Bank in the exporters country to finance the customer by 'giving of value for Draft(s) and/or document(s)' and the UCP further provides that the Issuing Bank by "allowing for negotiation by any bank" the Issuing Bank "undertakes to reimburse such bank in accordance with the provisions of these Articles"
So I feel that your wording is incomplete without NEGOTIATION.
[edited 9/11/2004 9:01:43 PM]
Under the raditional 'Negotiation Credit' as provided in UCP, the LC when issued available by negotiation authorises or allows a Negotiating Bank in the exporters country to finance the customer by 'giving of value for Draft(s) and/or document(s)' and the UCP further provides that the Issuing Bank by "allowing for negotiation by any bank" the Issuing Bank "undertakes to reimburse such bank in accordance with the provisions of these Articles"
So I feel that your wording is incomplete without NEGOTIATION.
[edited 9/11/2004 9:01:43 PM]
UCP Revision and availability
OK, let's continue our NEGOTIATION.
As you have pointed out very clearly, under UCP 500 the Issuing Bank is bound to reimburse a Nominated Bank that has Negotiated (provided documents comply).
Under my suggested wording the Issuing Bank remains bound to reimburse a Nominated Bank (provided documents comply).
As you have pointed out very clearly, under UCP 500 the Issuing Bank is bound to reimburse a Nominated Bank that has Negotiated (provided documents comply).
Under my suggested wording the Issuing Bank remains bound to reimburse a Nominated Bank (provided documents comply).
UCP Revision and availability
I don't think that you are getting my point.
The wording in your article does not provide the Nominated Bank with authorisation to 'Negotiate' or 'Finance' or Purchase' or in common language 'lend money' against the documents.
This practice as articulated in UCP and undertaken in huge volumes on a daily basis is one of the key benefits of the LC in Asia and in other parts of the World.
The wording in your article does not provide the Nominated Bank with authorisation to 'Negotiate' or 'Finance' or Purchase' or in common language 'lend money' against the documents.
This practice as articulated in UCP and undertaken in huge volumes on a daily basis is one of the key benefits of the LC in Asia and in other parts of the World.
UCP Revision and availability
I do get your point and wholeheartedly agree that the financing of the export customer based on Documentary Credits is critical to international trade development and the survival and prosperity of exporters, especially SME exporters in emerging markets.
We must make the Documentary Credit not only a better payment instrument but a better financing instrument.
Your key point is that the Credit available by Negotiation provides the Negotiating Bank with a clear authorisation to finance the beneficiary provided documents comply and the Issuing Bank is bound to reimburse the Negotiating Bank provided documents comply.
You underline that this key ability to finance the export customer is of extreme importance.
I agree that this key ability to finance the export customer is of extreme importance, and is in fact critical to survival of many emerging exporters.
I think that the question that must be answered is…
Is a Nominated Bank that wants to finance an export customer prohibited from financing the customer with that banks own (separate) funds or money under a Documentary Credit, unless that Credit has been issued by the Issuing Bank expressly available by 'Negotiation'?
The answer.....
There is no prohibition!
We must make the Documentary Credit not only a better payment instrument but a better financing instrument.
Your key point is that the Credit available by Negotiation provides the Negotiating Bank with a clear authorisation to finance the beneficiary provided documents comply and the Issuing Bank is bound to reimburse the Negotiating Bank provided documents comply.
You underline that this key ability to finance the export customer is of extreme importance.
I agree that this key ability to finance the export customer is of extreme importance, and is in fact critical to survival of many emerging exporters.
I think that the question that must be answered is…
Is a Nominated Bank that wants to finance an export customer prohibited from financing the customer with that banks own (separate) funds or money under a Documentary Credit, unless that Credit has been issued by the Issuing Bank expressly available by 'Negotiation'?
The answer.....
There is no prohibition!
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KimChristensen
- Posts: 404
- Joined: Fri Apr 05, 2019 5:21 pm
UCP Revision and availability
Dear Umar and Vincent,
I have been following your “negotiation” about “negotiation” with great interest.
It occurs to me, that I have seen these arguments - for and against negotiation – many times before. But still; it leaves me a bit confused.
The mentioned T.O. Lee article in DCInsight (vol 10, no 3) covers the same issue, and is very educational in its approach – in the sense that it illustrates it with a real life example. Based on this article, (I think that) it can be concluded, that what negotiation provides is the possibility for the negoti-ating/nominated bank to “PAY IMMEDIATELY" the beneficiary, after his presentation of credit complying documents – “WITH RECOURSE” (even – or especially – where the LC does not provide direct access to the funds). This sound very familiar; I would estimate that roughly 90 per cent our exporting customers has exactly the same need. They would prefer without recourse of course, but the “IMMEDIATE PAYMENT”, is an ever green clas-sic. No less than that
So my question to you Umar (and to any one who would like to enlighten me):
What is it exactly that the e.g. Hong Kong or Pakistan beneficiaries (or banks for that matter) needs: Is it the word "negotiation" in the L/C (I hope not)? Is it an accompanying draft (is a draft required)? Is it the payment “with recourse” or what is it?
If possible please let me have an example – that also illustrates why the “payment credit” would not be possible.
Regards & thanks
Kim
I have been following your “negotiation” about “negotiation” with great interest.
It occurs to me, that I have seen these arguments - for and against negotiation – many times before. But still; it leaves me a bit confused.
The mentioned T.O. Lee article in DCInsight (vol 10, no 3) covers the same issue, and is very educational in its approach – in the sense that it illustrates it with a real life example. Based on this article, (I think that) it can be concluded, that what negotiation provides is the possibility for the negoti-ating/nominated bank to “PAY IMMEDIATELY" the beneficiary, after his presentation of credit complying documents – “WITH RECOURSE” (even – or especially – where the LC does not provide direct access to the funds). This sound very familiar; I would estimate that roughly 90 per cent our exporting customers has exactly the same need. They would prefer without recourse of course, but the “IMMEDIATE PAYMENT”, is an ever green clas-sic. No less than that
So my question to you Umar (and to any one who would like to enlighten me):
What is it exactly that the e.g. Hong Kong or Pakistan beneficiaries (or banks for that matter) needs: Is it the word "negotiation" in the L/C (I hope not)? Is it an accompanying draft (is a draft required)? Is it the payment “with recourse” or what is it?
If possible please let me have an example – that also illustrates why the “payment credit” would not be possible.
Regards & thanks
Kim
UCP Revision and availability
Dear Kim and Vincent,
My comments are attempting articulate what I agree to be an 'imperfect practice' but what remains a practice that actually works on a day to day basis.
I agree that it is definitely in the best interest of the beneficiary for the Credit to be available by sight payment with a Nominated Bank. If the Beneficiary can perform under this 'payment credit' then it is better for his purposes as we all know.
If that is not the case, as is often the case, then it remains that the Nominated/Negotiating Bank that has been authorised to negotiate can actually do so as authorised in the Credit. This means that it can purchase documents from the beneficiary and then as a bona fide holder per UCP the Issuing Bank is bound to reimburse the Negotiating Bank.
The sending of actual documents by a Negotiating Bank to the Issuing Bank and eventually receiving payment from Issuing Bank takes time. The fact that the Negotiating Bank was prepared to negotiate brings benefits to both beneficiary and Negotiating Bank:
1) The beneficiary can get access to urgently needed finance from the Negotiating Bank before the funds arrive from the Issuing Bank, even though he must pay some transit interest to the Negotiating Bank.
2) The Negotiating Bank can earn income from advancing negotiation funds to the beneficiary including a margin.
These are important features for both the Negotiating Bank and the beneficiary in the context of current day to day 'negotiation' practice.
The fact that a Draft is or is not required to be drawn on an Issuing Bank is no longer an important issued since the UCP 500 revision, Article 9 clarified that if a Credit requires drafts to be drawn on the applicant these drafts are just to be considered an 'additional document'
The last comment from Vincent that 'There is no prohibition' is interesting but here again that is just his opinion, which I respect BUT it is just his own personal opinion, whereas the UCP provision for 'negotiation' expressly authorises such activity.
There is a small gap in our thinking on this but it remains an important and real gap.
Umar
My comments are attempting articulate what I agree to be an 'imperfect practice' but what remains a practice that actually works on a day to day basis.
I agree that it is definitely in the best interest of the beneficiary for the Credit to be available by sight payment with a Nominated Bank. If the Beneficiary can perform under this 'payment credit' then it is better for his purposes as we all know.
If that is not the case, as is often the case, then it remains that the Nominated/Negotiating Bank that has been authorised to negotiate can actually do so as authorised in the Credit. This means that it can purchase documents from the beneficiary and then as a bona fide holder per UCP the Issuing Bank is bound to reimburse the Negotiating Bank.
The sending of actual documents by a Negotiating Bank to the Issuing Bank and eventually receiving payment from Issuing Bank takes time. The fact that the Negotiating Bank was prepared to negotiate brings benefits to both beneficiary and Negotiating Bank:
1) The beneficiary can get access to urgently needed finance from the Negotiating Bank before the funds arrive from the Issuing Bank, even though he must pay some transit interest to the Negotiating Bank.
2) The Negotiating Bank can earn income from advancing negotiation funds to the beneficiary including a margin.
These are important features for both the Negotiating Bank and the beneficiary in the context of current day to day 'negotiation' practice.
The fact that a Draft is or is not required to be drawn on an Issuing Bank is no longer an important issued since the UCP 500 revision, Article 9 clarified that if a Credit requires drafts to be drawn on the applicant these drafts are just to be considered an 'additional document'
The last comment from Vincent that 'There is no prohibition' is interesting but here again that is just his opinion, which I respect BUT it is just his own personal opinion, whereas the UCP provision for 'negotiation' expressly authorises such activity.
There is a small gap in our thinking on this but it remains an important and real gap.
Umar