According to art. 8-a, ii of UCP 600, provided that compliant documents are presented to the confirming bank, the confirming bank must "negotiate, without recourse, if the credit is available by negotiation with the confirming bank".
We had a discussion at our bank with regard to the interpretation of the above if we are the confirming bank. It sounds like the confirming bank is obliged to negotiate (i.e. provide value to the beneficiary before actually receiving the payment), in which case the bank would charge the beneficiary some transit interest for the period from the date of negotiation until receipt of the proceeds from the issuing bank. However, the client may not be in need of funds or willing to pay interest, therefore I believe that negotiation should not be "forced" upon him and the obligation of the confirming bank should go only as far as we are requested to negotiate by the beneficiary. I do not expect that it will be the general banking practice to go out and negotiate presentations without having the explicit beneficiary's request or consent prior to that. However, we would like to hear some comments and opinions as to other banks' practice in this respect, and more specifically: do you consider the confirming bank obliged to negotiate by all means, in which case we might need to seek the beneficiary's agreement for not doing so (i.e. opt out), or is negotiation only to be triggered at the beneficiary's request? Thanks!
Doriana Nedkova
Toronto, Canada
Confirming Bank Undertaking - art. 8-a, ii
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RashidHasan
- Posts: 12
- Joined: Fri Apr 05, 2019 5:25 pm
Confirming Bank Undertaking - art. 8-a, ii
You must negotiate without recourse but having in mind the art.2 of UCP600 - definition of negotiation ("...by advancing or agreeing to advance funds to the bnf ON OR BEFORE the banking day on which reimb.is due to the nominated bank."
Regards,
Bogdan
Regards,
Bogdan
Confirming Bank Undertaking - art. 8-a, ii
This is an interesting and very practical query.
Having visited some 30 countries in context of UCP 600 in the past six months or so, most bankers appear to have a basically uniform understanding of part of the definition of NEGOTIATION in context what a nominated negotiating bank does when it actually negotiates based on definition in UCP 600.
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 ……FUNDS TO THE BENEFICARY on or before the banking day on which reimbursement is due to the nominated bank.
Most see this as the a standard day to day situation where the Nominated Bank, when it negotiates under a credit available by negotiation, the nominated bank creates a loan in its Nominated Bank’s books and credits the loan proceeds funds to the account of the beneficiary and the Nominated Bank charges interest until the reimbursement is finally received from the issuing bank.
I have encountered rare divergence from this understanding but very rare indeed.
However, there is a lot of confusion or lack of clarity as to what is meant by the nominated bank …AGREEING TO ADVANCE FUNDS TO THE BENEFICIARY
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 ………AGREEING TO ADVANCE FUNDS TO THE BENEFICARY on or before the banking day on which reimbursement is due to the nominated bank.
It would be interesting to learn what other participants consider is meant in the UCP 600 definition of the Nominated Bank ‘AGREEINGTO ADVANCE FUNDS TO THE BENEFICARY….. when it negotiates.?
Having visited some 30 countries in context of UCP 600 in the past six months or so, most bankers appear to have a basically uniform understanding of part of the definition of NEGOTIATION in context what a nominated negotiating bank does when it actually negotiates based on definition in UCP 600.
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 ……FUNDS TO THE BENEFICARY on or before the banking day on which reimbursement is due to the nominated bank.
Most see this as the a standard day to day situation where the Nominated Bank, when it negotiates under a credit available by negotiation, the nominated bank creates a loan in its Nominated Bank’s books and credits the loan proceeds funds to the account of the beneficiary and the Nominated Bank charges interest until the reimbursement is finally received from the issuing bank.
I have encountered rare divergence from this understanding but very rare indeed.
However, there is a lot of confusion or lack of clarity as to what is meant by the nominated bank …AGREEING TO ADVANCE FUNDS TO THE BENEFICIARY
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 ………AGREEING TO ADVANCE FUNDS TO THE BENEFICARY on or before the banking day on which reimbursement is due to the nominated bank.
It would be interesting to learn what other participants consider is meant in the UCP 600 definition of the Nominated Bank ‘AGREEINGTO ADVANCE FUNDS TO THE BENEFICARY….. when it negotiates.?
Confirming Bank Undertaking - art. 8-a, ii
Vin,
As it’s you, here are my thoughts.
Given Position Paper 2 made provision for ‘undertaking an obligation to make payment (other than giving a deferred payment undertaking or accepting a draft)’ when negotiating I would imagine few banks would have any trouble with the UCP600 equivalent, i.e. ‘agreeing to advance funds to the beneficiary…..’ and merely need to 'tweak’ their UCP500 wording.
At the risk of seeming flippant, I cannot see the meaning is other than what it says, i.e. ‘agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank’ is a form of ‘purchase’ and ‘purchase’ is ‘negotiation’. The agreement to advance etc. could possibly be along the following lines as part of a letter -for instance- addressed by the negotiating bank to the beneficiary:
‘We hereby agree that upon receipt of your request on or before [date] we will advance funds to you up to the Credit amount less interest for the period between the date of our advance and [date] calculated at [details].’
Of course, the negotiating bank might want to put all sorts of other stuff in, such as its recourse rights in the event of not receiving reimbursement.
Regards, Jeremy
[edited 9/13/2007 2:14:44 PM]
[edited 9/14/2007 9:03:16 AM]
As it’s you, here are my thoughts.
Given Position Paper 2 made provision for ‘undertaking an obligation to make payment (other than giving a deferred payment undertaking or accepting a draft)’ when negotiating I would imagine few banks would have any trouble with the UCP600 equivalent, i.e. ‘agreeing to advance funds to the beneficiary…..’ and merely need to 'tweak’ their UCP500 wording.
At the risk of seeming flippant, I cannot see the meaning is other than what it says, i.e. ‘agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank’ is a form of ‘purchase’ and ‘purchase’ is ‘negotiation’. The agreement to advance etc. could possibly be along the following lines as part of a letter -for instance- addressed by the negotiating bank to the beneficiary:
‘We hereby agree that upon receipt of your request on or before [date] we will advance funds to you up to the Credit amount less interest for the period between the date of our advance and [date] calculated at [details].’
Of course, the negotiating bank might want to put all sorts of other stuff in, such as its recourse rights in the event of not receiving reimbursement.
Regards, Jeremy
[edited 9/13/2007 2:14:44 PM]
[edited 9/14/2007 9:03:16 AM]
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Confirming Bank Undertaking - art. 8-a, ii
Hi
My understanding, is this statment should begin from '' by advancing or agreeing to advance funds....'' rather from ''agreeing to advance...''. When read as a whole statement it gives an option of doing immediately(advancing) or may do later (agreeing to advance).There is no compulsion to do or not to do since the statement also includes ''on or before'' the day it is reimbursed.The choice is open. On the confirmation part, there have been cases where the bene does not require the money immediately but definitely at a later date since he does not want to pay interest over and above the confirmation charges he is paying.
Regards
Jason
My understanding, is this statment should begin from '' by advancing or agreeing to advance funds....'' rather from ''agreeing to advance...''. When read as a whole statement it gives an option of doing immediately(advancing) or may do later (agreeing to advance).There is no compulsion to do or not to do since the statement also includes ''on or before'' the day it is reimbursed.The choice is open. On the confirmation part, there have been cases where the bene does not require the money immediately but definitely at a later date since he does not want to pay interest over and above the confirmation charges he is paying.
Regards
Jason
Confirming Bank Undertaking - art. 8-a, ii
either the payment to the bnf is effected on the value date confirming bank reimbursed itself on issuing bank/reimb.bank or is effected prior to such value date,
within the period between the docs were found complying with l/c terms and the value date confirming bank claimed (based on a special agreement between confirming bank and the bnf,at bnf's request).in both cases funds are remitted to the bnf without recourse.
Bogdan
within the period between the docs were found complying with l/c terms and the value date confirming bank claimed (based on a special agreement between confirming bank and the bnf,at bnf's request).in both cases funds are remitted to the bnf without recourse.
Bogdan
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RashidHasan
- Posts: 12
- Joined: Fri Apr 05, 2019 5:25 pm
Confirming Bank Undertaking - art. 8-a, ii
Thanks everyone for your input, very helpful! As prompted by the discussion, I believe the answer to my initial question lies in art.2, the definition of "negotiation" which actually imposes no obligation on the negotiating bank to advance funds to the beneficiary before reimbursement from the issuing bank and it is clearly stated that it can also mean "agreeing to advance funds". Hence negotiation in the meaning of advancing of funds should be entirely based on a mutual agreement with each respective L/C beneficiary.
Thanks again for your opinions!
Doriana
Thanks again for your opinions!
Doriana
Confirming Bank Undertaking - art. 8-a, ii
I write to emphasize that the Article 2 definiton of negotiation sets the time limit at when reimbursement is due, not when reimbursement is made. Also, a confirmer that charges "interest" would presumably charge on theory that it is discounting its own obligation rather than making a loan to the beneficiary. Regards, Jim Barnes
Confirming Bank Undertaking - art. 8-a, ii
Doriana,
I would echo Jim Barnes’ comments. The confirming bank of a credit available by negotiation -that ‘purchases’ by ‘agreeing to advance funds’- is obliged to pay the beneficiary the amount of the beneficiary’s drawing the banking day it should have been reimbursed by the issuing bank irrespective of whether or not it -the negotiating bank- has been reimbursed. That is unless prior to this date the beneficiary has called upon the negotiating bank to advance funds and the negotiating bank has done so.
Jeremy
I would echo Jim Barnes’ comments. The confirming bank of a credit available by negotiation -that ‘purchases’ by ‘agreeing to advance funds’- is obliged to pay the beneficiary the amount of the beneficiary’s drawing the banking day it should have been reimbursed by the issuing bank irrespective of whether or not it -the negotiating bank- has been reimbursed. That is unless prior to this date the beneficiary has called upon the negotiating bank to advance funds and the negotiating bank has done so.
Jeremy
Confirming Bank Undertaking - art. 8-a, ii
Thanks Jeremy, Jason and Bogdan for your valuable input on a feedback I often encounter on new definition of ‘Negotiation’
My question which followed on from Doriana’s . question is based on feedback I have received for experienced trade bankers in many different countries, and I take feedback from trade operations staff very seriously.
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Confirmation means a definite undertaking of the confirming bank, IN ADDITION to that of the issuing bank, to honour or negotiate a complying presentation.
Negotiation means the purchase by the nominated bank of DRAFSS (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.
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When a bank confirms the credit available by negotiation the confirming bank gives an additional undertaking to the beneificary to ‘negotiate’
When the beneficiary makes a presentation of documents which constitute a complying presentation then the Confirming/Nominated Bank under UCP 600 must Negotiate by purchasing the DRAFTS/DOCUMENTs.
Typically (but not always) the negotiating bank will negotiate by advancing funds by way of creating a loan in it books and charge interest until reimbursement on due date by the Issuing Bank. As the negotiation of the drafts/documents in this instance is under a confirmed credit the negotiation by the confirming bank is ‘without recourse’ per sub-article 8 (a), (ii).
However, sometimes the beneficiary has adequate cash flow and does not want the bank to advance funds at or about time of presentation but is happy to sit tight knowing that should issuing bank fail to reimburse on the due date the confirming bank is obliged to pay on that due date as clearly elaborated on by Jeremy and Jim.
Another twist of this scenario that also happens is that the nominated bank may want to negotiate by the typical method of ‘advancing funds’ but does not want to advance funds at or about time of presentation but want to wait for a short while. The Nominated Bank may want to wait until the documents have been received and taken or by the Issuing Bank.
The reasons such banks want to wait is that the Nominated Bank may be concerned about ‘documentary risk’ and would prefer to wait a while so that there are no issues regarding possible ‘discrepancies’ before advancing funds to the beneficiary.
This holds true in case of confirmed credit available by negotiation but also when a credit is not confirmed but the Nominated bank is prepared to act pursuant to its nomination.
Some bankers have commented to me that they consider the definition of NEOTIATION as ADVANCING FUNDS as an improvement on UCP 500 ‘giving of value’ and like it because of the clear language. But, the same bankers comment that they don’t see need for the words OR AGREEING TO (advance funds). These bankers believe the words ‘OR AGREEING TO’ brings vague language in to a definition that is otherwise very tight and clear.
We must remember, that a nominated bank that has confirmed a credit available by negotiation will in any event have to advance funds ‘without recourse’ to the beneficiary (if not rembursed by the issuing bank) on or before the day on which reimbursement is due to that same nominated bank.
Should the bank be only acting in the capacity of a Nominated Bank (not confirming) then that nominated bank per UCP 600 sub-article 12 (a) has no obligation on advance funds at or about the time or presentation or anytime later during intervening period but before reimbursement is due from issuing bank , (except when expressly agreed to by that nominated bank and so communicated to the beneficiary – UCP 600 sub-artilcle 12 (a))
Of course this agreement should it happen between Nominated Bank (Not Confirming) and beneficiary should clearly elaborate on issues such as ‘drawdown’ ‘recourse’ etc.
Position Papers
Position Paper 2 ‘Negotiation’ I felt brought an element of mystery and intrigue to the sometimes not so exciting life of documentary credit practitioners such as myself.
The clarification that negotiation can also mean ‘'undertaking an obligation to make payment' (other than giving a deferred payment undertaking or accepting a draft), in my mind added a lot of ‘intrigue’ and ‘mystery’ and in the mid 90’s helped me pass an engaging 30 minutes or so of a three or four day trade workshop when someone without fail would ask the question
“What exactly did the ICC Banking Commission mean with Position Paper II stating ‘that negotiation can also mean ‘'undertaking an obligation to make payment' (other than giving a deferred payment undertaking or accepting a draft)?
Vin
My question which followed on from Doriana’s . question is based on feedback I have received for experienced trade bankers in many different countries, and I take feedback from trade operations staff very seriously.
----------------------------------------------------------------------------------------------------
Confirmation means a definite undertaking of the confirming bank, IN ADDITION to that of the issuing bank, to honour or negotiate a complying presentation.
Negotiation means the purchase by the nominated bank of DRAFSS (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.
-----------------------------------------------------------------------------------------------------------
When a bank confirms the credit available by negotiation the confirming bank gives an additional undertaking to the beneificary to ‘negotiate’
When the beneficiary makes a presentation of documents which constitute a complying presentation then the Confirming/Nominated Bank under UCP 600 must Negotiate by purchasing the DRAFTS/DOCUMENTs.
Typically (but not always) the negotiating bank will negotiate by advancing funds by way of creating a loan in it books and charge interest until reimbursement on due date by the Issuing Bank. As the negotiation of the drafts/documents in this instance is under a confirmed credit the negotiation by the confirming bank is ‘without recourse’ per sub-article 8 (a), (ii).
However, sometimes the beneficiary has adequate cash flow and does not want the bank to advance funds at or about time of presentation but is happy to sit tight knowing that should issuing bank fail to reimburse on the due date the confirming bank is obliged to pay on that due date as clearly elaborated on by Jeremy and Jim.
Another twist of this scenario that also happens is that the nominated bank may want to negotiate by the typical method of ‘advancing funds’ but does not want to advance funds at or about time of presentation but want to wait for a short while. The Nominated Bank may want to wait until the documents have been received and taken or by the Issuing Bank.
The reasons such banks want to wait is that the Nominated Bank may be concerned about ‘documentary risk’ and would prefer to wait a while so that there are no issues regarding possible ‘discrepancies’ before advancing funds to the beneficiary.
This holds true in case of confirmed credit available by negotiation but also when a credit is not confirmed but the Nominated bank is prepared to act pursuant to its nomination.
Some bankers have commented to me that they consider the definition of NEOTIATION as ADVANCING FUNDS as an improvement on UCP 500 ‘giving of value’ and like it because of the clear language. But, the same bankers comment that they don’t see need for the words OR AGREEING TO (advance funds). These bankers believe the words ‘OR AGREEING TO’ brings vague language in to a definition that is otherwise very tight and clear.
We must remember, that a nominated bank that has confirmed a credit available by negotiation will in any event have to advance funds ‘without recourse’ to the beneficiary (if not rembursed by the issuing bank) on or before the day on which reimbursement is due to that same nominated bank.
Should the bank be only acting in the capacity of a Nominated Bank (not confirming) then that nominated bank per UCP 600 sub-article 12 (a) has no obligation on advance funds at or about the time or presentation or anytime later during intervening period but before reimbursement is due from issuing bank , (except when expressly agreed to by that nominated bank and so communicated to the beneficiary – UCP 600 sub-artilcle 12 (a))
Of course this agreement should it happen between Nominated Bank (Not Confirming) and beneficiary should clearly elaborate on issues such as ‘drawdown’ ‘recourse’ etc.
Position Papers
Position Paper 2 ‘Negotiation’ I felt brought an element of mystery and intrigue to the sometimes not so exciting life of documentary credit practitioners such as myself.
The clarification that negotiation can also mean ‘'undertaking an obligation to make payment' (other than giving a deferred payment undertaking or accepting a draft), in my mind added a lot of ‘intrigue’ and ‘mystery’ and in the mid 90’s helped me pass an engaging 30 minutes or so of a three or four day trade workshop when someone without fail would ask the question
“What exactly did the ICC Banking Commission mean with Position Paper II stating ‘that negotiation can also mean ‘'undertaking an obligation to make payment' (other than giving a deferred payment undertaking or accepting a draft)?
Vin