Discounting Under LC
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ShahidRizvi
- Posts: 2
- Joined: Fri Apr 05, 2019 5:27 pm
Discounting Under LC
What is the difference b/w negotiation and discounting?
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HOANGTHIANHTHU_invalid
- Posts: 189
- Joined: Fri Apr 05, 2019 5:15 pm
Discounting Under LC
Hi,
UCP has a definition for the term “negotiation” which you can refer to in Art. 2 but no definition for the term “discounting”.
I see that in practice when referring to an action of purchase at a discount of a time draft or a DPU, the term “discounting” is normally used. However, in the marketplace the two terms are sometimes used interchangeably without causing any misunderstanding.
Regards,
N.H.Duc
[edited 4/1/2010 1:19:09 AM]
UCP has a definition for the term “negotiation” which you can refer to in Art. 2 but no definition for the term “discounting”.
I see that in practice when referring to an action of purchase at a discount of a time draft or a DPU, the term “discounting” is normally used. However, in the marketplace the two terms are sometimes used interchangeably without causing any misunderstanding.
Regards,
N.H.Duc
[edited 4/1/2010 1:19:09 AM]
Discounting Under LC
Firstly, I would observe that UCP600 does not recognise the term ‘discount’. What most bankers -I think- would call ‘discounting’ is referred to -in sub-Art. 12(b)- as ‘prepayment’ or ‘purchase’. Unfortunately UCP600 offers no guidance as to the distinction, if any, between them. While I would talk about ‘prepaying’ a DPU (an obligation that does not have an existence independent of the credit) but ‘purchasing’ a draft (an accepted draft having an existence independent of the credit) I notice no such distinction is drawn on p53 of the Commentary. For the sake of simplicity I will use ‘discount’ to mean either.
Secondly, I assume:
A. the negotiation in question is purchase ‘by advancing’ rather than ‘agreeing to advance funds … on or before the banking day on which reimbursement is due to the nominated bank’ (Article 2).
B. the negotiating bank is a nominated bank and that the credit is available by negotiation and the discounting bank is (I) a nominated bank and the credit is available by deferred payment or acceptance or (II) an issuing bank.
I think the difference between negotiation and discount is essentially that with respect to:
1. negotiation, the negotiating bank is lending against ANOTHER bank’s obligation (that of the issuing or -if any- confirming bank) to honour a presentation that HAS been made to the negotiating bank. This is even so where the negotiating bank has confirmed the credit as it is not obliged to lend as it can negotiate simply by agreeing to lend. (You will note that the definition of negotiation in Article 2 does not allow any draft to be drawn on the negotiating bank.)
2. discount, is that the discounting bank is lending against its OWN obligation to honour by payment on the due date a presentation that HAS been made to it.
Operationally, I would not expect there to be any substantive difference except possibly where consciously negotiating with recourse (something I have not encountered in my professional life) as opposed to just basing one’s decision to negotiate purely on the bank & country risk.
[edited 3/31/2010 4:31:51 PM]
Secondly, I assume:
A. the negotiation in question is purchase ‘by advancing’ rather than ‘agreeing to advance funds … on or before the banking day on which reimbursement is due to the nominated bank’ (Article 2).
B. the negotiating bank is a nominated bank and that the credit is available by negotiation and the discounting bank is (I) a nominated bank and the credit is available by deferred payment or acceptance or (II) an issuing bank.
I think the difference between negotiation and discount is essentially that with respect to:
1. negotiation, the negotiating bank is lending against ANOTHER bank’s obligation (that of the issuing or -if any- confirming bank) to honour a presentation that HAS been made to the negotiating bank. This is even so where the negotiating bank has confirmed the credit as it is not obliged to lend as it can negotiate simply by agreeing to lend. (You will note that the definition of negotiation in Article 2 does not allow any draft to be drawn on the negotiating bank.)
2. discount, is that the discounting bank is lending against its OWN obligation to honour by payment on the due date a presentation that HAS been made to it.
Operationally, I would not expect there to be any substantive difference except possibly where consciously negotiating with recourse (something I have not encountered in my professional life) as opposed to just basing one’s decision to negotiate purely on the bank & country risk.
[edited 3/31/2010 4:31:51 PM]
Discounting Under LC
UCP600 Art. 12(b) uses "pre-payment and "purchase" to cover different activities. I think the differences are roughly as follows:
Pre-payment is something that the person obligated to pay does with the effect of canceling/discharging the obligation before it is due. That person may also purchase its own obligation with a view to holding it to maturity, or reselling it, and paying the holder the face amount at maturity. Consider in this regard a bank that pre-pays for or purchases its own acceptance. The holder of the acceptance is chiefly interested in the amount received and not whether the acceptance will be resold, held, or immediately cancelled (although a drawer or endorser might care whether the draft will be resold if there is any possibility of recourse in the event the accepting bank dishonours its acceptance at maturity).
No person other than the obligor can "pre-pay" an obligation. That leaves purchase as the concept most easily applied to a beneficiary's transaction with a nominated "negotiating" bank. The purchase concept is less final than pre-payment and allows for recourse or other rights and remedies over against the seller (the drawer-beneficiary) and allows for resale to the issuing bank on the terms of reimbursement provided in the LC and UCP.
The purchase concept is not entirely apt, but then neither is the concept of lending against the issuing bank's obligations, mentioned above by Jeremy. (The concept of nominated banks as the agents of issuing banks has some historical basis, but appears to have been rejected, rightly so, by the modern codifiers of LC law and practice.)
Discounting is not a UCP term. I think it covers both purchase and pre-payment and thus obscures whether the payment of an agreed amount was made of some or no representations, warranties, or recourse undertakings.
Regards, Jim Barnes
Pre-payment is something that the person obligated to pay does with the effect of canceling/discharging the obligation before it is due. That person may also purchase its own obligation with a view to holding it to maturity, or reselling it, and paying the holder the face amount at maturity. Consider in this regard a bank that pre-pays for or purchases its own acceptance. The holder of the acceptance is chiefly interested in the amount received and not whether the acceptance will be resold, held, or immediately cancelled (although a drawer or endorser might care whether the draft will be resold if there is any possibility of recourse in the event the accepting bank dishonours its acceptance at maturity).
No person other than the obligor can "pre-pay" an obligation. That leaves purchase as the concept most easily applied to a beneficiary's transaction with a nominated "negotiating" bank. The purchase concept is less final than pre-payment and allows for recourse or other rights and remedies over against the seller (the drawer-beneficiary) and allows for resale to the issuing bank on the terms of reimbursement provided in the LC and UCP.
The purchase concept is not entirely apt, but then neither is the concept of lending against the issuing bank's obligations, mentioned above by Jeremy. (The concept of nominated banks as the agents of issuing banks has some historical basis, but appears to have been rejected, rightly so, by the modern codifiers of LC law and practice.)
Discounting is not a UCP term. I think it covers both purchase and pre-payment and thus obscures whether the payment of an agreed amount was made of some or no representations, warranties, or recourse undertakings.
Regards, Jim Barnes
Discounting Under LC
Is it over-simplistic and too short if I assume ( as a nominated bank) that
-if I accept a draft, I may discount it.
-if I incur a deferred payment, I may prepay.
-if I negotiate, I may/must purchase the draft or the documents?
Daniel
-if I accept a draft, I may discount it.
-if I incur a deferred payment, I may prepay.
-if I negotiate, I may/must purchase the draft or the documents?
Daniel
Discounting Under LC
Daniel,
That's how I see it, depending a bit on the meaning of "may/must".
The reason you do not have to think in terms of prepayment or purchase of your own obligation as a nominated negotiating bank is that negotiation (to qualify you for an independent right of reimbursement under UCP600 7c) results either in your advance of funds or your ageement to timely advance funds on the terms that you then establish. The key terms are net amount, date of payment relative the expected reimbursement date, and recourse rights.
Regards, Jim
That's how I see it, depending a bit on the meaning of "may/must".
The reason you do not have to think in terms of prepayment or purchase of your own obligation as a nominated negotiating bank is that negotiation (to qualify you for an independent right of reimbursement under UCP600 7c) results either in your advance of funds or your ageement to timely advance funds on the terms that you then establish. The key terms are net amount, date of payment relative the expected reimbursement date, and recourse rights.
Regards, Jim
Discounting Under LC
Jim,
Even If I am a nominated bank that has confirmed the credit there is no obligation for me to discount or to prepay. Hence the use of "may". If I haven't confirmed the credit, I may negotiate; If I have confirmed, I must negotiate.
Regards
Daniel
Even If I am a nominated bank that has confirmed the credit there is no obligation for me to discount or to prepay. Hence the use of "may". If I haven't confirmed the credit, I may negotiate; If I have confirmed, I must negotiate.
Regards
Daniel
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GlennRansier_
- Posts: 132
- Joined: Fri Apr 05, 2019 5:19 pm
Discounting Under LC
There may be some confusion between Honour and Negotiate. Honour is sight payment, or time i.e. acceptance or deferred payment and payment at maturity.
Howver, Negotiation can also be sight or time. You can have a LC tenor of say 180 days BL, by Negotiation. UCP defined Negotiation in part, as: “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”. Once a bank agrees (typically in writing) to payment at maturity, UCP allows the Nominated Bank to “pre-pay” the maturity commitment provided under a time negotiation, acceptance or deferred payment.
Negotiation is "to purchase" and purchase is taking "ownership" by using your funds. I have an article on my website: www.loc.cc which refers to negotiation, if interested.
Best Regards
Howver, Negotiation can also be sight or time. You can have a LC tenor of say 180 days BL, by Negotiation. UCP defined Negotiation in part, as: “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”. Once a bank agrees (typically in writing) to payment at maturity, UCP allows the Nominated Bank to “pre-pay” the maturity commitment provided under a time negotiation, acceptance or deferred payment.
Negotiation is "to purchase" and purchase is taking "ownership" by using your funds. I have an article on my website: www.loc.cc which refers to negotiation, if interested.
Best Regards
Discounting Under LC
Glenn,
In my opinion it is history. If you are interested by the history of the documentary credits, you understand the negotiation, the sight payment, the deferred payment and the acceptance.
Regards
Daniel
In my opinion it is history. If you are interested by the history of the documentary credits, you understand the negotiation, the sight payment, the deferred payment and the acceptance.
Regards
Daniel
Discounting Under LC
Authorizations to pay at sight or to accept a time draft or to incur a DPU are all precise about how much to pay and when.
Authorizations to negotiate allow the nominated bank to set the terms of purchase. The nominated bank may advance funds before or after forwarding the documents. It may agree to advance funds on any date before maturity. It may amend the terms of its agreement to advance funds. It may do any of these without having to seek additional authorization from the issuer.
If a nominated negotiating bank advances funds sooner than it originally agreed to do, it should rely on the UCP600 Art. 7 or 8 authorization to negotiate and the definition of negotiate, and not on the Art. 12b authorization to prepay.
I don't know that we disagree on any of this, but I did want to emphasize that 12b does not address negotiation because negotiation is a more flexible type of authorization.
Regards, Jim
Authorizations to negotiate allow the nominated bank to set the terms of purchase. The nominated bank may advance funds before or after forwarding the documents. It may agree to advance funds on any date before maturity. It may amend the terms of its agreement to advance funds. It may do any of these without having to seek additional authorization from the issuer.
If a nominated negotiating bank advances funds sooner than it originally agreed to do, it should rely on the UCP600 Art. 7 or 8 authorization to negotiate and the definition of negotiate, and not on the Art. 12b authorization to prepay.
I don't know that we disagree on any of this, but I did want to emphasize that 12b does not address negotiation because negotiation is a more flexible type of authorization.
Regards, Jim