Honour or negotiation

CDCS study materials-Honour or negotiation

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CDCS study materials-Honour or negotiation

Chapter-17




Learning objectives

This chapter provides an overview of the concept of honour and negotiation.
By the end of this chapter, you should be able to:
◆◆ explain the different settlement terms; ◆◆ understand settlement flows;
◆◆ explain the terms ‘honour’, ‘negotiation’ and ‘prepay and purchase’, 
and understand how they are used; and
◆◆ explain transmission of proceeds.

17.1 Introduction

This chapter focuses on the settlement process.

With a documentary credit, the settlement process is driven by the presentation of complying documents. If complying documents are presented, UCP 600 requires that a bank act according to its own defined and agreed role and / or the undertaking that it may have given under that documentary credit. The delivery of documents to the applicant and the control over the goods that those documents may have is similarly driven by the presentation of complying documents.

17.2 Settlement

In simple terms, if a presentation has been examined and found to be complying, or if a waiver of discrepancies has been obtained from an applicant and is acceptable to the issuing bank, settlement should be made to the presenter without delay and in accordance with the availability conditions expressed in the documentary credit.

Whether or not a nominated bank or a confirming bank accepts the issuing bank’s advice of acceptance of discrepancies will determine which bank will make such settlement to the beneficiary.

17.2.1 Settlement terms

UCP 600, article 2, provides definitions of ‘honour’ and ‘negotiation’

Honour means:

a. to pay at sight if the credit is available by sight payment.
b. to incur a deferred payment undertaking and pay at maturity if the credit is
available by deferred payment.
c. 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.

UCP 600, sub-article 6(b), provides as follows.

b. A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation.

The settlement requirements for these forms of availability, when a complying presentation has been made, are as follows.

Note: For the purpose of the content of this section, and where applicable, the documentary credit is to be considered as expiring at the counters of a nominated bank.

◆◆ By sight payment

–– A confirming bank must honour by effecting payment, and such honour is without
recourse.
–– A nominated bank may or may not honour. Any honour of the drawing, by effecting
payment to the beneficiary, is generally without recourse, unless the nominated bank has entered into a recourse agreement with that beneficiary.
–– An issuing bank must honour by effecting payment, and such honour is without
recourse.
The documentary credit may or may not stipulate a requirement for a sight draft.

◆◆ By deferred payment

–– A confirming bank must honour by incurring a deferred payment undertaking and paying at maturity, and such honour is without recourse.

–– A nominated bank may or may not incur a deferred payment undertaking. When incurred, a deferred payment undertaking and its payment at maturity are without recourse.

–– An issuing bank must honour by incurring a deferred payment undertaking and paying at maturity, and such honour is without recourse.

The documentary credit will not stipulate a requirement for a draft.

Note: An issuing bank or confirming bank is required to incur

a deferred payment undertaking and/or to pay at maturity when a nominated bank or another nominated bank does not incur a deferred payment undertaking or, having incurred a deferred payment undertaking, does not pay at maturity. In this respect, UCP 600, sub-articles 7(a)(ii)–(v) and 8(a)(i)(b)–(e), should be referred to respectively. The effect of UCP 600, sub-articles 8(a)(i)(b)–(e) can be modified by the wording of the confirmation advice as indicated in Chapter 10, section 10.1.2.

17: Honour or negotiation

◆◆ By acceptance

–– A confirming bank must honour by accepting a draft drawn on it and paying at maturity, and such honour is without recourse.

–– A nominated bank may or may not accept a draft that is to be drawn on it. When accepted, a draft and its payment at maturity are without recourse.

–– An issuing bank must honour by accepting a draft drawn on it and paying at maturity, and such honour is without recourse.

Note: An issuing bank or confirming bank is required to accept a draft and / or to pay at maturity when a nominated bank or another nominated bank does not accept a draft or, having accepted a draft, does not pay at maturity. In this respect, UCP 600, sub-articles 7(a) (ii)–(v) and 8(a)(i)(b)–(e), should be referred to respectively. The effect of UCP 600, sub-articles 8(a)(i)(b)–(e) can be modified by the wording of the confirmation advice as indicated in Chapter 10, section 10.1.2.

◆◆ By negotiation

–– A confirming bank must advance funds or agree to advance funds to the beneficiary on or before the banking day on which reimbursement is due to it. Negotiation is effected without recourse.

–– A nominated bank may advance funds or may agree to advance funds to the beneficiary on or before the banking day on which reimbursement is due to it. Negotiation is effected either with or without recourse.

–– An issuing bank cannot issue a documentary credit that is available with it by negotiation. An issuing bank can only pay at sight, accept a draft and pay at maturity, or incur a deferred payment undertaking and pay at maturity. An issuing bank does not negotiate.

17.2.1.1 Considerations

As mentioned in Chapter 7, an issuing bank, depending on the terms of its documentary credit, may allow a nominated bank to obtain reimbursement by sending to it a SWIFT or telex message claiming reimbursement for a complying presentation that has been made, or by authorising the nominated bank to debit the account of the issuing bank that is held with that nominated bank, or by authorising the nominated bank to claim reimbursement from a reimbursing bank, or by undertaking to reimburse the nominated bank in accordance with its instructions, upon receipt of a complying presentation.

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CDCS Training materials-Examining documents

 

 

 

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