Negotiation
Definition: 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.
Reimbursement requirements:
(usance transaction) authorisation to (a) debit the account of the issuing bank held with the nominated bank or (b) to claim reimbursement from a named reimbursing bank. Alternatively, the issuing bank agrees to reimburse the nominated bank at maturity according to its instructions.
(sight transaction) The issuing bank agrees to reimburse the nominated bank according to its instructions. (Note that any authorisation to debit an account or to claim reimbursement from a reimbursing bank, results in the same circumstances as a credit available by payment - which can be detrimental to a nominated bank).
Confirmed documentary credit - once negotiation effected (advance or agreement to advance), no recourse.
Unconfirmed documentary credit - once negotiation effected (advance), recourse exists to the beneficiary. If the credit is not confirmed, the nominated bank has a choice of whether or not to act on its nomination and negotiate.
To have negotiated, requires the nominated bank to have either advanced funds (less interest costs) or to have agreed to advance funds on or before the date that it expects to receive reimbursement.
Financing
Acceptance:
An accepted draft may be discounted by the nominated bank or another bank. See UCP 600 sub-article 12 (b) regarding purchase by the nominated bank that has accepted the draft.
UPAS - Usance Payable At Sight - allows for a usance draft to be accepted but the beneficiary to be paid on a sight basis with interest costs for account of the applicant. Another variant is a documentary credit payable, say, 180 days sight but the beneficiary is to be paid, for example, after 60 days sight.
Deferred Payment:
UPAS - Usance Payable At Sight - allows for a deferred payment undertaking to be incurred but the beneficiary to be paid on a sight basis with interest costs for account of the applicant. Another variant is a documentary credit payable, say, 180 days sight but the beneficiary is to be paid, for example, after 60 days sight.
A deferred payment undertaking that has been issued by the nominated bank, under a confirmed or unconfirmed documentary credit, may be prepaid by that nominated bank. See UCP 600 sub-article 12 (b) regarding the prepayment of the undertaking by the nominated bank. Note that under sub-article 12 (b), a nominated bank is not authorised to prepay an undertaking that has been issued by another bank i.e., the issuing bank or confirming bank. A separate authorisation would need to be received from the bank that issued the undertaking.
No bank is under any obligation to provide finance under a draft that it has accepted or a deferred payment undertaking that it has issued.
This subject is covered in far greater detail within our training module ‘documentary credits in practice' which can be purchased at https://www.tradefinance.training/shop/