negotiation is a obligation for confirming bank or nominated

[edilee]

Hello my friends
suppose you are confirming bank and the credit is available by negotiation at your counters
are you in a obligation to negotiate the documents or a draft (that means you had to discount)
or is there an opportinity for you wait and pay at the maturity date like a regular deferred payment.
What is the main function of negotiation
thanks in advance

[iLC]

if there is a request for negotiation, then the confirming bank must negotiate a complying presentation as per article 8. there is no other option at their discretion.
in this case the main purpose of negotiation is to allow the beneficiary to have the money before maturity while the interest is on the account of the beneficiary (usually)

[edilee]

thanks iLC
I need a bit more clarification on a negotiation of L/C
how the discount rate is being determined. is it (discount rate) certain at the begining of the L/C (on mt 700) . And whats happens if they don't agree on the charges.

[ajoy]

Hi

It is true ,If you confirm an LC you have effectively stepped into the issuing bank's shoes with all rights and obligations therein.

So for LC available by negotiation , confirming bank must negotiate the docs presented and pay or commit to pay on maturity ,if docs are in order ( just as an Issuing bank would do).

Assuming docs are in order, this implies 1) for sight nego LCs must negotiate and pay the bene without waiting for reciept of funds from IB.

And 2) for term nego LCs confirming bank must negotiate and pay on maturity

( irrespective of whether they recieve funds from IB on or before or after maturity date)

There is no obligation however to discount and pay a term nego LC on sight basis. Confirmation does not obligate discounting.

how the discount rate is being determined. is it (discount rate) certain at the begining of the L/C (on mt 700) . And whats happens if they don't agree on the charges

as for above query, the interest /discounting rates are mutually agreed between bank and bene in the market and can be fixed/quoted in the LC itself. In case the parties dont agree on charges there will be no discounting I guess though the confirming bank will still have to negotiate the docs.

cheers

[edilee]

thank you ajoy
sory but I did not understand the main function of negotiation about why it is necessaray,( why it is being written on mt 700, available by negotiation and if it is not being written whats happens) and what is the difference as the confirming bank or nominated bank could have right to discount if they agree.

[ajoy]

Hi

Not sure if I understand your query precisely.

Maybe you should step back a little and look at the methods by which an LC is available : ie

Available
1) By nego (sight and term)
2) By payment
3) By acceptance
4) By deferred payment
( sometimes an LC may be available by mixed payment too but above are the basic 4)

The above 4 are suitable to meet certain requirements and situations. I think if we understand the differneces - rights /obligations etc of various parties - implied or otherwise in these 4 cases that would clear up any doubts related to any one particular method.

Of course if you would like to we can discuss them all but as I said I am not quite sure if that is what you are looking for.

cheers

[edilee]

yes you are all right ajoy
may be I confused but my question is simple
.
lets suppose we as a confirming bank received a letter of credit payable 180 days after shipment date (deferred payment lets say payment maturity date fall on 15 april xxx)

we confirmed the L/C (available by negotiation) (payable 180 days after shipment date)
are we in a obligation to negotiate thats means discount the L/C before maturity date?
Why by negotiation is being indicated on MT 700. am I wrong that always there is an opportunity for nominated bank for discount (as long as authorized by issuing bank according to ucp art.12) so I think no need indicate by negotiation on L/C I hope you understand me

[ajoy]

You say:

[we confirmed the L/C (available by negotiation) (payable 180 days after shipment date)
are we in a obligation to negotiate thats means discount the L/C before maturity date?
Why by negotiation is being indicated on MT 700. am I wrong that always there is an opportunity for nominated bank for discount (as long as authorized by issuing bank according to ucp art.12) so I think no need indicate by negotiation on L/C I hope you understand me
yes you are all right ajoy
may be I confused but my question is simple
/quote]

Let me try and answer as below:

Yes, you are obliged to negotiate if you have confirmed. However, 'negotiate' doesnot mean 'discount'.

'Negotiation' simply means you pay or promise to pay on due date ( i.e 180 days after shipment in your case) from your pocket in exchange for the negotiabe docs and get reimbursed by the Issuing bank in due course. You of course claim interest for the period you are out of pocket. If you donot pay before recieving funds from the Issuing Bank then you are 'not negotiating' at all.

( I know in practice this is not the case many times in many markets/countries i.e the bene is paid only after remibursement from IB has been recieved or authorised for the sight nego LC for example. This can be so even where the said LCs are confirmed.)

Also, in practice when a term LC is issued available by negotiation and is confirmed the bene does expect to get it discounted. So some times the bankers and customers alike think that 'discounting' not just 'negotiating' is an obligation for a confirming bank.

If as confirming or nominated bank you donot discount a term negotiation LC it is very much like a deferred payment LC in the sense that the bene will recieve payment only on due date.

The 'deferred payment' LC was supposedly designed to avoid 'stamp duties' on drafts. Although a court ruling made this controversial during the UCP 500 days , it is very mch possible to pay the bene upfront or effectively discount a 'deferred Payment' LC too. (The new UCP makes that clear though some of us belived that dscounting was such LCs was fine in UCP 500 days too.) So you see you could be discounting a 'deferred payment ' LC confirmed or otherwise but not discounting a 'negotiation' LC at all.... ( That is where your question probably comes from.)

My take finally is that the confirming bank is never under an obligation to discount by fact of being an confirming bank. Further, since the purpose of confirmation is only to provide bene protection from country risk and IB risk I donot see any issues with this fact.

......

Lastly you said,

so I think no need indicate by negotiation on L/C I hope you understand me

If we go by your argument then making such an LC available by 'negotiation' means that you are giving the 'confirming bank' and bene the option to 'discount if they so desire.......

Cheers