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Negotiable
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Bankers Acceptances
The
Creation of a Bankers Acceptance
The Market for Bankers Acceptances (Member
section)
Borrowers (Member
section)
Accepting Banks (Member
section)
Dealers (Member
section)
Investors (Member
section)
The Outlook for Bankers Acceptances (Member
section)
A bankers acceptance, or BA, is a time draft drawn on and accepted by
a bank. Before acceptance, the draft is not an obligation of the bank;
it is merely an order by the drawer to the bank to pay a specified sum
of money on a specified date to a named person or to the bearer of the
draft. Upon acceptance, which occurs when an authorized bank employee
stamps the draft "accepted" and signs it, the draft becomes
a primary and unconditional liability of the bank. If the bank is well
known and enjoys a good reputation, the accepted draft may be readily
sold in an active market.
The
Creation of a Bankers Acceptance (more
info)
Acceptances arise most often in connection with international trade: U.S.
imports and exports and trade between foreign countries. An American importer
may request acceptance financing from its bank when, as is frequently
the case in international trade, it does not have a close relationship
with and cannot obtain financing from the exporter it is dealing with.
Once the importer and bank have completed an acceptance agreement, in
which the bank agrees to accept drafts for the importer and the importer
agrees to repay any drafts the bank accepts, the importer draws a time
draft on the bank. The bank accepts the draft and discounts it; that is,
it gives the importer cash for the draft but gives it an amount less than
the face value of the draft. The importer uses the proceeds to pay the
exporter.
The bank may hold the acceptance in its portfolio or it may sell, or rediscount,
it in the secondary market. In the former case, the bank is making a loan
to the importer; in the latter case, it is in effect substituting its
credit for that of the importer, enabling the importer to borrow in the
money market. On or before the maturity date, the importer pays the bank
the face value of the acceptance. If the bank rediscounted the acceptance
in the market, the bank pays the holder of the acceptance the face value
on the maturity date.
An alternative form of acceptance financing available to the importer
involves a letter of credit. If the exporter agrees to this form of financing,
the importer has its bank issue a letter of credit on its behalf in favor
of the exporter. The letter of credit states that the bank will accept
the exporter's time draft if the exporter presents the bank with shipping
documents that transfer title on the goods to the bank. The bank notifies
the exporter of the letter of credit through a correspondent bank in the
exporter's country.
When the goods have been shipped, the seller presents its time draft and
the specified documents to the accepting bank's correspondent, which forwards
them to the accepting bank. If the documents are in order, the accepting
bank takes them, accepts the draft, and discounts it for the exporter.
At this point, the transaction is complete from the exporter's point of
view; it has shipped the goods, turned over title to them, and received
payment.
Once the bank has passed the shipping documents .................
More
information is provided in the Member Area
Recommended further reading:
Commercial
Paper Outstandings Federal Reserve
Guarantees
Bank Guarantees for officially
supported exports
Zero-Coupon Instruments
The mechanics of prime
bank SLCS and guarantees
Books
on Financial Instruments
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