Negotiation vs. Discounting under LCs: What’s the Difference?

Introduction

In practice, the terms negotiation and discounting are often used interchangeably in letter of credit (LC) transactions. However, under UCP 600, they are not the same. This Q&A clarifies the distinction—especially when an LC is available with a nominated bank by negotiation.

 QUESTION

Hi,

I would like to understand the difference between negotiation and discounting, particularly in cases where an LC is available with a nominated bank by negotiation.

If the nominated bank finds the initial presentation discrepant, and the beneficiary later re-presents corrected, complying documents within the LC validity and presentation period, on what basis may the nominated bank advance funds to the beneficiary?

Sunny

_______

ANSWER

Dear Sunny,

Thank you for your question.

Negotiation vs. Discounting

Under UCP 600, the term formally used is “negotiation,” not “discounting.”

According to Article 2 of UCP 600, negotiation means:

“The purchase by the nominated bank of drafts (drawn on a bank other than itself) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the day reimbursement is due.”

In simple terms, negotiation occurs when a nominated bank purchases complying documents under the LC by advancing funds to the beneficiary before the day the reimbursement is due.

The term “discounting” is not defined in UCP 600, but it is commonly used in practice. It typically refers to a case where a bank prepays or purchases its own accepted draft or its own deferred payment undertaking at a discount prior to maturity.

In practice, the two terms are often used interchangeably, without any clear distinction in meaning.

Role of the Nominated Bank

Under UCP 600 sub-article 12(a), unless a nominated bank is also the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to do so, unless it has expressly agreed and communicated that agreement to the beneficiary.

A confirming bank, on the other hand, must honour or negotiate without recourse if a complying presentation is made.

A non-confirming nominated bank may decide whether or not to honour or negotiate, and may do so with or without recourse.

Your Specific Case

If the beneficiary re-presents corrected and complying documents within the presentation period and LC validity, the non-confirming nominated bank may, at its discretion, agree to negotiate them (with or without recourse).

In all cases, the documents will then be forwarded to the issuing bank for reimbursement or payment.

I hope this clarifies the distinction.

Best regards,

Mr. Old Man