to >- GIFT APR Sj 1 Acceptance Primer .^v \ k^ i-- "^ ^ V Foreign 1 rade Banking Corporation "^ inerica's Pioneer Discount Bank" 35 WaU Street New York Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/acceptanceprimerOOforerich Acceptance Primer 7^ Foreign Trade Banking Corporation "America's Pioneer Discount Bank'' 35 Wall street, New York ^1 4t Copyright 1918 _p Foreign Trade Banking Corporation New York "By enlarging the field for the sale of such paper there will be promoted the establishment of a general discount market which is universally recognized as an important element in the improvement of American banking conditions." Governor Harding, Of the Federal Reserve Board, This booklet aims to bring together some of the more salient facts bearing on the use of Acceptances. The numerous inquiries received by this Bank indicate a demand for elementary information. This brief sum- mary seeks to answer this demand, to describe in simple terms what the Acceptance is, how it is used, and what recommends its use as the ideal credit instrument. In supplying this information, the Foreign Trade Banking Corporation hopes it may contribute to the growing recognition of the advantages of the Accept- ance. Such recognition is certain, among other things, to have as a result the strengthening of the country's finan- cial and economic condition — its ability to adjust itself to the strain of war and to meet its competitors in the * * war after the war. ' ' "The Acceptance is the standard farm of paper in the world discount market and both on this account and because of its acknowledged liquidity earns a preferential rate." Federal Eeserve Board What the Acceptance Is The Acceptance has been defined as a draft or bill of exchange, payable at a fixed or determinable future time, the obligation to pay which has been acknowledged in writing on the face of the bill by the person to whom it is addressed. It is a readily negotiable certificate of indebt- edness which is to be liquidated at a definite future date. It is two-name paper, the acceptor being pri- marily liable. It is essentially self-liquidating. In its chief applications, it utilizes goods as the basis of credit. Based on the sstlgf of merchandise which in turn will be sold, it provides automatically the funds with which to pay the obligation at maturity. Federal Reserve Definitions The present status of the Acceptance in the United States is largely determined by the Federal Reserve Act, as amended. M F'P R;E.I a N l/K^ J ^yBA NKING CORPORATION In the regulations setting forth the conditions under which Member Banks of the Federal Eeserve system are permitted to T)t drafts, rediscount, or purchase Acceptar »" ^aid down the prin- ciples chiefly governii iployment. Two kinds of Accept ^? •iie in use — the Trade Acceptance and the Bartn>-j±Weptance, The regulations of the Eeserve Act define these terms as applied for the purposes of the Act. The Trade Acceptance, The Trade Acceptance is defined* as a special form of the bill of exchange, namely : '*A bill of exchange, drawn by the seller on the purchaser of goods sold, and accepted by such purchaser. ' ' A "bill of exchange" as used in this definition is described as "an unconditional order in writing addressed by one person to another, other than a banker, signed by the person giving it, requiring the person to whom it is addressed to pay, in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person." The Bank Acceptance. The Bank Acceptance is defined* as a bill of exchange, of which the acceptor is a bank or trust ♦Regulation B, series of 1917. Americans Pioneer I?i^c|yNT Bank » •»• '^ company, or firm, person, company or corporation engaged in the business of granting bankers' ac- ceptaniie credits. How the Tra /acceptance is Used The business practice involved in the use of the Trade Acceptance is simple. The following exam- ple is typical : 1. A, the seller of the goods, consummates a bargain with the buyer, B. The amount due is agreed upon, with a definite term for payment. 2. A draws a bill upon B, covering the amount of money due and definitely indicating the date of maturity. 3. B, provided he is satisfied that the conditions of the sale have been complied with, accepts the bill by writing or stamping across its face "Accepted," the date and place of payment, and his name, and re- turns it to the seller. 4. A may hold the Acceptance until maturity, and then submit it to B for payment. 5. Or, A may discount the Acceptance and it may find several purchasers* i)ef ore presentation for payment at maturity to B. 6. B pays at maturity. •It is in the interest of maintaining the character of the Acceptance in its role as a negotiable credit medium, for the protection of its purchasers, that the requirements of "eligibility" are prescribed under the Federal Reserve Act. See page 10. t Foreign T^feAPE Banking Corporation The Trade Acceptance Distinguished f rom the Note or Sight Draft The Trade Acceptance is free from objectionable associations sometimes attached to the promissory note or sight draft. It shows on its face that it is given for a purchase and not for a loan; nor does it cover a past-due account. It is confined to credit obligations arising from the sale of goods, and it has a definite maturity fixed as an ele» ment of a current transaction. , In a financial statement, "Acceptances Payable" are an indication that the firm's business is so ordered as to enable it to pay its accounts when due. How the Bankers' Acceptance is Used The Bankers' Acceptance enables the drawer of a bill to obtain use of a bank's credit. The buyer of merchandise, for instance, arranges with a bank to "accept" the drafts of the seller from whom he buys. An export transaction, a class in which these Acceptances are largely used, will illustrate the procedure in one of its forms, of which there are many : 8 A ^^Documentary BilV^ The foreign buyer arranges an ''acceptance credif by means of a letter of credit from his own bank to an American bank. This authorizes acceptance by the American bank of drafts, under specified conditions, drawn on the bank by the American exporter, with docu- ments attached. The bank accepts the drafts when presented, takes pos- session of the documents, and forwards them to the foreign buyer's bank. The Acceptance may now be discounted for the exporter, who thus receives cash for the goods he has shipped, and the Acceptance, as a negotiable instrument, may pass through the hands of several purchasers, to be finally presented at maturity by its holder to the accept- ing bank. This bank will be reimbursed through the foreign bank by the buyer, who, in the meantime, has had a credit for the period elapsing to the bilPs maturity and has had an opportunity to receive the goods. Such an Acceptance, as evidence of eligibility, usually has stamped across its face: "This acceptance grows out of a transaction involving the importation or exportation of goods.'' A Liquid Investment The Bank Acceptance is one of the most liquid forms of investment. Essentially self -liquidating, it is usually of short maturity, the majority of these instruments matur- ing in ninety days or less. It is certain to be paid, banking institutions being of^ssured standing. What are^'Eligible Acceptances '? Acceptances are referred to as "eligible" when they may be purchased by the Federal Reserve Banks. The basic requirements of eligibility are: 1. The acceptance must arise from an actual commer- cial transaction, domestic or foreign. 2. It must be unconditional; that is, an unconditional bill, unconditionally accepted. 3. It must be for a definite amount of money. 4. It must possess a definite maturity. These requirements are set forth specifically in the Federal Eeserve Board regulations, with their definitions of Acceptances. FEDERAL RESERVE REGULATIONS General Character of Eligible Acceptances The Federal Reserve Board prescribes* that in general to be eligible for purchase by Federal Re- serve Banks, an Acceptance ♦Regulation B, series of 1917. 10 Americans Pioneer Discount Bank ''Must not have been issued for carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States. ''Must not be a bill, the proceeds of which have been used or are to be used for permanent or fixed invest- ments of any kind, such as land, buildings, or machin- ery, or for investments of a merely speculative character. "Must have been accepted by the drawee prior to purchase by a Federal Reserve Bank. unless it is accompanied and secured by shipping documents or by a warehouse, terminal, or other similar receipt conveying security title. "May be secured by the pledge of goods or collateral, provided it is otherwise eligible.'' Eligible Trade Acceptances A Trade Acceptance must conform to the Board's definition of this instrument, and the following more specific requirements must also be met; it "Must have arisen out of an actual commercial trans- action, domestic or foreign; that is, it — Must be a bill which has been issued or drawn for agricultural, industrial, or commercial pur- poses or the proceeds of which have been used, or are to be used for the purpose of producing, purchasing, carrying, or marketing goods in one or more of the steps of the process of production, manufacture, or distribution. "It must have a maturity at time of purchase of not more than ninety days, exclusive of days of grace.'' Evidence of Eligibility, "A Federal Reserve Bank shall take such steps as it deems necessary to satisfy itself as to the eligibility of the bill offered for purchase, unless it presents prima facie evidence thereof 11 Foreign Trade Banking Corporation "Or bears a stamp or certificate affixed by the acceptor or drawer showing that it is a Trade Acceptance." (This usually reads: "The obligation of the acceptor hereof arises out of the purchase of goods from the drawer.") The Trade Acceptance must be endorsed by a member bank, Or a satisfactory statement of the financial condition of one or more of the parties to the transaction must be furnished. Eligible Bankers' Acceptances A Bankers' Acceptance^ to be eligible, must be such as described in the Board's definition, and must meet the following requirements, additional to those holding for acceptances in general ; it "Must have a maturity at time of purchase of not more than three months, exclusive of days of grace, *'Must have been drawn under a credit opened for the purpose of conducting, or settling accounts resulting from, a transaction or transactions involving — (1) "The shipment of goods between the United States and any foreign country, or between the United States and any of its dependencies or in- sular possessions, or between foreign countries, or (2) "The shipment of goods within the United States, provided the bill at the time of its ac- ceptance is accompanied by shipping documents, or (3) "The storage within the United States of readily marketable goods, provided the acceptor of the bill is secured by warehouse, terminal, or other similar receipt, or (4) "The storage within the United States of goods which have been actually sold, provided the acceptor of the bill is secured by the pledge of such goods. "Or it must be a bill drawn by a bank or banker in a foreign country or dependency or insular possession of the United States for the purpose of furnishing dollar exchange. "In this latter case the bank or banker draw- ing the bill must be in a country, dependency, or possession whose usages of trade have been determined by the Federal Reserve Board to re- quire the drawing of bills of this character." 12 Americans Pioneer Discount Bank Evidence of Eligibility. A Federal Reserve Bank must be satisfied either by reference to the Acceptance itself or other- wise, that it is eligible for purchase. "Satisfactory evidence of eligibility may consist of a stamp or certificate affixed by the acceptor, in form satisfactory to the Federal Reserve Bank. "No evidence of eligibility is required with re- spect to a bill accepted by a national bank. ''Bankers' Acceptances, other than those accepted or endorsed by Member Banks, shall be eligible for purchase only after the acceptor has furnished a satisfactory statement of financial condition in form to be approved by the Federal Reserve Board, and ''Has agreed in writing with a Federal Reserve Bank to inform it upon request concerning the transactions underlying such acceptances.'' Benefits Conferred by Eligibility Marketability Assured The eligibility regulations of the Federal Re- serve Board aim at maintaining the character of the Acceptance as a fully and freely negotiable credit instrument. They thereby serve to protect the purchaser of the paper. "Eligibility" provides protection for the purchaser of the Acceptance, which is confined not alone to his knowl- edge of the names attached to the paper but is assured by the fact, as shown on its face, that, having con- formed to the Board's requirements, the Acceptance can be readily rediscounted at Federal Eeserve Banks. 13 Foreign Trade Banking Corporation Self -Liquidating Character Made Certain The conditions demanded by eligibility are such as to make the Acceptance essentially self-liqui- dating. The merchandise transaction involved virtually finances itself. Federal Reserve Board's Encouragement to Use of Acceptances The Federal Keserve Board has steadily encour- aged development of the Acceptance. It has by its rules and regulations created conditions giving special advantages to the Acceptance as a nego- tiable instrument of credit. The Board has established a preferential rate in its favor. It has enlarged the facilities for rediscount. It has given practical freedom from the limitation placed upon banks to loan to one person or concern upon single- name paper to the extent only of 10 per cent of the bank's capital and surplus. It has thus broadened banking facilities. The borrower's discounting ability is made practically unlimited so far as he can produce satisfactory Trade Acceptances of his customers. 14 Advantages of the Trade Acceptance Method The banker, manufacturer and merchant, and the commercial and financial structure of the coun- try as a whole are benefited through the broad adoption of the Acceptance — the premier self- liquidating, two-name paper — in the conduct of domestic and foreign trade. Advantages to the Banker The Trade Acceptance method is of advantage to the banker in that: It lessens his lending hazard By substituting two-name paper for unsecured single- name paper. By assisting him to measure his risks more accurately, showing the true credit standing of both seller and buyer of goods. By dividing risks, giving him an opportunity to take paper of comparatively small denominations signed by many different acceptors. 15 Foreign Trade Banking Corporation It promises a freer and steadier use of discount- ing facilities. It increases borrowing possibilities, strengthen- ing the bank's customers' credit. It Increases availability of assets. Negotiability of the eligible Trade Acceptance is as- sured by the readiness with which it can be rediscounted at the Federal Reserve Bank. It provides a high-class secondary reserve. Advantages to the Seller Employment of the Trade Acceptance is of ad- vantage to the seller of goods, because resulting economies and fuller utilization of capital place him in a better competitive position. It enables the seller to eliminate abuse of credit by the buyer. Transactions are concluded promptly and definitely, do- ing away with evils such as unearned discount, unwar- rantable extensions, etc. It puts on the buyer responsibility of proving correctness of the transaction. The buyer by accepting supplies an acknowledgment that he finds the account in order. Possibilities of dispute and litigation are mini- mized. It lessens expense of collections. 16 Americans Pioneer Discount Bank If the Acceptance is made payable at the seller's bank, collection requires no effort on the seller's part. It becomes a detail of banking machinery. It reduces losses on bad accounts. The Acceptance acts as a check on customers' tendency to overbuy. It helps the seller economically to extend the accommodation, Practically without impairment of his capital, because employment of the Acceptance, by virtue of its eligible quality, enables each transaction substantially to finance itself. It does away with "dead" capital. The seller's capital is not tied up in ' 'frozen" accounts. It is relieved from unremunerative financing of cus- tomers. It is transformed into two-name, self-liquidating com- mercial paper readily convertible into cash at low dis- count rates, whereas book accounts must usually be sold at a high rate. It thus lessens need for working capital. And consequently the ratio of earnings to capital actu- ally employed is increased. It provides a reliable secondary cash reserve. The seller thus having his capital in proper liquid form is fortified to meet unexpected business depression. It enables the seller to conduct his business more systematically. Because of certainty of regular influx of money and assured borrowing power. Places him in better shape to keep track of his outstand- ing obligations. 17 Foreign Trade Banking Corporation Advantages to the Buyer The Trade Acceptance benefits the buyer of goods because It benefits his business reputation, strengthen- ing his credit with sellers, indicating That he does not overbuy. That he is prepared to meet obligations promptly at maturity. That he is entitled to consideration as a preferred buyer. It enhances value of his paper when he borrows. When negotiated, it will benefit by the best preferential discount rates, because of his proved willingness to make prompt payment in assuming the obligation of accept- ances. It frees his transactions with the seller from dependence on special favors. It makes for systematic, efficient routine in his business, eliminating waste effort. It automatically prevents accumulation of over- due accounts. It puts a check on overextension in buying. General Advantages Compared with the open book account, cash dis- count and single-name paper methods of conduct- ing business transactions, the use of the Trade Acceptance is more sound and economical, because it is founded on a logical basis. 18 Americans Pioneer Discount Bank The Trade Acceptance bears evidence on its face of the rational relationship of buyer, seller and lender, and of its security. The Trade Acceptance improves trade relations between buyer and seller by clearly defining their respective obligations. It enables invested capital to do more than its present volume of work with less risk. It lowers borrowing rates because of the produc- tion of standard paper, elimination of unnecessary risk and because the Federal Eeserve Board gives to it preferential rediscount rates. It plays an important part in providing national financial commercial preparedness. "In the entire list of methods and expe- dients commonly employed in the class of busi- ness which is conducted upon a credit basis, I know of none more safely founded, more logi- cally arranged, more economical in operation or better calculated to protect the proper in- terests of all parties concerned than the Trade Acceptance. ' ' Lewis E. Pierson. 19 The Acceptance a Promotor of Foreign Trade The value of the Acceptance in foreign business is well recognized. The regulation of the Federal Keserve Board, providing for Acceptances to fur- nish dollar credits, has heightened its advantage to the American exporter and importer. Its use in foreign trade meets the difficulties of manufacturers in the United States who have been hampered by inability to grant credits as liberally as their foreign competitors. It practically solves the long-credit problem. Through the use of Acceptances, the exporter avoids the necessity of locking up his capital. He obtains immediate reimbursement for the value of his shipment by negotiating the draft. He is thus enabled promptly again to use the money for a new transaction. Acceptances arising from foreign trade have given rise to a vast amount of financing formerly carried on chiefly through London but growing rapidly in New York. 20 Americans Pioneer Discount Bank Supplying a Gfroiving Need London has benefited by the operation of dis- count banks especially devoted to this form of business. In America, the Foreign Trade Banking Corporation, as a pioneer in the field, seeks to supply a similar need. •Service for the purpose of building up and hold- ing our foreign patronage, is at present much under discussion. While educational work relative to proper packing and similar features is important, these after all are questions of detail. Of the greatest importance to help us achieve this most desirable result is the matter of credits. A more elastic credit system, in which the Acceptance and the discount bank are vital elements, together with adequate shipping facilities, is what this coun- try chiefly needs to maintain its recently won supremacy as an exporter. 21 An American Discount Market Opportunity for the establishment of an Ameri- can discount market has been opened by the pro- visions of the Federal Keserve Act and its amend- ments. The Acceptance is acknowledged to be "the standard form of paper in the world discount market.'' Its en- joyment of the purchase and rediscount privileges by Federal Reserve Banks under the rules of eligibility is an important factor in the development of a broad dis- count market here. The regulation permitting purchase by the Federal Re- serve Banks of Acceptances drawn for the purpose of furnishing dollar exchange has been an incentive to a wider use of this kind of credits in foreign trade trans- actions, with accompanying demands for larger market facilities for Acceptances. Improvement in the machinery of financing for- eign trade in this respect is the more desirable as the war promises to usher in a period of exacting international commercial competition. In this situation is marked out the place for a bank that devotes its energies particularly to the business of discounting Trade and Bankers' Ac- ceptances. 82 Foreign Trade banking Corporation Incorporated under the Banking Laws of the State of New York 35 WaU Street New York Capital and Surplus - $2,200,000 OFFICERS George A. Gaston - - - - President Max May - Vice-President & Managing Director William T. Law . - - _ Secretary DIRECTORS George A. Gaston - President, Gaston Williams & Wigmore, Inc. Harry T. Hall - Vice-President, Merchants National Bank Max May - - Vice-President and Man- aging Director Wade Robinson - President, Wade Robinson & Co., Marine Underwriters Benjamin S. Guinness, Ladenburg,Thalmann&Co. Director, New York Trust Co, Bank, Bankers' and Trade Acceptances Domestic & Foreign Shipments of Merchandise Financed Commercial & Travelers' Letters of Credit Issued Foreign Exchange Bought and Sold ' 'America V Pioneer Discount Bank' UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW Books not returned on time are subject to a fine of 50c per volume after the third day overdue, increasing to $1.00 per volume after the sixth day. Books not in demand may be renewed if application is made before expiration of loan period. :.r.-: 7 isaa y/^^fK NOV ^ ^930 -^;\0V ^''■-' ' m26i9iO ijP 6495SA.U MOV 19 riff S!:P11!m?*' C.EP2T 192? 50w-7,'16 NOV 5 m^ Oaylord Bros. Makers Syracuse, N. Y. PAT. JAN. 21,1808 'B 392634 JMV^SITY OF CALIFORNIA LIBRARY