Data analysis – pros and cons

| 18-04-2018 | Lionel Pavey |

 

With the advent of computing and ever more powerful processing capabilities, we are living in a time where there is more and more data available within a company. Advocates of data mining speak of the advantages that can be obtained by analysing all the data and discovering trends within the data. But there is also the risk that we end up being swamped by the data overload – so much data, so little time. If we want to analyse all our data, what is it that we truly want to find? How can we interpret all the data and arrive at beneficial conclusions?


Treasurers and cash managers are long time users of data analysis – it is used to go from a macro level to a micro level for individual transactions. When designing a cash flow forecast it is essential to take the micro approach. There will always be peak days for outflows – wages are paid, normally, on 1 specific day of the month; on the last working day of the month there is large expenditure relating to taxes and social premiums. Additionally, if the company works with monthly subscriptions, there will be peak days for inflows as all the renewals take place. These “exceptional” items need to be input as hard data on the relevant working days to assist in presenting an accurate forecast.

Another application of data analysis is to interrogate the actual Days Sales and Days Purchasing Outstanding – DSOs and DPOs – that make up the cash conversion cycle. A lot of unnecessary working capital can be tied up in this process. Understanding the transactional characteristics of individual debtors and creditors can be very beneficial to freeing up working capital. Furthermore, it allows the company to review their relationships – is it worth maintaining certain contacts if they do not meet the agreed terms and conditions on their trade transactions.

It is also possible to conclude that certain clients could benefit from a more advantageous pricing policy. Rewarding those that comply leads to better relationships and the improvements in cash flow can help reduce external borrowing requirements.

When attempting to analyse data, it is imperative to first understand what you are looking for. Obvious metrics could be month on month sales or purchases, seasonal effects on turnover, new products, promotional offers etc. The act of analysing data, together with the awareness within the company that the data is being analysed, can lead to anomalies caused by people’s actions. Data input could be subject to a form of “window dressing” – entries are made before the end of the month and then corrected in the following month.

It is possible to conclude that there is a trend in the data – some people even look for these – that could lead to a false sense of conclusion. There is also the danger that 2 different streams of data are linked to each other because they show the same trends. When analysing data is it necessary to be open minded about the expected outcome. If people start analysing with a preconceived idea of what the outcome should be, human nature can intervene and the data is interpreted in a way that justifies the preconceived idea.

Data analysis is a technical discipline that can overlook the fundamentals. Before the CDO crisis of 2008, most banks agreed with the interpretation of the underlying data within the systems, without challenging the reality of the scenarios being presented. Even after the crisis started, the banks were unable to foresee the severe impact that it would have on the whole financial market. I have a curious leaning to analysing long term interest rates – I have collated data on Interest Rate Swaps since the inception of the Euro. Whilst I am able to spot long term trends, I have failed in ever calling the top or the bottom of the market.

When analysing data, it is imperative that the basic fundamentals of a company and its products is never forgotten, If sales are down, a more fundamental approach needs to be undertaken. Are our competitors cheaper, are their products better, is the economy in a downturn, are our products obsolete?

Analysis should always be undertaken, but the results must always be weighed up against the reality of the marketplace. It is too easy to draw conclusions – it gives the illusion that the analysis is good.

A lot of good things can come from data analysis, but it must not exclusively determine the actions that a company takes in its quest for growth and survival.

Lionel Pavey

Lionel Pavey

Cash Management and Treasury Specialist

 

Short term financing – lines of credit

| 17-04-2018 | treasuryXL |

Cash PoolingThere are many instruments that can be used to obtain short term funding. We have touched on some of them earlier in this series. This article is all about lines of credit. These are normally provided by banks of other financial intermediaries and help corporates with their short term funding needs. At first glance is might appear to be the same as a short term loan, but there are some clear differences. Normally, the financial institute that is the counterparty, will provide you with a line of credit – after appropriate inspection – which sets a specific limit on the amount of credit to be extended. Let us see how this works.

An agreed line of credit will contain, within its contract, a few simple terms:

  • The maximum amount that can be drawn
  • The minimum amount that can be drawn
  • The minimum and maximum tenor
  • If based on floating rates – the base will be specified
  • The additional margin rate above the index rate
  • The end date of the facility
  • The facility fee – usually expressed in basis points

Facility Fee

When a bank extends a line of credit, they are actually earmarking these funds in their books – they have a contingent liability. The facility fee can be seen as the cost of the arrangement. Normally the facility fee is paid monthly on the notional amount outstanding on the facility. In other words, if 70% of the facility was not being used, then a facility fee would be owed at the end of the month on a pro rata basis for this amount.

Drawdowns are communicated via the agreed channels and the bank credits the client. Lines can either be secured or unsecured – a secured line would attract a lower interest rate payable. Furthermore, normal corporate governance would apply in respect of bank compliance – agreed ratios must be maintained in order to keep the facility running.

The main advantage with a line of credit, is that the client has the flexibility to borrow exactly the amount that they require – given the contract conditions – and also have flexibility regarding the tenor. With a traditional loan, they would receive all the funds on the first day, irrespective of if they actually needed all the funds on that day.

Interest is only paid on the amount borrowed – not on the whole facility. For the balance, as mentioned earlier, a facility is payable. Due to its revolving nature, the facility can be used for many times during the agreed life of the facility. This gives the borrower enormous flexibility and ensures that they never need to borrow more than they actually require.

This product is normally used for operational issues, that are influenced by specific factors. It could be that a company is exposed to seasonal factors that result in a shortage of cash. A line of credit enables the company to smooth out these peaks and troughs and ease the bottlenecks restricting their operations. Additionally, due to the time lag inherent in many companies between delivering goods and receiving payment a line of credit ensures continuation of the daily operations.

The product can be renewed, but will be subject to a new inspection and, possibly, new terms and conditions at renewal. For companies that experience wide fluctuations in cash flows, this is a useful product to arrange their short term funding.

 

If you have any questions, please feel free to contact us.

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Repurchase Agreements – alternative short term funding

| 16-04-2018 | treasuryXL |

 

There are times when a corporate needs to borrow funds – this can be accomplished in a manner of ways. If the corporate actually held securities (Government paper, bonds etc.), it could consider entering into a repurchase agreement – better known as a Repo. This transaction entails a trade where the corporate sells securities at an agreed price and date to a counterparty and purchases them back at a future date for an agreed price. In return, the corporate receives cash – in essence, a Repo is a collateralised loan. Let us look at the working and reasons behind this money market product.

As a funding instrument, repos have been around for 100 years – originally used by the Federal Reserve to facilitate open market operations. As a repo is a collateralised loan, the interest rate is, normally, lower than for unsecured lending. The major factor is the type of collateral that is offered. This can normally be Government paper, but can also include other forms of bonds and securitised paper. The interest amount is not paid separately, but included in the final price upon redemption. The classic term for a repo is a “sell and buyback” – the paper is sold in exchange for a principal amount and bought back on the agreed future date. The counterparty that buys the paper is entering into a reverse repo.

By offering the paper as collateral, the lender is entering into a secured transaction – if the borrower defaults, the lender still holds the paper. The preference in the market is for high quality liquid securities, though markets can be found for more opaque paper. After the financial crisis, the demand for repo trading rose sharply as the interbank market was reluctant to extend unsecured funding to counterparties.

The paper falls into 2 distinct categories – specials and general collateral. A special refers to a specific security (recognised by its unique ISIN number) that is in demand. These are bonds that are normally being very heavily traded in the market and market makers need to cover their short positions by borrowing the paper. As such the rates on specials can be appreciably lower than on normal repos – and far below the rates on the interbank money market. In particular times of shortage, rates can even be negative.

General collateral is any paper that is accepted as collateral at that moment – it could be any German Government paper as this is deemed by market participants as being of equal value and standing. Most collateral is subject to a haircut – due to the additional work involved and the potential credit risk. This means that a bond with a face value of EUR 1 million can only be used as collateral to borrow EUR 950,000. Whilst these loans are collateralised, and often cover Government paper, the is always a specific credit risk.

For the buyer of a repo, they are lending funds and receiving collateral. One of the main players on the buy side are Money Market Funds. For the seller there is an opportunity to receive short date finance whilst pledging assets that they are holding in their portfolio.

Repos normally have a short tenor – from overnight to 3 months. They facilitate the short dated market and provide funding at attractive rates, and assist bond traders in covering their positions.

If you have any questions, please feel free to contact us.

 

 

Cashless society – the backlash

| 13-04-2018 | treasuryXL |

Last week an article appeared on the BBC website about the current situation in Sweden. They have embraced the world of digital payments – cash payments in the retail sector now amount to only 15% of the total, compared to 40% in 2010. But against this resounding success, there is a growing unrest among the elderly and other groups perceived as vulnerable. The majority of the banks in Sweden have stopped customers from withdrawing or paying in cash at the banks. So, what are the consequences in a cashless society and how will digital money perform in the future?

75% of Swedes claim that they hardly use cash anymore – they take advantage of digital payments via cards, mobile phone and online facilities. The counter argument is that as long as people have the right to use physical cash and it is permitted by law, the people should be free to choose their method of payment. Those people that are protesting are normally seen as the elderly who have yet to embrace the culture and are still adverse to using digital technology. There are also many elderly who have no access to a computer at home who are now facing additional costs in a cashless society.

The crux of their argument that it should not be more expensive to enter into transactions if they decide not to use digital services. Riksbank (the Swedish Central Bank) adopted a cautionary stance in their annual report, stating that whilst progress was good, this must not result in a part of society from being excluded from the payment markets. Whilst the progress towards a cashless society looks inevitable, a survey in Sweden has shown that 70% of Swedes would still like the choice to pay with cash in the future.

If we move towards a completely cashless society, this will have a profound impact on the banking industry. Digital cash can be issued by the central bank directly to residents. It will not require the current level of intermediation that commercial banks currently provide to disperse money. Cash, as currently used, provides a certain level of anonymity – this trait would cease to exist if central banks issued digital currency. A fully digital currency would shorten the time needed for transactions to be settled and replace the plethora of existing settlements systems and exchanges.

It would appear that the biggest benefit would come in cross border payments – an area of banking that is still relatively slow and expensive to implement.

Cash is still king, but it would appear that it is starting to be seen as an old fashioned and inefficient means of settlement in an increasingly digital world.

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Buy now, pay sooner – dynamic discounting

| 12-04-2018 | Lionel Pavey |

 

We live in a time of very low interest rates which translates to lower funding costs. However, at the same time, obtaining credit is becoming more difficult as banks are reluctant to lend in the ways that they did years ago. This is caused by the need for additional financial buffers to comply with all the regulatory issues that surround modern day banking. Credit is still available via other avenues – look at P2P lending for example. When all else fails, it is necessary to look at one’s own internal supply chain to see how financing can be facilitated. Here is a report on the practice of dynamic discounting.

Dynamic discounting

As a corporate is common to purchase goods and services on the basis of receiving an invoice and paying at a later date. It is normal to see invoices stating that payment must be made within 30 days of the invoice date – not the acceptance date. As an incentive to pay the invoice early many companies offer a discount – the classic example is called 2/10 net 30. Breaking down this code shows that a 2 per cent discount is offered on the face amount of the invoice if it is paid within 10 days of the invoice date, otherwise payment is expected within 30 days.

Whilst 2 per cent might not sound very tempting, we need to look at the mathematics that lie behind this:
On an invoice for EUR 1,000 this means a discount of EUR 20. If we decided not to use the discount and only pay after 30 days we would have held onto our EUR 1,000 for an extra 20 days – this being the difference between the early payment date and the standard payment date. At present, we might make 1 per cent interest per annum on our bank account. The interest earned on EUR 1,000 for 20 days at 1 per cent, would reward us with EUR 1.11 – or, put in other words – EUR 18.89 less than if we paid early.

Why offer a discount?

• The supplier wants to lower their banking costs and improve their ratings
• The supplier needs the money
• Banks are not willing to lend money to the supplier
• The supplier is worried about their level of exposure to credit risk and counterparty risk
• It gives a supplier a useful insight into the business practices of their clients – if they calculated the advantage of taking the discount and declined, could there be inherent problems with the financial health of the client

Also, generating your own internal supply chain finance operation lessens the reliance you have on external funding from banks or factoring agencies.

A more modern adaptation of this practice is the development of discounts that are truly dynamic and work on a sliding scale. The highest discount is given for the fastest payment, and then progressing down in stages till the original invoice settlement date. This gives buyers an opportunity to still receive a discount, but not being tied down to the original 10 day period.

Irrespective of the financial gains offered by discounting, a more important aspect is positive growth in the working relationship between supplier and client. By supporting each other the bonds of trust increase and can lead to new and better opportunities together.

If you are interested to know what the effect of these changes can be on a coupon payment and calculation, please contact us for more detailed information.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist

 

Basis Swap – how to convert your exposure

| 10-04-2018 | treasuryXL |

At the moment, there is a growing movement within interbank markets to replace all the existing interbank offer rates that are used to price a myriad of financial instruments. The motivation for this movement has been the revelation that these indices have been fraudulently priced by banks delivering inaccurate prices for the daily fixing. At the moment the markets are first looking at secured overnight lending indices – but these are not complimentary to all the existing instruments that regularly reference a longer tenor on an unsecured basis. These can lead to problems with the asset and liability management of a portfolio – not just for banks, but also for corporate clients.

So, what is a basis swap and how does it work?

A basis swap is an interest rate swap where both legs reference a floating rate – either in the same currency or on a cross currency. Examples would be a 3 month Euribor exposure against a 6 month Euribor exposure, or 3 month USD Libor versus 3 month GBP Libor. In a normal positive yield curve the interest rate for a longer tenor is higher than for the shorter period – 3 month USD Libor is 2.33746% and 6 month USD Libor is 2.47219%. There are 2 main reasons for the difference in price – the tenor is longer, therefore the risk of repayment is lengthened and the individual credit rating of the counterparty is also affected.

Before the financial crisis of 2008, basis swaps were traded, but not given much attention. Their primary function was for transforming the asset and liability management in the same currency. It was actively used in the cross currency market where a bank might raise long term funds in Japanese Yen, but needed to convert the proceeds into USD. Furthermore, the consensus at the time was that 1 master curve could be built to price all products – this used short dated deposits, 3 month interest rate futures and long date interest rate swaps to build the single curve.

This meant that a 6 month deposit was built on the basis of a 3 month deposit and a 3m v 6m FRA (Forward Rate Agreement) . In such an instance there would be no arbitrage possible and the market did not really look at the basis risk. But the basis risk was inherent and certain market players exploited this misconception – particularly banks that received fiduciary funding via Switzerland.

Today, there is far more awareness of the basis risk. 3 month Euribor is -0.329% and a 3v6m EUR FRA is -0.33/-0.31%. However the 6 month Euribor is 0.270% (we will leave you to do the calculation)

As a longer tenor has a higher interest rate (in normal market conditions) a basis swap referencing a 3 month versus 6 month payment would see the 3 month period being quoted as flat rate plus a premium, and the 6 month period being shown as a flat rate. A typical quotation for a 1 year EUR basis swap referencing a 3 month against 6 month Euribor would be priced around at about 5 -6 basis points premium. This means if you were to pay the shorter period of 3 months you would pay the base of 3 month Euribor plus 5-6 basis points every 3 months for 1 year, against receiving the 6 month Euribor flat every 6 months.

This product allows you to transform your position, but also gives insight into how the market sees the continuous 3 month and 6 month curves, together with their inherent basis risk.

An interest rate swap curve that references a 6 month floating leg, will normally be built from an interest rate swap curve built off a 3 month floating leg, with an adjustment for the 3m v 6m basis swap to reflect the higher price on a 6 month curve.

 

1 year to Brexit – the banking exodus?

| 09-04-2018 | treasuryXL |

If all goes as stated, then the United Kingdom will be leaving the European Union on 29th March 2019. There has been fierce competition within the EU to entice banks away from London and to settle within the Euro zone. In London there is a fear that there will be a banking exodus –  an industry that has prospered and made London a global centre. At till now banks have been able to sell their services into Europe via London, that this is envisaged to change. So, how are the major European cities faring in their campaigns?

What is at stake?

The scenarios of job losses are varied – 10,000 job in banking, 20,000 in further financial services. Others speak of job losses totaling more than 200,000. The large US investment banks retain more than 80 per cent of their European staff in London. The main target appears to be the Euro clearing role – a settlement service mainly in financial derivatives denominated in Euro’s that is now performed in London.

The Netherlands has certainly tried to attract interest from foreign banks and has many good qualities. Most of the population speak English, and there is a good infrastructure. Tax incentives are offered to qualified foreign workers, together with a global port in Rotterdam. The Netherlands Foreign Investment Agency is actively engaging with foreign companies, extoling the virtues of the country. Recently, Unilever took the decision to place its headquarters in Rotterdam – even though they have had a head office there for close on 100 years. Whilst there is already an appreciable physical presence of foreign banks on Dutch soil, there have yet to be any big announcements about a bank moving from London to Amsterdam or Rotterdam.

Germany, and specifically Frankfurt, have also been hard at work. The economy minister for the state of Hesse, claims that more than 20 financial institutions have chosen for Frankfurt. As of today, their names have not all been revealed. Frankfurt is an established financial centre, though discernably smaller than London. As well as banks, there are also regional corporate treasury centres, prime brokers, legal services and other ancillary groups.

Paris – that has been chosen for the European Banking Authority – is also in the picture but does not appear to be attracting the financial institutions. If banks follow the London model, then they would rather be closer to the central bank – the ECB – and that is headquartered in Frankfurt.

Relocation of the financial industry from London to Europe will be good for local employment. It is not just the direct banking industry that will be of benefit to the local communities. The support services are very significant and must also be factored into any equation.

With now less than 12 months to go till Brexit, the race will be heating up to woo the banks as the prize is very enticing and the gains to local economies very large!!

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State of the nation – the future looks bright

| 06-04-2018 | treasuryXL |

Last week, the Centraal  Bureau voor de Statistiek (CBS) released their year end data for 2017 regarding the Dutch economy. The recovery is strong – for the first time since 2008 the Netherlands complies with 2 of the important Euro criteria at the same time; the government debt is below 60% of GDP and the annual budget deficit must not exceed 3% of GDP. Furthermore, Dutch GDP grew at an annual rate by 3.2% in 2017 – this is higher than in 2016 when the growth was 2.2%. This is the strongest growth since 2007. We take a look at the data and the contributing factors.

Debt

At the end of Q4 2017, government debt was reported as EUR 416 bn. This is 56.7% of GDP, compared to 61.8% in 2016. There was a reduction of EUR 18 bn in the total debt – the largest annual fall recorded. As recently as 2014, this ratio stood at 68.0%

Budget surplus

At the end of Q4 2017, the government had a budget surplus of EUR 8 bn – a surplus of 1.1% of GDP. In 2009, this was a deficit of 5.4% of GDP. Expenditure increased by EUR 7 bn in 2017, but this was offset by an increase in revenue of EUR 12 bn. Tax revenues increased by EUR 15 bn. There was additional income of EUR 8 bn from the sale of state shareholdings in ASR and ABNAmro among others.

Inflation

There was a rise in consumer prices – CPI showed an annual rise of 1.4% in 2017. This compares with a rise of 0.3% in 2016.

Labour

Wages in 2017 increased by 1.7% and unemployment fell in 2017 – at the end of 2017 the rate was 4.1%. Shortages of available labour are being observed in the market – employers have stated that they are finding it increasingly hard to find appropriate employees. The latest reports suggest that there are 1 million vacancies, but that employers are having difficulty finding qualified people. Most of this growth appears to be coming from the small and medium sized enterprises (MKB) – large organisations are still in a round of cost-cutting and down-sizing.

The report of the Netherlands looks very rosy, but international events could impact on the health of the economy. There are threats of trade wars; Brexit will impact on trade within 1 year; the EU parliament is asking for more money in the next budget cycle; the composition of the new Italian government could cause unrest within the rest of the EU.

The future does look bright, but caution is advised on the road ahead.

What future role for CSDs in blockchain post-trade environment?

| 05-04-2018 | Carlo de Meijer |

Blockchain technology enables real-time settlement finality in the securities world. This may mean the end of a number of players in the post trade area. For a long time, central securities depositories (CSDs), as intermediators in the post-trade processing chain, were expected to become obsolete. CSDs, but also other existing players in the post-trade environment, are however changing their mind on these new technologies and on their future position in the blockchain world. Increasing regulation, legacy systems and costs pressures, are drivers for CSDs to at least embrace some aspects of blockchain. They are increasingly considering them as enabler of more efficient processing of existing and new services, instead of a threat to their existence. It is interesting to see that some of these actors – who could be potentially big losers in a distributed ledger technology (DLT) or blockchain system – are open to innovation with blockchain and willing to invest in DLT. Last January SWIFT and seven CSDs worldwide agreed on a Memorandum of Understanding to explore the use of blockchain technology in the post trade process esp. e-proxy voting.

Where do CSDs stand now?

Complex and fragmented post-trade infrastructure

The current post-trade infrastructure is highly complex and fragmented, crowded with intermediaries, and dealing with outdated legacy systems and technologies. Much of the complexity and fragmentation of the post-trade world is the result of the various participants (custodians, issuers, registrars, CSDs) holding their own, separate ledgers in order to carry out the processes. Consequently, they spend much time and resources on reconciliation and risk management, in order to ensure that transactions can be (and are) appropriately carried out. The completion of securities transactions is as a result a costly and risky business. This has important consequences, efficiency-wise.

Situated at the end of the post-trading process, CSDs are systemically important intermediaries. In the post-trade process the CSDs play a special role both as a depository, involving the legal safekeeping and maintenance of securities in a ‘central depository’ on behalf of custodians, in materialised or dematerialised form; and for the, involving the issuance of further securities by issuers, and their onboarding onto CSDs’ platforms.

Is there a future for CSDs in a disruptive blockchain world?

Blockchain: disruption in securities post-trade

DLT has the potential to heavily disrupt existing post-trade processes in financial services, impacting the business model of a number of intermediaries. This raises significant questions for the present actors in the post-trade world as their role may change dramatically or even disappear. For some actors in the post-trade world, DLT could completely replace their businesses or even make them obsolete. And others should question what will be their added-value within future DLT services.

With blockchain, that is linking trading partners directly, everything will be in place in the ledger at the time of the transaction. Institutions will no longer have to maintain their own databases in the future with DLT, as there will be only one database for all participants in the transaction.

With DLT, all of the complex systems and processes to transfer cash and equities from one account to another are not required. Everything can be embedded into the blockchain. Buyers and sellers can match transactions in seconds and all parties are aware a transaction has been done. This will heavily ease the reconciliation process. Blockchain could ultimately become the standard for financial transactions and real-time settlements, increasing transparency and efficiency in a highly fragmented industry.

Read the full article of our expert Carlo de Meijer on LinkedIn

 

Carlo de Meijer

Economist and researcher

 

Financing your international trade – documentary collections

| 04-04-2018 | Lionel Pavey |

 

Acquiring the right goods at the right price can eventually lead a company to overseas markets. International trade has certain barriers – buyers and sellers have never met and are reluctant to completely trust each other; drawing up documentation can be difficult and time consuming due to difference in law between 2 countries; agreement has to be made on the settlement currency; documentation that implies ownership needs to be sent, but the seller is hesitant to have these released to the buyer before payment has been made. This article looks at 1 of the 3 main financial instruments used in international trade – the documentary collection (DC).

What is the process?

1 – Buyer and seller agree terms and conditions for a trade to take place – the means of payment, the collecting bank (this is usually the house bank of the buyer), a detailed description of the set of documents that have to supplied.

2 – The seller (exporter) arranges for shipment of the goods to the buyer (importer) via a shipping agent and receives a transport document (usually a bill of lading) that is negotiable.

3 – The seller prepares the agreed documents into 1 package and presents these to his bank (the remitting bank). This will include the bill of lading, certificates of origin, inspection notices, a collection order stating the terms and conditions under which the bank can release the documents etc. and a draft.

4 – The remitting bank will send these documents to the collecting bank instructing the collecting bank to present the documents to the buyer and to collect the payment.

5 – The collecting bank will inspect the documents and the contract, ensuring that they are in compliance with the collection order.

6 – The collecting bank will contact the buyer stating that the documents are in order, or what discrepancies have been established; and inform the buyer about the terms and conditions of the collection order.

7 – The buyer will be shown the documents and asked to accept them. Acceptance is recognised by signing the draft. When the documents are accepted, and payment is made then the documents are handed over to the buyer.

8 – Release of the documents occurs in  2 ways – documents against payment is when payment is made at sight of the documents; and documents against acceptance is when payment is made at an agreed date in the future.

9 – The buyer takes possession of the documents allowing them to receive the goods from the warehouse or port where they are being stored.

10 – The collecting bank arranges to pay the remitting bank either immediately in the event of a sight bill, or at the agreed future date in the event of an acceptance bill.

11 – The remitting bank arranges to credit the account of the seller.

So it is a letter of credit?

No, a documentary collection is an alternative to a letter of credit. In a DC, the banks undertake no guarantee role – they merely advise, release documents and effect payments. If a buyer does not agree to the documents, they do not receive the goods, the banks do not effect payment and the seller is out of pocket. Therefore a DC is normally far cheaper than a LC.

Why use a DC?

Both buyer and seller know each other and are happy with their existing relationship.

The collections are for a one-off transaction – there is no open account between the parties.

The seller has faith in the economic and political characteristics of the importing country.

A LC is not acceptable to both parties.

Documentary collections are governed by the Uniform Rules for Collections as issued by the International Chamber of Commerce.

Lionel Pavey

 

Lionel Pavey

Cash Management and Treasury Specialist