Glossary

Acceptance Collection

This refers to the commitment by a Drawee (Importer), evidenced by their accepting a Bill of Exchange drawn on them by an Drawer (Exporter), to pay for goods at a fixed date in the future.

Acceptance Credit

A Letter of Credit which includes a term Bill of Exchange in its required documentation. The bill will be accepted by the bank on which it is drawn, usually the issuing or advising bank, and the proceeds paid to the beneficiary at maturity.

Accreting Interest Rate Swap

An accreting Interest Rate Swap is one where the notional principal amount is growing over time. Used (for example) to hedge a loan being drawn down in instalments.

Advance Payment Guarantee

Usually issued for between 10% and 20% of the contract value when an Advance Payment has been offered by the Buyer to the Seller to meet his mobilisation or other initial costs. This type of Guarantee is normally required as security for money released and therefore should be issued in a form which renders it inoperative until receipt by the Seller of the agreed Advance Payment.

Advising Bank

A bank normally located in the country of residence of the receiver of the Letter of Credit or Guarantee/Bond, used to validate the authenticity of the Letter of Credit or Guarantee/Bond before it is advised.

Amendment

A bank normally located in the country of residence of the receiver of the Letter of Credit or Guarantee/Bond, used to validate the authenticity of the Letter of Credit or Guarantee/Bond before it is advised.

Amortising Interest Rate Swap

Amortising Interest Rate Swaps calculate interest on a reducing notional principal amount over the life of the swap, in order to hedge underlying exposures whose principal amount is also reducing. Used (for example) to hedge a loan being repaid by instalments.

Applicant

The party who applies to an issuing bank for a Letter of Creditor a Guarantee/Bond.

At the Money (ATM)

1. An option is at the money when immediate exercise of the option would result in neither a gain nor a loss. This is when the underlying asset price is equal to the strike price of the option.
2. A derivative such as a swap is at the money when, for example, the swap rate is equal to the relevant current market rate, so that the net present value of the derivative is Nil.

Availability

A term used in Letters of Credit to indicate the bank nominated by the issuing bank to pay, accept, incur a deferred payment, or negotiate the Letter of Credit on their behalf.

Avalise

‘Pour Aval’ or to guarantee, is a request for an endorsement, by a bank, on a bill of exchange or promissory note effectively guaranteeing payment.

Base Currency

A Letter of Credit which includes a term Bill of Exchange in its required documentation. The bill will be accepted by the bank on which it is drawn, usually the issuing or advising bank, and the proceeds paid to the beneficiary at maturity.

Basis Point (BP)

1. Interest rates.
A basis point in terms of Interest Rates  is One hundredth of 1%
= 0.01%
= 0.0001 as a decimal.

2. Foreign exchange rates.
One hundredth of a cent, for example €0.0001, or its equivalent in other currencies.
Often, but not always, this represents a minimum price movement in the related foreign exchange rate quotation.

Beneficiary

The Exporter on a Letter of Credit, or the party authorised to claim from a bank under a Guarantee/Bond.

Bid Bond/Guarantee

Usually issued for between 2% and 5% of the contract value as an indication to the Buyer that the tender is a serious offer and that the party submitting it (the Seller) will sign the contract if his tender is accepted. It is important to note that the issue of this type of Guarantee is also an indication that if subsequent guarantees are required under the contract, covering Performance and/or Advance Payment, they will be forthcoming.  Also referred to as a Tender Bond/Guarantee.

Bid - Offer spread

The difference between the rate at which a bank is willing to buy a currency and the rate at which it is willing to sell the same currency.

Bid Price

The price that a bank is willing to pay for a particular base currency, quoted in terms of units of counter currency per unit of base currency.

Bill of Exchange

This is an unconditional order in writing drawn up by the Exporter on the Importer to pay a specific amount of money immediately or at a future date.

CAD (cash against documents) or D/P (documents against payment)

This relates to an Import Collection where a bank is requested to release shipping documents to the Drawee (Importer) against immediate payment.

Call Option

An option that gives the holder the right, but not the obligation, to buy a currency at a specified price during a fixed time period or on a fixed date in the future.

Carrier

Person or company hired for the conveyance of goods e.g. shipping company

CFR (C & F or cost and freight)

Please see ‘An introduction to Incoterms’

CIF (cost, insurance and freight)

Please see ‘An introduction to Incoterms’

CIP (cost, insurance and carriage to point of destination)

Please see ‘An introduction to Incoterms’

Clean Collection

A collection which contain 'Financial Documents' such as Bills of Exchange, Promissory Notes, Cheques, and are not accompanied by commercial documents.

Collection

The Importer agrees to pay for goods only upon receipt of documents evidencing the shipment of the goods by the Exporter. The Exporter sends the documents through his bank to the Importer's bank. The Importer's bank collects the proceeds on behalf of the Exporter.

The documents can be released to the Importer in either of the following ways
1. Against Payment (D/P Collection) i.e. immediate payment by the Importer.
2. Against Acceptance (D/A Collection) i.e. against a commitment to pay at some future determinable date

Collection Letter

This is the covering form or letter sent by a bank requesting that the enclosed shipping documents and/or bill of exchange be released to a Drawee (Importer) as per their detailed instructions.

Confirmed letters of credit

This is where a bank other than the issuing bank also guarantees payment under the Letter of Credit. It normally is used if a Seller finds the issuing bank an unacceptable risk and asks their own bank or another acceptable bank to guarantee (confirm) the issuing bank's letter of credit. The Letter of Credit, when issued, should include an instruction from the issuing bank for confirmation to be added.

Confirming Bank

A bank, other than the issuing bank who guarantees the payment obligations of the issuing bank.

Consignee

The party on a transport document to whom the goods are addressed for delivery

Consignor

The party on a transport document on whose behalf the goods are being shipped

Credit Risk

The risk that a buyer or seller will not complete a deal due to their inability to meet their obligations, or a deterioration in their financial position.

Cross Currency Interest Rate Swap (CCIRS)

A longer term derivative contract which is used to transform longer term interest rate-related obligations or assets in one currency, into another currency. For example, a EUR based firm with a USD borrowing might use a CCIRS to transform the USD borrowing into a synthetic EUR borrowing.

D/A (documents against acceptance)

This refers to shipping documents which are presented to a bank on a collection basis to be passed to the Drawee (Importer) when they accept a bill of exchange. The bank holds the bill of exchange until the maturity date when they ask the Drawee (Importer) for authority to pay the Drawer (Exporter).

D/P (documents against payment) or CAD (cash against documents)

This relates to an Import Collection where a bank is requested to release shipping documents to the Drawee (Importer) against immediate payment.

Deferred Payment Credit

A Letter of Credit payable at a future determinable date in which a term Bill of Exchange is not required to evidence the maturity date.

Derivative Products

A generic term for the range of traded instruments that have grown up around currency, securities and commodity trading.

Discounting

The purchase of accepted Bills of Exchange, maturing at a future date, by a bank from the holder.  A discount charge in the form of interest is applicable for the discount period and will be deducted at time of payment.

Discrepancy

Where documents presented by an Exporter under a Letter of Credit do not comply with the terms of the Letter of Credit or are inconsistent with other documents presented.

Dishonour

The refusal to pay or accept a Bill of Exchange.

Documentary Collection

A Collection which contain ‘Commercial Documents’ such as Invoices, Shipping Documents, Insurance Documents, Official Documents etc., which may or may not be accompanied by financial documents.

Documentary credit (letter of credit)

A Letter of Credit is a conditional payment guarantee provided by an Importer's bank to the Exporter. The payment guarantee is conditional upon the Exporter providing documentary evidence of the shipment of goods in accordance with the terms of the L/C. The Importer's bank will guarantee the payment to the Exporter either immediately upon receipt of the correct documents or at some future determinable date.

Documents of Title

Documents (Bills of Lading) that confer the status of ownership upon the holder of the document e.g. the holder of a correctly endorsed bill of lading has effective ownership of the goods

Dodd Frank

Abbreviation for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The main objective of Dodd-Frank is to promote the financial stability of the United States by improving accountability and transparency in the financial system;

Deal Date

The date on which a deal is entered into.

Draft

An alternative term used for a Bill of Exchange in a trade transaction, but can also refer to a bank cheque (as opposed to a customer cheque).

Drawee

The party on a Bill of Exchange who is liable for payment (Importer)

Drawer

The party that issues the Bill of Exchange (Exporter)

EMIR

The European Market Infrastructure Regulation.

eUCP

Supplement to Uniform Customs and Practice for Documentary Credits which governs electronic presentation of data under Letters of Credit.

Ex works

Please see ‘An introduction to Incoterms’ (link)

Expiry Date (Guarantee)

The last day on which the beneficiary can present a valid claim to the designated bank.

Expiry Date (Letter of Credit)

The last day on which the seller can present documents to the advising, issuing or confirming bank.

Financial Documents

These are documents relating to the financial aspects of a Trade Transaction which would include but are not limited to Bills of Exchange/Promissory Notes and Invoices.

FOB (free on board)

Please see‘An introduction to Incoterms’ (link)

Foreign Exchange Rate

The price at which one currency can be converted into another currency.

Foreign Exchange risk

The risk that the functional currency value of an asset, liability, cash flow (or forecasted values of same) may change due to movements in the foreign exchange rate).

Forward Foreign Exchange Contract

Forward Rate Agreement (FRA)

A short term interest rate derivative. It is a contract for differences, settled on a single fixed date by reference to an agreed market interest rate, usually LIBOR or EURIBOR. FRAs are used by corporates to hedge short term interest rate exposures.

FX Order

Guarantee/Bond

Usually Guarantees/Bonds are payable on demand and will relate to the circumstance for which the Guarantee/Bond was originally issued. Bid Guarantees will be used to reimburse the Importer in cases where the Exporter’s bid is accepted but the Exporter then fails to sign the contract. Performance Guarantees will reimburse the Importer if the Exporter fails to fulfil their obligations under the contract. An Advance Payment Guarantee will reimburse the Importer for any advance made to the Exporter when the Exporter has failed to fulfil the contract.

Guaranteed Bill of Exchange

This is an unconditional order in writing drawn up by the exporter on the importer to pay a specific amount of money at a future date, accepted by the drawee (importer) and irrevocably guaranteed by the drawee’s bankers to pay at the maturity date.

In the Money (Derivatives)

1. An option is in the money for the holder when immediate exercise of the option would result in a gain for the option holder.
2. A derivative such as a swap is in the money when, for example, the swap rate is favourable compared with the current market rate, so that the net present value of the derivative is positive.

INCO terms (International Contract trade terms)

Incoterms, short for "International Commercial Terms", are standard trade definitions devised and published by the International Chamber of Commerce (ICC). These terms are used in international sales contracts to clearly establish the basis on which the seller will invoice the buyer. The terms identify the additional costs, over and above the cost of the goods, that the seller can include in their invoice. Their use in sales contracts act as a form of legal shorthand to clearly identify the responsibilities of both parties.

Interbank market

The market in which banks deal when trading amongst themselves.

Interest Rate Cap (Cap)

Interest Rate Collar (Collar)

Interest Rate Exposure

A measure of the potential cost to a business of adverse changes in market interest rates.

Interest Rate Swap (IRS)

Irrevocable Letter of Credit

This is a Letter of Credit that cannot be changed (amended) or withdrawn (cancelled) without the agreement of all parties involved (importer, exporter, and banks)

ISDA Agreement

A legal document that governs the terms of an Interest Rate Swap.

ISP98

International Standby Practices (ISP98) developed by the International Chamber of Commerce are the set of rules that govern the operation of Standby Letter of Credit transactions and are accepted worldwide.

Issuing Bank

The bank that issues a Letter of Credit or Guarantee on behalf of the Importer.

Latest Shipment Date

A date inserted in a Letter of Credit to compel the seller to ship the goods within a specific time period

Letter of credit (Documentary)

A Letter of Credit is a conditional payment guarantee provided by an Importer's bank to the Exporter. The payment guarantee is conditional upon the Exporter providing documentary evidence of the shipment of goods in accordance with the terms of the L/C. The Importer's bank will guarantee the payment to the Exporter either immediately upon receipt of the correct documents or at some future determinable date.

Letter of Credit available by acceptance

A Letter of Credit  that is payable at a future date  and requires a Bill of Exchange to be presented in addition to the shipping documents requested

Letter of Credit available by deferred payment

A Letter of Credit that is payable at a future date, that does not require a Bill of Exchange as commitment to pay will be by a separate bank undertaking to pay.

Letter of Credit available by negotiation

A Letter of Credit that authorises a bank other than the issuing bank to give value to the customer for documents presented under the Letter of Credit.

Letter of Credit available by payment / at sight

A Letter of Credit that is payable immediately upon presentation of the conforming documents.  No credit terms have been agreed.

Marine Insurance

An insurance policy arranged by either the buyer or the seller to insure goods against damage in transit. The appropriate Incoterm will determine the responsibility of the buyer or seller to arrange the insurance.

Maturity Date

The date on which a Bill of Exchange or Letter of Credit becomes due for payment.

MiFID

Markets in Financial Instruments Directive

Negotiable Instrument

A negotiable instrument is any document, which permits one party to transfer their rights to a second party by endorsing and delivering the document to the second party. An instrument is only fully negotiable when the party transferring it receives value and the party receiving the document can obtain a stronger legal position than the party transferring the document. For example, a first party transfers their rights to the second party, who are unaware that the transaction is fraudulent and negotiates the instrument in good faith and for value. If the first party has transferred their rights against a third party, then the second party retains a valid claim against both the first and third parties. Examples of negotiable instruments in international trade are cheques, Bills of Exchange and promissory notes.

Negotiation

The process by which a negotiable instrument such as a Bill of exchange, Promissory Note or Cheque is transferred in good faith and for value. Negotiation only occurs when the transferring party receives value. In international trade this is normally an exchange of funds or a commitment to pay.

Nominated Bank

A bank nominated by the issuing bank in a Letter of Credit to perform a function(s) which makes them a legal party to the Letter of Credit and therefore subject to the application of UCP600, the rules that govern the operation of Letter of Credit

Non Deliverable Forward

An NDF differs from an outright foreign currency forward contract in that there is no physical settlement of two currencies at maturity. Rather, a net cash settlement is made by one party to the other.

Non-Recourse Discounting

The purchase without recourse of accepted Bills of Exchange, maturing at a future date, by a bank from the holder.  A discount charge in the form of interest is applicable for the discount period and will be deducted at time of payment.

Open account

This is a trading term between buyer and seller where a seller agrees to deliver goods to a buyer before a payment is made and without any form of guarantee of payment.

Option Premium

The price paid to purchase an option.
Out of the Money (Derivatives)
1. An option is out of the money when immediate exercise of the option would result in a loss for the holder of the option.

2. A derivative such as a swap is out of the money when, for example, the swap rate is unfavourable compared with the current market rate, so that the net present value of the derivative is negative.

Partial shipment

Performance Bond/Guarantee

Performance Risk

The risk that the buyer or seller will not complete the contract in accordance with their contractual obligations.

Period of Presentation

The number of days from the shipment date that the seller is allowed to present documents to the advising or issuing bank under a Letter of Credit. It is normally 21 days, although it can be shorter.

Promissory Note

A signed undertaking from one party containing a promise to pay a stated sum to specified person or company at a specified future date

Protesting (a bill of exchange)

Protesting involves getting legal evidence that a bill of exchange or promissory note has not been paid.

Put Option

An option that gives the holder the right, but not the obligation, to sell a currency at a specified price during a fixed time period or on a specified date in the future.

Revolving Letter of Credit

A Letter of Credit in which the value of the Letter of Credit is automatically reinstated upon utilisation. A Letter of Credit may revolve by value, time or both. This type of Letter of Credit would be used where the seller is shipping goods on a regular basis to the buyer over an extended period.

Settlement (value) date

The date on which both parties to a foreign exchange trade remits funds to the other in settlement of the transaction

Shipper

The party on a transport document on whose behalf the goods are being shipped

Silent Confirmation

In a normal confirmed Letter of Credit, the issuing bank will request the advising bank to add its confirmation. A silent confirmation occurs when the issuing bank has not requested the advising bank to add its confirmation but the bank does so at the request of the seller and unknown to the issuing bank.

Spot rate

In foreign exchange markets, the foreign exchange rate for a transaction to be settled at the earliest possible date after the deal date, no longer than 2 days.

Standby Letter of Credit

Standby Letters of Credit are used to support regular supply contracts with Exporters. The Importer arranges for their bank to provide the Exporter with a Guarantee that, in the event that goods have been shipped and the Exporter has not been paid, the Importer's bank will guarantee payment for a pre-determined amount. It is issued subject to usual International Chamber of Commerce rules and is usually payable against a written declaration of non-payment supported by a copy of the unpaid invoice and relevant shipping documentation.

Stop Loss FX Order

A 'stop loss' is an FX order placed in advance by a customer to protect their downside in the event of an adverse move in foreign exchange rates.

Strike rate / price

The strike (or exercise) rate of an option is the fixed price at which the owner of the option can buy (in the case of a “call” option), or sell (in the case of a “put” option), the underlying instrument.

The strike rate is a key variable in a derivatives contract between two parties. Where the contract requires delivery of the underlying instrument, the trade will be at the strike price, regardless of the spot price (market price) of the underlying instrument at that time.

SWIFT

This is an inter-bank communication system and stands for Society For Worldwide Interbank Financial Telecommunications. It enables financial institutions to send and receive information about financial transactions in a secure, standardized and reliable environment.

Take Profit FX Order

A 'take profit' is an FX order placed in advance by a customer to avail of an advantageous rate if the market moves in their favour.

Tender Bond/Guarantee

Usually issued for between 2% and 5% of the contract value as an indication to the Buyer that the tender is a serious offer and that the party submitting it (the Seller) will sign the contract if his tender is accepted. It is important to note that the issue of this type of Guarantee is also an indication that if subsequent guarantees are required under the contract, covering Performance and/or Advance Payment, they will be forthcoming. Also referred to as a Bid Bond/Guarantee.

Transferable Letter of Credit

A Transferable Letter of Credit allows the beneficiary (exporter) to pass on the benefit of a Letter of Credit to one or more third parties. Normally used by companies that source rather than produce goods.

Transhipment

This is when a consignment is unloaded from one form of transport (lorry or ship) to another during the course of its journey from place of origin to place of destination. In a letter of credit, the buyer can say whether this is allowed or not allowed.

UCP

Uniform Customs and Practice for Documentary Credit developed by the International Chamber of Commerce as the rules that govern the operation of Letter of Credit transactions worldwide. ICC publication No.600 contains details of the rules currently in use.

URC

Uniform Rules for Collections developed by the International Chamber of Commerce as the rules that govern the operation of collection transactions worldwide. ICC publication No.522 contains the details of the rules currently in use.

Validity Date

The last day on which the seller can present documents to the advising, issuing or confirming bank, or the last day on which the beneficiary can present a valid claim to the designated bank.

Variable currency

The variable currency in a foreign exchange quotation is the currency which there is a variable number of. For example in the quotation 1 EUR = 1.2500 USD, the variable currency is USD, meaning the variable number 1.2500 US dollars is exchanged for one Euro.

Warranty Bond/Guarantee

Warranty bond is a guarantee issued by a bank on behalf of the seller which secures any claims by the buyer on the seller due to possible defects in the goods during any agreed warranty period.