Eligible Bankers' Acceptances

An eligible banker's acceptance is one that complies with the requirements of Regulation A of the Board of Governors of the Federal Reserve System (Section 13, paragraphs 7 or 12 of the Federal Reserve Act).  In accordance with Federal Reserve requirements, there are three general classifications as follows:

• Acceptances that are eligible for discounting with the Federal Reserve Bank.
• Acceptances that are eligible for purchase by the Federal Open Market Committee.
• Acceptances that are labeled "ineligible" because they are not eligible for discount or purchase by the Federal Reserve.

Federal Reserve Requirements (Regulation A)

• Member banks may accept drafts having not more than six months sight to run exclusive of days of grace. 
• Transactions involving the import or export of goods or that develop from transactions involving the domestic shipment of goods.
• Transactions secured at the time of acceptance by a warehouse receipt or other such document conveying or securing title covering readily marketable staples.
• Foreign Exchange (Drafts authorized for acceptance by paragraph 12 of Section 13 of the Federal Reserve Act)

These drafts have the following characteristics:

Drawee. The draft is drawn upon a bank that is a member of the Federal Reserve. The bank upon which the draft is drawn must also be the bank that accepts the instrument.  Time Limitation. The draft has no more than three months sight to run at the time of acceptance (exclusive of days of grace).  Drawer. The draft is drawn by banks or bankers in foreign countries or dependencies or insular possessions of the United States (in accordance with regulations prescribed by the Board of Governors of the Federal Reserve).  Purpose. The drafts must be drawn for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries, dependencies or insular possessions. Regulations. The drafts must conform to any other regulations enacted by the Federal Reserve from time to time.

Federal Open Market Committee Requirements

For bankers' acceptances that are eligible for purchase by the Federal Open Market Committee Authorization of April 1, 1974, the regulations now provide as follows:

• Member banks may accept drafts maturing in not more than six months. 
• Transactions must arise out of a current shipment of goods between countries or within the United States.
• Transactions must arise out of the storage within the United States of goods under contract of sale or expected to move into trade channels within a reasonable time and goods that are secured throughout their life by a warehouse receipt or similar document conveying title to the underlying goods. 

It should be noted that today, the Fed no longer buys bankers acceptances.

General Comments on Eligibility of Acceptances

The regulations for eligibility requirements provide sufficient information to determine the eligibility of most trade transactions. However, there are many cases where strict adherence to the requirements may be questionable. Therefore, the Board of Governors of the Federal Reserve System has published eligibility interpretations over the years, which provide guidelines in questionable situations. General Federal Reserve Policy rules are as follows:

1. Trade Transactions:  The financing must be supported by the import, export or domestic shipment of identifiable goods to/from one or more parties. The term 'goods' is broadly defined to include virtually any type of tangible items traded.

2. Duration:  Drafts must mature in no more than 180 days and must be tied to the trade transaction. They may range between 30 and 180 days. When a draft is drawn in a transaction not involving a sale of goods (corporation to its agent), the maturity of the draft should approximate the duration of the transit of goods. Where, however, a draft is drawn in a transaction involving the sale of goods as well, the draft may be drawn and accepted for the purpose of financing both the shipment and sale; its maturity may cover both, although it cannot exceed six months.

3. Financing Amount:  Invoice values of shipments must be equal to or greater than the amount of the drafts. The proceeds generated must be applied to finance the shipment.

4. Self-Liquidating:  The transaction financed should generate funds to pay off the acceptance at maturity.

5. Current Transaction:  The creation of the BANKERS' ACCEPTANCE must occur within 30 days prior to or after the shipment of goods.

6. Length of Shipment Time:  There is no restriction concerning the length of shipment time. The Fed has indicated that goods must travel at least 25 miles and depart from the jurisdiction of a municipality in order to be eligible.

7. Double Financing:  Transactions may not be double financed. For example, if Company A imports widgets from Taiwan and sells to Company B, a wholesaler in Atlanta, either A or B could finance the goods on an acceptance basis, but not both. Also, if Company A showed an account payable to Company B, then the proceeds of any B/A discounted for Company A must be used to liquidate the account payable.

8. Individual Limitation:  The aggregate amount of drafts a bank may accept for any one person or corporation (foreign or domestic) is currently limited to 10% of the bank's paid-in and unimpaired capital stock and surplus, unless the bank is secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance.

Note: Warehouse financing eliminates this restriction due to documents conveying or securing title at the time of acceptance. See Section 13-7 Federal Reserve Act.

9. Total Limitation:  Banking institutions can accept or participate in the acceptance of instruments up to a general aggregate amount limitation of 150% of the institution's paid-up and unimpaired capital stock and surplus but allows the Board of Governors, Federal Reserve to increase the limitation to 200%. Domestic shipment acceptance financing is restricted to 50% of the aggregate limits.

Interpretations: (#1700) Bank's own acceptances not included. Where a member bank purchases its own acceptances before maturity, such acceptances need not be included in the aggregate of acceptance prescribed by section 13, since the purchase of such an acceptance cancels the obligation of the bank. If a member bank subsequently disposes of its acceptance either by sale or hypothecation, thus renewing its obligation to pay it at maturity, the acceptance should be included in the amount outstanding. Digest of 1916 BULLETIN 397.

The fundamental purpose of these requirements is to assure that the bankers' acceptance financing is supported by an underlying trade transaction and is not used for general working capital purposes. The Federal Reserve explicitly states that bankers' acceptances cannot support a transaction where bankers' acceptance financed goods are changed in character before they are liquidated. For example, a manufacturing firm cannot use a bankers' acceptance to finance the trade cycle of an incoming shipment of mother boards that is a component in the manufacture of computers. The Fed also states that goods cannot sit in inventory unless they are "readily marketable staples," defined as articles or commerce, agriculture or industry for which a price is easily and definitely ascertainable or for which the goods covered by the bankers' acceptance are being held in storage pending a reasonably immediate sale, shipment or distribution for manufacturing purposes.

However, an acceptance may be created for the shipment of goods with a payment maturity consistent within customary credit time. The requirements are not rigidly defined and are open to interpretation. In particular, the issues of self liquidation, current transaction and double financing are open to interpretation.

Edited by Michael C. Dennis