Ineligible Bankers' Acceptances

A market may exist for ineligible bankers' acceptances, meaning those acceptances that do not meet the eligibility criteria for other Bankers' Acceptances. Working capital loans could be funded in this market, but because these bankers' acceptances are not true trade transactions, this funding source requires the following:

• A Reserve Requirement (3%) Regulation D--specifies reserve requirements unless a bank discounts its own acceptance i.e. when a drawee bank acknowledges in writing on the face of the draft that the buyer will be paid against the  draft at maturity. and holds it in its own portfolio. If the bank subsequently sells its own B/A (The Bank's Own Acceptances Purchased) then a reserve requirement must be charged. The reserve factor is usually considered within the discount rate calculation in order to compensate for the additional funding cost. 
• A Higher Discount Rate Quoted Due to Under Prime Market Salability. Example: A Bankers' Acceptance Financing may continue with discretion after 180 days. However, it will then be labeled as an Ineligible Acceptance. Ineligible Acceptances are not eligible for re-discounting with the Federal Reserve but may be sold to dealers at a higher discount rate. Reserve requirements or a rate adjustment for the reserve factor will also be applied to further influence the quoted rate.  The discount rate will be increased by a reserve factor to increase the yield to attract investors.

Thus, ineligible acceptances do not warrant or receive preferred rates due to reserve requirements, and also due to the fact that the Federal Reserve Bank will not discount or purchase them. However, some dealers may create a market for this type of banker's acceptance at a higher discount rate.

Generally, the creation of acceptances is governed by the Uniform Commercial Code of the various States, or by state statutes. State regulations should be reviewed before creating non-eligible acceptances.

Edited by Robert Merrill and Michael C. Dennis.  Robert Merrill is a credit & collections professional with extensive industry and banking experience.  He works and lives in Campbell, CA (www.creditcollectionsolutions.com).