II.

SETTLEMENT (Making payment)

1. Settlement by Payment
a. Concept: Settlement by payment, also known as cash settlement or cash delivery,
is a concept that refers to the process of settling financial transactions through the
transfer of funds. It's when actual money is transferred between people or
companies involved in a deal, typically for the purchase or sale of a financial
instrument such as stocks, bonds, or derivatives.
 In a settlement by payment, the buyer is responsible for delivering the agreed-upon
amount of funds to the seller, and in return, the seller transfers ownership of the
financial asset to the buyer. This transfer of funds may occur through various
means, such as wire transfer, electronic funds transfer (EFT), or cash or checks.
 It is commonly used in financial markets to make sure that the completion of
trades and fulfill contractual obligations. It helps minimize counterparty risk by
ensuring that both parties receive their respective payments. It also assists to
reduce the possibility of default or non-delivery of funds.
 Overall, settlement by payment is an essential component of financial markets
b. Procedure
 Step1: The seller ships the goods to the buyer and obtains a negotiable transport
document(negotiable of lading) from the shipping firm/agent.
 Step 2: The seller prepares and presents a document package to the advising bank
consisting of
 (a) the negotiable transport document
 (b) other documents(e.g.,commercial invoice, insurance document,
certificate of origin, inspection certificate,etc.) as required by the
buyer in the documentary credit.
 Step 3: The advising bank
 (a) reviews the document package making certain the documents are
in conformity with the terms of the credit.
 (b) pays the seller.
 Step 4: The advising bank then sends the documentation package by mail or by
courier to the issuing bank.
 Step 5: The issuing bank
 (a) reviews the document package making certain the documents are
in conformity with the terms of the credit and
 (b) pays or reimburses the advising bank as previously agreed(in the
documentary credit)
 Step 6: Sends the document package by mail or courier to the buyer.
 Step 7: The buyer pays or reimburses the issuing bank as previously agreed.

c. Risk
 Counterparty Risk: Counterparty risk arises when one party fails to fulfill its
obligation to make or receive payment on the agreed-upon settlement date. This
 can occur due to various reasons, including financial distress, default, operational
failures, or insolvency. It can lead to financial losses and disruptions in the
settlement process.
 Liquidity Risk: Liquidity risk refers to the difficulty of buying or selling a
financial instrument. In settlement by payment, liquidity risk can arise if a
participant is unable to access sufficient funds to make the required payment
promptly. This can result in delayed settlements or even failed trades.
 Settlement Timing Risk: Settlement timing risk relates to the potential mismatch
between the settlement of a trade and the availability of funds. Delays in funding
or unexpected changes in circumstances can affect the timely completion of
payment, leading to operational challenges and potential financial losses.
 Operational Risk: Operational risk encompasses risks associated with internal
processes, systems, people, and external events that can impact settlement by
payment. Examples include errors in payment instructions, technological failures,
cyber threats, or communication breakdowns. Operational risks can disrupt the
settlement process, cause delays, and result in financial losses.
 Legal and Regulatory Risk: Settlement by payment is subject to legal and
regulatory requirements that govern financial transactions. Failure to comply with
these regulations can lead to penalties, legal disputes, and reputational damage.
Additionally, changes in laws or regulations may introduce uncertainties and
compliance challenges for settlement processes.

a. Settlement by Acceptance Concept

 Acceptance L/C, in essence, will be the same as Deferred L/C, with the same
deferred payment. But with Acceptance L/C, the exporter can issue a Deferred
Bill of Exchange to request the Open Bank to sign the debt, then either the
exporter will wait until maturity to receive payment from the Open Bank, or the
exporter can get money early by discounting the Bill of Exchange at the Notifying
bank. As for Deferred L/C, to receive a set of shipment documents, Open Bank
only issues one Commitment to pay later to the exporter. Therefore, the exporter
has only one option: to wait until the maturity date of this Payment Commitment
to get money from Open Bank.
 Also to expand, in some rare cases, some exporters may also discount this 'Pay
Later Commitment' with a few friendly banks in their country (of course, the Open
Bank is more The more reputable this Payment Commitment is, the more valuable
it is). Because of the similarity between Acceptance L/C and Deferred L/C in
terms of deferred payment, some documents also call these two types of L/C
together with the name "Usance L/C" - Deferred L/C.

There are two types of acceptance credit, the confirmed acceptance credit and the
unconfirmed one. When a letter of credit is confirmed, it guarantees a bank
payment (regardless of whether the Applicant or Buyer has the money in its
 account) and serves as a proof that all the terms for payment of the letter have
been met. Unconfirmed acceptance letter on the other hand means that the bank is
not guaranteeing payment. Payment will only be rendered if assets are available in
the payer's account.

b. Procedure
1. The seller (beneficiary) ships the goods to the buyer and obtains a negotiable
transport document (negotiable bill of lading) from the shipping firm/agent.
2. The seller prepares and presents a document package to the advising/confirming
bank consisting of (a) the negotiable transport document, (b) other documents (e.g.,
commercial invoice, insurance document, certificate of origin, inspection certificate, etc.)
as required by the buyer in the credit, and (c) a draft drawn on the bank at the specified
tenor (maturity date).
3. The advising/confirming bank (a) reviews the document package making certain
the documents are in conformity with the terms of the documentary credit, and (b)
accepts the draft and returns it to the seller.
4. The advising/confirming bank then sends the documentation package along
with a statement that it has accepted the draft by mail or by courier to the issuing bank.
5. The issuing bank (a) reviews the document package making certain the
documents are in conformity with the terms of the documentary credit and (b) at maturity
the draft pays or reimburses the advising/confirming bank as previously agreed (in the
documentary credit).
6. Sends the document package by mail or courier to the buyer.
7. The buyer pays or reimburses the issuing bank as previously agreed (in the
documentary credit).

c. Risk
Risks associated with a document against acceptance are as follows. Sometimes,
importers refuse to accept the shipping order, and exporters incur losses. Of course, the
goods can be shipped back, but the transport costs are wasted. Similarly, the importer
may refuse to initiate the payment for the shipment.
Acceptance letters of credit, also known as documentary letters of credit or simply letters
of credit, involve certain risks for the parties involved. Here are some common risks
associated with acceptance letters of credit:

 Non-Payment Risk: The primary risk for the beneficiary (seller) of an acceptance
letter of credit is the risk of non-payment by the issuing bank or the applicant
(buyer). If the bank or buyer fails to honor the payment obligation stated in the
letter of credit, the beneficiary may face financial losses.
 Document Compliance Risk: Letters of credit require the beneficiary to present
specific documents and comply with the terms and conditions outlined in the
letter. If any discrepancies or non-compliance with the requirements arise, the
issuing bank may refuse to accept the documents, leading to delays in payment or
even non-payment.

 Political and Country Risk: Acceptance letters of credit involve international

transactions, which can be subject to political and country-specific risks. Factors
such as political instability, changes in government policies, economic crises, or
trade sanctions can impact the ability of the issuing bank or the applicant to fulfill
their payment obligations.

3. Settlement by Negotiation
a. Concept
In settlement by negotiation the buyer accepts the documents and agrees to pay the
bank after a set period of time. Essentially, this gives the buyer time (a grace
period) between delivery of the goods and payment. The issuing bank makes the
payment at the specified time, when the terms and conditions of the credit have
been met.

b. Procedure
 Step 1: The seller ships the goods to the buyer and obtains a negotiable transport
document from the shipping firm.
 Step 2: The seller prepares and presents a document package to the advising bank
consisting of:
 The negotiable transport document
 Other documents: commercial invoice, insurance document, certificate of
origin, inspection certificate,... as required by the buyer in the credit
 A draft on the bank
 Step 3: The advising bank:
 Reviews the document package making certain the documents are in
conformity with the terms of the documentary credit
 Pays the seller
 Step 4: The advising bank then sends the documentation package by mail or by
courier to the issuing bank
 Step 5: The issuing bank:
 Reviews the document package making certain the documents are in
conformity with the terms of documentary credit
 Pays or reimburses the advising bank as previously agreed
 Step 6: Sends the document package by mail or courier to the buyer
  Step 7: The buyer pays or reimburses the issuing bank as previously agreed

c. Risk
 Inadequate Documentation: If the settlement agreement is not adequately
documented, it can lead to misunderstandings or disputes in the future. It's crucial
to have a clear and comprehensive written agreement to avoid this risk.
 Hidden Information: There is a risk that one party may withhold or misrepresent
information during negotiations, which may lead to an unfair settlement.
 Changing Circumstances: Settlements are often based on the circumstances and
information available at the time of negotiation. If circumstances change
significantly after the settlement, one or both parties may feel the settlement is no
longer fair.
 Enforcement Challenges: Enforcing settlement agreements can be challenging,
especially if one party fails to comply. Legal action may be required to enforce the
terms of the settlement, which can be time-consuming and costly.
 Preservation of Rights: In some cases, settling a dispute through negotiation may
require parties to give up certain legal rights or claims. This can be a risk if those
rights or claims are valuable and should not be waived.

III. IN VIETNAM
1. Which type of settlement of L/C is most commonly used by Vietnamese
businesses? (Thái Sơn - Việt)
a. E-commerce Industry:
 Most common payment method: Settlement by Negotiation.
 Reason: Settlement by Negotiation is commonly used in the E-commerce industry
because it offers flexibility to adapt to the fast-paced online environment,
facilitates quick agreement on payment terms, accommodates complex scenarios,
supports long-term relationships, addresses international trade complexities, and is
versatile for various types of E-commerce transactions.

b. Tourism and Hospitality Industry:

 Most common payment method: Settlement by Payment.
 Reason: In the tourism and hospitality sector, services are often provided in real-
time or shortly after a reservation is made. These services can include hotel
accommodations, tours, meals, and more. Settlement by Payment ensures that
customers pay immediately upon receiving the services they've booked, allowing
for a smooth and efficient customer experience. Additionally, payment
immediately after using the service is common to ensure quality and safety for
both customers and service providers.

c. Agriculture and Food Processing Industry:

 Most common payment method: Settlement by Payment or Settlement by
Acceptance.
 Reason: In the agriculture and food processing industry, freshness and product
safety are often prioritized. Therefore, payment immediately upon product
delivery (Settlement by Payment) or after product inspection (Settlement by
Acceptance) may be used to ensure quality. Many farmers and food processors
rely on timely payments to cover operational costs, including labor, equipment,
and maintenance. Settlement by Payment helps maintain a steady cash flow,
allowing businesses to operate efficiently. Beside, Settlement by Acceptance may
also be used when there is an established trust between buyers and sellers. It can
be seen as a sign of confidence in the creditworthiness of the buyer, allowing for
deferred payments. In summary, the choice between Settlement by Payment and
Settlement by Acceptance in the Agriculture and Food Processing Industry
depends on the specific transaction, product type, timing, and the nature of the
business relationships involved. Both methods are chosen to ensure timely
payments, efficient cash flow management, risk reduction, and the maintenance of
high-quality standards.

d. Oil and Gas/Energy Industry:

 Most common payment method: Settlement by Negotiation.
 Reason: In the oil and gas/energy industry, contracts are often highly complex and
involve various terms, conditions, and variables. These contracts may cover the
exploration, production, transportation, and sale of energy resources. Settlement
by Negotiation allows parties to tailor payment terms to the specific requirements
and complexities of each contract, considering factors such as delivery schedules,
quality specifications, and price adjustments based on market conditions. The oil
and gas/energy industry is exposed to various risks, including geopolitical,
operational, and market risks. Settlement by Negotiation allows parties to
negotiate risk-sharing mechanisms, such as penalties for non-performance or price
adjustments for unexpected events like supply disruptions.

e. Construction and Large-scale Project Industry:

 Most common payment method: Settlement by Negotiation.
 Reason: In large-scale construction projects, payment terms are often complex and
require negotiation and flexible adjustments. Settlement by Negotiation allows for
the negotiation of payment terms based on the specific nature and complexity of
each project.

f. Chemical processing industry

 Most common payment method: Settlement by Acceptance
 Reason: The industry deals with a wide variety of chemical materials, each with
unique properties and requirements. Settlement by Acceptance allows for
flexibility in payment terms tailored to the specific characteristics of these
materials. Different chemicals may require various quality checks and
performance evaluations before payment is accepted. In addition, ensuring the
quality and performance of chemical materials is paramount in this industry.
Settlement by Acceptance allows for payments to be contingent upon the
successful incorporation of the chemicals into the production process and the
attainment of desired product quality and performance. Payment is only made after
thorough checks and inspections have been completed.