Acceptance Market

What Is an Acceptance Market?

The term acceptance market refers to a contractual agreement involving the use of short-term credit as payment in international trade. This type of agreement is commonly used in the import-export market and is often guaranteed by a financial institution. The credit instrument has a maturity date that specifies when the buyer must fulfill their obligations. Exporters are able to sell these bills to their banks at a discount, allowing them to get paid faster for the goods and services they provide. Acceptances, as they are commonly known, are also packaged and sold on the secondary market to investors.

How Acceptance Markets Work

An acceptance market is a time draft or bill of exchange accepted as payment for goods and services. The agreement involves two parties — usually an importer and exporter — helps facilitate trade between two foreign companies or countries. The short-term credit instrument is signed by a buyer indicating their intention to pay a specific sum of money to the seller or exporter by an agreed date. The exporter can use this credit instrument and doesn't have to wait to get paid.

Here's how it works: The exporter sends the importer or buyer an acceptance or bill. This party signs it to affirm their obligation to make good on the payment for the purchased goods. By signing, the receiver agrees to fulfill their financial obligation by a certain date. This is the maturity date of the credit instrument. Once signed, the buyer returns the bill to the exporter who sells it to a bank or other financial institution at a discount. Thus, the seller receives immediate payment for goods sold even if the buyer has not received the goods. The buyer also doesn't have to settle payment for the transaction until the goods arrive. In addition, the importer can often obtain physical possession before payment, and also has some time prior to maturity to sell the goods of which the proceeds will be used to settle the debt.

The acceptance market is generally useful for all parties involved in the transaction. For instance, exporters are immediately paid for exports. Importers, on the other hand, aren't required to pay for them until possession of goods occurs. This is especially important when shipments may be held up at customs, which can usually take some time to clear.

Financial institutions are able to profit from acceptances at the spread that ensues between the negotiating rate and the rediscounting rate. There's also a benefit for investors and dealers who trade acceptances in the secondary market. Acceptances are sold at a discount from face value — similar to the Treasury Bill market — at published acceptance rates.

As an investor, you can purchase acceptances on the secondary market, which are sold at a discount from face value.

Types of Acceptance Markets

There are many types of acceptances, one of which is called a banker's acceptance. This is a time draft drawn on and accepted by a bank and is commonly used as a way to finance short-term debts in international trade including import-export transactions. A banker's acceptance works just like a postdated check with one slight difference. With a postdated check, the payer is the one who guarantees the funds. In a banker's acceptance, it is the financial institution that provides the guarantee for the funds. This allows the purchaser to pay for a large transaction without having to borrow any money.