What Is an Acceptance Market?

An acceptance market is a financial market underpinned by short term credit in the form of acceptances, bills of credit and exchange that sellers can accept for their goods in lieu of cash funds. Short term credit of this nature is critically important for many financial markets and provides an important mechanism for buying and selling a variety of goods. Many markets operate on these grounds, and there is also a lively secondary market for acceptances, which can be bought and sold as a secondary investment.

Importers and exporters rely heavily on acceptance markets. Such markets are a natural outgrowth of historic trading techniques, where people used letters of guarantee from financial institutions to do business. Instead of a guarantee indicating that a client has funds on deposit, a bank can take an acceptance, indicating that a client has available credit and the bill will be paid when the acceptance is submitted.

Banks can choose to maintain acceptances in their investment portfolios or can trade them on the secondary market. They usually sell for below face value, and can change hands numerous times before being redeemed. The buying and selling of short term credit provides an important market for such instruments and helps facilitate movements within the credit market as a whole. Banks can use the funds raised from activities in the acceptance market to offer more credit, for example.

Activities in the acceptance market are reported in financial publications and may capture the attention of the mainstream media when significant events occur. Tightening of credit markets tends to limit the availability of acceptances as a form of payment. This can result in a market contraction, as buyers and sellers can no longer rely on credit for their transactions. Imports and exports can be hit particularly hard, as nations cannot obtain or sell goods on credit markets.

The importance of credit in financial markets and economic welfare means that most governments monitor activities on credit markets like the acceptance market carefully. They are alert to early warning signs of problems so they can prepare. Fiscal policies can vary between nations and administrations, and the level of intervention deemed appropriate may be minimal, but it can still be important for governments to be aware of what is happening in the credit market. A contraction in imports and exports on the acceptance market, for instance, has the potential to create a ripple effect across the economy.