A demand draft is a negotiable instrument similar to a bill of exchange. A bank issues a demand draft to a client (drawer), directing another bank (drawee) or one of its own branches to pay a certain sum to the specified party (payee).
A demand draft can also be compared to a cheque. However, demand drafts are difficult to countermand. Demand drafts can only be made payable to a specified party, also known as pay to order. But, cheques can also be made payable to the bearer. Demand drafts are orders of payment by a bank to another bank, whereas cheques are orders of payment from an account holder to the bank.
Definitions and regulations by region
Demand drafts are also known as sight drafts, as they are payable when presented by sight to the bank. Under UCC 3-104, a draft has been defined as a negotiable instrument in the form of an order. The person making the order is known as the drawer and the person specified in the order is called the drawee, as defined in the UCC 3-103. The party who creates the draft is called the maker, and the party who is ordered to pay is called the drawee.
In US, remotely created cheques are also called demand drafts. Remotely created cheques are orders of payment created by the payee and authorized by the customer remotely, using a telephone or the internet by providing the required information including the MICR code from a valid cheque. They do not bear the signatures of the customers like ordinary cheques. Instead, they bear a legend statement “Authorized by Drawer”. This type of instrument is usually used by credit card companies, utility companies, or telemarketers. Remotely created cheques are susceptible to fraud.
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- ^“Uniform Commercial Code: 3-104 Negotiable Instrument”. Legal Information Institute. Retrieved 1 January 2015.
- ^“Uniform Commercial Code: 3-103 Definitions”. Legal Information Institute. Retrieved 1 January 2015.
- ^The Code of Federal Regulations of the United States of America. U.S. Government Printing Office. 2006. pp. 662–663. Retrieved 1 January 2015.
- ^“Remotely Created Checks”. Federal Financial Institutions Examination Council. Archived from the original on 2 January 2015. Retrieved 1 January 2015.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.