Standby Letter of Credit SBLC providers can be one of the most valuable resources you can use for many reasons. SBLC’s are typically used for securing project funding, to satisfy lenders, back up protection and for commodities transactions such as Fuel, Gold, Sugar as examples. Although one of the most common use for SBLC is trading in Private Placement Programs PPP. In this type of program a structured buy sell of these bank instruments is set up bank to bank with guaranteed exit buyers ready to purchase them at a specific price. The trader is able to make the spread between buy price and sell price and then repeat the process multiple times a day and for a period of weeks.
The SBLC is almost always sent via SWIFT bank to bank through Swift codes:
There are hundreds of Swift codes for Letters of Credit however, below you will find some of the more common ones you will see in transactions. Abbreviations SLC or SBLC:
MT799 – RWA Ready Willing and Able communication that is sent Bank officer to bank officer through the Swift system which basically is an inter-bank electronic correspondence that each bank officer utilizes to confirm the senders funds have been blocked for the amount listed on the SBLC and that the senders bank is RWA to send this debenture MT760 on behalf of the client.
MT760 – Is actual issuance of SLC or SBLC – basically shows that the Bank has blocked the funds in favor of the receiver and that the sender is providing this debenture to either collateralize a project or lodge the bank instrument for a commodities transaction.
Example: A gold transaction typically requires a SBLC is issued on behalf of the Seller from the potential buyer. The instrument acts as insurance to protect the seller during the time the gold is transported to the refinery for the buyer to verify its real. Once the buyer confirms the validity of the asset, in this case Gold, the buyer normally will pay via MT103″description below” The buyer will normally keep the SBLC in place during the duration of the contract to ensure the seller is protected in the event of payment default by the buyer. Its important to note, that SBLC’s are commonly used in Private Placement Platforms and leveraged for trading. This type of instrument can be monetized as well for a percentage of the face value to be used for trading.
MT700 – Documentary Letter of Credit DLC is typically used for Commodities as well since it simply designed as default only instrument and can not be leverage or drawn down against other than default. The terms of the default will be communicated on the DLC itself.
MT103 – In simple terms, its a bank instrument used for payment and it is as good as cash. Its face value is the same as the Cash backing it, easier to use than a wire for larger transactions typically used for payment in Fuel, Sugar, Gold and many other commodities transactions.
The issuance of bank (credit) instruments dates back to the early days of “banking” when private wealthy individuals used their capital to support various trade orientated ventures. Promissory Notes, Bills of Exchange, Bankers Acceptances and Letters of Credit have all been a part of daily “bank” business for many years. If you were to walk in the front of the bank they would have no idea what your talking about. Bank instruments are off bank sheet transactions that the front or retail side of the bank is not familiar with or have access too basically its way above their pay grade.
There are three types of Letters of Credit which are issued on a daily basis. These are Documentary Letters of Credit, Standby Letters of Credit and Unconditional Letters of Credit or Surety Guarantees.
The issuance of a “Letter of Credit” usually takes place when a bank customer (Buyer) wishes to buy or acquire goods or services from a third party (Seller). The Buyer will cause his bank to issue a Letter of Credit which “guarantees” payment to the Seller via the Seller’s bank conditional against certain documentary requirements. In other words, when the Seller via his bank represents certain documents to the Buyer’s bank the payment will be made. These documentary requirements vary from transaction to transaction, however, the normal type of documents will usually comprise of:
- Invoice from Seller (usually in triplicate)
- Bill of Lading (from Shipper)
- certificate of Origin (from the Seller)
- Insurance documents (to cover goods in transit)
- Export Certificate (if goods are for export)
- Transfer of Ownership (from the Seller)
These documents effectively “guarantee” that the goods were “sold” and are “en route” to the Buyer. The Buyer is secure in the fact that he has “bought” the items or services and the Seller is secure in the fact that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will “guarantee” payment if he complies with the terms of the Letter of Credit.
This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear that the issuing bank will not “honour” its obligation, providing that the bank if of an acceptable stature provided it was issued from a top 25 global bank. Typically smaller local banks or lower rated international banks will not be accepted for these types of transactions.
The Letter of Credit is issued in a manner which has been recognized by the Bank for International Settlements (B.I.S.) and the International Chamber of Commerce (I.C.C), and is subject to the uniform rules of collection for documentary credits (ICC 400, 1983).
This type of instrument is normally called a Documentary Letter of Credit (“DLC”) and is always trade or transaction related, with an underlying sale of goods or services between the applicant (Buyer) and the Beneficiary (Seller). This type of instrument is never used for PPP or any type of monetization.
During the evolution of the trade related Letters of Credit, a number of institutions began to issue Standby Letters of Credit )”SLC’s”). These credit instruments were effectively a surety or guarantee that if the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank would take over the liability and pay the beneficiary (Seller).
In the United States banks are prohibited by regulation from providing formal guarantees and instead offer SLC’s as a functional equivalent of a guarantee.
A conventional Standby Letter of Credit (CSLC) is an irrevocable obligation in the form of a Letter of Credit issued by a bank on behalf of its customer. If the bank’s customer is unable to meet the terms and conditions of its contractual agreement with a third party, the issuing bank is obligated to pay the third party (as stipulated in the terms of the CSLC) on behalf of its customer. A CSLC can be primary (direct draw on the Bank) or secondary (available in the event of default by the customer to pay the underlying obligation). [Extracts from “recent Innovations in International Banking – April 1986 prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]
As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held “off balance” sheet in respect to the bank’s accounting principles.
This type of Letter of Credit is commonly referred to in the market place as a short form format. This number is not found as a specific ICC 400 (1983) reference and is purported to be a federal court docket reference number which is related to a law suit involving such instrument, no details are available to the author.
During the period when SLC’s were being evolved and used, the banks, and their customers began to see the profitable situation created by the “off balance sheet” positioning of the instruments. In real terms the holding of the Standby Letter of Credit was attributed to a “contingent” liability and, as such, was held off the balance sheet therefore in an unregulated area.
Due to constraints being imposed on the banks by regulatory bodies and government control, the use of these “off balance sheet” items as financial tool to effectively adjust the capital asset ratios of the banks, was seen to be a prudent and profitable method of staying within the regulations and yet to achieve the needed capital position.
At request of central-bank Governor’s of the Group of Ten countries a Study Group was established in early 1985 to examine recent innovations in, or affecting, the conduct of international banking.
The Study Group carried out extensive discussions with international commercial and investment banks that are most active in the market for the main new financial instruments. The purposes were both to improve central-bank knowledge of those instruments an their markets as the situation existed in the second half of 1985, and to provide a foundation for considering their implications for the stability and functioning of international financial institutions and markets, for monetary policy, and for bank’s financial reporting and statistical reporting of international financial developments. Alongside this work the Basle Supervisor’s Committee has undertaken a study of the report of the prudential aspects of banking innovations and a report on the manage-ment of bank’s off-balance-sheet exposures and their supervisory implications was published by that Committee in March 1986.
The growth of these instruments has been enhanced by two influences.
Firstly, bankers have been attracted to off-balance-sheet business because of constraints imposed on their balance sheets, notably regulatory pressure to improve capital rations, and because they offer a way to improve the rate of return earned on assets.
Secondly, for similar reasons, banks have sought ways to hedge interest rate risk without inflating balance sheets, as would occur with the use of the interbank market. [Extracts from “Recent Innovations in International Banking – April 1986” prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]
If you are a direct buyer looking for SBLC for your project or trade contact us.