Who Are Financial Instruments providers? How Does One Find A Genuine Provider ?
Standby Letter of Credit or Bank Guarantee (SBLC/ BG) Providers are mostly active in the secondary and the tertiary markets. But how does one find a genuine/reliable Provider for SBLC/BG ? To understand who these Providers are and how they function, one must understand what is called as Collateral Transfers in the financial world. Collateral Transfer is basically the provision of transferring assets from one party (the Provider) to another party (the Beneficiary) often in the form of a Bank Instrument (BG or SBLC). This occurs whereby the Provider agrees (through his Issuing Bank) to issue a “Demand Guarantee” to the Beneficiary in return for a “rental” or “return” generally known as the “Contract Fee”. The parties agree to enter into a Collateral Transfer Agreement (CTA) which governs the issuance of the guarantee.
A Provider for SBLC/BG would often be a collateral management firm, a hedge fund, a Financial Holding Company (FHC), a non-bank commercial company, or private equity company. They are high net worth corporations or individuals who hold bank accounts at a bank which holds either large sums in cash deposits, bonds, or other forms of security that can turn into legal tender. Basically, in most cases these are liquid assets at the immediate disposal of their owner. Whenever the occasion arises, a Provider instructs his bank to secure and encumber liquid assets/ cash in his own account and authorizes the bank to “cut” (an industry term meaning to create a financial instrument such as SBLC or BG.
Provider’s bank has neither interest nor unsecured liability in such a transaction. The bank receives its fee for “cutting” (creating) the SBLC/BG and “delivering” it to the Receiver/Beneficiary’s bank first digitally over the SWIFT Platform and subsequently a hard copy of the SBLC/BG via bank bonded courier. All liabilities that might arise from selling or leasing the SBLC/BG rests completely with the Provider since the financial instrument (SBLC/BG) was created at the Provider’s instruction alone and also since it is secured against Provider’s cash/ liquid assets held by the bank. Provider’s bank that creates and delivers the SBLC/BG is called the Issuing Bank.
Financial Instruments Providers are a rare breed and are extremely difficult to find. Providers do not advertise themselves or send emails soliciting business from clients. As mentioned earlier, they are high net-worth corporations or individuals or funds and they hold a commanding position in the financial sector. Their businesses span across finance, banking, capital markets, oil & gas, commodities trading, manufacturing, IT, etc. More often than not, dealing in Financial Instruments is only a small portion of their business interests.
Providers of Financial Instruments providers generally work through their brokers or mandates who further engage sub-brokers in the chain making direct access to Providers even more difficult. It is absolutely futile to look for SBLC/BG Providers over the Internet. For those who work in the Financial Services sector and interact closely with high net worth individuals, private equities, funds, asset managers, banks, etc. on a regular basis, the chances of coming across a genuine SBLC/BG Provider is much higher than those who are outside the Financial Services sector.