If you receive a valid financial instrument in your own bank from a third party, you should be able to issue your own bank instruments on the back of the instrument that you received. This works perfectly and you can have a back-to-back instrument issued, if you have a relevant banking relation and the financial instrument that you receive is fully cash backed, issued by a prime bank, and if it is divisible and assignable.
Back to back instruments are referred to as auxiliary letter of credit or sub-letter of credit. The term back-to-back Credit or Secondary Credit is used in the USA, Countervailing Credit, Counter Credit is used in Great Britain, and Credit Dos-ä-Dos Contre-Credit is used in France.
In a commercial transaction, if the initial letter of credit is not transferable or it cannot be transferred or assigned, a back-to-back transaction may become necessary.
A Back-to-back letter of credit is created when an export trader, an intermediary or transit trader (PARTY B) instructs his bank to issue, back-to-back, on the basis of a documentary credit opened in his favour (by PARTY A), a Letter of credit in favour of an upstream supplier (PARTY C).
In a commercial transaction, a back-to-back letter of credit involves two letters of credit to secure financing for a single transaction, involving an intermediary between the buyer and seller.
Both letters of credit relate to the same delivery of goods and provide for the same documents and conditions. But there can also be different conditions and the documents involved or required.
Here is a practical example. A back-to-back-credit is a credit instrument issued on the back of an existing (the first) letter of credit. In case of an import export business, this first Letter of Credit is issued by the end buyer (PARTY A) to his direct seller contact, for example an exporter, or intermediary trader or broker (PARTY B).
The beneficiary of this first Letter of Credit (PARTY B) is the end buyer’s (PARTY A) direct contractual partner. He is in contract with the actual supplier (PARTY C).
To carry out the transaction and to source/access delivery of the product or service, the beneficiary of the first LC (PARTY B) now instructs his house bank to open a new counter-letter of credit in favour of his supplier (PARTY C), from whom the intermediary (PARTY B) sources the product or service for the end buyer (PARTY A).
The second LC issued back-to-back is of lower face value, usually by the gross (profit) margin of the intermediary trader or broker in this transaction. A counter-letter of credit corresponds to the basic conditions of the original letter of credit, except for the amount (face value) of the letter of credit and the duration.
Back-to-back letters of credit are legally considered two separate LCs which are used to finance and to materialize a single transaction involving three parties, an intermediary (PARTY B) between the end buyer(PARTY A), and the actual supplier of the product or service (PARTY C).
An example in figures: Let us assume that the end buyer (PARTY A) is prepared to pay Euro 1,000,000 for a certain product. He issues a Letter of Credit to the intermediary (PARTY B) who is the end buyer’s direct seller. The intermediary himself probably has a seller (PARTY C) for this product at Euro 800,000 (as an example). To secure the Euro 200,000 profit margin for the intermediary, and to get delivery of the product from (PARTY C) to (PARTY A), the intermediary (PARTY B) has his bank issue a Letter of Credit in the amount of only Euro 800,000 to originating provider or supplier (PARTY C).
With the first LC the end buyer (PARTY A) is secured to receive the product or service at the agreed price of Euro 1,000,000. With the second LC, the originating provider or supplier (to PART C) of the product or service is assured of his sales price of Euro 800,000 and the intermediary broker (PARTY B) can materialize his profit margin of Euro 200,000 once the transaction goes through and the product or service is provided to the end buyer (PARTY A).
To sum up, a back-to-back LC is a special form of documentary credit that is opened on the back of a guarantee instrument (the original letter of credit) an intermediary trader or seller may have received from his direct client.
But a back to back transaction can also be a strictly financial transaction.
The instruments generated on the back of highly rated, publicly listed securities and made available to qualified clients on the basis of a Securities Borrowing and Lending Agreement are emitted through a standard verbiage which confirms the instrument to be
• fully cash backed
This is the ideal scenario for a beneficiary to receive the instrument at his own bank, and then, on the back of it, issue own bank instruments for commercial or financial transactions, as may be required to suppliers, to secure long term commodity contracts, or to a trade platform to participate in high yielding investments, or in smaller increments to several parties.
If you want to issue your own bank instruments on a back-to-back basis of a borrowed instrument, get in touch! Call Morris on +353.86.0325153. This phone number also works on Whatsapp, Signal, Telegram and WeChat.