Securities Borrowing and Lending is probably the only way to generate a valid Bank Guarantee or Standby Letter of Credit – if your own bank refuses to provide you with this service.
With this Securities Borrowing and Lending concept you probably have the only way to generate a valid Bank Guarantee or Standby Letter of Credit if you do not have at least 100% of face value on account with your bank, and your own bank therefore would not issue such an instrument for you. A valid BG or SBLC is very much like cash and this is also the reason why you will get such an instrument issued for you by your own bank only if you have sufficient cash, or cash backed securities or collateral on account.
Here is what basically happens in this process to generate your SBLC or BG through Securities Borrowing and Lending for you.
Clearly identified top rated, publicly traded and listed prime bank securities are ordered by an investor or an investor group on the secondary market and are placed into their securities account and paid for simultaneously as these securities are advised to your receiving bank (in the format of a Bank Guarantee of Standby Letter of Credit, cash backed by these securities) and your receiving bank pays for the agreed lending/borrowing fee. The instruments backing up your transaction are purchased particularly for you and for your transaction. This is why you will have to commit yourself to the transaction and place a commitment fee. No investor would want to buy securities for you and to your own benefit, without your firm and valid commitment to the transaction.
You can clearly identify the securities backing up your BG or SBLC by their ISIN (International Securities Identification Number) and a full description of the securities as stated in the Securities Borrowing and Lending Agreement and the pro forma invoice. Your commitment will cause the investor to reserve and order specific securities for you and your transaction. Once the investor has ordered these securities to back up your SBLC or BG transaction, he will be obliged to fully settle the purchase price and fully pay for these securities within 20 days to fully take possession of these securities and to apply these securities to the emission of your Bank Guarantee or Standby Letter of Credit.
EMISSION & PAYMENT
Now the reservation fee can only be considered some kind of an “appreciation” of the investor’s efforts for you, and the action that will be taken on your behalf. The payment of the agreed Borrowing and Lending Fee has to be secured through a commitment provided by your bank. There are 4 different, conditional payment options available and you should have a basic agreement with your bank in place when you start this transaction. Your bank will have to support you and be in agreement to issue the payment instrument for you.
After you have committed yourself with the payment of the reservation fee, the investor orders securities to be delivered into his securities account to be purchased and to back up your transaction. The agreed conditional payment instrument will have to be arranged by yourself and be available within 20 days after you have placed your reservation fee. Once your payment instrument is transmitted as mutually agreed in the Securities Borrowing and Lending Agreement, your Bank Guarantee or SBLC is going to be emitted and sent via SWIFT MT760 to the agreed receiving bank account. Your bank verifies the instrument and releases the conditional payment to the provider/investor.