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Check your understanding
Does paying an issuance/provider fee automatically mean the buyer owns the instrument’s full face value?
Credit Facilities, Cash and Collateral
Simple concepts first. Proper banking terminology second.
Why a bank cares about reimbursement
When a bank issues an LC, SBLC or guarantee, the bank may take credit exposure. It therefore needs to know how it will be reimbursed if it has to pay.
Cash-backed issuance
A bank may require cash to be placed or blocked as collateral. The percentage depends on the bank, customer, product and risk. Cash backing does not change the beneficiary into the owner of that collateral.
Credit facility
A strong customer may have an approved trade or guarantee facility. The bank can issue within that facility subject to its conditions instead of taking 100% cash for every transaction.
Other collateral
Banks may accept other forms of security depending on policy and law, such as deposits, securities, property-related security or corporate support. What is acceptable varies greatly by bank.
Leased and purchased terminology
Market expressions such as “leased,” “purchased” or “owned” instrument should be unpacked carefully. The real questions are who is the applicant, who provides collateral, who owes reimbursement, what rights the beneficiary has and what the issuing bank actually undertook.
Remember thisPaying an issuance or provider fee does not automatically mean somebody purchased the instrument’s full face value as a freely tradable asset.
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