As Collateral Transfer facilities are founded on the injection of an inter-bank financial instrument (Bank Guarantee or Standby Letter of Credit) from the Provider’s bank to the Recipient’s bank, the transaction relies on both banks talking to each other…
As Collateral Transfer facilities are founded on the injection of an inter-bank financial instrument (Bank Guarantee or Standby Letter of Credit) from the Provider’s bank to the Recipient’s bank, the transaction relies on both banks talking to each other, i.e. The bank of the Provider issuing the facility (the Issuing Bank) and the bank of the Recipient receiving the facility (the Recipient Bank). It is therefore important to first set these communications between the banks as the stage of performance of the transaction. Without the two banks’ involvement, the transaction is not possible.
Both parties (the Provider and the Recipient) cannot enter into contract with each other whereby such contract commits the Issuing Bank and the Recipient Bank to undertake matters on behalf of their customers (the parties) since the two banks are not party to this contract. It is therefore necessary for the parties to first enter into an offering contract (or pre-contract). This is generally done by the Provider issuing to the Recipient an Offering Contract, rather like a mortgage offer that a bank may offer its customers.
This Offering Contract sets the parameters of the transaction. Once this contract is entered into, the Provider will instruct their Issuing Bank to first advise the Recipient Bank by what we call a ‘pre-advice’. This is done through the inter-bank communication system called SWIFT.
The Issuing Bank will send a SWIFT message to the Recipient Bank stating that their customer (the Provider) is about to enter into contract with their customer (the Recipient) and will be sending a Letter of Guarantee (or SBLC), the ‘collateral medium’. The wording or draft of this instrument will also be enclosed. The Issuing Bank will request within this pre-advice communication the Recipient Bank’s to confirm their readiness and willingness to receive such financial instrument on their client’s behalf. Only when this communication line has been established will the two parties be able to enter into contract for the remittance of the collateral and therefore the closure of the Collateral Transfer provision. At this point the Collateral Transfer Agreement is signed and the medium is remitted. The Collateral Transfer Agreement is an identical agreement (in respect to the terms) to the Offering Contract or Collateral Transfer Offering.
The remittance of such intention or ‘pre-advice’ involves the Provider committing the funds to the Issuing Bank and the funds will often be ‘locked’ by the Issuing Bank prior to sending this pre-advice communication. Therefore, the Provider may seek some form of commitment from the Recipient as to lock them in to receive the facility and prevent them from backing-out. These communications are also often irrevocable and represent a binding commitment between the parties.