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What Financial Instruments are Hypothecated?

There are two bank instruments that are hypothecated, a bank guarantee and a standby letter of credit. Although as stated here there are two types of bank guarantee only a financial guarantee is used for hypothecation.

What is a Performance & Financial Guarantee?

There are two types of Bank Guarantee. A financial guarantee and a performance guarantee. In both cases if the guarantee is called or has a claim made against it and the claim complies with the terms and conditions of the Bank Guarantee the Issuing Bank will have to pay.

A Financial Guarantee is where the bank that issues the bank guarantee has a financial obligation to pay the beneficiary of the instrument should the provider or applicant fail to honour their monetary obligation to the beneficiary.

A Performance Guarantee is issued on the instructions of the provider and the issuing bank will have to pay any losses the beneficiary incurs if the provider fails to perform on a contract such as late delivery of goods or not conforming to a construction contract.

For the purposes of information, a provider or applicant is a client of the issuing bank. They will have an underlying contract with the beneficiary and accordingly will have instructed the issuing bank to issue the bank guarantee.

What is a Standby Letter of Credit?

A Standby Letter of Credit is a financial instrument issued by a bank and is a payment of the last resort. A Standby Letter of Credit guarantees payment to a seller should their buyer default on payment.

Find more information on Why Financial Instruments Hypothecated