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What is Collateral Transfer?

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Definition of Collateral Transfer

The Collateral Transfer market has been around for many years but it has always been referred to incorrectly as a Leased Bank Guarantee or Leased Standby Letter of Credit. Financial experts believe this is because of the similarities between a leased bank guarantee and a commercial leasing contract.

As defined previously, a company looking to obtain credit facilities will sign a contract, (a Collateral Transfer Agreement), with a provider to lease or rent a bank guarantee usually for a period of one year. The company is now referred to as the beneficiary and they will pay the provider a fee for use of the instrument. This is referred to as a Collateral Transfer Fee.

Under the terms of the Agreement the provider will instruct their bankers to issue and transfer by SWIFT either a bank guarantee or standby letter of credit to the beneficiary’s account with their bankers. The beneficiary will now attempt to monetise the instrument(s).

What is a Collateral Transfer Agreement?

A collateral transfer agreement is a contract between two parties referred to as the provider and the beneficiary. The provider agrees to loan or rent a Bank Guarantee or Standby Letter of Credit to the beneficiary usually for a period of one year. The beneficiary will have agreed to pay a fee to the provider for renting the instrument. This is referred to as the Collateral Transfer Fee.

Furthermore, the Collateral Transfer Agreement will contain in regard to the financial instruments the amount, the currency, expiry date which importantly is when the instrument must be returned to the ownership of the provider. Reference will also be made to the underlying business plan.

What is SWIFT?

Society for Worldwide Interbank Financial Telecommunications known as SWIFT is a global interbank financial messaging system. There are over 11,000 members in 200 countries and SWIFT is responsible for sending roughly 32 million messages per day. From a security stand point SWIFT offers a fully standardised authenticated service with validation and verification checks.

All SWIFT messages have their own peculiar designation. Each message has two letters MT, (Message Type) followed by three numbers. For example, a MT103 is a Single Customer Credit Transfer. When used for transferring Bank Guarantees, Standby Letters of Credit and Documentary Letters of Credit the swift designations are MT 799 and MT760 are used. The MT799 is a pre-advice and the MT760 transmits the actual instruments.

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