Securities Defined
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Securities Defined
A financial security is recognised as a tradeable instrument. As such, they will carry either a Cusip number or an ISIN number. These numbers are recognition codes for trading and settlement. Financial securities can be recognised as stocks, bonds, futures and options to name but a few.
On this website we refer to securities as bank guaranties and standby letters of credit. This is because these bank instruments are utilised as security for loans and lines of credit
Bank Guarantees
A bank guarantee is a legally binding promise to pay by the issuing bank to the beneficiary. This payment occurs when the beneficiary suffers a loss due to the applicant reneging on their financial and contractual agreements.
The beneficiary is the beneficiary of the bank guarantee. The issuing bank issues the bank guarantee. The applicant is the client of the issuing bank.
The applicant instructs the issuing bank to issue the bank guarantee in favour of the beneficiary. The applicant and the beneficiary will have a contractual agreement. This agreement will call for the issue of a bank guarantee.
Standby Letters of Credit
A Standby Letter of Credit is often used to support trade finance deals. It is considered to be a payment of the last resort. Here is an example of a how a Standby Letter of Credit is employed.
Two companies a buyer and a seller enter into a contract. The seller may feel the buyer may not be able to pay for their product when delivered. The contract they sign will call for the buyer’s bank to issue a Standby Letter of Credit in favour of the seller.
If the buyer fails to pay the seller the seller can claim the full invoice value from the Standby Letter of Credit. The seller will instruct their bank to claim the full sum from the buyer’s bank or the issuing bank. The issuing bank will then claim the same from the buyer.
A Demand Bank Guarantee
If a bank guarantee is being used for monetising there is only one bank instrument that qualifies for this procedure. The Demand Bank Guarantee. This guarantee carries specific verbiage written solely for monetisation. The demand bank guarantee is governed by ICC Uniform Rules for Demand Guarantees, (URDG 758).
For more information on demand bank guarantees and URDG758 please got to Format and access ICC Uniform Rules for Demand Guarantees, (URDG 758).