Name: ABDUL AZIZ BALOUCH

Bank B, C, D, E and F participated in a trade transaction fronted by Bank A.

According to Bank A they are fronting  an LC transaction as such and booked an LC liability with them, however in terms of nature / wording /clauses of instrument , it is a SBLC with Bank  D,  hence Bank D created a SBLC liability in their books.
The Risk participation agreement signed by all banks indicates the transaction as LC.

Is Bank D at the right path / track to book a SBLC liability which differs from the fronted Bank (A) liability.

Regards
Aziz Balouch

We have been discussing this one in the editorial board - but we are not sure that we able to provide a thorough answer. There exist no standard for such participations - basically it is regulated by an agreement between the participating banks - so it may well be ok - if the agreement is clear.

If you need further you are free to elaborate.

Thanks

Kim Christensen

Thanks for clarification.

I would like to understand, whether this will be appropriate for all participating banks to book different liabilities in their books according to their understanding of instrument whereas the Risk Participation Agreement signed by all of them represent a particular instrument.

Regards

Aziz Balouch

Under normal circumstances each of the participating banks will book their own liability in their own books.

So based on your case it could be done so that bank D will book the full

Standby - but then also indicate the part covered by the other banks - so that the net liability will reflect their own risk.

The other banks will then book their own liability in their own books - based on the risk participation agreement.

Best regards

Kim Christensen

Thanks again.

Let me present like this.

1. There is a Risk participation agreement between all banks which covers a underlying transaction of an LC.

2. Bank A which is fronting the transaction book a liability in their books under LC

3. In terms of text and clauses of instrument, Bank D (Member bank) feels that it is a SBLC; hence book a SBLC liability in their books unto the extent of their sharing.

Now, the situation is that few banks booked LC liability with them treating the transaction as an Letter of Credit whereas other banks are booking SBLC liability assuming it as an SBLC. Would it be appropriate for all banks to book two different liabilities under / against a single transactions which are contradictory to each other.

Regards

Aziz Balouch

For the outset this sounds strange - however it again depends on the agreement made.

I have seen some of those agreements where the master bank will handle the commercial LC - and of course book it as such (of course their net liability). These agreements have been structured in such a way that the handling (including document examination) is done by the master bank. The master bank will inform the others when the deal balance of the LC is decreased.

If the agreement is structured in such a way - you may argue that it looks like a standby credit from the perspective of the other participating banks - as they are not part in the commercial LC - and their risk would only materialise if the master bank does not receive funds due to default at the issuing bank.

Best regards

Kim Christensen