Debunking the myth of “secret trading programs”: All about Bank Guarantees – Part 1

In a world fraught with Bank fraud, one often comes across unregistered brokers who invite you to join a “secret trading program” among “prime European banks” that will make you rich by trading “prime bank guarantees” which can bought at a discount and sold at enormous premiums shortly thereafter. This author has heard of claims being made of 27% return a month and of US$ 10 million being converted to US$ 100 million in a year. On top of this you are told that due to the regulations, you can join this “secret trading program” through invitation only and have to sign letter of non-disclosure and often “a letter of no solicitation” and proof of clean funds. The claim is also made that the procedures and cost of the banking instruments are dictated by the issuing bank and your investment is absolutely risk free. This author has heard of minimum amounts of investment from US$ 10 million to “tranches” of US$ 1 Billion or more. None of this could be further from the truth.

The simple truth is that Bank Guarantees do exist and are legally issued by a large number of banks worldwide primarily to finance trade. Unfortunately, a chain of unregistered brokers muddy the waters and try to engulf the business of Bank Guarantees in a shroud of secrecy for personal (often enormous) gain.



First, let us understand exactly what a bank guarantee is. The investopedia defines a bank guarantee as a “guarantee made by a bank on behalf of a customer (usually an established corporate customer) should the customer fail to deliver the payment, essentially making the bank a co-signer for one of its customer's purchases. Should the bank accept that its customer has sufficient funds or credit to authorize the guarantee, it will approve a written contract stating that in the event of the borrower being unable or unwilling to pay the debt with a merchant, the bank will act as a guarantor and pay its client's debt to the merchant.” The bank guarantee is an irrevocable instrument and once issued cannot be cancelled. It’s main role in trade finance is a guarantee of payment reassuring the supplier that he will be paid if he meets his part of a contract or a tender guarantee, bid bond, advance payment guarantee and similar, which belong to the most important instruments protecting the client against default in performance of terms and conditions of a contract.

Bank Guarantees are primarily issued as a letter by the issuing bank and often issued in electronic form via the SWIFT bank to bank telecommunication network as an MT (Message Type) 760 – Issue of Guarantee for moving the bank guarantee from the seller’s bank to the buyer’s bank. In the electronic version, the verbiage of the Bank Guarantee is specified in the field specifications of the MT 760, particularly Field 77C - Details of Guarantee. Bank Guarantees are not registered securities and they cannot be seen on computer systems of Central Securities Depositories such as DTC or Euroclear for screening, authentication, or settlement. Hence settlement of payments for Bank Guarantees must be transacted through NON-Euroclear Delivery Versus Payment (DVP) procedures agreed in advance by transacting parties. The agreed procedures are thus extremely important in the absence of standard DVP procedures for example through Euroclear.



Even though Bank Guarantees are not registered securities approved by regulators for sale to the public, nonetheless, they are fully cash backed financial instruments guaranteed by a bank. It is this aspect of a Bank Guarantee that makes it a negotiable instrument between transacting parties. This negotiable instrument cannot be traded through normal channels since it is not regulated by regulators. Hence the shroud of secrecy surrounding trading of bank guarantees and the need for “letters of non-solicitation.

In next part of this series we will examine how an entire financial industry has sprung up around the leasing or trading of Bank Guarantees that involves intermediaries (sometimes a chain of intermediaries), participating banks and of course the buyers and sellers themselves.

- Eric