Who trades Bank Guarantees and is there a market for them? - Part 3 of the series on trading Bank Guarantees

A couple of years ago I published  Part 1 and Part 2  of the series on trading Bank Guarantees to help make this highly complex and fraud ridden area of corporate finance clearer and as a warning to non-professionals contemplating getting into this highly risky business. In Part 1 I explained the structure of a Bank Guarantee and in Part 2 I explained the aspects of a Bank Guarantee a security that can be traded. In this Part 3, I will explain the mechanism and the intermediaries who trade in Bank Securities. Again, a strong note of caution - this area of corporate finance is unregulated by any regulator and attracts hordes of fraudulent intermediaries looking to make a quick penny by duping gullible investors.



Essentially, Bank Guarantees are traded by merchants involved in large volume international trade. For example, lets assume a food distributor in Europe "EuroMetro" purchases and imports canned sea food from a seafood processing factory in Asia "AsiaSeaFoods". If EuroMetro runs into cash flow difficulties due to the current economic crisis and can't pay AsiaSeaFoods, then a bank guarantee arranged by EuroMetro would pay an agreed-upon sum to AsiaSeaFoods. Similarly, if AsiaSeaFoods was unable to provide the goods, the bank would then pay EuroMetro the agreed-upon sum. In this instance, the bank guarantee acts as a safety measure for the counter party in the transaction. As explained in Part 2, either AsiaSeaFoods or EuroMetro could discount their counter party Bank Guarantee to a trading house, a non banking financial company or wire house through intermediaries.



The legitimate intermediaries (and there are a very few legitimate intermediaries) have created an unregulated international market of sorts in the trading of these Bank Guarantees. Unfortunately, the vast majority of intermediaries are fraudulent and have set up elaborate jargon ridden scams under varying names such as "Secret trading programs" etc. with the sole intention of defrauding potential investors. For the uninitiated, the best piece of advice I can give is to stay as far away as possible from any intermediary who claims to be "representing" buyers or sellers of Bank Guarantees.