The International Bank Debenture Trading

Introduction

The following document has been prepared based upon all the available information and is largely a hypotheses, due to the fact that much of the information is hearsay and unsubstantiated. The basis in fact, however, is strong and several documents which re attached as appendices give a detailed summary of the information and reasoning behind this document.

Basic history of specific types of credit instruments

The issuance of bank (credit) instruments dates back to the early days of "banking" when private wealthy individuals used their capital to support various trade orientated ventures. Promissory Notes, Bills of Exchange, Bankers Acceptances and Letters of Credit have all been a part of daily "bank" business for many years.

There are three types of Letters of Credit which are issued on a daily basis. These are Documentary Letters of Credit, Standby Letters of Credit and Unconditional Letters of Credit or Surety Guarantees.

The issuance of a "Letter of Credit" usually takes place when a bank customer (Buyer) wishes to buy or acquire goods or services from a third party (Seller). The Buyer will cause his bank to issue a Letter of Credit which "guarantees" payment to the Seller via the Seller's bank conditional against certain documentary requirements. In other words, when the Seller via his bank represents certain documents to the Buyer's bank the payment will be made. These documentary requirements vary from transaction to transaction, however, the normal type of documents will usually comprise of:

- Invoice from Seller (usually in triplicate)
- Bill of Lading (from Shipper)
- certificate of Origin (from the Seller)
- Insurance documents (to cover goods in transit)
- Export Certificate (if goods are for export)
- Transfer of Ownership (from the Seller)

These documents effectively "guarantee" that the goods were "sold" and are "en route" to the Buyer. The Buyer is secure in the fact that he has "bought" the items or services and the Seller is secure in the fact that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will "guarantee" payment if he complies with the terms of the Letter of Credit.

This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear that the issuing bank will not "honour" its obligation, providing that the bank if of an acceptable stature.

The Letter of Credit is issued i a manner which has been recognised by the Bank for International Settlements (B.I.S.) and the International Chamber of Commerce (I.C.C), and is subject to the uniform rules of collection for documentary credits (ICC 400, 1983).

This type of instrument is normally called a Documentary Letter of Credit ("DLC") and is always trade or transaction related, with an underlying sale of goods or services between the applicant (Buyer) and the Beneficiary (Seller).

During the evolution of the trade related Letters of Credit, a number of institutions began to issue Standby Letters of Credit )"SLC's"). These credit instruments were effectively a surety or guarantee that if the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank would take over the liability and pay the beneficiary (Seller).

In the United States banks are prohibited by regulation from providing formal guarantees and instead offer these instruments as a functional equivalent of a guarantee.

A conventional Standby Letter of Credit (CSLC) is an irrevocable obligation in the form of a Letter of Credit issued by a bank on behalf of its customer. If the bank's customer is unable to meet the terms and conditions of its contractual agreement with a third party, the issuing bank is obligated to pay the third party (as stipulated in the terms of the CSLC) on behalf of its customer. A CSLC can be primary (direct draw on the Bank) or secondary (available in the event of default by the customer to pay the underlying obligation). [Extracts from "recent Innovations in International Banking - April 1986 prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]

As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held "off balance" sheet in respect to the bank's accounting principles.

This type of Letter of Credit is commonly referred to in the market place as a short form format. This number is not found as a specific ICC 400 (1983) reference and is purported to be a federal court docket reference number which is related to a law suit involving such instrument, no details are available to the author.