Posted by: Financial Sith Lord | December 30, 2009

A thing or two regarding Guarantees – Part 2

In my previous post, I’ve explained the various natures of guarantees, and its specifics in functions. Guarantees are delicate legal documentation issued by banking institutions, thus if worded wrongly, the bank could seriously get into trouble. That’s why, most of the time, guarantees are worded precisely and are vigorously checked before they are issued. In this post, I’ll be elaborating a bit on the issuing protocols of guarantees, issued by commercial banks.

Once the applicant instructs the issuing bank to issue a guarantee, the applicant would have to provide concise details of the nature of guarantee, its purpose, collateral or security for the guarantee, fees etc, on top of the regular beneficiary’s name, address, contact numbers, receiving bank’s coordinates (which includes SWIFT Code, bank name, address, branch, account numbers, etc).

When all requirements are met by the applicant, the bank would then proceed to issue a ping message to the receiving bank, probing an authentication on the beneficiary’s details, as per given by the applicant. The receiving bank would then confirm the details by sending a reply ping message, confirming and authenticating the given details. If and should the given details be found incorrect or inaccurate, this reply ping message would contain such warnings.

Assuming that all given information are true and correct, the issuing bank would then send a full SWIFT transmission to the receiving bank, following the prescribed SWIFT Format (There are specific SWIFT Formats for specific financial transactions, which follows a uniformed financial transaction serial codes – I’ll explain it in my future posting). The SWIFT message, usually between 4 to 5 pages long, will printed out by the receiving bank. Upon validating the contents and its context format, the receiving bank would normally send an authentication ping message to the issuing bank, and within a specified time frame, the issuing bank must authenticate the authentication ping message. Failure to do so would result the receiving bank deeming the SWIFT message as null and void.

Once the receiving bank receives the  required authentication ping message reply, the receiving bank would then endorse the document as validated and authenticated. Depending on the receiving bank’s arrangement with the beneficiary, sometimes the receiving bank would insert their own clauses into the printed SWIFT message, stating that they have validated and authenticated the message, but the beneficiary is to check on its own, the terms and conditions mentioned in the guarantee.They would also advise the beneficiary to revert to the applicant for any unwarranted or unnecessary clauses in the guarantee, for omissions or removals.

If the beneficiary has a prior arrangement with the receiving bank, the bank would then process the guarantee within the trade finance department, and make the necessary arrangement for the beneficiary’s  financial draw-down of funds against the guarantee.

Basically, that’s how guarantees are transmitted via SWIFT. It’s a simple two-way bank-to-bank communication process which are often distorted by unscrupulous so-called financial advisors or consultants, with the objective of misleading individuals or corporations towards illogical guarantee issuing procedures, thus creating the possibilities of unneccessary complications, which could result to the loss of hundreds of thousand of dollars.

So, now you know!!

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Responses

  1. Dear Financial Sith Lord, thank you for sharing your postings with us. I’ve had numerous bad experiences when it comes to BGs as most of the so called traders dupped me and only wants to get money. They couldnt care less whether your BG is fake or real, and when things turn rocky, they claim that they need us to pay some whatever fees, that’s always in the hundreds of thousands region.. Your explanation on the process of BG and the different types of BG is really helpful. Now I know what to say to all those people claiming to be traders or BG experts. Thanks


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