SWAP LCs

KimChristensen · Post by **KimChristensen** » Thu Mar 29, 2007 1:00 am

Dear all,

Lets talk about oil LCs!

In oil LCs it is common to include a fluctuation clause – example:

“The amount of this letter of credit may escalate / de-escalate according to the price clause mentioned above without any further amendment from our part”

Usually this is related to a “normal” LC – so fluctuation (if any) would be directly related to the quantity.

However – I have also seen this used on so-called SWAP LCs. In this case it is a standby letter of credit – and the LC amount is much less than the quantity of gods that it covers, e.g.:

LC amount USD 60.000
Quantity: 10.000 metric tones; USD 300.000 per metric tones
LC including a “Swap contract ref. no XXX”.

In this case (as far as I can tell) the fluctuation is based on the goods amount – and not on the LC amount. The consequence is that even small fluctuations in price of goods – will (in percentage) casus significant changes to the LC amount – which I guess makes the credit process harder for the issuing bank.

So my question is: Does anyone know what a SWAP LC (as described above) is – and why it is being used … or just have comments to offer.

Thanks in advance.

Kim

DanielD · Post by **DanielD** » Thu Mar 29, 2007 1:00 am

Kim,

Such Sdbys are related to oil products where there is no futures market.
People enter a contract where the price for a specified quantity is swapped i.e. fixed on the one side and floating price on the other (according to publications). To secure the transaction a stby is issued for a "margin" say USD 50'000.-- or in your case USD 60'000.--. Fluctuation clause in the SDBY cover the fluctuation of the margin. It must be pointed out that the liability of IB may exceed
extensively the amount of the stdby.
Daniel

RolandLeupi · Post by **RolandLeupi** » Fri Mar 30, 2007 1:00 am

Due to the specificity of this kind of product I have always maintain the position that this type of transactions should not fall into the sphere of activities in the area of documentary credit / guarantee.
Roland

DanielD · Post by **DanielD** » Fri Mar 30, 2007 1:00 am

Roland,

You may as well think so, I cannot possibly comment
Daniel

RolandLeupi · Post by **RolandLeupi** » Fri Mar 30, 2007 1:00 am

This so called Stand-by is in fact a guarantee to secure price fluctuation. A guarantee should however clearly indicate the guarantee clause of which the most important point, i.e. the definition of the circumstances under which the bank can be required to pay. In the present case it would or better will not all all will be easy to calculate the amount due for ex. and may very easely bring to contestations (those products are related to particular markets, they are days and time from which calculate eventual prices, a.s.o., a.s.o. , reason why we would abstain to enter such deal, neihlter in an active, nor passive position
Roland

KimChristensen · Post by **KimChristensen** » Sat Mar 31, 2007 1:00 am

Dear Roland and Daniel,
Thanks for comments. Truly appreciated.
Best regards
Kim