Use of Counter-Guarantee in Cross-Border Transaction

Did you know your correspondent bank can help if your corporate client wants to do business in a country where you as an FI do not have a branch presence.

Let's say your corporate client wants to invest in Mexico. For instance they want to set up a manufacturing plant there but their Mexican partner would prefer to receive a local performance guarantee or standby LC locally in support of such joint venture. Reason being for the Mexican partner is plain and simple. It is the ease of submitting a claim if your corporate client defaulted in its performance obligation. Other factors for consideration such as same time zone and local language interaction are important as well for your corporate client's Mexican partner.

The trick to accommodate your corporate client's request is to select a correspondent bank where they have a branch presence in Mexico and latter is allowed in the Mexican jurisdiction to issue local guarantee or standby LC on your behalf.

Once you have reached out to the correspondent bank in question, you would need to work out a mutually agreed pricing that is also acceptable to your corporate client. Pricing component would comprise of (a) pricing you would normally charge your corporate client for the guarantee duration plus (b) your correspondent bank's charges.

Your correspondent bank's pricing for agreeing to issue such local guarantee or standby LC will be based primarily on your (FI) creditworthiness and tenor of such guarantee. They would also have a final veto on the local guarantee wording and such wording would need to be acceptable to the beneficiary (your corporate client's Mexican partner).

Your correspondent bank would also require the counter-guarantee that you issued to be at least 30 days longer than the expiry date of the local guarantee or standby LC so they have ample time to submit the claim to you (FI) in the event that their local guarantee or standby LC is being claimed by the beneficiary.

Hence the use of counter-guarantee helps your corporate client to expand into new territory where you as an FI do not have a branch presence in such location.

Please reach out to us if you would need further dialogue on this arrangement either as a corporate or FI.