SBLC MT760 "Monetisation" Myths: What a Standby Letter of Credit Can and Cannot Do

Few instruments are as misdescribed in commodity circles as the standby letter of credit sent by SWIFT MT760. Offers for EN 590 and other fuels routinely require the buyer to "issue an SBLC MT760 for monetisation", or propose that a "leased SBLC" be placed with a "monetiser" who returns cash. None of this corresponds to how banks issue, receive or use standby letters of credit. This article sets out what an SBLC is, what the MT760 message does, and where the limits lie.

What an SBLC by MT760 is

A standby letter of credit is an irrevocable undertaking by an issuing bank to pay a beneficiary a stated amount if the beneficiary presents a demand that complies with the terms of the standby, usually a signed statement that the applicant has not performed. It is a default instrument: in a well-run trade it is never drawn. The governing rules are ISP98 (ICC Publication 590) or, if so stated, UCP 600. Demand guarantees of similar effect are issued under URDG 758.

MT760 is the SWIFT message type by which the issuing bank transmits the full text of the guarantee or standby to the advising bank. It is authenticated between the two banks and binds the issuer from the moment of issue. The message carries the applicant, the beneficiary, the amount and currency, the expiry date, the governing rules and the exact wording of the demand. Nothing else creates an SBLC; a draft on letterhead or an MT799 pre-advice does not.

What an SBLC can do in a physical trade

• Secure the buyer's payment obligation under a long-term supply contract where each lift is invoiced on open terms, so that the seller can draw if an invoice is unpaid at maturity.
• Serve as the performance security of a seller, replacing a cash performance bond, where the contract allows it.
• Be confirmed by a second bank, which adds that bank's own undertaking, at a fee reflecting the issuer's credit rating.

In each case the beneficiary is a counterparty with a defined claim, the amount is tied to a contract and the demand wording describes a default event under that contract.

Rule: a standby letter of credit is a promise by a bank to pay on default. It is not money, not collateral that can be leased, and not an instrument that a third party can turn into cash for a fee.

What an SBLC cannot do

It cannot be "monetised" by a third party

A bank will lend to its own customer against a standby it has received and confirmed, in the same way it lends against any receivable, after its normal credit process. That is a loan to the beneficiary, priced on the beneficiary's credit and the issuer's standing. There is no counterparty anywhere that pays a fixed percentage of face value to a stranger who presents an SBLC, and the "monetiser" in these offers never has a bank behind it. The sequence is always the same: a fee is paid to "lease" the instrument, a document is shown that is not an authenticated MT760, and the cash never arrives.

It cannot be "leased"

Banks issue standbys for their own customers against collateral or credit lines; they do not rent out undertakings to unrelated parties. An "SBLC provider" offering to issue in favour of any beneficiary for a few percent of face value is offering something no regulated bank does. Where such an MT760 is actually sent, it comes from an unregulated entity whose undertaking is worthless.

It cannot be used to pay for a cargo

Payment for a diesel cargo is made under a documentary credit against shipping documents, or by wire after a collection. A standby is drawn only on default and after a demand stating non-performance. A seller who asks for an SBLC "as payment" has either confused the instruments or intends to draw regardless of delivery.

How SBLC offers appear in diesel transactions

What institutional buyers do instead

1. Pay for cargo under a documentary letter of credit by MT700, subject to UCP 600, against documents.
2. Where a standby is appropriate, have it issued by their own relationship bank in favour of a named supplier, under ISP98, with an amount tied to a signed contract.
3. Reject any structure in which an instrument must be issued before a contract exists, or in which a fee is payable to a third party for issuing, leasing or monetising.
4. Verify every claimed MT760 bank to bank, and treat the absence of a named issuing bank with a SWIFT BIC as the end of the discussion.

A standby letter of credit is a useful instrument in a long-term supply relationship. Used as a substitute for a cargo or as an asset to be sold, it is the signature of a transaction that will not close.