The credit line of the principal is not adequate for an Import L/C to be opened. Accordingly, the bank requests its customer to deposit the relevant amount as cash cover. The amount is booked as collateral to a separate account (cover account). The cash cover is either used to settle the documents or it is repaid to the applicant after the L/C has expired, if no payment obligation was involved.

The handling of cash cover is available to the business sectors in which obligations are also posted as part of exposure (e.g. for import L/Cs, export L/Cs, guarantees and confirmed reimbursements).

There are two different processes in the application:

The cash cover amounts are assigned to the relevant contracts.
The use of cash cover calls for an account of the type 'CC' for the relevant party.

A prerequisite for the “Cash Cover” panel is that the “LIAALL Liability” is available in the transaction. If the cash cover amount is saved, the panel will always be visible. Otherwise, the “Cash Cover” panel is only visible if the “LIAALL Liability” is also visible and a contract change amount has been entered.

The new process differs from the legacy process in the sense that the cash cover amounts can be assigned to any role available in the contract and a prorated assignment of cash cover amounts is possible via the liability.

In order to use the new process, the checkbox for use of the new cash cover process must be checked in the “Maintaining System Configuration” transaction. After that, distribution of the liability is possible between the line and cash covered portion.

This is how the new process works, using an import L/C as an example:

When “Opening an Import L/C” a guarantee booking (AVL) is charged to the standard line of the applicant (APL role) in the amount of the maximum risk.

To carry out a separation of the liability into a line and a cash covered portion, either the liability amount or the percentage can be recorded that is to be covered by the customer's standard line. The remaining balance is then entered in the “Amount not yet assigned” field and can be loaded into the Liability Grid by placing the cursor in a new liability field and clicking the [ to current line] button. To make the assignment of the new liability line to cash cover, the [Details] button can be used to select 'Cash cover'. If 'Cash cover' is to be used to hedge a risk, a further [Details] button is available next to the field. On this Cash Cover Details panel, a party other than one from the liability role can be selected. All roles entered in the contract are available, including third parties.

If the hedge of the share collateralized in cash is to be made in some currency other than the contract currency, this setting can also be made using the “Cash Cover Details” panel. The conversion is effected at the respective middle rate on the recording date. The recording of cash cover triggers the associated postings in the settlement process: a credit note in favor of a 'hold account' and the debit entry of the party to the contract paying the cash cover.

As in the case of the risk being hedged via a standard line, a limit inquiry to the line system is also generated in cases where the hedge is to be made by cash cover. In the case of cash cover, it is a line that is blocked and set to zero.

If an increase is made in the above-mentioned case of the import L/C opened, in the liability the relevant liability amounts are booked in accordance with the shares set up for the line and cash covered portion at the time of the opening.

Within a contract, each liability line with cash cover can be collateralised in another currency. However, it is not possible to modify the currencies of individual liability lines during the contract term e.g. to hedge a share collateralised in euros at the time of the contract opening in the event of a change in USD.

Transfers of cash cover amounts can be carried out in transactions “Internal change” (LITAMC), “Change confirmation/cash cover” (LETAMC, GITAMC, RMTAMC) as well as in transactions “Liability adjustment” (xxTTEN).

The cash covered portions from the liability are booked out in line with the shares in the transactions to be settled, such in the case of documents being taken up / paid under an L/C.

The relevant bookings are automatically included in the settlement statement: the charge to the 'hold account' and the credit entry of the party to the contract paying the cash cover. Here it is not possible to select the 'hold account'. If the pay and the cash cover party are identical, then the cash cover amount to be booked out will be netted against the document amount.

If no documents are presented under the L/C, then the cash cover amounts will be repaid when the L/C is closed.

The commission entries are prepared per liability line, and the respective individual amounts are settled if the commitment amount is defined as a condition. As a result, if necessary in case the cash covered portion needs to be commissioned in some other manner, various charges can be used for normal and for the cash secured portion.

Furthermore, on the Settlement Details panel the basic amount can be modified manually for calculation purposes. This results in the calculation being made on the manually set basic amount, with the basic amount suggested by the application being overwritten in the process.

If no import L/C commission is to be charged at all for the cash secured portion, then the line with '-' in the grid can be deleted.