The “Guarantees” business sector covers all transactions related to the processing of an undertaking (guarantees and standby L/Cs).

The guarantees/ undertakings differ in the way they are handled. Accordingly, each purpose of message type will be described separately since not all of the available transactions can be used in a similar manner with each type.

For outgoing (direct and indirect) guarantees, the guarantee texts specified under “Maintaining Advanced Text Definition” by the legal department are stored only once in the master data system according to the type of guarantee (e.g. advance payment guarantee, performance guarantee), legal form, language and frequency of use, and they can then be used as often as required for issuing undertakings.

SWIFT 2021 regulatory changes for Guarantees and Standby L/C's have been introduced to improve the communication efficiency and to support STP (Straight Through Processing) through highly structured and clearly defined messages. This means that the SWIFT messages (MT760, MT767 etc.,) for Guarantees and Standby L/C's consist primarily of structured fields and fields with coded options (such as amounts, parties, expiry details etc.).

The messages for issuance and amendment of undertakings are divided into three blocks:

• Sequence A: is mandatory and contains general information, such as the Purpose of Message (Tag 22A) which basically drives the whole subsequent flow.
• Sequence B: is mandatory in interbank messages and indicates either the details of the directly issued undertaking or the details of the (counter) counter-undertaking resp. the counter-counter-undertaking.
• Sequence C: is optional and indicates the details of the requested local undertaking when Sequence B is used for the (counter) counter-undertaking.

The Sequence B must always be completed and in the case where a local undertaking (Purpose of message – ISCO or ICCO) is requested to be issued by a local bank, such details can be completed in Sequence C. Sequence B then contains details for (counter) counter-undertaking to be issued by the applicant’s bank in favor of the local bank.

Detailed explanation on handling of the sequences per purpose of message is explained separately.

The following types of processing are supported in the application:

• Issuance of undertaking (ISSU)
• Issuance of counter-undertaking (ISCO)
• Issuance of counter-counter-undertaking (ICCO)
• Advice and confirmation of issued undertaking (ACNF)
• Advice of issued undertaking (ADVI)
• Guarantee in own favor (Received Guarantee)
• Receive Assignment

A direct undertaking is issued by a bank on the basis of an order from one of its own customers or on the basis of an order from another bank in favour of the beneficiary.
The direct undertaking is advised to the beneficiary either direct or via an advising bank in the beneficiary's country.

The original guarantee document can be created and sent electronically (SWIFT) or non-electronically (paper-based).

For more details see Issuance of Undertaking (ISSU).

The 'Issuance of a counter-undertaking and request to issue a local undertaking' (also known as indirect undertaking) arises when a bank requests another bank to issue an undertaking in favor of a beneficiary. This request is secured, as the requesting bank issues a counter-undertaking in favor of the bank, which is asked to issue the final undertaking in favor a the ultimate beneficiary.
These cases mostly arise with international trades. E.g. for an international trade agreement between an Applicant in Germany and a Beneficiary in India, the Applicant's bank (in Germany) will issue a counter undertaking in favor of the bank in India and instruct via this counter-bank another bank in India to issue a local undertaking in favor of the beneficiary.

The counter-undertaking and instructions are usually sent to the counter-bank either via SWIFT communication. Alternatively, the instructions can be sent non-electronically (paper-based).

For more details see Issuance of counter-undertaking and request to issue local undertaking (ISCO).

An 'Issuance of a counter-counter-undertaking (ICCO) is a request to issue counter-undertaking for a local undertaking, also known as indirect undertaking.
It arises when a bank (issues a counter-counter undertaking) in favor of another bank. This bank issues a counter-undertaking in favor of a local bank. And this local bank will then issue a local undertaking in favor of its clients.
This case is a very rare scenario which mostly arises with international trades.

Accordingly, instructions are sent via SWIFT communication. Although very rare, it is also possible to send the instructions by letter.

Further details on the handling of this scenario can be found under Issuance of a counter-counter-undertaking (ICCO).

'Advice and confirmation of issued undertaking' is used if a bank receives a guarantee (or a standby L/C) issued by another bank by order of one of their customers. The bank is instructed to advise the beneficiary of the undertaking in accordance with the instructions received from the issuing bank or an advising bank and to add its own confirmation.

For more details see Advice of an issued undertaking with/without confirmation (ACNF/ADVI).

'Advice of issued undertaking' is used if a bank receives a guarantee (or a standby L/C) issued by another bank by order of one of their customers. The bank is instructed to advise the beneficiary of the undertaking in accordance with the instructions received from the issuing bank without incurring any obligation.

For more details see Advice of an issued undertaking with/without confirmation (ACNF/ADVI).

Received guarantees are used when the bank using the application receives a guarantee in their own favor issued by another bank by order of their client.

This “Handling Type” is only available in the Receive Guarantee/Standby Assignment transaction (“GITASG”) and enables to create an Inward Assignment Guarantee contract and a received claim at the same time.

Confirmations of advised undertakings and Standby L/Cs are only possible up to 100% of the undertaking amount with “Handling Type” “'Advise with Confirmation'”.

Mandatory “Confirmation instructions” for an issued Standby L/Cs and optional requested “Confirming Party” details can be handled on the “Confirmation”-panel.

There may be up to 5 principals/ debtors under an outgoing guarantee. The commitment can be divided up among the principals involved in the contract both in terms of the amount as well as a percentage.

Moreover, within the guarantee a distinction can be made between the role of a principal and that of a debtor, for example, if a parent company issues an order for a guarantee to be issued to its subsidiary to the debit of its own commitment.

For guarantee types that require the deposit of collateral (e.g. direct or indirect guarantees), up to 100% of the guarantee amount can be deposited in cash.

Details see LIACCV Cash Cover.

This functionality is enabled for Standby L/C's only, where the user can include the Reimbursement bank who can reimburse a claim that is presented by the 'Available with bank' (AVB).

In the Guarantees business sector, it is possible to spread the risk to up to 10 additional participants.

For more details see Participations Sold (Syndications).

Direct Payment is a “Undertaking Type”, to address the needs related to covering drawings of principal and interest amounts under industrial revenue bonds. Claims will be settled on a predefined payment date after receipt of the claim and reinstated after a preagreed, with the applicant, period of days after settlement. Details of the “Direct Payment - Reinstatement” can be entered on a separate Panel.

When processing a guarantee it is common practice for guarantee provisions to be only settled in advance for a specific period. In order to simplify commission settlement which accompany such transactions on a regular basis, an option has been provided to settle guarantee commissions automatically (in addition to the manual commissioning of guarantees, which is also available).

In order to use this function, it is necessary for the options accessed by clicking the icon on the Liability panel to be set to 'automatic'. This can be defined during the system implementation phase to meet the specific requirements of the bank using the application. Regardless of the default setting, the user can change this setting for any guarantee in the liability-relevant transactions (e.g. in the process of creating or amending a guarantee).

Launching the “Automatic Commissioning for Guarantees/Standby” (GIBCOM) transaction triggers a database search for guarantee contracts on which commission settlement is due and the opening of the contract is committed already. The transaction then calculates the next due commissions for the relevant guarantee contracts and stores the contracts under pending items. The user can then retrieve these contracts from there and execute the default follow-up transaction “Commissioning” (GITCOM).