One of the “covered transaction” categories under Section 23A of the Federal Reserve Act and Regulation W is the issuance of a guarantee or letter of credit by a bank “on behalf of an affiliate.” But what exactly does ‘on behalf of’ mean here?<\/p>\n\n\n\n
The Federal Reserve has clarified that a guarantee or letter of credit is issued “on behalf of” an affiliate when the affiliate is the account party, not the beneficiary. In other words, it is a transaction where the bank promises to make a payment to a nonaffiliate if the affiliate defaults on an obligation to that nonaffiliate.<\/p>\n\n\n\n
This definition traces back to the 1982 Senate Report (S. Rep. No. 97-536) and a 1982 Federal Reserve Bulletin article. The key distinction is between: (1) transactions where the bank backstops the affiliate’s obligations to third parties (a “covered transaction”), and (2) transactions where the affiliate happens to be the beneficiary of a letter of credit the bank issues for a nonaffiliate customer (not a “covered transaction” in the same sense).<\/p>\n\n\n\n
The “covered transaction” amount is the full face value of the guarantee or letter of credit, regardless of the probability of the affiliate actually defaulting. This conservative approach reflects the potential for the bank’s resources to be called upon to satisfy the affiliate’s obligations.<\/p>\n\n\n\n
DM Tip:<\/strong> Before issuing any guarantee or letter of credit where an affiliate has any role or is any way related to the transaction, carefully determine whether the affiliate is the account party (triggering Regulation W) or merely the beneficiary. Document the analysis and ensure the transaction counts toward quantitative limits if the affiliate is the account party.<\/p>\n","protected":false},"excerpt":{"rendered":" One of the “covered transaction” categories under Section 23A of the Federal Reserve Act and Regulation W is the issuance of a guarantee or letter of credit by a bank “on behalf of an affiliate.” But what exactly does ‘on behalf of’ mean here? The Federal Reserve has clarified that a guarantee or letter of … <\/p>\n Continue reading “Guarantees and Letters of Credit: Understanding “On Behalf Of” Under Regulation W”<\/span><\/a><\/p>\n","protected":false},"author":693,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"ppma_author":[502],"class_list":["post-610","post","type-post","status-publish","format-standard","hentry","category-general"],"authors":[{"term_id":502,"user_id":693,"is_guest":0,"slug":"jsilvia","display_name":"Joseph E. Silvia","avatar_url":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-content\/uploads\/sites\/14\/2024\/09\/silviajoseph-100x100.jpg","author_category":"","last_name":"Silvia","first_name":"Joseph E.","job_title":"","user_url":"https:\/\/www.duanemorris.com\/attorneys\/josephsilvia.html","description":"Read Joseph's bio.<\/a>"}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts\/610","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/users\/693"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/comments?post=610"}],"version-history":[{"count":1,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts\/610\/revisions"}],"predecessor-version":[{"id":611,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/posts\/610\/revisions\/611"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/media?parent=610"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/categories?post=610"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/tags?post=610"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/bankinglaw\/wp-json\/wp\/v2\/ppma_author?post=610"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}