What You Should Know Before Signing a Letter of Guarantee
By Rob Parker
It may be that sometime over the course of your life someone asks you to sign a letter of guarantee for him or her. Letters of guarantee are very specific documents that have to do with the buying, selling, and trading of stock. Banks issue them in order to guarantee the ownership of certain stocks by an individual, and there are two different types:
The letter is a type of contract. In this case the issuing bank states that the customer has agreed to purchase goods from a supplier, and that the customer will meet any financial obligations in case there is a default with the supplier.
The letter is a delivery guarantee. In this scenario, the letter is issued on behalf of a call writer, and states that the writer owns the asset on which the goods are underwritten, and that the bank will deliver the securities if the call is exercised.
Obviously, in both cases the letter of guarantee stipulates obligations in the event that an agreed upon transaction does not take place. It is important, therefore, to make sure that you know a certain amount of information about the person, the letter, and the bank before you sign a letter of guarantee. Here are some of the most important items to consider:
Does the bank have an international presence? Many share purchases take place on an international scale; therefore it is useless to have a letter of guarantee issued by a bank without clout beyond the regional level. Credit unions are good examples of banks that may not have the reach to implement certain letters of guarantees.
Is the bank reliable? Believe it or not, not all banks can be relied on to fulfill their obligations. In fact, many will stack up costs for an investor by trying to get out of obligations. It is important to check the record of the bank with whom you are considering taking out a letter of guarantee, to see what their records are in the case of defaults.
The credit of the individual. While the letter itself should place the burden on the bank, the fact is that any situation in which the letter needs to be used in court should be avoided. It is a lot of extra hassle and expense, so your best guarantee will be the individual to whom you are selling the stocks or extending credit.
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