Fulfilment of “fixed short-term maturity, […], without automatic rollover” for trade finance product bank guarantees (“Guarantee”) in case of a contractually agreed clause between the issuing bank and its client instructing the issuing bank to issue the Guarantee (“Instructing Party”) that allows the issuing bank to effectively exit the risk position within a contractually agreed fixed timeframe

The definition of trade finance refers to “financial products of fixed short-term maturity, generally of less than one year, without automatic rollover”. We would like to confirm that an open-ended Guarantee, i.e. a guarantee that does not provide for a fixed maturity date, meets the aforementioned definition of trade finance, in case the issuing bank and the Instructing Party agree on contractual provisions that allow the issuing bank to effectively exit the risk position incurred via the Guarantee. In this specific case the issuing bank conducts a regular bank internal review regarding the Guarantee and may – in case it deems this appropriate on the basis of its review – on the basis of a contractual arrangement between the bank and the Instructing Party, at its full discretion, require the Instructing Party to provide the issuing bank within a contractually agreed fixed time period with either a counter-guarantee from another bank in favour of the issuing bank, cash cover collateral or a substitution of the Guarantee by ensuring that another bank issues a Guarantee replacing the issuing bank’s Guarantee.

The Guarantee is a trade finance product which is related to the exchange of goods or services. Although the product does not contain a fixed maturity date, the bank internally reviews the product on a regular basis. The contract between the issuing bank and the Instructing Party includes a contractual provision that allows the issuing bank to effectively exit the risk position incurred via the Guarantee. The contractual provision has the following effect:   If as part of its regular review the issuing bank decides to exit the risk position, the following options are available to the bank: the bank may require the Instructing Party to  provide cash collateral to the bank in the full amount of the Guarantee; or  the bank may require the Instructing Party to provide a counter guarantee on first demand from another bank which the bank may draw in case it has to pay under the Guarantee it has issued; or the bank may require the Instructing Party to ensure that another issuing bank replaces the bank’s Guarantee in favour of the beneficiary and that the beneficiary releases the bank therefore from its liabilities under the bank’s Guarantee.  In each of these cases the issuing bank will have effectively exited the risk position it so far had.  A trade finance classification due to the presence of the above mentioned rights of the issuing bank towards the Instructing Party is consistent to previous EBA guidance in the context of contractual options allowing the bank to exit a risk position (e.g. via termination). For example, EBA Q&A 2014_883 states that a termination right reduces the remaining residual maturity in the context of an exposure without a contractual maturity. In addition, EBA Q&A 2013_687 states that a prolongation decision of the bank does not increase the maturity.