Why do some Brazilian sugar sellers ask for a transferable standby letter of credit?

What a standby letter of credit is

US bank regulators include in the definition of a standby a bank’s obligation to pay on account of a default by the party that asked for it (the FDIC’s rule adds “including any statement of default”), and they exclude ordinary commercial letters of credit, where the bank expects the beneficiary to draw. The US International Trade Administration puts it plainly: a standby is “not intended to serve as the means of payment for goods but can be drawn in the event of a contractual default.” An ICC trade-finance expert describes standbys as payable most often against simple statements by the beneficiary, a payment of last resort. The ICC’s UCP 600 rules apply to standbys only to the extent they can; standbys also have their own rules, ISP98, endorsed by the ICC.

Standby or documentary credit: what changes for you

The ITA describes the standby as suitable once a regular trade relationship is established, and as a condition for trading on open account, where the goods ship before payment falls due. How a standby sits next to the actual payment for the sugar is set in the sale contract, so read that contract as closely as the standby itself.

“Transferable and divisible”

• Transferable has to be stated. Under UCP 600 Article 38, a credit is transferable only if it specifically says so, and it can be transferred in parts to more than one second beneficiary if partial drawings or shipments are allowed.
• “Divisible” is not a transfer term. The word does not appear in UCP 600. Its predecessor, UCP 500, said that terms such as “divisible” do not make a credit transferable and are to be disregarded.
• Standbys transfer whole. Under ISP98 Rule 6.02, as explained by the ICC Academy and by the institute that drafted the rules, a standby may be transferred in its entirety, more than once, but not in part.

So a seller asking for a “transferable, divisible” standby is asking for something ISP98 does not provide: under those rules a standby transfers whole, not in parts. Transfer is useful to a seller who needs to pass the right to be paid to someone else, such as the producer behind it. A producer shipping its own sugar rarely has that need. More on transfer in transferable vs non-transferable letters of credit.

Where this question comes from

In July 2024 a trader on Reddit’s r/Commodities forum asked why Brazilian sugar suppliers keep insisting on standbys that are transferable and divisible. One reply described a sugar deal that fell through because the seller would accept only a standby and the buyer would use only a documentary credit; the same user later added that the seller would have taken a letter of credit from a world top-20 bank, and no UAE bank ranked that high.

When a standby is a fraud marker

US authorities have warned about schemes built on standbys. The SEC lists “standby letter of credit” among the official-sounding terms used to sell investments that don’t exist, and the FBI lists claims that standbys “can be discounted or traded for profits” among the common features of these schemes. A real standby is not leased or “monetized” for profit, and you should not lodge one before the company, the cargo and the banks have been verified. See how sugar fraud actually works.

What the supplier I represent accepts

• As standard, a non-transferable documentary letter of credit at sight, paid against shipping documents.
• A non-transferable standby letter of credit, issued to the supplier’s own bank.

Either way, the instrument is non-transferable, the supplier is the beneficiary, and you pay the supplier directly, never an intermediary.

Questions to ask a seller who wants a transferable standby

• Are you the producer, and who will actually ship the sugar?
• Why does the instrument need to be transferable, and to whom?
• Will you accept a non-transferable credit with an independent inspection certificate as a payment document?

Then verify the seller before anything is issued.