Transferable vs. Non-Transferable LCs: The Intermediary’s Lifeline for 2026
The Strategic Intermediary’s Advantage
In the high-stakes world of Brazilian sugar, the “Trader’s Gap” is a common hurdle. You have a Buyer willing to pay $460/MT and a Refinery selling at $450/MT, but you lack the $5 million in liquid capital to close the loop. Without the right financial instrument, you are just a broker waiting for a commission. With a Transferable DLC, you become the Principal, securing the $10/MT spread while leveraging the Buyer’s creditworthiness.
This guide deconstructs the 2026 standards for UCP 600 Article 38, ensuring you can navigate these complex instruments without exposing your margins or your suppliers.
A Transferable Letter of Credit (DLC) is a financial instrument that allows a middleman to transfer a portion of a Buyer’s credit to a secondary supplier (the refinery). It enables the intermediary to profit from the price spread without needing a dedicated credit line or significant cash reserves.
1. The Mechanics of Transferability
Under UCP 600 Article 38, a Transferable Letter of Credit allows the First Beneficiary (You, the Trader) to request the bank to transfer the credit to a Second Beneficiary (The Refinery). This is the only way to facilitate a bulk sugar trade without personal capital.
The 2026 Operational Sequence:
- The Issuance: The Buyer issues a DLC to You at the agreed price (e.g., $460/MT).
- The Instruction: You instruct your bank (the Transferring Bank) to transfer the DLC to the Refinery at the lower price (e.g., $450/MT).
- The Shipment: The Refinery ships the sugar and presents the shipping documents (B/L, SGS) to the bank.
- The Settlement: The Bank pays the Refinery $450/MT.
- The Profit: The Bank pays You the $10/MT margin immediately upon the substitution of invoices.
Crucial Note: The credit must explicitly state: “This Letter of Credit is Transferable.” If this specific wording is absent from the MT700, the instrument is legally non-transferable.
2. The “Substitution of Invoices” Protocol
Intermediaries often fear Circumvention—the Buyer going direct to the Refinery to cut out the $10/MT margin. The legal shield against this is UCP 600 Article 38(h).
- Document Swapping: The Refinery submits their invoice for $450 to the bank. The bank “quarantines” this document.
- The Swap: You provide your invoice for $460. The bank swaps the Refinery’s invoice for yours before sending the document set to the Buyer.
- Opacity: The Buyer only ever sees your company’s name and your price. They remain unaware of the Refinery’s original pricing.
3. Comparison: Transferable vs. Back-to-Back LCs
In 2026, banks have tightened regulations. Understanding which instrument fits your balance sheet is vital.
| Feature | Transferable DLC (Article 38) | Back-to-Back LC |
|---|---|---|
| Primary Collateral | The Buyer’s original LC. | A new LC backed by the Buyer’s LC + your credit. |
| Capital Required | Zero to Minimal. | High (Banks often require 10-20% margin). |
| Risk to Intermediary | Low (No debt obligation). | High (You are liable to the supplier). |
| Complexity | High (Requires expert document handling). | Extreme (Two separate LCs must match). |
| Bank Appetite | Good for verified traders. | Very Low (Risk of “Documentary Mismatch”). |
4. Critical Red Flags: Preventing Circumvention
RED FLAG: The Bill of Lading (B/L) Leak
Even with invoice substitution, the Bill of Lading typically lists the “Shipper.” If the B/L identifies the refinery, your Buyer has the contact information needed to circumvent you on the next contract.
The 2026 Fix: You must negotiate the use of a “Switch Bill of Lading” or a “Third Party B/L.” This allows you to replace the original B/L with a second set that lists your company as the Shipper, keeping the supply chain details confidential.
5. The Verity Deal Transfer Protocol
At Verity Deal, we ensure intermediaries are protected through a three-tier verification process:
- Banking Alignment: We verify that the Issuing Bank and the Transferring Bank are on the same page regarding Article 38.
- Document Audit: We review the “Draft DLC” to ensure the substitution clauses are robust enough to protect your margin.
- Neutrality Check: We ensure the refinery is “Intermediary-Friendly,” meaning they have a history of respecting the First Beneficiary’s position.
6. Frequently Asked Questions
Can a Transferable LC be transferred twice?
No. Under UCP 600, a Transferable LC can only be transferred once (from you to the supplier). The Refinery cannot transfer it again to their cane farmers. This prevents “daisy chains” of brokers from diluting the deal.
What are the typical transfer fees?
Most banks charge between 0.1% and 0.25% of the total LC value. You must ensure the LC terms state: “Transfer fees are for the account of the First Beneficiary” to avoid surprises.
What if my Buyer refuses a Transferable LC?
If the Buyer insists on a Non-Transferable LC, you cannot use their credit to pay the refinery. In this case, you must either use a Back-to-Back LC (if you have the credit line) or step back and act as a Commission Agent using an IMFPA (Irrevocable Master Fee Protection Agreement).
