back to back letter of credit (L/C)

Arrangement in which one irrevocable letter of credit serves as the collateral for another; the advising bank of the first letter of credit becomes the issuing bank of the second letter of credit.

In contrast to a transferable letter of credit, permission of the ultimate buyer (the applicant or account party of the first letter of credit) or that of the issuing bank, is not required in a back-to-back letter of credit. It is used mainly by intermediaries to hide the identity of the actual supplier or manufacturer. Also called counter credit or reciprocal letter of credit.