INFORMATION BELOW IS FROM THE WEB AND WILL HELP OUTLINE PRIVATE PLACEMENT TRADING PROGRAMS AND MANAGED BUY/SELL PROGRAMS:
PRIVATE PLACEMENT PROGRAMS (PPP)
Private Placement Programs (PPPs) also known under other names, such as Private Placement Opportunity Programs (PPOPs) or Private Placement Investment Programs (PPIPs) PPOPs exist to “create” money. Money is created by creating debt. PPPs involve trading with discounted bank-issued debt instruments, money is created due to the fact that such instruments are deferred payment obligations, or debts. Money is created from that debt. Debt notes such as Medium Terms Notes (MTN), Bank Guarantees (BG), and Stand-By Letters of Credit (SBLC) are issued at discounted prices by major world banks in the amount of billions of USD every day. Financially strong rated banks can issue such a debt note, sell it at discount, and promise to pay back the full face value at the time the debt note matures. There is an enormous daily market of discounted bank instruments (e.g., MTN, BG, SBLC, Bonds, PN) involving issuing banks and groups of exit-buyers (Pension Funds, large financial institutions, etc.) in an exclusive Private Placement arena. All such activities by the bank are done as “Off-Balance Sheet Activities”. As such, the bank benefits in many ways. Off-Balance Sheet Activities are contingent assets and liabilities, where the value depends upon the outcome of which the claim is based, similar to that of an option. Off-Balance Sheet Activities appear on the balance sheet ONLY as memoranda items. When they generate a cash flow they appear as a credit or debit in the balance sheet. The bank does not have to consider binding capital constraints, as there is no deposit liability.
All trading programs in the Private Placement arena involve trade with such discounted debt notes in some fashion. Further, in order to bypass the legal restrictions, this trading can only be done on a private level. This is the main difference between this type of trading and “normal” trading, which is highly regulated. This is a Private Placement level business transaction that is free from the usual restrictions present in the other Markets. Usually, trading is performed under the “open market” (also known as the “spot market”) where discounted instruments are bought and sold with auction-type bids. To participate in such trading, the traders must be in full control of the funds, otherwise they lack the means buy the instruments and resell them. Also, there are fewer arbitrage transactions in this market, since all participants have knowledge of the instruments and their prices.
However, in addition to the open market there is a closed, private market wherein lies a restricted number of “master commitment holders”. These holders are Trusts with huge amounts of money that enter contractual agreements with banks to buy a limited number of fresh-cut instruments at a specific price during an allotted period of time. Their job is to resell these instruments, so they contract sub-commitment holders, who in turn contract exit-buyers. These programs are all based on arbitrage transactions with pre-defined prices. As such, the traders never need to be in control of the client’s funds. However, no program can start unless there is a sufficient quantity of money backing each transaction. It is at this point the clients are needed, because the involved banks and commitment holders are not allowed to trade with their own money unless they have reserved enough funds on the market, comprising unused money that belongs to clients, never at risk.
The trading banks can loan money to the traders. Typically, this money is loaned at a ratio of 1:10, but during certain conditions this ratio can be as high as 20:1. In other words, if the trader can “reserve” $100M, then the bank can loan $1B. In all actuality, the bank is giving the trader a line of credit based on how much money the trader/commitment holder has, since the banks won’t loan that much money without collateral, no matter how much money the clients have.
Because bankers and financial experts are well aware of the open market, and equally aware of the so-called “MTN-programs”, but are closed out of the private market, they find it hard to believe that the private market exists.
SUBMISSION OF DOCUMENTS INFORMATION:
Submission of the application documents to more than one management group at a time he can expect to be blacklisted and never accepted by any group. Trade will commence as soon as the client has passed through the due diligence and deliver the required collateral.
This business is entirely private. To get access to these investment programs, the client needs to send his preliminary documentation to a broker whom the client trusts to be in direct contact with the trading group. That means a Client Information Sheet, a copy of their passport, and a bank statement showing the balance of funds being committed for trade. It is generally required that the bank statement be signed by two authorized bank officers to make it full bank responsibility. There is no other way for the client to get contact with the trading group.
After the client has sent the following but not limited to: Complete KYC File, which is includes (their Passport, Client Information Sheet, and recent bank statement showing cash), etc.
The trading group will investigate the applicant. If the response is positive, the program manager in the trading group will contact or meet with the client. If the investigation is not favorable, the program manager will contact the broker and tell him that the client did not qualify.
During the contact with the client, the trader will explain the program terms/conditions to the client, and outline the guarantees and requirements to start the program.
The client will receive a contract which states the total gross yield, the percentage of the gross profit reserved for projects, the percentage for the trading group and the percentage for profit participation fees to be deducted for brokers/intermediaries. The net return to the client will be wired to another account that can be located in any bank worldwide. If the client accepts the contract, the contract is signed and the program is ready to start.
The trader is now able to leverage the client’s reserved money and is now able to back up the arbitrage transactions with that money, a credit line that remains in the bank account that is screened before each arbitrage transaction. Trading now continues, and the profit is paid out per the contract terms to the client.
MANAGED BUY/SELL TRADING PROGRAMS:
In a managed buy/sell trading program, the spread between the buying and selling of bank debentures creates profits by buying low and selling high to a predetermined exit buyer. Because traders cannot use their own money to operate a program, they look for financially qualified investors to provide collateral support for the initial purchase of a new issue asset.
In trading, as we are discussing it here, a trader has locked in the first issuance of some instrument – such as a standby letter of credit, a bank guarantee or a medium term note – while, at the same time, the next, or secondary buyer has been lined up and ready to take the asset at a higher price. However, the trader cannot execute the start trade without having shown new money, such as a line of credit; there is nothing to buy or sell. That is where the investor comes in.
Typically, a credit line makes the trades work, and in order to get the credit line, the trader must show that an investor is proffering his cash or instrument assets to be monetized. In many cases, the investor becomes a joint venture partner in the process of this monetization. The investor money is never really touched – it simply acts as supporting collateral for the trade credit line. As the credit line is generally non-repayable, non-recourse or non-depletion, this means little to no risk to the investor of losing his money. This limits the risk of the underlying collateral being tapped in the event of a default. For additional safety, the bank blocks cash funds in an administrative hold, which prevents credit line depletion during the trade contract, or utilizes an acceptable instrument as the support. In the case of a bank instrument, the trader can rightfully use the instrument to support the credit line. Because the trader already has the ‘exit’ buyer – the second buyer taking the asset at the predetermined higher price – the profit spread has also been predetermined.
When profits are generated, they are generally split so that the investor shares in the bounty, sometimes up to the full amount of the trade credit line, resulting in a Historical Return up to 100 percent profit to the investor, sometimes more. Each program has different types of profit sharing with the trader, which are negotiated when the program is established with the client.
For illustration purposes, a new issue bank debenture may be purchased at about 40 percent of the face value. So, a €500m face value instrument may cost the trader €200m to buy. The trader uses the trade credit line to make that new issue purchase. Then an exit buyer who was pre-established at the beginning of the program may purchase it at 70 percent (or €350m). The difference is the profit made in the trade, of €150m. That is then used to pay profit to the investor (a shared percentage of the total profit), as well as the trader. When bank debentures trade multiple times during a month, this profit adds up handsomely. This is why an investor can see a profit on his money ranging from Historically up to 100 percent of the amount of the trade credit line, and sometimes more (depending on the program).
The challenge for many investors is understanding the minimal risk for loss of principal, particularly if the money owned by the investor stays in his own bank account or is used to issue a cash-backed standby letter of credit.
A financially qualified investor, in order to avoid potential solicitation rules, is the one who moves first to establish the relationship. This is done with the submission of a Know Your Customer (KYC) and proof of funds set of documents which indicate the investor’s desire and capacity to enter a program. While the preparation of these documents takes just a little time to complete, it fulfills the solicitation rules allowing the trading organization to open the conversation and subsequently prepare the trade contract shortly after receipt by the appropriate authorized intake person.
In general, it takes a couple of weeks to arrange the trade commitments and the banks, along with approval from the authorities governing these programs, at which time the trading may proceed at the next opportunity to start.
With the noise of internet brokers misinforming people about these programs, building trust must first be mutual between parties. Without trust, there can be no transaction. Trust is the first thing any investor needs to feel is in place before too much discussion of a program is presented.
The fact is that managed buy/sell programs using bank debentures do exist, however actual providers are few and far between. The supply of these programs is small, and demand far exceeds it. Getting in the way of being connected to something real are usually the internet brokers, who smell money but do not have the relationships or knowledge of how these work, so, the likelihood of success is almost nil. When you have a trusted party to work with, with authentic relationships and compatibility, it is possible to be included in a program. For most investors, this is the mechanism used to fund projects without debt or repayment.