Types of Programs & Trading
Several types of arrangements are available for investors to place their funds in trading programs. Returns vary from program to program, but most offer a contractual minimum return to the investor or a fixed yield per trade and minimum number of trades per year.
1. Direct Programs: In most cases, the investor’s funds are directly employed for the trading program. The trading is actually done in an investor transaction account while granting the program’s trading manager limited power of attorney to conduct the trades. These programs offer high return and high “perceived risk”.
2. Indirect Programs: In this case, the investor’s funds are utilized by the program’s trading manager to obtain a line of credit or loan. The proceeds are utilized by him to conduct a trading program in his own name. Through an arrangement between the program’s trading manager and the bank in which the funds are deposited, the investor’s funds are not encumbered by the loan and are therefore not placed at risk. The investment may be secured by a bank guarantee or CD that guarantees repayment of principal and often at least a minimum return to the investor. These programs offer medium to high returns and full security.
The trading in "debt instruments" is a multi trillion dollar industry worldwide. Top world banks (Money Center Banks) are authorized to issue blocks of debt instruments like Bank Purchase Orders (BPOs), Promissory Bank Notes or Mid-Term Notes (MTNs), Zero Coupon Bonds (Zeros), Documentary Letters of Credit (DLCs), Stand By Letters of Credit (SLCs), or Bank Debenture Instruments (BDls) under International Chamber of Commerce guidelines (ICC - 500 & 600). The prices of these instruments are quoted as a percentage of the face amount of the instrument, with the initial market price being established when first issued. Thereafter, as they are resold to other banks, they are sold at escalating higher prices, thus realizing a profit on each transaction, which can take as little as one day to complete. As these debt instruments are bought and sold within the banking community, the trading cycles generally move from the higher level banks to lower level (smaller) banks. Often they move through as many as seven or eight trading cycles, until they eventually are sold to an already contracted retail customer or "exit buyer" such as a pension fund trust fund, foundation, insurance company, security dealer, etc. that is seeking a conservative, reasonable yield investment that is suitable for 8 figure amounts. By the time the bank debentures ultimately reach the "retail" or secondary market level, they are of course selling at substantially higher prices than when originally issued. For example, while the original issuing bank might sell a "MTW" at 80% of it's face value, by the time it finally reaches the "retail/exit" buyer it can sell for 91% to 93% of it's face value. Since these transactions are intended for large financial institutions, they are denominated in face amounts commonly ranging from US $10 million.
When investors hear about the opportunity to earn high profits, the first reaction is almost inevitably to assume that the risks must be commensurably high. Otherwise, one assumes that every investor would place funds in such programs. In fact, the risk to the investor’s capital in a properly structured Bank Credit Instrument trading program is almost nil. The means employed to eliminate risk vary with the type of program and include:
1. Investor’s funds are deposited in investor’s own name and own account in the trade bank and cannot be removed without investor’s instruction or encumbered in any way. The investor is the sole signatory on the account. Investor does not place his/her funds with the Program Manager or Introducing Broker. The bank holds the funds throughout the investment.
2. Investor gives the bank or the Program Manager a very limited power of attorney, which authorizes the purchase and resale of specific types of bank instruments from a specific category of banks, (e.g. A-AAA rated, top 100 World or top 25 European). The Program Manager can have no further influence over the funds.
3. The bank will typically offer a CD, U.S. Treasuries or a Bank Guarantee, which, it holds in custodial safekeeping. These instruments pay a modest money market rate of interest to the investor at maturity (usually one year and one day from deposit) in addition to any profits derived from the trading program. The investor holds the safekeeping receipt.
In instances where the investor actually purchases and owns the credit instrument, i.e., “direct programs”, ownership is typically limited to a matter of hours, or at most a few days, before the instrument is resold. The price of these credit instruments is not known to fluctuate significantly even with sizable changes in interest rates or bond prices.
Given these very secure procedures, why then isn’t everyone investing in these programs? There are several reasons:
Most programs operate with $100 million or more and are meant for large investors. Relatively few programs have been structured to accept small investments of $1 million or less. The banks bind Program Managers and Investors to very strict confidentiality agreements and it is very difficult to find the Program Managers or Investors willing to disclose their activities. Most programs are operated in the top European banks or domestic branches of top European banks and are therefore harder for U.S. citizens to access, research and invest in with confidence.
Investor behaviour depends on “perceived” risk rather than actual risk. While the actual risk may be very low, the “perceived” risk of a little known and somewhat obscure sounding business does dissuade many investors from getting involved. This is especially true because only specialized back room departments of the bank are involved with these transactions. Most bank officials have no knowledge of them, particularly in the United States. Knowledgeable banking officials are sworn to secrecy and would never divulge the existence of this market for fear of disturbing large depositors who would clamor for higher deposit yields.
There have also been several highly publicized instances of fraud, which has prompted the SEC and Federal Reserve to issue warnings. Although to our knowledge no fraudulent programs have been discovered that utilize the secure investment procedures that we have outlined in this technical report. The fraudulent activities usually arise when investors give up control of their funds to phony trade managers who use Ponzi scheme type payouts.
While the risk to principal can be completely eliminated, there may be no guarantee that the profits will actually be fully earned, i.e., best efforts trading. In some programs this presents a potential interest or dividend earnings loss from the time when funds are placed in the program until the date of first payout. Typically this period is only two to three weeks. In programs for small investors, it can be as long as eight weeks. For large investors, this potential earnings loss presents a real risk. Often, a minimum return secured by a bank guarantee is used to offset this risk factor.
Good trading programs are difficult to find, costly and time consuming to verify, quickly oversubscribed and frequently closed before interested investors can arrange the necessary funds. Literally dozens, perhaps hundreds of programs are offered annually. Many are non-existent repackaging of the same programs by different people or first time efforts that never get off the ground. The fundamental question, - which should be asked by a potential investor when reviewing program procedures - is “How does this program protect my principal from loss?” If complete protection of principal is provided for in the procedures, the potential investor has established a sound basis for moving forward.
The key to safety and profits
The key to successful trading in Bank Instruments lies in having the contacts, initial cash resources, and where to purchase them at the maximum discount while also having the necessary resources and contacts to sell the Instruments in the higher priced secondary markets. The real secret of successful participation lies not in knowing the how, why and wherefore of these transactions, but far more importantly, in knowing and developing a strong working relationship with the "Insiders": the Principals, Providers, Bankers, Lawyers, Brokers, and other specialized professionals who can combine their skills and connections to turn these resources into lawful, secure, and responsible programs with the maximum potential for safe gain. There has been a lot of interest expressed by persons seeking to learn more about risk free capital accumulation by participating in Forfaiting (Trading) Programs. Essentially, we are discussing a Money Center Bank Instrument or Bank Debenture Purchase and Resale Program in which these monetary securities are bought at a beneficially lower price and then sold in the money markets at a higher price. Before a trader commits to any transaction, they must always ensure that they have a guaranteed Exit Sale, (another party willing to purchase the bank debentures at an agreed to higher price, at the conclusion of a number of trading cycles). If no end customer is available before the transaction commences, then no trade will take place, as the trader must always protect his positions; this is, of course, vital for the maintaining of the profitability of the program.
The use of Bank Credit Instruments as a medium or short-term investment is obvious. If one takes the differential between the “face” and the “present value” and moves a client’s funds into and out of the instruments on an active, regular basis the effective yield is substantial. The downside from trading in these instruments is nearly nil, if one retains strict protocol over the program structure and documentation.
A worst-case market risk scenario would be that a client would either not transact and therefore not be at risk or hold the instrument to maturity. If an instrument had been purchased and for whatever reason could not be onward “sold or discounted” the client who “held to maturity would automatically achieve a substantial yield (compared to other A-AAA rated paper) based on the maturity value against the discounted face value.
As can be readily seen from this report Bank Credit Instruments when handled by expert, ethical Program Managers and Traders are a safe and prudent investment. In the final analysis, it behoves prudent investors, in an effort to diversify the range of their holdings, to include investment in these instruments to offset other, higher risk portions of their portfolios. These instruments truly embody the best risk/reward ratio in today’s investment marketplace!
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