The term “Private Placement” represents a category of investments that are not available on the open market.

There exists a special type of Private Placement Program (PPP) that is sometimes referred to as a Private Placement Investment Program, Private Placement Transaction Program, Private Placement Opportunity, Managed Buy/Sell Program, Fiduciary Trade, or more simply as a “Bank Trade”. These involve bank trades that bringing Bank Instruments from the Primary Market to the Secondary Market, usually Medium Term Notes (MTNs).

These are private and by invitation only. Trading does not take place in the US, but occurs primarily in Europe (London, Zurich, Geneva) and Asia (Hong Kong, Singapore) among top-tier banks. They are only available to Ultra High Net Worth Individuals or qualified Institutional Investors. They occur at the upper echelons of the world financial system and are not available to the general public. The returns are usually contractual double-digit monthly returns and the capital is not put at risk in the trading. With properly structured programs, the Investor’s capital never even leaves their own bank account. Trade proceeds are usually disbursed weekly, over a 40 week period (international banking weeks over 12 calendar months).

These are regulated by strict guidelines established by the Federal Reserve, European Central Bank, and the Bank of International Settlement (BIS) and both Traders and participating financial institutions require special licenses in order to participate.

Trade Platforms are middle-men organizations that facilitate non-typical transactions, put the contrac in the Platform’s name, and they split the profits with the Investor (usually 25% to 50%), thereby adding an element of risk and cost. However, a cash investor with sufficient capital can bypass a Trade Platform and participate directly with the Trade Desk, receiving a contract on bank letterhead, with full banking responsibility. Intermediaries in the form of a Program Manager and a Facilitator serve to pre qualify investors, answer their questions, and get all the necessary compliance documents.

Due diligence is undertaken by the Investor once they have the contract from the Trader stipulating the terms and procedures, on bank letterhead, with full banking responsibility. The serial number of that contract and the banking license of the Trader can easily be verified by the Investor’s own banker.

After reviewing the contract and performing banker due diligence, the Investor then decides if they want to move forward or not.

Background

The “United States Department of the Treasury” (US Treasury), fulfilling its responsibilities under the Bretton Woods Agreement, developed the Medium Term Note (MTN) by employing established European financing methods through which banks and financial institutions commonly finance long term loans by selling Letters of Credit or Bank Notes of medium term to provide funding for loans.

The MTN bank issues are debt instruments that are legally allowed to be excluded from the debit side of their ledger or “off-balance sheet“, but count towards the banks capital reserves. Funds received by issuing these instruments rank at equal rate with depositors accounts, but these are long-term “contractual obligations” and as such are allowed to be listed in the footnotes instead of on the balance sheet. In simple terms, the bank deposits the net proceeds of the newly issued MTN into the bank’s asset or credit side of its ledger without any offsetting debit. As banks have the ability to borrow funds on a leveraged ratio against their capital reserves, in order to engage in fractional reserve lending, this method of financing can be very profitable.

In the post-World War II era, the Bretton Woods Agreement created a stable international financial system and to finance macroeconomic projects to re-build parts of Asia and Western Europe. The US Treasury and the “Federal Reserve System” (Federal Reserve) developed an instrument that may be traded to create new credit and that credit would be used in specific approved macroeconomic projects, allowing such funds and credit to be applied in geographical areas requiring credit and cash infusions to survive and grow.

While that understanding or intent remains true today, it is no longer always a necessary requirement to involve an economic project / humanitarian project. Investors can engage in wealth creation or project funding, depending on the client’s goal and the terms of the trade program. The contracts to purchase and sell these trading instruments are managed and/or approved by the US Treasury, which are administered by prime US and European bank syndicates.

The US Treasury or the Federal Reserve may price these instruments at whatever price is necessary to provide the needed new credit in the geographical location or for the project(s) for which they have been approved.

Not all applicants or projects are approved. Both the applicant and the funds that will be used to purchase and sell the financial instruments must be screened according to US Patriot Act and Anti Money Laundering (AML) Guidelines and their European equivalents.

Generally, there is just one Principal (or Asset Provider). That Principal is the owner of the Funds and the Principal is the applicant to the “trade desk”, which must also have the approval to trade from the US Treasury or the Federal Reserve.

Nature of the Investment

These programs are a very low-risk opportunity for an “Investor” who can provide a cash deposit, Bank Guarantee (BG) or a Standby Letter of Credit (SBLC) for a minimum of 100 Million Euro (€100,000,000).

This deposit or Bank Instrument (BI) allows the trade bank to release credit facilities for the trading of MTNs. The notional returns to the Investor/Asset Provider are expected to be over 20% per month. This expectation is based on the track-record over the last decade. However, returns are contractually agreed upon by the Asset Provider and the Trader before the trading begins, and can vary on a case-by case basis. For Investors who do not have 100M Euro there is the possibility to do a wealth-accumulation “bullet trade”. These are for Investors with a minimum of 10M Euro, and the trade proceeds are paid in one lump sum (usually 7 days to 30 days), in order to help the investor get to the 100M Euro level more quickly.

The Investor’s capital is not put at risk in the trading. The Investor’s capital is used to trigger a credit line. The credit line is fully underwritten before it can be triggered. The investor’s capital is not physically involved (prohibited use) with the buy and re-sale exchange activities generating the profit. Private Placement capital always sits in their own back account, without liability of lien, encumbrance, transfer of control or subject to first call by anyone, and only serves as a security pledge under contract to a trader.

The trader uses this pledge to trigger his own credit facility under contract with his trade bank, which extends a conditional leveraged credit line against the sum total of his Private Placement capital contracts with Investors. The bank protects the Investors account from call in that the credit facility used for the purchase of securities is subject to bank responsible confirmation of a “closed book” sale only.

The trader must have confirmed evidence of contracts with exit buyers (closed book) for the securities before the bank will release the credit line. The sale itself is managed and scrutinized by the bank at all times, as their funds and license are exposed.

In other words, the investor’s funds are not directly involved in the buy/re-sale transactions. The Investor’s cash deposit, as a security commitment, is non-callable and not subject to loss liability because of the terms and conditions of the credit line facility in which the transaction re-sale funds are in place prior to release of the credit line.

How it Works

The prime banks that offer credit facilities are governed by the Basel II and Basel III Accords, which became effective in September 2006 and January 2010, respectively, which impose strict requirements on bank lending and borrowing. Most notably, a bank’s credit lines must be “capitalized” by an acceptable form of collateral (of sufficient value) held “in the care, custody and control” of the credit issuing facility. The collateral is the Investor’s cash deposit or BI.

Successful trade programs, besides having unique access to established bank lines-of-credit, require the expertise of qualified licensed traders capable of engaging in the purchase and sale of investment-grade bank debentures in the wholesale market. Traders are licensed by European regulatory agencies, and trades proceed according to strict procedural and legal guidelines. Under present rules, traders cannot use their own assets to trade. This is why third-party investors are necessary.

This trading operation is generally referred to as a “controlled”, “managed”, “closed” bank debenture trading effort because the Supply Side of the financial instruments and the Exit Buyer for the financial instruments have already been pre-arranged and the price of the instruments already established. In other words, the licensed traders contractually manage the buy and the re-sale of the financial instruments before any trading actually takes place, thus the term, “Managed Buy/Sell”. Therefore, each and every completed trade will result in a net gain (and never a net loss) to the trader.

The following procedural protocol are normally be followed:

• The investor’s funds are never touched (funds verification only).
• Targeted 30% yield per tranche to clients (maximum allowable by authorities).
• Four tranches a week – with settlements on Friday – there may be multiple trades on a given day.
• No Powers of Attorney.
• No surprises (the Investor/Asset Provider is be a Signatory to the Buy-Sell Trading Contract).
• The crucial distinction, however, is that under a properly managed “buy-sell” transaction the Investor does NOT transfer any funds to an intermediary trader, nor are the funds required to be pledged or subjected to a lien.

When moving a MTN into the secondary market, through trading,

• Master Commitment Holders are first in line.
• Commitment Holders are second in line.
• The secondary market comes after that.

A newly issued or “fresh cut” instrument is issued by a bank at a steep discount to face value, for example, 58% of face value. It can only be purchased by a Fed-authorized Master Commitment Holder, who has a certain quota they have to fill annually in order to keep their Fed appointment.

They line up a number of Commitment Holders who have the exclusive right to purchase these MTNs from the Master Commitment Holders, each in smaller volume and at a slight markup. This is the popular business model of “buy wholesale, sell retail”… buy wholesale in bulk, then sell in smaller quantities at a higher price. These Commitment Holders can then sell it as a live seasoned instrument, into the secondary market, at 98.5% of face value. The spreads can be HUGE. They get contractual commitments from the exit buyers before the initial fresh-cut transaction with the Master Commitment Holder is ever triggered.

It is all done digitally… authentication, verification, invoicing, and close-out can be done in seconds, using Reuters or Bloomberg.

Again, BIS regulation is that banks cannot sell their authorized issues to each other, which is where the third-party Investor comes in. The Investor is the key for the trader to unlock the credit line from the trade bank.

The traders who do these trades use credit lines from banks, but the credit line has to be fully underwritten before it can be triggered. In other words, the trader must have confirmed evidence of contracts with exit buyers for the MTNs, what they call a “closed book” before the bank will release the credit line. This is risk-free arbitrage… the simultaneous purchase and sale of the exact same asset, at the exact same time, but at different prices.

A $100MM deposit supported by humanitarian project funding can gross 40% per day and net 30% per day to the account, after invoicing, clearing, and bank fees.

The trader keeps a large percentage of that profit and shares the rest with the investor, based upon their contractual agreement.

Payouts are usually weekly. Returns are contractually agreed upon by the trader and the Investor, based upon what paper issues he has lined up, and it is generally listed as a minimum or as a “best efforts” basis. Facilitators can only state “notional returns of 20% per month” and must let the trader disclose to the Investor if it ends up being higher, something as high as 100% per week. Facilitators are not allowed to specify returns, as that is privately contracted between the trade and the Investor after the Investor passes AML compliance.

Because of the high returns, investors with large sums will eventually be required to donate around 80% of their profits to an economic project (can be as low as 40% or as high as 95%), as non-recourse project funding.

The Federal Reserve requires an accounting of those project funds so that they are released only against certified invoice by the accounting entity.