All trading programs in the Private Placement arena involve trade with 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 PPP 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 securities market. It is based on trusted, long-established private relationships and protocols. Normal trading activity 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 PPP trading, the trader must be in full control of the funds, otherwise he has no means of buying the instruments before reselling them. However, in addition to the widely recognised open market there is a closed, private market comprising a restricted number of ‘master commitment holders’. These are trusts, foundations and other entities 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.
This form of pre-planned and contracted buy/sell is known as arbitrage, and can ONLY take place in a private market (the PPP market) with pre-defined prices. Consequently, the traders never need to be in control of the client’s funds. No program can start unless there is a sufficient quantity of money backing each transaction. It is at this point that you, the client, is needed because the involved banks and commitment holders are not allowed to trade with their own money unless they have reserved enough funds, comprising money that belongs to clients, which is never at risk.
The ‘host’ trading bank is then able to loan money to the trader against your deposit. Typically, this money is loaned at a ratio of 10:1, but during certain conditions it can be as high as 20:1. In other words, if the trader can ‘reserve’ €100 million of client funds, then the bank can loan €1 billion against it, with which the trader can trade.
In all actuality, the bank is giving the trader a line of credit based on how much client funds he controls, since the banks can’t loan leverage money without collateral. Because bankers and financial experts are well aware of the ‘normal’ open market and of so-called ‘MTN-programs’, but are closed out of this private market, they find it hard to believe that it exists. Bankers in top-tier, global banks (where this trading takes place) are ignorant that this trading exists within their own institutions because it happens at a level far removed from their own mainstream corporate or retail banking operations.
Arbitrage and Leverage Private Placement trading safety is based on the fact that the transactions are performed as arbitrage. This means that the instruments will be bought and resold immediately with predefined prices. A number of buyers and sellers are contracted, including exit-buyers comprised mostly of large financial institutions, insurance companies, or UHNWI’s. The arbitrage contracts, provision of leverage funds from the banks and all settlements follow long-established and rapid processes. The issued instruments are never sold directly to the exit-buyer, but to a chain of market participants.
The involved banks are not allowed to directly participate in these transactions, but are still profiting from them indirectly by loaning money with interest to the trader as a line of credit. This is their leverage. Furthermore, the banks profit from the commissions involved in each transaction. The client’s principal does not have to be used for the transactions, as it is only reserved as a compensating balance (‘mirrored’) against the credit line provided by the bank to the trader. This credit line is then used to back up the arbitrage transactions.
Arbitrage trading does not require the credit line to be used, but it must still be available to back up each and every transaction. Such programs never fail because they don’t begin before arbitrage participants have been contracted, and each actor knows exactly what role to play and how they will profit from the transactions. The trader is usually able to secure a line of credit typically 10 to 20 times that of the principal (the client’s deposit). Even though the trader is in control of that money, the money still cannot be spent. The trader need only show that the money is unencumbered (blocked), and is not being used elsewhere at the time of the transaction.
This concept can be illustrated in the following example. Assume you are offered the chance to buy a car for €30,000 and that you also find another buyer that is willing to buy it from you for €35,000. If the transactions are completed at the same time, then you will not be required to ‘spend’ the €30,000 and then wait to receive the €35,000. Performing the transactions at the same time nets you an immediate profit of €5,000. However, you must still have that €30,000 and prove it is under your control.
Arbitrage transactions with discounted bank instruments are done in a similar way. The involved traders never actually spend the money, but they must be in control of it. The client’s principal is reserved directly for this, or indirectly in order for the trader to leverage a line of credit.
Confusion is common because the perception is that the money must be spent in order to complete the transaction. Even though this is the traditional way of ‘normal’ trading – buy low and sell high – and also the common way to trade on the open market for securities and bank instruments, it is possible to set up arbitrage transactions if there is a chain of contracted buyers, but only in a private market. This is why client’s funds in Private Placement Programs are always safe and without any trading risk.
High Yield – How PPP’s Yield Your Exceptional Profits To gain a full understanding of how the exceptional profits associated with PPP’s are generated please read this section carefully Compared to the yield from traditional investments, PPP’s deliver a very high yield. 25%-100% (or more) per week is possible. And this is how:
• Assume a leverage effect of 10:1, meaning the trader is able to back each buy-sell transaction with ten times the amount of money that you, the client, has deposited with the program.
• In other words, you have €100 million but the trader, because of his leveraged loan with the bank, is able to work with €1 billion.
• Assume also the trader is able to complete three buy-sell transactions per week, with a 5% profit from each buy-sell transaction: (5% profit/transaction) x (3 transactions/week) = 15% profit/week Assume 10x leverage effect = 150% profit…PER WEEK Even with a 50/50 split of profit between you and your trading group, this still results in a double-digit weekly yield. This example can still be seen as conservative, since Tier-1 trading groups, can introduce you to, can achieve a much higher single spread for each transaction, as well as a markedly higher number of weekly trades.
Private Placement Photo by Pepi Stojanovski on Unsplash
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