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Private Securities Trading
There is no other investment that is as popular as MTN Trading and so hard to understand due to confidentiality. Here’s how MTN Private Securities Trading Programs truly function. Considering that top major banks issue Medium Term Notes (known as MTNs and Mid-Term Notes) to raise funds in both U.S. and Euro dollars, we can better understand that they are for the purpose of generating Operating Loans and issuing Letters of Credit to businesses which wish to buy material and products from other business organizations in other countries. To further expand on this in laymen terms, this therefore results in an International Treaty whereby the U.S. Dollar (or the Euro) becomes the common Medium of Exchange for International Trading. By Law, a European bank is not allowed to sell such Medium Term Notes directly to the Public. They must be issued and sold through a fully Licensed Trader, just as in the same context a Corporation or a Municipality must sell Bonds through a Dealer or Underwriter. The Trader, aiding in the distributional sales of newly issued MTNs from the major sized Bank will have a $50B (Billion) contract (or of equivalent amounts) with the Issuing Bank to purchase MTNs for immediate resale. This Trader would instigate the following: A Non-Revocable Contract (see further explanation in Paragraph A) with an Exit Buyer, such as a Pension Fund, to buy those MTNs from them immediately, and with a contract with a Participating Investor, acting as the Trader’s ‘Associate’ to furnish the Proof Of Funds (POF) required, simply as a formality, to start and continue the Purchase and Resale series of Transactions. The Trader also makes contractual arrangements with their own bank, through their bank’s Trading Department, to act for them during the Transactions of $100M (Million) or greater. This $100M amount is the minimum set for this type of Bank issued MTN Distribution. The ‘Associate’ thereby arranges for their own bank to issue to themselves a POF using $100M in Cash Funds, which are wholly owned by them, in their account at their own bank. This enacts the ability to obtain cash credit of $100M for the POF. This POF is then sent to the Trader in accordance with the contract between Trader and their ‘Associate’. It is important to note that Medium Term Note Trading is a very specific process. When less than experienced Investors expect absolute perfection and “up-to-the-minute” communication, these immediate reactions inevitably cause more delays, short-comings and frustrations on behalf of not only the Associate but the Trade Platform as well. Several factors influence the timing of entering a trade; the current availability of Medium Term Notes, which can easily be in short supply, the timing of the trade submission and the specific programs that cancel without notice. On occasion, these unexpected market trends give a false illusion resulting in the sophisticated MTN Trading Platform to appear chaotic. Nothing is further from the truth.
Below is a typical scenario of a Private MTN Buy/Sell Program. a. The Trader’s Bank communicates with the Issuing Bank as well as with the Exit Buyer’s Bank, obtaining a detailed agreement with the Issuing Bank Officer and with the Exit Buyer’s Bank Officer that they are both prepared to commence the contracted series of transactions. The Exit Buyer’s Bank forwards a POF to the Trader’s Bank for the amount of the first purchase of $100M. Note: when a POF has been issued for the Exit Buyer and forwarded to the Trader’s Bank, there is a legal Funding Commitment to complete that Transaction, which may NOT be revoked while the transaction is taking place. b. The Trader’s Bank forwards to the Issuing Bank a POF in the name of the Trader and requests that a MTN be issued in the name of the Trader, along with an Invoice at a discounted price, say for example only $97M, payable in 8 Hours. c. A copy of the Note and an invoice at $97M, is forwarded to the Trader’s Bank, which authenticates signatures and MTN terms to verify compliance with the Purchase Contract. d. The Trader’s Bank then forwards the copy of the MTN, along with a Conditional Assignment of the MTN, to the Exit Buyer’s Bank, along with an Invoice at the Exit Buyer’s Purchase Contract Price, $100M for example purposes, payable in 4 hours. e. The Exit Buyer’s Bank authenticates signatures, verifies compliance with the Purchase Contract, and pays the $100M Invoice price to the Trader’s Bank for credit to Trader’s account, within the 4 hour limit. f. The Trader’s Bank pays Issuing Bank’s Invoice for $97M within the 8 hour limit, along with instructions for the Original MTN to be sent to the Exit buyer’s Bank by courier. g. The Trader’s Bank debits the Trader a Bank Fee (1/4% for example purposes) for their Services Rendered, and forwards the balance, $100M minus $97M minus 1/4 %, to the Trader, who pays the Trader’s ‘Associate’ for their Service Rendered. h. The Procedure used for this example, typically takes place 4 times each day of a 4 business day week, and repeats until the Trader’s Purchase Contract is completed. Using this formula, the weekly payments to the ‘Associate’, would be equal to 22% of their POF amount. (3% per transaction x 4 per day x 4 days per week = 48% - 4% as Bank Fee = 44% / 2 = 22% = $22M per week) Note: The Operation described above is a very conservative one. There are other MTN Trade Operations, of the same MTN basis but involving a resale of the MTNs by the ‘Exit Buyer’, which have a higher Rate of Return to the Trader involved, and therefore an even higher payment to the ‘Associate’ involved. An experienced Associate can safely state that with the listed procedure and controls for the Transactions, the only reason for a Transaction failing, once commenced, would be for the Exit Buyer’s Bank to default on completing a contracted purchase of a Note, which would result in jeopardy to their Bank Charter. Should any default take place, it would be quite simple for the Trader to make the required Payment, using their own Funds, to complete their purchase of the Instrument, and to immediately sell it to a different contracted Exit Buyer. This action by the Trader eliminates any risk of loss by the Buyers and Exit Buyers and ‘Associate’. NOTE: With minor variances in the connection of an Investor’s Funds to a Trader’s $100M Operating Fund, an Investor may enter into an Operation with $10M, or more, with similar percentage payments to them for services rendered. By the same token, an Investor may enter into a trading operation with as much over $100M as they have available.
The Effect of Global Economic Crisis on Private Securities Trading The availability of transactions for investors increases during economic times like this, and thus there are even greater opportunities for profits. Remember that the investor receives the profits from the “matched trading” of bank instruments and also that the investor does not hold these bank instruments or have the risk of bank failure of the issuer because the window for completing the transaction is very short.
Overview Private securities trading is the buying and selling of instruments that are usually issued by banks. These instruments may be medium term notes, collateral notes, structured notes, etc. The instruments are usually long term and in the marketplace provide a higher yield that is perfectly in tune with the requirements of pension funds that need a cash generating portfolio that in turn provides funds to pay the pensioners and at the same time does not fall within the forbidden “speculative” status. In essence, the pension funds want to purchase these higher yielding, cash generating instruments and hold them for a long period. As if created specifically for the pension funds, the banks that issue these instruments want them in the hands of the pension funds, because the pension funds hold onto them and do not trade them, thus not making a greater market in the instruments. If the pension funds do not hold on to the instruments, then the banks in the future may be reluctant to provide them with subsequent issues for their “failure to cooperate”, so to speak. So the issuer banks and the pension funds have “functionality partnership” that serves the interest of each of them. There is a profit opportunity in the bank/pension fund “functionality partnership” that is created by a small investment crevice for the highest-end investor. For certain reasons, the pension funds want to purchase the instruments, not from the issuing bank but from an intermediate owner, which is the role of the highest-end investor. This means the instruments are sold by the issuing bank, through the trader, to the investor and he almost simultaneously resells them, through the trader, to the pension funds. Suffice to say for the purposes of this article that there are various regulatory and practical reasons for this intermediate sale to the investors. One reason that is applicable to American pension fund purchasers is that of "non issuer" transactions. American pension funds desire to take advantage of a certain statutory exemption to the requirement that states that the instruments must be registered before pension funds purchase or re-sell them. This exemption does not apply to "new issue" transactions (SEC Rule 144a offerings to Qualified Institutional Buyers) and therefore intermediate ownership by the investors serve to re-classify the instruments as "non issuer" securities and thereby qualifying for the exemption from registration under the statute. The banks like to place a great number of these instruments with pension funds because the pension funds do not trade them. On the other hand, the pension funds may also need flexibility, so that they are able to sell or trade the instruments just for balance and portfolio adjustment reasons. The need for an intermediate sale to the investor between the issuer selling the instruments and the pension funds buying the instruments creates the investment opportunity, as the investor buys and re-sells the instruments at a profit. The spread or discount is often small, but these transactions involve huge amounts of money so the profits are substantial. In "new issue" transactions the investor is able to purchase instruments at an acceptable price and sell them at a profit.
Three Problems the Investor Faces 1). The first problem for the investor who is interested in trading these instruments is the “finding the instruments” problem. It is very difficult to get one’s hands on these new issues or on the alternative instruments already in the marketplace that can be purchased at a sufficiently low price that the resale price is attractive to the pension fund buyers after the inclusion of the costs of interim ownership by the highest-end investor. The people that are successful in obtaining these instruments are the “traders”, and they spend most of their time circling the globe and having meetings in bankers and lawyers offices working out the details that secure them the control over these instruments. So the remedy for the highest-end investor is to be introduced to a trader that controls the instruments with whom the investor can join, and together complete successful transactions with acceptable safety. 2.) Next, there is the second problem. It is the “finding a trader” problem. How does an investor find a trader that has the access to the entities that provide the instruments? This is difficult. One of the reasons it is difficult is that there is a trading concept called “High Yield Investment Programs” or “HYIP” that appear to be similar to Private Securities Trading. HYIP’s are all fraudulent and the latter are few and far between. There are probably more than a million people around the world that are trying to induce investors to invest in either (1) high yield investment programs (HYIP) or (2) the buying and selling of bank instruments which they do not control. This group of “entrepreneurs” is composed of either naïve brokers who do not know what they are doing or fraudsters perpetrating a fraud. The problem is that unlawful HYIP deals look very similar to lawful private securities trading transactions (called “PST”). As we consult investors in PST matters, these investors come to us (or avoid us) because brokers and fraudsters have confused them to the point that they believe that the unlawful HYIP deals are the same as legitimate PST transactions. The investor has to break through this barrier and find a legitimate PST trader. 3.) The third problem is the “finding a trader that is willing to take the investors money” problem. This third problem that an investor may face even though he is introduced to a legitimate trader is that the trader may not want to take the investor’s money because of two factors (1) the trader does not have sufficient instruments available to take on new investors, meaning that he has to use the instruments and his sources of instruments to keep his existing investors funds in trading circulation, and (2) over the long term, the traders know that because of the substantial returns with acceptable safety, once invested, the investors never take their money out and this poses more work for the trader in seeking out a larger continuing flow of instruments to keep the larger portfolio actively trading. (Note: The usual reasons that the investors take their money out is (1) divorce, (2) death, or (3) taxes.) These PST investments pay a high return on investment. However, there are many factors that go into establishing the rate of return such as the discount on the instruments, market conditions, length of trading period, velocity, volume of contract, etc. Therefore, until the investor meets with the trader or trading entity that has access to the securities that are to be purchased and sold, and they contractually join together in the buying and selling process, there is no way to determine a rate of return. However, investors seldom take their money out of one of these investments because the rate of return is more than acceptable. But it is important to note that these private securities trading transactions do not pay the exorbitant and unrealistic sums misrepresented in the fraudulent HYIP investments. These types of misrepresented returns are a tip-off of a fraud. As to the acceptable safety factor, each investor has to determine to his own satisfaction whether or not the particular investment meets the investor’s safety of investment standards. Many (but not all) of the transactions have “matched trading” requirements that are monitored by a bank. This means that the bank is compensated to monitor the use of the investor’s funds which are in the investor’s account to make sure that the funds are only used for “matched trades”. If you are unfamiliar with the term “matched trades”, this simply means that (1) the investor’s funds are only used to purchase securities (2) for the account of the investor (3) when there is a confirmed buyer standing by committed to purchase the security at a profit (4) from the account of the investor. The idea is to make sure that the investor’s funds are only used for “profitable” trades, which is a significant safety factor. Further, in PST transactions, finding acceptable safety has never been a problem once the transaction is fully revealed to the investor. The safety rule we require for our investor clients is that at all times the client’s funds are either (1) under his sole control or (2) there is a written bank commitment that protects the funds to the investors satisfaction. Also, with the caliber of investor who has $100 million to invest, such an investor is simply not going to invest unless he is satisfied upon entering into the investment agreements that the risk factors are acceptable. As to the depository bank involved in these PST transactions, the banks are excellent. Though often the banks are not the huge money center banks, the transactions utilize excellent and substantial banks. The banks are in Europe and (1) the investor is almost always required to travel to the bank to conduct due diligence on the transaction and to open an account in his name, and (2) the investor is almost always required to transfer the investment funds to this account (there are exceptions to both of these requirements). It is important to note that the funds are not committed to any time frame, as the investment can be withdrawn by the investor at any time as the funds are in his account, however he should not withdraw in the middle of a matched trade. It is also important to note that with the worldwide attention given to stopping terrorism, the investment funds and the investor are subject to a two to three level compliance and due diligence examination. The minimum investment in some situations may be as low as $10 million. The minimums change depending on the funding needs of any particular trading entity. However, usually the minimum is $100 million. The maximum investment has been $500 million and these are usually exceptionally good deals. A last point, the profits to the investors are often subject to the payment of an intermediaries fee which usually does not exceed 1% of the gross profits collected by the investors. In conclusion, the investor MUST be aware of the fraudulent high yield investment programs and if presented with an investment situation, have the proposal reviewed by competent and experienced counsel. The first thing that has to be done in any investment situation is to protect the capital. That is always the place to begin.
What do private securities trading programs generally look like?1. Pay High Return PST investments pay a high return on investment. However, there are many factors that go into establishing the rate of return such as the discount on the instruments, market conditions, length of trading period, etc. Therefore, until the investor meets with the trading entity that has access to the securities that are to be purchased and sold, there is no way to determine a rate of return. It is inaccurate for anyone to quote a rate of return as it is nearly impossible to determine until the transaction is set by a meeting between the investor, the trader and the transaction bank. 2. Safety of Investment Each investor has to determine to their own satisfaction whether or not the particular investment meets the investor’s safety of investment standards. Many (but not all) of the transactions have “matched trading” requirements that are monitored by a bank. This means that under a written undertaking, a bank monitors the use of the investor’s funds to make sure that the funds are only used for "matched trades". The idea is to endeavor to make sure that the investor’s funds are only used for "profitable" trades, which is a significant safety factor. Definition of "Matched Trades". If you are unfamiliar with the term "matched trades", this simply means that (1) the investor’s funds are only used to purchase securities (2) for the account of the investor (3) when there is a buyer standing by confirmed by a bank and ready to purchase those securities at a profit (4) from the account of the investor. The PST contains acceptable safety and mitigated risk. Acceptable risks are taken by everyone on a daily basis as in the case of walking, driving or flying. Finding acceptable safety has never been a problem once the transaction is fully revealed to the investor. The safety rule required for our investor clients is that at all times the client’s funds are either (1) under his sole control or (2) he has a written bank commitment that protects the funds to their satisfaction. We are not referring to a promise of a trader, as this is usually a fraud and not worthwhile. There must be a written commitment from a reliable bank. In a "Matched Trade" situation, the client basically has a written commitment from the bank handling the transaction (and the bank is getting paid well for it) that the client’s funds will only be used for matched trades. An investor is not going to invest unless he is satisfied upon entering into the investment agreements that the risk factors are acceptable. 3. Excellent Banks Involved Though often the banks are not the largest banks, the transactions utilize excellent and substantial banks. The investor has the final acceptance of the bank used. The banks are in Europe and (1) the investor is almost always required to travel to the bank to conduct due diligence on the transaction and to open an account in his name, and (2) the investor is almost always required to transfer the investment funds to this account (there are exceptions to these requirements). 4. Simple Procedures Usually, the investor is required to submit a full compliance package which includes a bank submitted Proof of Funds (POF), a Letter of Intent (LOI), a Client Information Summary (CIS), a Corporate Board Resolution (CBR), an Authorization to Verify Funds (ATV), and an intermediary Fee Protection Agreement (FPA). Once the investor is confirmed as owning the funds, then the investor is introduced to the trading entity to work out the procedural details directly between them. 5. Term of Transaction The term or length of time of these transactions is determined by the availability of instruments to trade. There may be sufficient instruments to last three weeks or twelve months of trading and sometimes much longer. Each transaction is different. The most difficult element to make these transactions work is the ability of the trading entity to obtain the instruments to trade and as the supply is limited, the number of people who can obtained them is even more limited. 6. Bank Instruments Traded Often the bank instruments that are traded by the investor and the trading entity are medium term notes, collateral notes, and/or structured notes. The banks issuing these notes can be of any rating however, the trading entities which are involved usually restrict their trading to AA rated or A rated instruments. 7. Minimum Investment For private securities trading, the minimum investment required is usually $100 million. These minimum investment figures are subject to change and from time to time there will be lower minimums. The maximum investment required is $500 million and these are usually exceptionally profitable transactions due to the volume involved. The minimum investment in some situations may be as low as $10 million. 8. No Nonsense Documents No confidentiality, circumvention or disclosure agreements are required in most situations. These are broker documents…not transactional documents. However, the investor always has to provide a written confirmation of availability of funds, along with a Compliance Package (mentioned above) before he is introduced to the trading supervisor and the bank where the transaction takes place. 9. No Secrecy Involved There is no secrecy involved. Secrecy is only to protect brokers…not move the transaction forward. There is never a domestic or international monetary agency involved such as the Federal Reserve, World Bank, International Monetary Fund, etc. There are no humanitarian purposes involved or required. These are simply private transactions between an investor, a trading entity, and a highly respected bank. 10. References of Success For most private securities trading transactions there are no references of success from previous investors available. If you want a reference from Merrill Lynch on one of their successful $100 million investors, walk in and ask to meet that investor and you can be assured that Merrill will not introduce you to him/her. A reference is not really necessary because once the investor and the trader talk on the phone they will each give to the other their respective banking coordinates. Then the traders bank will call the investors bank to ask if the funds are on deposit and the investor’s bank will ask if the trader’s bank can vouch for the reliability and experience of the trader. When both responses are in the affirmative, they move on to set up a contract. Note that the funds are never transferred to the account of the trader and should always be in an account where the investor is the sole signatory. 11. Intermediaries Really Get Paid The intermediaries commissions usually do not exceed 1% of the amount earned by the investor. Unlike HYIP deals, the “novelty” of these commissions is that they are in fact paid, and intermediaries earn millions of dollars. During the transaction, the banks and the traders involved insist that their attorney set up the documents for the intermediaries to be paid (Fee Protection Agreement) because they do not want the intermediaries compromising the transaction to become disgruntled. Intermediaries must serve as "finders" and after signing a fee agreement, they have to step back and not participate in the transaction at all, other than being paid their finder’s fees. They are usually paid on subsequent transactions on the behalf of the party they introduce, so investors should be aware of this fact. 12. Introductions To Transactions If qualified investors want an introduction to a private securities trading transaction, it is not easy to achieve, because there are too many naïve or fraudulent brokers who represent that they can get the investor to the “holy grail” of profit. THERE IS NEVER AN UPFRONT FEE FOR AN INTRODUCTION. DO NOT PAY AN UPFRONT FEE FOR AN INTRODUCTION THAT AN ATTORNEY MAY DISGUISE AS A LEGAL FEE. When hiring lawyers in investment situations of any kind it is recommended that the client pay the lawyer on an hourly basis only. It is not recommended to pay the lawyer from the profits of the investment because this presents a potentially deadly conflict of interest between the client and the lawyer as the lawyer has to make a time investment to move forward. IMPORTANT NOTE: You will never be introduced to a private securities trading situation without FIRST providing a confirmation of availability of funds. There is no getting around it. Funds have to be confirmed before the powers that be will talk with ANY investor. 13. Grandfathered Intermediaries Some situations come to an investor with long standing finder commitments in place. These are a result of the first time, for example, that the grandfathered intermediary introduced the client to a trader. Sometimes this happened years ago. In some transactions there is a continuing intermediary fee for all subsequent transactions. That obligation is honored by the traders. On some transactions, an investor should be prepared to pay a grandfathered intermediary fee.
Frequently Asked Questions about Private Securities Trading
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