Institutional Trading
Debt instrument trading is a multi Trillion dollar industry, worldwide. Top world banks, also know as Money Center Banks, have been authorized to issue debt instrument block such as Promissory Bank Notes or Mid-Term Notes (MTNs), Stand By Letters of Credit (SBLCs), Bank Purchase Orders (BPOs), Bank Debenture Instruments (BDIs), or Zero Coupon Bonds (Zeros) under the guidelines set forth by the International Chamber of Commerce (ICC – 500 & 600). Quoted prices of these instruments are a percentage of the face amount, and the initial market price being determined when first issued. As these are resold to other banks for a profit, the price continues to increase with each transaction. A transaction can complete as quickly as one day. Trading cycles generally progress from the higher bank levels to lower (or smaller) banks as these debt instruments are bought and sold within the banking community. Seven or eight trading cycles are not uncommon, until they are ultimately sold to a predetermined retail customer (exit buyer) such as a security dealer, a pension trust fund, foundation, insurance company and so on that seeks a suitable yield on an investment for these amounts. The bank debentures are selling at a substantially higher price by the time it reaches the “retail” or secondary market level as when it was originally issued. For example, let’s say the original bank issued a “MTW” at 80% of face value, by the time the “retail” or “exit” buyer obtains it the selling price could be 91% to 93% of face value. These transactions are meant for large financial institutions which is why the face amounts are generally US $10 million and greater.
Investor Risk
Investors’ initial reaction to learning about the opportunity to earn high returns is generally to assume that the risk must by proportionately high as well. Otherwise, everyone would be participating in such a program. However, properly structured Bank Credit Instrument trading programs place virtually no risk upon the investor’s capital. Meaning that methods of reducing risk differ depending on the type of program and include:
- The investor retains sole signatory rights, without encumbrances, on the account as funds are deposited in the trade bank in the investor’s name. Funds are held in the bank throughout the investment. Neither the Program Manager or the Introducing Broker have access to the investor’s funds.
- The Bank or the Program Manager is granted limited power of attorney by the investor, authorizing the purchase and resale of specific types of bank instruments from a specific group of banks, (i.e. A-AAA rated, top 25 European, etc.). There are no other powers authorized under this agreement.
- The Bank offers a traditional instrument such as a Bank Guarantee, Treasury Notes or Certificate of Deposit to be held in their custody. Generally, these instruments generate a moderate rate of return in interest at maturity (commonly one year and one day from the initial deposit) as well as profits that may have been earned from the program's trades. A safekeeping receipt is presented to the investor at the time of the initial transaction.
In transactions, such as "direct programs", where the investor takes possession of the credit instrument, ownership generally is no more than a few days and usually only a matter of hours before they are resold. Credit instruments such as these typically maintain a fairly static prices and are virtually unaffected by market conditions.
Why isn't everyone investing in these programs, since they are so secure?
Here are some of the reasons why:
Here are some of the reasons why:
- First, there is a significant barrier to entry in terms of cost. These programs are generally for large investors and typically have minimum transation amounts of $100 Million USD or more.
- Program Managers and Investors are bound to very strict confidentiality agreements by the banks.
- These programs are predominately operated by top European banks or domestic branches of top European banks, greatly limiting access for U.S. citizens and are also more difficult to research.
- Investors respond to "perceived" risk rather than actual risk. The "perceived" risk of investments that are not well known can be seen as quite great, even though the actual risk might be very low. This perception is particularly so when transactions are conducted only by specialized departments, that officers in other departments are completely unaware of, especially in the United States.
- There have been highly publicized cases of fraud that the SEC and Federal Reserve have issued warning about. To our knowledge, no instance of fraud has ever been found in programs which employ the secure procedures that we have outlined here. Fraudulent activities are connected to situations where the investor gives up control of funds to bogus trade managers with Ponzi scheme payout schedules.
- Risk to the principal can be eliminated entirely; however profits are not guaranteed to be fully earned. Potential dividend or earnings loss from initial investment until the first payout can happen in some programs. Usually this is only a two to three week period of time, but can be as long as eight weeks for smaller investors. A Bank Guarantee is often used to offset this risk factor by offering a minimum return to the investor.
- It is difficult to find good programs and time consuming to verify. There are perhaps hundreds of programs offered annually. Unfortunately there are a lot of non-existent repackaging of the same programs by several different groups. When reviewing a program's procedures you should ask yourself this paramount question: "How is my principal being protected from loss in this program?" The answer should be complete protection. If so, you have a well-founded basis for moving forward.
