- 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 Federal 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 Federal Reserve 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 'Back Room' Trading Department, to act for them during the Transactions of $100M (Million) or greater. This $100M amount is the minimum set by the U. S. Federal Reserve 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 Associates 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 than the truth.
Below is a typical scenario of a Private Mid-Term Buy/Sell Program
- 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 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).
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 a 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.
In a managed buy/sell trading programme, the spread between the buying and selling of bank debentures creates profits by buying low and selling high to a predetermined exit buyer. Because traders cannot use their own money to operate a programme, they look for financially qualified investors to provide collateral support for the initial purchase of a new issue asset.
In trading, as we are discussing it here, a trader has locked in the first issuance of some instrument – such as a standby letter of credit, a bank guarantee or a medium term note – while, at the same time, the next, or secondary buyer has been lined up and ready to take the asset at a higher price. However, the trader cannot execute the start trade without having shown new money, such as a line of credit; there is nothing to buy or sell. That is where the investor comes in.
Typically, a credit line makes the trades work, and in order to get the credit line, the trader must show that an investor is proffering his cash or instrument assets to be monetised. In many cases, the investor becomes a joint venture partner in the process of this monetisation. The investor money is never really touched – it simply acts as supporting collateral for the trade credit line. As the credit line is generally non-repayable, non-recourse or non-depletion, this means little to no risk to the investor of losing his money. This limits the risk of the underlying collateral being tapped in the event of a default. For additional safety, the bank blocks cash funds in an administrative hold, which prevents credit line depletion during the trade contract, or utilises an acceptable instrument as the support. In the case of a bank instrument, the trader can rightfully use the instrument to support the credit line.
Because the trader already has the ‘exit’ buyer – the second buyer taking the asset at the predetermined higher price – the profit spread has also been predetermined.
When profits are generated, they are generally split so that the investor shares in the bounty, sometimes up to the full amount of the trade credit line, resulting in an 80 to 100 percent profit to the investor, sometimes more. Each programme has different types of profit sharing with the trader, which are negotiated when the programme is established with the client.
For illustration purposes, a new issue bank debenture may be purchased at about 40 percent of the face value. So, a €500m face value instrument may cost the trader €200m to buy. The trader uses the trade credit line to make that new issue purchase. Then an exit buyer who was pre-established at the beginning of the programme may purchase it at 70 percent (or €350m). The difference is the profit made in the trade, of €150m. That is then used to pay profit to the investor (a shared percentage of the total profit), as well as the trader. When bank debentures trade multiple times during a month, this profit adds up handsomely. This is why an investor can see a profit on his money ranging from 80 to 100 percent of the amount of the trade credit line, and sometimes more (depending on the programme).
The challenge for many investors is understanding the minimal risk for loss of principal, particularly if the money owned by the investor stays in his own bank account or is used to issue a cash-backed standby letter of credit. Small cap programmes typically require movement of funds to a trader account in order to obtain the trade credit line. Few small cap programmes, although there are some, can take under €100m and some offer an insurance policy against loss of principal. Several that we have seen do not offer this. One that we know of, does.
Having understood the principles behind a managed buy/sell, the next question most potential investors ask is, ‘what are the steps needed to engage with such a programme?’.
Most investors need a minimum of $100m or €100m – either in cash in a commercial corporate bank account or the face value of a bankable instrument. That number is a little bit deceiving, because you have to factor in the trade credit line being anywhere from 70 to 80 percent of the value of the account. That 70 to 80 percent net must equal at least $100m. So, the real need is for the investor to have about $150m, to account for the deduction with the loan-to-value factored in.
A financially qualified investor, in order to avoid potential solicitation rules, is the one who moves first to establish the relationship. This is done with the submission of a Know Your Customer (KYC) and proof of funds set of documents which indicate the investor’s desire and capacity to enter a programme. While the preparation of these documents takes just a little time to complete, it fulfils the solicitation rules allowing the trading organisation to open the conversation and subsequently prepare the trade contract shortly after receipt by the appropriate authorised intake person.
In general, it takes a couple of weeks to arrange the trade commitments and the banks, along with approval from the authorities governing these programmes, at which time the trading may proceed at the next opportunity to start.
With the noise of internet brokers misinforming people about these programmes, building trust must first be mutual between parties. Without trust, there can be no transaction. Trust is the first thing any investor needs to feel is in place before too much discussion of a programme is presented.
The fact is that managed buy/sell programmes using bank debentures do exist, however actual providers are few and far between. The supply of these programmes is small, and demand far exceeds it. Getting in the way of being connected to something real are usually the internet brokers, who smell money but do not have the relationships or knowledge of how these work, so, the likelihood of success is almost nil. When you have a trusted party to work with, with authentic relationships and compatibility, it is possible to be included in a programme. For most investors, this is the mechanism used to fund projects without debt or repayment.
How MTN Buy/Sell Programs Work
- The basis of any legitimate trade program is medium term note( MTN) buy sale opportunities. MTNs are banking instruments with a fixed maturity value. It also normally has a coupon associated to it which is the yearly interest yield. These MTNs are issued by the top banks to raise cash off balance sheet and thus these don't get reported in the audited balance sheets of the banks.
- Fresh cut MTNs or just bank issued MTNs are extremely difficult to get for private buyers and are mostly reserved for humanitarian foundations which have licensed traders. These licensed traders buy these fresh cut instruments at price range of 20%-25% and get them enlisted into the Euroclear system so that it gets an international security identification number (ISIN). These MTNs with ISINs are then sold off immediately to exit buyers at 40%-45%. The exit buyers are normally pension funds, hedge funds, sovereign funds or ultra-high net worth individuals.The exit buyers can seldom buy fresh cut MTNs and therein comes the proficiency of a licensed trader.
- The profits generated through these are exponentially high but a lion share of the profits goes for humanitarian projects and the rest is shared between the investor, the trade organizers and the intermediaries. Traders or program organizers always need a client as they can only do the trades on behalf of a client and not for themselves.They can't also solicit for clients. So the only way to get into these opportunities is through associated intermediaries.
- The traders generate a credit line for buying and selling MTNs by blocking the funds of the client. The client's funds are not put at risk as those are for show purposes for the regulators to approve the credit lines. The trader normally gets a MT799 bank payment undertaking of 40% to 45% from an exit buyer and based on that issues a MT799 bank payment undertaking of 20% to 25% to the selling bank. So the mechanism is used to flip the instrument within a day or two with incredible profits.
- The best way to get into these trade opportunities is through a tear sheet wherein the client's banker needs to send a tear sheet of the account signed by 2 bank officers to the trade organizers. Based on that tear sheet the credit line of the trader is triggered.In case a tear sheet option is not available then an internal block or admin hold is the other choice. In other scenarios a BG / SBLC MT799 block might be necessary for the blocking of the funds to get into trade. Clients should always get into trade through the above mentioned options. Under no circumstances should they transfer funds to a trader's account or a subaccount. Though a subaccount is in the name of the client but the parent account owner can withdraw the money from the subaccount. Also a MT760 should never be used because in case the MT760 is callable then the money can be withdrawn from the account.