Arbitrage and Leverage

Private Placement trading safety is based on the fact that the transactions are performed as "arbitrage". Instruments will be bought and re-sold immediately with pre-defined prices. A number of buyers and sellers are contracted, including exit-buyers comprising mostly of large financial institutions, insurance companies, etc. The arbitrage contracts, provision of leverage funds from the banks and all settlements follow long-established and rapid processes.

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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.

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The client's principal does not have to be used for the transactions, as it is only reserved as a compensating balance or "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.

 

This is the purest form of arbitrage because they don't begin before participants have been contracted, and each actor knows exactly what role to play and how they will profit from the transactions. The trader is 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.

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Assume you are offered the chance to buy a house for $300,000 and that you also find another buyer that is willing to buy it from you for $350,000.

 

If the transactions are completed at the same time, then you will not be required to ‘spend’ the $300,000 and then wait to receive the $350,000. Performing the transactions at the same time nets you an immediate profit of $50,000. However, you must still have that $300,000 and prove it is under your control.

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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.

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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; completed in rapid succession.

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This is why client’s funds in Private Placement Programs are safe and without any trading risk.  I.e., the purest form of arbitrage.

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High Yield – How PPP’s Yield Your Exceptional Profits

Compared to the yield from traditional investments, these programs deliver a very high yield.

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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 the client, has deposited with the program.

 

In other words, you have $10 million but the trader, because of his leveraged loan with the bank, is able to work with $100 million. 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 ----illustrative purposes only

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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 usually achieve a much higher single spread for each transaction and perform a higher number of weekly trades.

 

Protection Of Placement Funds

Naturally, our first consideration is the protection of deposits. There have been many scams associated with PPP’s.  Traders have to show the funds as being under their ‘control’ to their host banks in order to secure the leveraged funds from the bank, which will deliver the exceptional returns.

 

Different traders and the different programs operated between them use a variety of ways to secure the deposits and these range across:

 

Blocked funds

Funds remain ‘blocked’ in investor's own account using a SWIFT MT760. An inter-bank mechanism that prevents you using the funds for any other purpose for the period your program is operating.

 

Sole signatory

The trader may ask you to move your funds to an account with their host bank (always a global tier-1 institution) where the account will be under your sole signature. No funds can be moved from the account without your say-so.

 

Non-depletion

The account the traders open for you can also be non-depletion meaning that, no matter what, no funds can be taken from your account by anyone – other than you.

 

Escrow

Some programs will accept your deposit funds into an escrow account, always with a top-tier bank and under the control of an attorney or recognised and/or authorised escrow agent.

 

Non-Solicitation and Non-Disclosure

As a direct consequence of the PPP environment where these transactions take place, a non-solicitation agreement has to be strictly followed by all parties involved. This agreement strongly influences the way the participants can interact with each

other.

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Virtually every contract involving the use of these high-yield instruments contains very explicit non-circumvention and non-disclosure clauses forbidding the contracting parties from discussing any aspect of the transaction for a specified number of years.