Arbitrage/Leverage Your Capital Is Not at Risk Like Traditional Trading
Private Placement Programs have built in safety protocols for the investor’s capital. These transactions are performed as arbitrage, meaning that the instruments will be bought and immediately resold with pre-defined prices.
The Process
Several sellers and exit-buyers of Banking Instruments are in place. These are usually large financial institutions, insurance companies, or extremely wealthy individuals.
The issued instruments are not always sold directly to the exit buyer but to a chain of market participants.
The banks are not allowed to directly participate in these transactions.
The banks are profiting indirectly by loaning leverage money with interest to the trader as a line of credit. This is their leverage.
The banks also profit from the commissions involved in each transaction. Fees, Fees and more Fees.
The client’s capital is reserved as a compensating balance against the credit line provided by the bank to the trader.
The credit line is used to back up the arbitrage transactions. Arbitrage trading does not require the client's capital to be used, but it still has to be available to back up the transaction.
How Safe is the Investor's Capital
The Investor's money is never actually used or "spent"- It simply acts as a balance of Proof Of Funds for the credit line.
These types of Programs won’t fail because they don’t ever begin before arbitrage participants have been contracted.
The chain of Exit Buyers are already in place before the contract to purchase the instrument is finalized
A trader with a high quality banking profile is usually able to secure a line of credit 10 to 20 times that of the principal.
Even though the trader is in control of that money, the money still cannot be spent.
The trader has to show that the money is unencumbered, and is not being used elsewhere at the time of the transaction.
Arbitrage transactions with discounted bank instruments are done similarly.
The traders don’t actually spend the money, but they must be seen to be in control of the funds. The client’s capital is reserved for the trader to leverage a line of credit.
The transaction is done through the credit line with the exit buyers already in place so the client's funds are not not being sent anywhere.
This type of risk averse arbitrage trading can only be done in a private market.
Where is the Risk?
The risk comes with getting involved with non-existent programs usually involving a daisy chain of brokers who are trying to get a bite of the apple.
They may misrepresent their connection to a Private Placement Program and give out bad information unknowingly. Or knowingly create “sub-programs” and try to scalp the client by cutting into the profit margin..
Seek out a trusted source who knows the program principal or owner of the platform personally and can set up an introductory phone call to have your questions answered. Transparency is the key to any legitimate program.
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PPPs involve trading with discounted bank-issued debt instruments, money is created because such instruments are deferred payment obligations or debts. Money is created from that debt. Debt Notes such as Medium Terms Notes ( MTN), Bank Guarantees ( BG), and Stand-By Letters of Credit ( SBLC) are issued at discounted prices by major world banks in the amount of $-billions every day.
The core problem is that issuing such a Debit Note is very simple. Still, the issuer would have problems finding buyers unless those buyers ‘believe’ that the issuer is financially strong enough to honor that Debt Note upon maturity. Any bank can issue such a Debt Note, sell it at a discount, and promise to pay back the Full-Face value at the time the Debt Note matures.
But would that issuing bank be able to find any buyer for such a Debt Note without being financially strong? If one of the largest banks in Western Europe sold Debt Notes with a face value of €1 million at a discounted price of€800,000 most individuals would consider purchasing one, given the financial means and opportunity to verify it beforehand.