History of the Buy/Sell Trading Programs

History of the Buy/Sell Trading Programs

This article was written about five years ago which became a draft of a book that that I thought was completed until a publisher got his hands on it. The book is now being rewritten but the information herein is correct and useful today without rewriting.

The title of the book is Nontraditional Financing for small or large projects. This book contains invaluable information related to trade programs and project funding. The report was originally prepared for training purposes and to be used by employees of L'Equipe World Wide, Inc. It was not meant for external distribution; however, because of questions we field from our clients almost on a daily, we decided to make parts of it available to the general public. You may use this information anyway you choose; but please be advised that you do so at your own risk. In this financial arena functions, laws, and forms even history or someone’s opinion could change without warning. Also, the Basal community meets every three years and it could also change some of this writing. However, much of the writing is on the history of private placement programs which does not change.

Although the participating banks and Governments across the world do not openly acknowledge that such programs exist, the truth is that they have been in existence for over 75 years. Shortly after the end on the Second World War, there was a need for massive amounts of capital to underwrite the costs of reconstruction and the building of new infrastructure mainly in Europe. Also, Japan, China & Pacific Rim countries which was almost destroyed. Mediterranean countries were also struggling under post war occupation and there was total economic destruction.

The world including the United States as it existed July 1944 was in total chaos, financial ruin and collapsed economies. Most of the world had no industry, no liquidity in banks, destitute families, no food - no jobs total desperation potential for World War III. There had to be a radical plan required to rebuild the world economy without repeating mistakes made post World War I which had the same problems and a similar program was used to pull the world out of disaster. A new international monetary system had to be established with a strong international banking system and a common world currency. The architects of the post war economic rebuild were John Maynard Keynes British Economist, Harry Dexter White American Economist and Senior U.S. Treasury Department official jointly proposed a plan that would see the U.S. supported by Canada and Switzerland become the banker of the world, the U.S. Dollar would replace the pound sterling as medium for international trade. Although the plan was radical for its time it was based on the century’s old framework of import/export finance.

The convention accepted the basic economic plan but due to fears of run-away inflation and loss of control over their own national economies opted for the adoption of a “hard currency” standard. The U.S. dollar would become the standard world currency and the value of all other western currencies. The U.S. dollar had to become a gold backed currency for it to be the medium of exchange in the non-Communist world as per the Bretton Woods Convention.

The BRETTON WOODS CONVENTION produced the MARSHALL PLAN, which was the plan that came about after World War I. The Bank for Reconstruction and Development known as the WORLD BANK, INTERNATIONAL MONETARY FUND (IMF) and the BANK for INTERNATIONAL SETTLEMENTS were established. They are still operational today. These institutions would re-establish and revitalize the economies of the western nations. The World Bank would borrow from rich nations and lend to poorer nations. The IMF working closely with the World Bank, with a pool of funds, controlled by a board of governors would initiate currency adjustments and maintain the exchange rates among national currencies within defined limits. The Bank of International Settlements would then function as a "central bank" to the world.

The International Monetary Fund was to be a lender to the Central Bank of countries that were experiencing a deficit in the balance of payments. By lending money to that country's Central Bank, the IMF provided currency, allowing the underdeveloped country to continue in business, building up its export base until it achieved a positive balance of payments. Then, that nation's Central Bank could repay the money borrowed from the lMF, with a small amount of interest and continue its own as an economically viable nation. If the country experienced an economic contraction, the IMF would be standing ready to make another loan to carry it through.

The BIS was established 1930 making it the world’s oldest international financial institution and remains the principal Center for international Central Bank cooperation. The BIS was created as a new Central Bank to the central banks of each nation. Principally responsible for the orderly settlement of transactions among the central banks of individual countries. The Bank of International Settlements is controlled by the Basel Committee that is comprised of ministers sent from each of the G-10 nation central banks. It has been traditional for the individual ministers appointed to the Basel Committee to be the equivalent of the New York "Fed's" chairperson controlling the open market desk.

In the monetary policy field, cooperation at the BIS in the immediate aftermath of the Second World War and until the early 1970s focused on implementing and defending the Bretton Woods system. In the 1970s and 1980s, the focus was on managing cross-border capital flows following the oil crises and the international debt crisis. The 1970s crisis also brought the issue of regulatory supervision of internationally active banks to the fore, resulting in the 1988 Basel Capital Accord and its "Basel II " revision of 2001-06. More recently, the issue of financial stability in the wake of economic integration and globalization, as highlighted by the 1997 Asian crisis, has received a lot of attention.

The World Bank organized along more traditional commercial banking lines was formed to be “lender to the world” initially to rebuild the infrastructure, manufacturing and service sectors of the European and Asian Economies, and ultimately to support the development of Third World nations and their economies. The depositors to the World Bank are nations rather than individuals. However, the Bank's economic "ripple system" uses the same general banking principles that have proven effective over centuries.

THE BANK OF INTERNATIONAL SETTLEMENTS AND THE WORLD BANK have ministers from each of the G-10 countries control the directors of both banks: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and Luxembourg.

By 1961, the plans adopted at the Bretton Woods convention of 1947 were succeeding beyond anyone's expectation. World monetary crisis was brought on by a lack of enough currency (U.S. dollars) in world circulation to support rapidly expanding international commerce. The world needed more U.S. Dollars to facilitate trade. The U.S. was faced with a dwindling gold supply to back such additional dollars. Printing more dollars would violate the gold standard established by the Bretton Woods agreements.

The solution to this crisis lay in the hands of the Kennedy Administration, the U.S. Federal Reserve Bank and the Bank of International Settlements. To break the treaty would potentially destroy the stable core at the center of the world’s economy, leading to international discord, trade wars, lack of trust and possibly to outright war. The crises were further aggravated by the belief that most of the dollars then in circulation were not concentrated in the coffers of sovereign governments, but rather in the vaults or treasuries of private banks, multinational corporations, private businesses and individual personal bank accounts. A mere agreement or directive issued by governments among themselves would not prevent the looming crisis. Some mechanism was needed to encourage the private sector to willingly exchange their U.S. Dollar currency holdings for some other form of money.

The problem was solved by using the framework of a forfeit finance; a method used to underwrite certain import/export transactions which relies upon the guarantee a form of guarantee under Napoleonic law issued by a major bank in the form of either documentary or standby letters of credit or bills of exchange which are then used to assure an exporter of future payment for the goods or services provided to an importer. The system was well established and understood by private banks, government and the business community worldwide.

The documents used in such financing were standardized and controlled by international accord, administered by the members of the International Chamber of Commerce (ICC) headquartered in Paris. This is not like the Chamber of Commerce in your neighborhood. The ICC is a private, non-governmental, worldwide organization, evolved over time into a well-recognized organized, respected and, most of all, trusted association. Its members include the world’s major banks, importers, exporters, merchants, and retailers who subscribe to well-defined conventions, bylaws, and codes of conduct.

Over time, the ICC has hammered out pre-approved documentation and procedures to promote and settle international commercial transactions. In the ICC and forfeit systems lay the seeds of a resolution to the looming crisis. Recycling the current number of dollars back into world commerce would solve the problem by avoiding the printing of more U.S. dollars and would leave the Bretton Woods Agreement intact. The private international banking system required an investment vehicle, which could be, used to access dollar accounts, thereby recycling substantial dollar deposits without printing additional dollars.

 The answer was to encourage the most respected and creditworthy of the world's private banks to issue a financial instrument guaranteed by the full faith and credit of the issuing bank, with the support from the central banks, lMF and Bank of International Settlements. The world private investment and business sector would view new investments issued in this manner as "safe". To encourage their purchase over Treasuries, the investor yield on the new issues would have to be superior to the yield on Treasuries. If the instruments could be viewed as both safe and providing superior yields over Treasuries, the private sector would purchase these instruments without hesitation.

The crisis was prevented by encouraging the international private banking sector to issue letters of credit and bank guarantees, in large denominations, at yields superior to U.S. Treasuries. To offset the increased to the issuing banks, due to the higher yields accompanying these bank instruments, banking regulations within the countries involved were modified in such a way as to encourage and or allow the reduced reserve requirements via offshore transactions. Support of the program by the central banks. World Bank, IMF and Bank of International Settlements. Off-balance sheet accounting by the banks involved. Financial Instruments to be legally ranked "Para passe" (on the same level) with depositor’s funds. The banks obtaining these depositor funds would be allowed to leverage these funds with-the applicable central bank of the country of domicile in such a way as to obtain the equivalent of federal funds at a much lower cost. When these "leveraged funds'" are blended with all other accessed funds, the overall blended rate cost of funds to the issuing bank is substantially diminished, thus offsetting the high yield given to attract the investor with substantial funds to deposit. The bank instruments offered to investors were sold in large denominations often $100 million through a well-established and very efficient market mechanism, substantially reducing the cost of accessing the funds. The reduced costs offset the higher yields paid by the issuing banks.

Investors include any qualifying individual or institution, including the managers of retirement and profit-sharing plans, insurance companies, trust companies, charitable trusts, corporations with surplus funds, savings banks, money managers, portfolio managers, investment bankers, private bankers, and business managers.

ICC’s URBPO are the first-ever Uniform Rules for Bank Payment Obligations (BPOs), a 21st century standard in supply chain finance that governs BPO transactions worldwide. BPOs enable banks to mitigate the risks associated with international trade to the benefit of both sellers and buyers. Benefits include; risk mitigation; speed; reliability; convenience; reduced costs and improved accuracy; assurance of payment; access to flexible financing and security of supply chain. The ICC Banking Commission developed the URBPO in partnership with financial messaging provider SWIFT to consider the legitimate expectations of all relevant sectors. 

Forfaiting facilitates the provision of finance to the international trade community. It eliminates certain risks, improves Cash Flow and can considerably speed up and simplify transactions. The International Chamber of Commerce (ICC) and the International Forfaiting Association (IFA) have joined forces to provide the business community with the first ever Uniform Rules on Forfaiting (URF 800).

The value of the forfaiting market is estimated at more than 300 billion USD annually. In effect since 1 January 2013, ICC’s URF now provide a standard set of rules that reflect a broad consensus among bankers, users and all members of the forfaiting community worldwide. The use of global rules and standards helps avoid misunderstandings, harmonizes best practice around the globe and facilitates dispute settlement. Clear definitions and practical model agreements, also included in this edition, will help further understand and efficiently apply the present rules.

The ICC Uniform Rules for Demand Guarantees (URDG) reflect international standard practice in the use of demand guarantees and balance the legitimate interests of all parties. Since their first adoption in 1991, ICC's URDG have gained international acceptance and official recognition by bankers, traders, industry associations and international organizations including UNCITRAL, FIDIC and the World Bank. The current edition, URDG 758, was officially endorsed by the UN Commission on International Trade Law (UNCITRAL) at its 44th annual session in Vienna from 27 June – 8 July 2011. More than an update of the existing rules, the revised URDG 758 are a new set of rules for the twenty-first century that came into effect on 1 July 2010.

Major commercial banks soon came to realize that these instruments could serve as more than just a "funds recycling and redistribution tool”, as originally envisioned. For the issuing bank, they could provide the means of resolving two of the bankers’ s major problems: a) interest rate risks over the term of the loan, and b) the loss of potential value of the depositor funds. Bankers now for the first time had available a reliable method of accessing large amounts of money in a very cost-efficient manner.  These funds could be held as deposits at a predetermined cost over a specific period. This new system to promote currency redistribution had also given private banks a way to pass on to third parties the interest rate and risks formerly borne by the bank.

The use of these instruments provide instant liquidity and safety and has worked amazingly well since 1961. It is one of the principal factors that have served to prevent another financial crisis in the world economies. In recent years, smaller banks not ranked among the top 100 have been issuing their own instruments. There have been few instances where a major bank has had financial problems. In all cases, the central bank of the G-10 country concerned and the BIS have moved in quickly to financially stabilize the bank, insuring its ability to honor its commitments. Funds invested in these instruments rank para passe with depositor’s accounts, and as such, their integrity and protection is considered by all the institutions involved as fundamental to a sound international banking system. 

Another significant change of the Bretton Woods Agreement came in 1971, when the volume of world trade using U.S. dollars as the medium of exchange, finally exceeded the ability of the United States to support its currency with gold. The restraints of the gold standard at $35 per ounce established under the Bretton Woods Agreements placed the United States in a very precarious position.  As Keynes had predicted, there was not enough gold in the U.S. Treasury to back the actual number of U.S. dollars then in circulation. In fact, the treasury was not sure how many paper dollars were in circulation. What they did know, however, was that there was not enough gold in Fort Knox to back them. All G-10 countries were aware of this. To resolve the crisis, the U.S. needed to unilaterally abandon efforts to maintain the official price of gold at an artificial level of $35 per ounce the same price that existed in 1933. Gold in 1971 had a market value of approximately $350 to $400 per ounce in the commercial world market, or about 10 times the official price.  By letting gold seek its market price, the U.S. Treasury's gold would automatically become worth approximately 10 times its value at the official price.  Under these circumstances, any government bank or private investor would have to exchange $350 to $400 U.S. dollars for an ounce of gold at the market price rather than one U.S. dollar to acquire 1/35th of an ounce of gold at the old official price. An ounce of gold would rise in exchange value by a factor of ten, and the U.S. Treasury's gold supply would increase correspondingly. The United States needed to let its currency "float" in value against all other world currencies and not tie it to gold. Market forces would set the dollar's value through its exchange rate with other foreign currencies. The system for controlling currency supply, established by the Kennedy Administration, became an indispensable tool to the Nixon administration. The IMF and the BIS insured that the U.S. dollar would hold its value in the international market and was recycled from countries with a positive balance of payments back into the world economy. The illusion of U.S. dollar backed by gold was now gone.

In the United States of America, the supply of money or credit is regulated by the Federal Reserve, an independent body which came in to existence by an act of congress in 1913, and in part by means of the recognition and authorization granted by the International Chamber of Commerce and certain key International Money Center Banks. Money Center Banks comprise the top 250 banks worldwide, as ranked by net assets, long-term stability and sound management.  The Money Center Banks are also referred to as the top 100 or fewer (as for example the Fortune 500 or Fortune 100) and are authorized to issue blocks (aggregate amounts) of Bank Debenture instruments such as Bank Purchase Orders (BPO's), Medium Term Debentures (MTDs) such as Promissory Bank Notes (PBNs) Zero Coupon Bonds (Zero's), Documentary Letters of Credit (DLCs), Stand By Letters of Credit (SBLC's) or Bank Debenture Instruments (BDI's) issued under the International Chamber Of Commerce (not to be confused with your local Chamber Of Commerce) which is the worldwide regulatory body for the International banking community, which sets the policies which governs the activities and procedures of all banks conducting business at international levels.

Authority to issue a given allotments of the banking instruments over and above those regularly employed as an accommodation to customers regularly engaged in international trade and project development, is issued quarterly for each issuing bank, according to the Federal Reserve’s or Central Bank’s review of each bank’s portfolio. The prices of these instruments are quoted as a percentage of the face amount of the instrument with the initial market price being established by a willing buyer who will fund the instrument when it is first issued. The customer is ideally advised to have a valid reason to request the bank to issue such instruments – it is generally accepted practice for buyer to lodge a project plan with the issuing bank. Thereafter- these instruments are sold and resold to other banks at escalating higher prices, thus realizing a profit on each transaction or trade or “buy sell”, which can take as little as one day to complete.

Participation in this business of Private Placement is sensitive because of the volume of funds involved and considered “insider privilege”. One needs to have the appropriate banking connections and relationships in place in order to participate in these he transactions from the beginning to end. For this purpose, it is not uncommon to have A purchasing bank which represents the buyer (trader) on the purchasing side of the transaction, which is also acting as the "holding Bank" A Fiduciary, or "Pass Through Bank" An Issuing or "Selling Bank"

Bank credit instruments are conditional bank obligations, like a check cash-able under certain circumstances - issuer credit worthiness being the criteria. In these instances, they are general obligations of the issuing institution, without reserves for repayment being set aside. Stipulation is not a direct liability in the balance sheet but in the Notes to the financial statement of contingent liabilities. While not secured obligations, the implications would be quite serious for the banking industry if a major institution defaulted on any payment due, secured or unsecured. Bank guarantees are instruments issued by a bank or other lending institutions ensuring that the money owed by a debtor will be paid. In other words, the bank or lending institution is promising to be liable if the customer fails to meet their obligations. U.S. banks generally do not issue bank guarantees, but issue other types of promissory notes that are intended to fulfill the same function. Instead of bank guarantees, U.S banks issue standby letters of credit (SBLC), which are heavily used in international trade. Under section 415 of the Securities Exchange Commission (SEC) rules, approved banks issue MTNs to approved investment banks and brokerage houses. They, in turn, trade the MTNs with institutional investors, who issue them to retail investors. Bank guarantees and letters of credit can also be traded between institutions but the underlying component in their valuation is the creditworthiness of the non-banking company

MTNS are different types of instruments that serve different purposes for corporations. MTNs are specific bond-like debt securities with maturity values of nine months to 30 years. Since 1983, companies have used MTNs to raise funds in a way that is like debt offering. Most MTNs are non-callable, unsecured and have fixed rates. Medium Term Notes (MTN’s) are debt instruments which are created by banks and sold to investors, having a predefined face value, date of maturity, and annual interest rate.

Governments and large organizations need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a lender (the issuer) to a borrower (the investor). 

Private Placement Opportunity Programs (PPOPs) are also known under other names, such as Private Placement Programs (PPPs) or Private Placement Investment Programs (PPIPs). PPOP / PPPs exist to “create” money. Money is created by creating debt. All trading programs in the Private Placement arena involve trade with discounted debt notes ( MTN, BG, SBLC, Bonds, PN) in some fashion. Further, in order to bypass the legal restrictions, this trading can only be done on a private level. This is the main difference between this type of trading and “normal” trading, which is highly regulated. This is a Private Placement level business transaction that is free from the usual restrictions present in the securities market. In summary - A trading program is nothing more than a pre-arranged buy/sell arbitrage transaction of discounted banking instruments. There are no smoke and mirrors involved; all the trading programs are conducted under the specific guidelines set up by the I.C.C and is the regulatory body for the World's Great Money Center Banks and is based in Paris, France. It has existed for more than 100 years and exert strict control on world banking procedures. The real secret of successful participation lies not in knowing the how, why and wherefore of these transactions, but far more importantly, in knowing and developing a strong working relationship with the “Insiders” The Principals, Providers, Bankers, Lawyers, Brokers, and other specialized professionals who can combine their skills and connections to turn these resources into lawful, secure, and responsible programs with the maximum potential for safe gain.

The intent of these programs is not to create wealth for individuals or huge profits for corporations but to help fuel the economy of the countries by providing funding for humanitarian, infrastructure or other projects that will create and/or save jobs and improve the quality of life. Banks are limited to the amount of normal debt they may issue, traders have numerous limitations placed upon them, including the mandate that most of the profits (92%) made from the trades will be used to fund projects.