When investors hear about the opportunity to earn high profits, the first reaction is almost inevitably to assume that the risks must be commensurably high. Otherwise, one assumes that every investor would place funds in such programs. In fact, the risk to the investorís capital in a properly structured Bank Credit Instrument trading program is almost nil. The means employed to eliminate risk vary with the type of program and include:
1. Investorís funds are deposited in investorís own name and own account in the trade bank and cannot be removed without investorís instruction or encumbered in any way. The investor is the sole signatory on the account. Investor does not place his/her funds with the Program Manager or Introducing Broker. The bank holds the funds throughout the investment.
2. Investor gives the bank or the Program Manager a very limited power of attorney, which authorizes the purchase and resale of specific types of bank instruments from a specific category of banks, (e.g. A-AAA rated, top 100 World or top 25 European). The Program Manager can have no further influence over the funds.
3. The bank will typically offer a CD, U.S. Treasuries or a Bank Guarantee, which, it holds in custodial safekeeping. These instruments pay a modest money market rate of interest to the investor at maturity (usually one year and one day from deposit) in addition to any profits derived from the trading program. The investor holds the safekeeping receipt.
In instances where the investor actually purchases and owns the credit instrument, i.e., ìdirect programsî, ownership is typically limited to a matter of hours, or at most a few days, before the instrument is resold. The price of these credit instruments is not known to fluctuate significantly even with sizable changes in interest rates or bond prices.
Most programs operate with $100 million or more and are meant for large investors. Relatively few programs have been structured to accept small investments of $1 million or less. The banks bind Program Managers and Investors to very strict confidentiality agreements and it is very difficult to find the Program Managers or Investors willing to disclose their activities. Most programs are operated in the top European banks or domestic branches of top European banks and are therefore harder for U.S. citizens to access, research and invest in with confidence. As of Nov. -05, 19 Financial Institutes / Banks has the ability/permission to perform these programs.
Investor behaviour depends on ìperceivedî risk rather than actual risk. While the actual risk may be very low, the ìperceivedî risk of a little known and somewhat obscure sounding business does dissuade many investors from getting involved. This is especially true because only specialized back room departments of the bank are involved with these transactions. Most bank officials have no knowledge of them, particularly in the United States. Knowledgeable banking officials are sworn to secrecy and would never divulge the existence of this market for fear of disturbing large depositors who would clamour for higher deposit yields.
There have also been several highly publicized instances of fraud, which has prompted the SEC and Federal Reserve to issue warnings. Although to our knowledge no fraudulent programs have been discovered that utilize the secure investment procedures that we have outlined in this technical report. The fraudulent activities usually arise when investors give up control of their funds to phony trade managers who use Ponzi scheme type payouts.
This is illegal when it comes to Joint Ventures and must also go through the necessary paperwork. While the risk to principal can be completely eliminated, there may be no guarantee that the profits will actually be fully earned, i.e., best efforts trading. In some programs this presents a potential interest or dividend earnings loss from the time when funds are placed in the program until the date of first payout. Typically this period is only two to three weeks. In programs for small investors, it can be as long as eight weeks. For large investors, this potential earnings loss presents a real risk. Often, a minimum return secured by a bank guarantee is used to offset this risk factor.
Good and reliable trading programs are difficult to find, costly and time consuming to verify. They are quickly oversubscribed and frequently closed before interested investors can arrange the necessary funds. Literally dozens, perhaps hundreds of programs are offered annually. Many are non-existent repackaging of the same programs by different people or first time efforts that never get off the ground. The fundamental question, which should be asked by a potential investor when reviewing program procedures is ìHow does this program protect my principal from loss?î If complete protection of principal is provided for in the procedures, the potential investor has established a sound basis for moving forward.
