The history of PPPs goes back as far as the 1930s when it was developed, after the global depression, by the USA and Switzerland based on a unique money lending/ creation structure then operated in Siam (Thailand).
How well it worked (or not) has been lost in the annals of economic history. However, it was energized and significantly updated in 1944 when the world was reeling from the devastation inflicted by World War II. Economic destruction, human misery, and dislocation existed on an unprecedented scale.
This was the world as it existed in July 1944 when a small group of 130 of the world’s most prominent economic, social, and political minds met in Bretton Woods, a small vacation town in New Hampshire. John Maynard Keynes, who needs no introduction presented a radical plan, based on the Siam experience, to rebuild the world’s economy and, hopefully, avoid a third world war.
The world listened and his initiatives eventually led to the establishment of the IMF, World Bank, and Bank for International Settlements ( BIS) which, between them, now manage and operate a financing structure for which the first major application was the Plan, which financed the rebuilding of Europe and much of Asia after WWII.
EXPLANATION AND EVOLUTION OF PPPs
First and foremost, PPPs exist to ‘create’ money. Money is created by creating debt. Since 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.
Large Debts Instruments’ Market.
As a consequence of ‘money creation’ above, there is an enormous daily market of discounted bank instruments (e.g., MTN, BG, SBLC, Bonds etc.) involving issuing banks and groups of exit-buyers (pension funds, large financial institutions, etc.) all operating in an exclusive Private Placement arena. All such activities by the bank are done as ‘ Off- Balance Sheet Activities’. As such, the bank benefits in many ways. Off-Balance Sheet Activities are contingent assets and liabilities, where the value depends upon the outcome of which the claim is based, similar to that of an option. Off- Balance Sheet Activities appear on the balance sheet ONLY as memoranda items.
When they generate a cash flow they appear as a credit or debit in the balance sheet. The bank does not have to consider binding capital constraints, as there is no deposit liability.
Until the crash of 2008, PPP’s were the exclusive territory of the world’s largest corporations and ‘arm’s length’ government bodies (governments cannot place funds directly into a PPP, the same applying to companies listed on stock exchanges and banks themselves).
Traders in the half-dozen genuine trade groups, hosted by the world’s Tier-1 banks, will normally only accept a minimum deposit of $100,000,000 and their Small Cap investors are excluded. Large institutions, funds and foundations sometimes deposit funds in their tens of billions to create money for major projects, particularly in the developing world.
The World Bank, IMF and other global monetary authorities do not have any concerns about the inflationary effects of this new money, as it is always absorbed through labour and materials.
Please read this section carefully to gain an understanding of how the profits associated with PPPs are generated. All trading Programmes in the Private Placement arena involve trade with discounted Debt Notes in some fashion. Further, to bypass the legal restrictions, this trading can only be done on a private level. This is the main difference between PPP 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. It is based on trusted, long-established private relationships and protocols. Normal trading activity is performed under the ‘open market’ (also known as the ‘spot market’) where discounted instruments are bought and sold with auction-type bids. To participate in such trading, the trader must be in full control of the funds, otherwise he has no means of buying the instruments before reselling them.
However, in addition to the widely recognised open market, there is a closed, private market comprising a restricted number of ‘master commitment holders’. These are trusts, foundations and other entities with huge amounts of money that enter contractual agreements with banks to buy a limited number of fresh-cut instruments at a specific price during an allotted period. Their job is to resell these instruments, so they contract sub-commitment holders, who in turn contract Exit buyers.
This form of pre-planned and contracted buy/sell is known as arbitrage, and can ONLY take place in a private market (the PPP market) with pre-defined prices. Consequently, the traders never need to be in control of the client’s funds.
No Programme can start unless there is a sufficient quantity of money backing each transaction. It is at this point that you, the client, is needed because the involved banks and commitment holders are not allowed to trade with their own money unless they have reserved enough funds, comprising money that belongs to clients, which is never at risk.
The ‘host’ trading bank is then able to loan money to the trader against your deposit. Typically, this money is loaned at a ratio of 10:1, but during certain conditions, it can be as high as 20:1.
In other words, if the trader can ‘reserve’ $100 million of client funds, then the bank can loan $1 Billion against it, with which the trader can trade. In all actuality, the bank is giving the trader a line of credit based on how much client funds he controls, since the banks can’t loan leverage money without collateral.
Because bankers and financial experts are well aware of the ‘normal’ open market and of so-called ‘ MTN-Programmes’, but are closed out of this private market, they find it hard to believe that it exists. Bankers in top-tier, global banks (where this trading takes place) are ignorant that this trading exists within their institutions because it happens at a level far removed from their mainstream banking operations.
Arbitrage and Leverage – built in fail safe
Private Placement trading safety is based on the fact that the transactions are performed as arbitrage This means that the instruments will be bought and resold immediately with pre-defined prices.
Several buyers and sellers are contracted, including exit-buyers comprising mostly of large financial institutions, insurance companies, or extremely wealthy individuals. The arbitrage contracts, provision of leverage funds from the banks, and all settlements follow long-established and rapid processes.
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 leverage 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.
The client’s principal does not have to be used for the transactions, as it is only reserved as a compensating balance ( 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 every transaction.
Such Programs never fail because they don’t begin before arbitrage participants have been contracted, and each actor knows exactly what role to play and how they will profit from the transactions. The trader is usually 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. Arbitrage transactions with discounted bank instruments are done similarly. 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 for the trader to leverage a line of credit.
Confusion is common because the perception is that the money must be spent to complete the transaction. Even though this is the traditional way of ‘normal’ trading – buy low and sell high – and 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.
You need to work with a professional who knows his /herself around the market. Everyone other than the seller and the buyer are brokers in his market and it’s wise to note that it is usually the brokers that kill the deal off. Mostly because the so-called broker chain is too long and nothing gets done or is stalled by disagreement. So always check who is involved and make sure you have a near-on direct deal whenever possible.
Best to engage with a professional who knows the “ intake managers” of the platforms personally and has active files.
The commission is restricted to 1% to the seller’s side and 1% to the buyer’s side. Any more than that and you risk the trade from going ahead.