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Introduction

The following document has been prepared based upon all the available information and is largely a hypotheses, due to the fact that much of the information is hearsay and unsubstantiated.

Basic history of specific types of credit instruments

The issuance of bank (credit) instruments dates back to the early days of "banking" when private wealthy individuals used their capital to support various trade orientated ventures. Promissory Notes, Bills of Exchange, Bankers Acceptances and Letters of Credit have all been a part of daily "bank" business for many years.

There are three types of Letters of Credit which are issued on a daily basis. These are Documentary Letters of Credit, Standby Letters of Credit and Unconditional Letters of Credit or Surety Guarantees.

The issuance of a "Letter of Credit" usually takes place when a bank customer (Buyer) wishes to buy or acquire goods or services from a third party (Seller). The Buyer will cause his bank to issue a Letter of Credit which "guarantees" payment to the Seller via the Seller's bank conditional against certain documentary requirements. In other words, when the Seller via his bank represents certain documents to the Buyer's bank the payment will be made. These documentary requirements vary from transaction to transaction, however, the normal type of documents will usually comprise of:

  • Invoice from Seller (usually in triplicate)

  • Bill of Lading (from Shipper)

  • certificate of Origin (from the Seller)

  • Insurance documents (to cover goods in transit)

  • Export Certificate (if goods are for export)

  • Transfer of Ownership (from the Seller)

These documents effectively "guarantee" that the goods were "sold" and are "en route" to the Buyer. The Buyer is secure in the fact that he has "bought" the items or services and the Seller is secure in the fact that the Letter of Credit, which was delivered to him prior to the loading or release of the goods, will "guarantee" payment if he complies with the terms of the Letter of Credit.

This type of transaction takes place every day throughout the world, in every jurisdiction and without any fear that the issuing bank will not "honour" its obligation, providing that the bank if of an acceptable stature. 

The Letter of Credit is issued i a manner which has been recognised by the Bank for International Settlements (B.I.S.) and the International Chamber of Commerce (I.C.C), and is subject to the uniform rules of collection for documentary credits (ICC 400, 1983).

This type of instrument is normally called a Documentary Letter of Credit ("DLC") and is always trade or transaction related, with an underlying sale of goods or services between the applicant (Buyer) and the Beneficiary (Seller).

During the evolution of the trade related Letters of Credit, a number of institutions began to issue Standby Letters of Credit )"SLC's"). These credit instruments were effectively a surety or guarantee that if the applicant (Buyer) failed to pay or perform under the terms of a transaction, the bank would take over the liability and pay the beneficiary (Seller).

In the United States banks are prohibited by regulation from providing formal guarantees and instead offer these instruments as a functional equivalent of a guarantee.

A conventional Standby Letter of Credit (CSLC) is an irrevocable obligation in the form of a Letter of Credit issued by a bank on behalf of its customer. If the bank's customer is unable to meet the terms and conditions of its contractual agreement with a third party, the issuing bank is obligated to pay the third party (as stipulated in the terms of the CSLC) on behalf of its customer. A CSLC can be primary (direct draw on the Bank) or secondary (available in the event of default by the customer to pay the underlying obligation). [Extracts from "recent Innovations in International Banking - April 1986 prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]

As these Standby Letters of Credit were effectively contingent liabilities based upon the potential formal default or technical default of the applicant, they are held "off balance" sheet in respect to the bank's accounting principles.

This type of Letter of Credit is commonly referred to in the market place as a short form format. This number is not found as a specific ICC 400 (1983) reference and is purported to be a federal court docket reference number which is related to a law suit involving such instrument, no details are available to the author.

During the period when SLC's were being evolved and used, the banks, and their customers began to see the profitable situation created by the "off balance sheet" positioning of the instruments. In real terms the holding of the Standby Letter of Credit was attributed to a "contingent" liability and, as such, was held off the balance sheet therefore in an unregulated area.

Due to constraints being imposed on the banks by regulatory bodies and government control, the use of these "off balance sheet" items as financial tool to effectively adjust the capital asset ratios of the banks, was seen to be a prudent and profitable method of staying within the regulations and yet to achieve the needed capital position.

At request of central-bank Governor's of the Group of Ten countries a Study Group was established in early 1985 to examine recent innovations in, or affecting, the conduct of international banking.

The Study Group carried out extensive discussions with international commercial and investment banks that are most active in the market for the main new financial instruments. The purposes were both to improve central-bank knowledge of those instruments an their markets as the situation existed in the second half of 1985, and to provide a foundation for considering their implications for the stability and functioning of international financial institutions and markets, for monetary policy, and for bank's financial reporting and statistical reporting of international financial developments. Alongside this work the Basle Supervisor's Committee has undertaken a study of the report of the prudential aspects of banking innovations and a report on the manage-ment of bank's off-balance-sheet exposures and their supervisory implications was published by that Committee in March 1986.

The growth of these instruments has been enhanced by two influences.

Firstly, bankers have been attracted to off-balance-sheet business because of constraints imposed on their balance sheets, notably regulatory pressure to improve capital rations, and because they offer a way to improve the rate of return earned on assets.

Secondly, for similar reasons, banks have sought ways to hedge interest rate risk without inflating balance sheets, as would occur with the use of the interbank market. [Extracts from "Recent Innovations in International Banking - April 1986" prepared by a study group established by the Central Banks of the Group of Ten Countries and published by the Bank for International Settlements.]

Why should such an instrument be issued?

To understand the logic behind the actual mechanics of the operation it is necessary to look at the way in which a bank usually operates. The bank's credit rating and status within society is judged by the "size" of the bank and its capital/asset ratio. The bank lists its real assets and its cash position, including deposits, securities, etc., against its loans, debits and other liabilities showing a ration of liquidity. Each jurisdiction of the World banking system has different minimum capital adequacy requirements and, depending on the status of the individual bank, the ratio over assets which the bank can effectively trade can be as high as 20 times the minimum capital requirement.

In simple terms for every $100 held in asset/capital the bank can lend or obligate ate least $1,000 to other clients or institutions against the cash on hand.

The money placed on deposit by the bank's customers is dealt with in a different manner to the actual cash reserves or assets of the bank.

If the bank disposes of an asset, the reluctant capital is able to be "leveraged" using the bank's multiplier ration, based on the minimum capital adequacy requirements.

To bring all of this into focus and identify the application of these points to the matter of the question we will now make the following overview:

A bank receives an indication from a client that the client is willing to "buy" from the bank a one year obligation, zero coupon, and effectively unsecured by any of the physical assets of the bank, the credit instrument is based solely on the "full faith and credit worthiness of the bank".

Obviously the format of the credit instrument must be one which is acceptable in an jurisdiction and freely transferable, able to be settled at maturity in simple terms and is without restrictions other than its maturity conditions. The instrument which immediately comes to mind is the Documentary Letter of Credit or Standby Letter of Credit.

Standby Letters of Credit also serve as substitutes for the simple or first demand guaranty. In practice, the Standby Letter of Credit functions almost identically to the first demand guaranty. Under both, the beneficiary's claim is made payable on demand and without independent evidence of its validity. The two devices are both security devices issued in transactions not directly involving the sale of goods, and they create the same type of problems. [Extract from a paper entitled "Standby Letters of Credit: Does the Risk outweigh the Benefits?" published in the 1988 Columbia Business Law Review.]

The blank piece of bank paper which is technically as asset of the bank valued at say 2 cents is now "issued" and the text added in say "ten million U.S. Dollars face value", signed and sealed by the authorised bank officers. The question now is "what is the piece of paper worth?" It is worth 2 cents or US$10 million, bearing in mind that it is completely unsecured by any tangible or real asset? In reality it has a "perceived value of US$10 million" in 366 days time, based upon the "full faith and credit of the bank".

The next question which now must be asked is "will the bank honour its obligation when the bank note or credit is presented"? This will, of course, depend upon the reputation and credit worthiness of the issuer.

Having now arrived at the "belief" that the "value" is US$10 million in 366 days time, the "Buzer" must negotiate a price, or discount, which is acceptable to the Bank to cause it to "sell" the credit.

To arrive at a sale price one has to determine the accounting ramifications of the sale. The liability is US$10 million payable "next year", and it is important to note that the reason for the one year and one day period is to take the liability into the next financial year, no matter when the credit is issued. The liability is held "off balance" sheet and is technically a contingent liability as it is not based upon any asset. On the other side of the model, the bank is to receive cash from the "sale of an asset" and this cash is classified as capital assets which in turn are subject to the ratio multiplier of say 10 times.

So in real terms, the issuing bank is to receive say 80% of the face value upon sale which is US$8 million cash on hand against a forward liability of US$10 million in one year and one day's time. The actual contingent liability being US$2 million. The cash received, US$8 million allows the bank to lend 10 times this amount under the capital adequacy rules, so US$80 million is able to lent on balance sheet against normal securities such as real estate, etc. If the interest rate is say 8% simple and the loans are short term, say one year, to coincide with the liability, the income and return (without taking into account the principle sums loaded) from interest alone is equal to US$6,400,00.

At the end of the year the credit is due for payment against the cash on hand and the interest received, in other words, US$8 million plus US$6,400,000 which total US$14,500,000 less the US$10 million shows a gross profit of US$4,400,000 or 44% plus the full value of the loan amounts (principle).

The reason for issuing the credit is now obvious, the resultant yield is well over the given discount and the bank is in a profitable position without risk. They have achieved a greater asset yield than by any conventional means.

There is a greater underlying reason which is also indicated if an overview of the complete supply system is taken. To simplify the explanation, a flow chart h as been drawn which shows the roles of each entity and the details which are given by an individual who represented the information as direct from the "Federal Pool" which will be outlined herein.

To understand the system one must take a view which is not supported by any physical evidence but is indicated by the actual occurrences of events.

As most people are not aware, the Federal reserve Bank is not a Federal Government entity or body, it is in fact a private institution. It may well operate in a quasi-government manner but it is still under the control of private individuals.

If one assumes that the money supply requirements for a specific period shows a need to print, say US$100 million of new issue currency, and the U.S. Treasury is required to issue same, the impact of the release of those "new" Dollars in terms of inflation and market effect is quite strong.

I, however, the U.S. Treasury through the Federal Reserve Bank was asked to forward "sell" those Dollars for "cash" the amount of "new" Dollars today is reduced by whatever amount is being yielded. If we take the case in question, suppose the Federal Reserve Bank had "contracted" with a major world bank to "issue" Dollar denominated one year paper in the amount of US$100 million and "sold" this paper through a secure network of entities so that the "sale" did not appear "on market" and that the "sale" was at a discount of say 80% of face value. The cash yield back to the U.S. Treasury would be US$80 million against a Dollar credit of same amount to the issuing bank, with the bank taking a US$100 million liability position at maturity date.

The U.S. Treasury has now received US$80 million in cash back in from the market/system and need only print US$20 million to meet its current obligation to the money supply. This is 20% of the original amount and, as such, its impact on the system is greatly reduced. Of course, if the amount "sold" is greater than the money supply requirement, the U.S. Treasury has a reduction which allows lower interest rates to be maintained and/or controlled.

The long term position is not affected as the bank has taken on the liability not the U.S. Government, the Dollar credit is classed as "cash" for the purpose of capital adequacy and is not required to be physically "printed" as such, a simple ledger entry is sufficient.

The off market issue and sale of bank credit instruments is controlled by simple supply and demand techniques, and all U.S. Dollar denominated paper is "issued" through the Federal Reserve Bank.

To do this, the Federal Reserve Bank enters into an understanding with the U.S. Treasury and the top 100 world banks, excluding state operated banks, American Banks (with the exception of Morgan Guaranty), Third World banks and any other banks which may have a capital/credit problem. The current list (Based upon the January 1992 Bankers Almanac) totals some 62 banks.

Each bank agrees to allow the Federal Reserve Bank to issue, on its behalf, a specific amount of U.S. Dollar denominated paper or the alternative applies where the Federal Reserve Bank allocates a specific amount to each bank. The details are not published and no physical evidence has been made available to the author. In any case, the result is that a specific volume is available and the Federal Reserve Bank is now able to release it on demand.

The various bank paper is "pooled" together to give the total position for each year, and it is from the "Federal Pool" that the supply contracts are issued. The existence of the "Federal Pool" is not confirmed. However, various documents including GNMA transfer documents contain a "Pool Number".

The "collateral contracts" which one hears about, are effectively issued by the Federal Pool. It is indicated that these are usually issued in US$500 million units, with each minimum denomination being US$100 million. In other words, the minimum order is US$500 million in US$100 million tranches. From our research, it has been indicated that the "cost" or deposit for one of these contracts is US$100 million cash. This obviously reduces the number of entities who are able to participate.

One point which should be raised at this time, although the market place and issue of these instruments is "unregulated", the banks are effectively controlled by the B.I.S. and self imposed rules. Otherwise the whole system would be subject to possible manipulation and abuse by a bank, or group of banks, entering into a form of "insider trading", this would be detrimental to the system and the long term effect of same.

The entities who are the holders of the "collateral contracts" are commonly referred to as "cutting houses", as they usually reduce the siye of the denomination from US$100 million to as little as US$10 million. They in fact "cut down the size of the note" hence "cutting house".

The cutting houses then in turn "sell" delivery commitments to wholesale brokers, the cost of such is indicated at approximately US$10.0 million cash.

In both cases the cash payment or deposit is able to be called upon if an order is not met or paid for on time, and if called for the contract holder would lose his contract and would be "blacklisted" in the system to prevent any new contract position. The rules are very simple, cash payment at all times for all notes ordered, this is a cash driven industry not credit.

It is assumed by the author that each cutting house would normally issue say 50 delivery commitments or "sub master commitments" at US$2.5 million each. Therefore, their deposit of US$100 million is now covered plus a reserve of US$25 million. This is very similar to the normal activities of pos betting where the odds are "laid off" to restrict exposure.

The wholesale brokers are responsible to feed the volume of instruments to the clients or customers who are at the retail or retail distribution level and, subsequently, to the secondary market.

The issuing banks can be identified as the manufacturers of this product, in this cast the product is bank paper. The Federal Reserve Bank can be identified as the importer (80%). The Federal Pool can be identified as the storage depot (82.5%) for all the product prior to sale and are responsible for the bulk release to the regional distributors. The cutting houses can be identified as the regional distributors (85%) and are responsible for the release of units to the local distributor. The wholesale brokers can be identified as the local wholesaler (87.5%) who release units on demand to the retail showrooms. The primary clients can be identified as the retail showroom (89%) who deliver the units to the public buyers. The public buyer exists in the secondary market (92 - 94%), such as pension funds, Middle East (Muslim) clients banks (to buy on the secondary market is not classed as contrary to the rule). They hold the instruments until maturity and gain the preferred yield from the discount against the face value (100%) from the issuing banks.

The biggest problem encountered by the author regarding this matter is the contradictory and somewhat unusual attitude of the banks when any attempt is made to obtain any definitive documents or undertakings. The very existence of these instruments has been denied, at senior level by bank officials, and yet, within the same bank, requests to purchase said instruments have been received by the author.

Also the regulatory position of these instruments creates a major problem for any regulated entity to participate. How can an unregulated item be handled by a regulated body!

It is the opinion or the author, based on all the information available that the main reason for most of the mystery and misinformation is quite simple, this is a sophisticated form of financial engineering, it makes normal accounting principles a complete mockery and basically exposes the banking system for what it is.

In reality, the whole system is flawed and is one which no one really understands, we based our daily life on a "paper house". Nothing has really changed since the very first "money" transactions or even earlier, "I'll swap you two blue shells for three red shells and I'll give you three red shells for your XYZ goods". The whole monetary system is based on "perceived value" including currencies, credit, and day to day life.

A bank note issued by the Bank of England is in reality an unsecured "Promissory Note" payable and demand. Its face value is its perceived value, however, if the word demand were changed to a future date, of say one year and one day, the perceived value has now been reduced to cover the "cost of money" for the period.

If we were to discuss the value of one single 50.00 note, the "value" today would be approximately $45.00 However, if we wished to "discount the present value" several million of these notes, it is reasonable to expect that the "wholesale" buyer would expect a better "price". The note, however, still has a "perceived value" of 50.00 and a present value of approximately 45.00

Very little "cash" is used in the day to day operation of business, mostly it is in the form of ledger or "paper" entries. Even when a private bank account is used, most of all transactions are "paper" driven not cash. A cheque is a "Promissory Note", either unsecured or guaranteed by the bank up to a certain limit (cheque guarantee card). If a bank draft is "purchased" the draft is still unsecured but is perceived to be a 100% guarantee of payment.

The current trend towards "plastic" and "electronic banking" is an indication of the future and is based purely upon the amount of business which takes place daily. The banks can no longer cope with physical "paper" and need to reduce each transaction to a simple ledger entry. The end result is less "money" and more "business".

The use of these instruments as a medium for short term investment is obvious, if one takes the differential between the "invoice" price and the "present value" and moves a client into and out of the instruments on a regular basis, the effective yield is substantial.

The downside risk is nil, if one retains strict protocol over the potential purchases, with a worse case scenario of the fact that a client would either NOT transact and therefore not be at risk. If an instrument had been purchased and for whatever reason could not be onwards "sold or discounted", the client would automatically achieve a substantial yield based on the maturity value against the "invoice paper".

The preceding document is a summary of the circumstances and evidence which has been presented and are based purely upon the same, as received, no representation is made or implied as to the legal position of the information contained therein or for any resultant losses, if so incurred as a result of the use of any of the referred to information.

Any potential investor or participant, is advised to seek independent legal and/or financial advice before making any decisions regarding this type of investment.

The preceding information is considered confidential and is not to be copied, reproduced (in part or whole) without the express written permission of the author.

Introduction and principals behind bank debenture

Instruments

Bank Instruments, also referred to as collaterals or Bank Credit Instrument are issued by all Banks of the world in one form or another.

Generally, the collaterals are issued in the following form.

Type of Bank Debenture Instruments: Bank notes or, Bank Guarantee's.

This type of instruments is issued for a period of 10 or 20 years.

Also, Standby Letters of Credit are another form of Debenture Instrument, however, normally Standby Letters of Credit are only issued for a one year period.

What we hold are contracts with the following classifications and specifications.

  1. Type of instrument : Bank notes.

Term of issuance : 10 years plus 1 day.

Interest rate : 7.5% fixed, payable annually in arrears.

Menu of issuing banks: Top one hundred of the world with credit rating of A or better.

  1. Type of instrument: Bank notes.

Term of issuance: 20 years plus 1 day.

Interest rate: 7.5% fixed, payable annually in arrears.

Menu of issuing Banks: Top one hundred of the world with credit rating of A or better.

  1. Type of instrument: Bank notes.

Term of issuance: 10 years plus 1 day

Interest rate: 14% fixed, payable annually in arrears.

Menu of issuing Banks: Top one hundred of the world with credit rating of A or better.

  1. Type of instrument: Standby Letters of Credit

Term of issuance: 1 year plus 1 day

Interest rate : Yero percent

Menu of issuing Banks: Top one hundred of the world with credit rating of A or better.

The above mentioned Instruments are sold through contract holders.

They have the right to sell the Instruments on behalf of the U.S. Government and indirectly the eventual issuing Banks.

Fiduciary procedures

Step by step fiduciary proceedings

A Fiduciary Bank's role is purely to protect the interests of the entity of whom the Fiduciary Bank are contracted to.

For example:

The Fiduciary Bank is normally placed between the buyer of one commodity and the seller of that same commodity. This being based on a trading situation.

With regard to Bank Debenture Instruments, the process is much the same, the only difference being that the Bank Debenture Instrument replaces the commodity.

The vested interests of the entity contracting the Fiduciary Bank is primarily as follows:

Non circumvention and non disclosure of any party to the other and protection of any trading profits which arise from any transaction.

These being the main principals behind contracting a Fiduciary Bank.

The technical aspects of the procedures are as follows:

The Fiduciary Bank must always act on behalf of the client at all times.

The Fiduciary Bank will receive either funding or collateral confirmations commitments.

Below is an example of a typical transaction:

A conditional bank purchase order and a conditional SWIFT wire transmission, as per exhibits 1A and 1B, are provided.

These are known as Conditional Funding Instruments and would be transmitted to the Fiduciary Bank by an agreed and accepted bank form. This is normally by key tested telex, issued from a bank of the top 200 in the world.

Upon receipt into the account of the party initiating the transactions, the Fiduciary Bank must authenticate and validate the authenticity of the Funding Instrument.

How does the Fiduciary Bank authenticate such a Funding Instrument?

The Conditional Funding Instrument is issued by a certain bank.

This bank has certain officers who are authorized to sign all conditional Funding Instruments on behalf of the bank.

One way to authenticate the said Instrument is by checking the issuing banks authorized signatures through a bank book directory associated with this type of banking.

Providing the signatures on the Bank Funding Instruments match those of the ones listed in the bank directory, the instrument is then considered to be authentic.

Please note there are other methods of authentication which are internationally used and accepted.

Once the Instrument is considered to be authentic by the Fiduciary Bank, the Fiduciary Bank must issue an identical Funding Instrument to the collateral supplying bank.

Hence protecting the identity of the purchaser and also confirming the actual invoice amount as per specified in the contracts deposited.

For example:

  1. The Fiduciary Bank receives a Conditional Bank Purchase Order for the purchase of Standby Letters of Credit issued for a period of one year and one day, with an invoice price 85% of the face value (face value 100.000.000 US$).

  2. The invoice price of which is payable to the collateral suppliers is only 82.25% of face value. Therefore, the Fiduciary Bank would then have to issue a Conditional Funding Instrument to the Collateral supplying Bank in the amount of 82.25%.

  3. This leaves an average of 2.75% to be held in the account of the party to whom the Fiduciary Bank is contracted.

  4. On full completion of the transaction, the Fiduciary Bank would then deduct the agreed bank fee from the overage remaining in the client's account, but only when the collateral supplying bank are in receipt of the Collateral Funding Instrument...

Usage of corresponding banks

The reason for the implementation of a corresponding bank to front the transaction at hand is as follows:

Banks, when engaged to perform these types of transactions, tend to be very restrictive with regard to assisting the clients.

Logically, Banks of the world are involved in the discounting of their own Bank Debenture Instruments and obviously do not appreciate individuals transacting in this field.

Therefore, generally Banks do not undertake to perform these transactions on behalf of a client directly.

This brings us to the point where obviously without the usage of a well known international bank to act as our Fiduciary Bank, this leads to a situation which obstructs any further developments.

Therefore, the objective is to use a small private or commercial bank and in turn this bank would instruct one of their corresponding banks to confirm on their behalf. The private or commercial Bank would, in turn, take instructions from the account holders prior to any instructions being transmitted to the corresponding bank.

For example:

  1. Account(s) would be opened on behalf of the clients to lodge the said collateral contracts, this being in the private or commercial bank.

  2. The said contracts would, in turn be placed in an account held by the private/commercial bank in a corresponding bank.

  3. The private/commercial bank would then transmit instructions to the corresponding bank via key tested telex or another agreed form of bank to bank communication to confirm receipt of the said contracts. This communication also confirming on behalf of the private/commercial bank an approximation of a window time when the private/commercial bank was anticipating confirming the first of the Conditional Funding Instruments.

  4. In turn, the corresponding bank would receive, on behalf of the private/ commercial bank confirmation with full bank responsibility, a guarantee to deliver the said collateral against a Conditional Funding Instrument in the agreed form.

  5. Once received the corresponding bank would advise to the private/commercial bank what had been received into their account.

  6. In turn, the private/commercial bank would advise their account holders of what was received.

  7. The account holders would then instruct the private/commercial bank where to advise the availability of the said collateral and in turn, the private/commercial bank would instruct the corresponding bank.

  8. The corresponding bank, once the said confirmation was made to the Funding Bank, would then receive a Conditional Funding Instrument in the agreed form for the purchase of a specific Debenture Instrument.

  9. Once received by the corresponding bank, the corresponding bank again, always on behalf of the client (private/commercial bank), would authenticate the Conditional Funding Instrument.

  10. Once authenticated the corresponding bank must then issue a Conditional Funding Instrument in the identical format as received from the funding bank, the only difference being: The corresponding bank would receive the gross amount agreed for the purchase of the said Debenture Instrument. In turn, the corresponding bank would then issue the new Conditional Funding Instrument for the net amount as per the contracts lodged in the said banks.

For example:

The transaction consists of the purchase of Standby Letters of Credit in the amount of: 500.000.000.00 US$.

Agreed invoice price (gross) 86.25%
Net invoice price 82.25%

Trading differential: 4.00%

The corresponding bank would receive the initial Conditional Funding Instrument in the amount of 86.25% of face value. The corresponding bank would then issue to the collateral supplying bank a Conditional Funding Instrument in the net invoice amount of 82,25%.
The differential after all bank charges, as agreed, for both banks when deducted would be transferred to a parallel account opened in the corresponding bank for and on behalf of the clients who instruct the private/commercial bank.

Moving back to procedure:

  1. Once the collateral supplying bank receives the Conditional Funding Instrument, they will authenticate and validate the said Instrument, and in turn confirm the registration numbers, safe keeping receipts and any other applicable screening information relevant to the transaction. They will also submit an invoice for payment.

  2. In turn, once the corresponding bank receives the verifiable screening information, they in turn will advise to the bank who committed the Conditional Funding Instrument, the verifiable screening information, along with invoice for payment.

  3. The funding bank who receives the above stated, then proceeds to authenticate. Upon authentication, the Funding Bank will be requested to make payment as per the invoice, and then release funds.

Also arrangements will be made for the delivery of the hard copies by bank bonded courier. This being between banks only.

P.S. Please note all instructions will be given by the account holders, and the steps as indicated above will always be carried out on behalf of the client.

Collateral contracts

Please be advised of the following procedures regarding the placement and activation of the said collateral (contracts).

  1. A fiduciary agreement must be drawn between the Fiduciary Bank and the Contract holders.

  2. Opening of accounts to receive the Contracts.

  3. The Contracts will be lodged into one of the accounts provided.

  4. Upon placement of the Contracts into the account(s) provided, the fiduciary bank must acknowledge receipt of the Contracts along with an approximation of a window time of when the Fiduciary Bank anticipates transmitting the first of the Conditional Funding Instruments. (Bank purchase order).

  5. Upon receipt of point 4, the Collateral Confirming Bank, will acknowledge receipt of the above and confirm acceptance of the approximation of the window time to transmit the Conditional Funding Instrument, and further guarantee to deliver the required collaterals upon receipt of the said Funding Instrument.

  6. Upon receipt of point 5, by the Fiduciary Bank, instruction will be given to the Fiduciary Bank by the account holders to solicit the Funding Instruments to be confirmed to the Fiduciary Bank.

  7. Upon receipt of point 6, the Fiduciary Bank must then confirm the availability of the Conditional Funding Instruments to the Collateral Confirming Bank. This being once the initial Funding Instrument is validated and authenticated by the Fiduciary Bank.

  8. Once the said Funding Instrument is transmitted to the Collateral Confirming Bank, the Collateral Confirming Bank will transmit registration and cusip numbers to the Fiduciary Bank, this being for authentication.

  9. In turn the Fiduciary Bank would the confirm the registration numbers and cusips to the original Buyers Bank.

  10. Upon authentication by the Buyers Bank the said funds will be called for release by the Fiduciary Bank, in turn the said funds will be transmitted to the Collateral Confirming Bank.

Instruction will be given where hard copies of the Collateral will be delivered to Buyers Bank by bonded courier.

The said Instruments are discounted at various prices depending on the specifications of each of the issued instruments.

The reason for discounting the instruments is purely because of the volume which are purchased.

The minimum amount that can be purchased at one time is 100.000.000.00 (one hundred million) with rollovers to 500.000.000.00 (five hundred million) (United States Dollars).

Hence the major buyers of these Instruments are large Insurance companies, large corporations in the private sector, and in some cases Governments.

The Instruments are discounted at the following prices:

  1. Bank notes issued for a period of 10 years and one day, with interest coupons of 7.5% paid annually in arrears. (Herein after referred to as: BN 7.5/10). Invoice price 73% OF FACE VALUE.

  2. Bank notes issued for a period of 20 years and one day, with interest coupons of 7.5% paid annually in arrears. (Herein after referred to as: BN 7.5/20). Invoice price 63% OF FACE VALUE.

  3. Bank notes issued for a period of 10 years and one day, with interest coupons of 14% paid annually in arrears. (Herein after referred to as: BN 14/10). Invoice price 85% OF FACE VALUE.

  4. Standby Letters of Credit issued for a period of 1 year and one day, interest yero percent. (Herein after referred to as: SBLC's) Invoice price 82,25% OF FACE VALUE.
    Institutes, trusts, banks, and so forth purchase these Instruments for two main reasons:

  1. Investment

If an Insurance company purchases, say 500.000.000.00 US$ of SBLC's at a cost of say 85% of the face value. In order to receive the equivalent of 500.000.000.00 US$ in face value amount, the investor would only have to pay: 85% of 500.000.000.00 = 425.000.000.00 US$ thus giving an annual yield of more than 17% for the year long investment.

  1. Project funding

Large companies have required funding for various different projects for many years.

Until recently project funding in the normal conventional way was relatively simple for large corporations.

Purchase procedure

The reason: If a large corporation required a loan to commence the construction of a hotel.

Providing the lending source considered the hotel project to be viable, and the borrower had in the past a good track record with the funding institute, it was relatively easy to secure the required loan, not forgetting the project and possibly other assets had to be placed with the lending bank as collateral.

However, owing to the recent world recession, funding institutes, banks trusts, have adopted the attitude that only clients who can provide a very attractive project along with some form of bank Guarantee, would then be eligible for a loan.

Therefore, many private individuals who then approach their banks for the Guarantee, are rejected.

This leaves only two options:

  1. Wait until Lending conditions improve or change or:

  2. Buy a bank Guarantee.

At a discounted rate and then in turn use the bank Guarantee to collateralize a loan.

For example:

A client purchases a:  BN 7.5% / 10
Face value amount:  100.000.000.00 US$
Invoice price:  73.000.000.00 US$

Once the Guarantee is purchased at a cost of 73.000.000.00 US$, the client would then receive a Guarantee of 100.000.000.00 US$ with interest coupons of 7.5% p/a for a term of 10 years.

The client then confirms the Guarantee to a Funding Institute, along with a Viable Project, and subject to approval of the Project would then receive from the Funding Institute amount of money equivalent to the face value of the Guarantee.

For example:

Bank Guarantee:  amount: 100.000.000.00
Amount of Loan:  100.000.000.00
Less bank fees:  2%:  98.000.000.00
Cost to purchase Guarantee:  73%:  73.000.000.00

Differential between : Cost of Guarantee and loan amount 25.000.000.00
Overage:  25.000.000.00

If the above operation is performed in the mannerism as described above, then it would take four times the net amount received 4 X 25.000.000.00 to have sufficient funding for the proposed project.

All that is necessary is to repeat the process, (four times).

After the first operation was successfully completed, the client would re-invest in the same way as in the first place.

What happens if the client with the project does not have enough assets liquid to purchase the Guarantees required to commence with the operation as described.

A situation then arises of which through a fiduciary bank working with our group, would assist in the following way.

A project would be submitted for your approval, this being from the interested borrower.

Subject to approval by ourselves of the project we would proceed as follows: We would instruct our Fiduciary Bank to confirm to a Funding Institute Bank that collaterals can be provided as per the requirements of the Lending Institute

In turn, and upon receipt of this communication, the Lending Institute would the confirm to our Fiduciary Bank the terms and conditions of the agreed loan and proceed on a bank to bank basis to the conclusion of the loan.

For example:

Fiduciary bank confirms on behalf of the client that upon receipt of good, clean and clear funds, bank Guarantees issued by a bank from the top 100 banks of the world, would be available to collateralize a loan.

In turn the funding bank would then deposit funds in to the Fiduciary Bank conditionally to the delivery of the agreed bank Guarantee.

In turn the fiduciary bank would then confirm the availability of funds to the collateral supplying bank and purchase the bank Guarantee with the funds deposited by the Lending bank.

The bank Guarantees are then confirmed to the Lending Bank for authentication.

Upon authentication of the Guarantees the funds are automatically released and are no longer conditional.

The procedure is worked on a back to back bases, for example: What ever conditional funding instrument is confirmed to the Fiduciary bank, the Fiduciary bank issue the identical Funding Instrument to the collateral issuing bank. And so in, the Fiduciary bank perform all movements on a simultaneous bases.

The cost of the bank Guarantee for this operation is:  73% of loan amount.

The loan amount would be:  100% of the face value of the bank Guarantee.

Less bank charges:  2%

Total loan:  98% of face value of the Guarantee provided.

Again we then take the differential between the cost of the actual bank Guarantee and the net loan amount.

Cost of Guarantee:  73%

Loan amount:  98%

Differential:  25%

Again this process is repeated four times to obtain the full loan amount.

Upon completion of the first cycle as explained above, the differential (25%) is held in trust on our behalf by our Fiduciary bank.

This being until such time as the full cycle of operations is complete.

Upon completion, funds for the proposed project will be administered by our Fiduciary Bank and on our behalf as mandatee's for the subsequent trusts and funding Institutes funding for the project would the be administered on the bases of stage payment being made concurrent to the stage and development of the project.

The difference between this format of project funding and the first, is that the first example was based on trading.

The prospective borrower actually buys the Bank Guarantee at a discounted rate, and then use the full benefit of having a Bank Guarantee with a higher face value.

However, in the second example where the borrower does not have the financial resources to purchase the Guarantee with their own funds, then the 2nd example comes into effect.

Therefore, the Lending Institute secure their full loan amount from the completion of the first stage.

A separate loan agreement is the drawn between the borrower and ourselves as mandatee's for the Funding Institutes to administer the funding for the proposed project at the same time agreements are finalized regarding agreeing terms and conditions of interest and capital repayment of the loan.

Further, a first charge would be taken on the project as a second security.

The same formal applies to buy and sell operations with regards to the disbursement of any trading overage, the only two differences being:

  1. No project is required.

  2. The trading differential is smaller, therefore making large quantities of funding available to make the differentials to the amount of the first example. One final point with regards to the straight forward buy and sell operations.

There are several reasons why the Debenture Instruments we have available are in demand.

  1. Very good discounted rates for investment purposes, and excellent return and annual yield for a U.S. Dollar investment.

  2. Portfolio Enhancement
    E.G. Boosts stocks and shares of the corporation as well as asset base, if integrated into the portfolio of the purchasing corporation.

  3. Purchase or Bank Debenture Instrument for re-sale in secondary market. (Please refer to Secondary Market explanation).

  4. Collateraliyation for eventual project funding.

Introduction to Secondary Market

The Secondary Market, as it is commonly referred, is a market made of small private investors, banks, and trusts, plus security and brokerage houses.

Owing to different concepts adopted by institutes, banks and private sector; investors create what is known as the Secondary Market.

What does the Secondary Market consist of?

Take current interest rates for depositors based in the United States.

The current interest rate is currently around 3% - 4% per annum approx.
Many small investors within the United States have liquid assets between 5.000.000.00 and 10.000.000.00 US$.

Taking the current depository rates and the current inflation rate, it does not make good reading concerning any short term investment plan.

Repo programmes - they function in the following way:

Entities purchase Standby Letters of Credit at a discounted rate of: 85% of the face value. Owing to the low investment returns in the United States at this moment, investors whom have the possibility to yield 8% on a US$ investment tend to be namy.

It should be remembered that although the depository rate is between 3% and 4%, we must take into consideration the fact that American banks are not considered to be the world's strongest banks.

Therefore, for long term deposits of one year, investors consider a Standby Letter of Credit issued from a top 100 world bank as a secure investment: also, for example U.S. treasury bonds but however, these bonds yield a much lower rate of return.

Therefore entities purchase the Standby Letter of Credit at a discounted rate of 85% of the face value.

This process is very similar to 'Bridging?

Following purchase, they then deliver the Standby Letters of Credit to the trust who administer the programme and sell to the trust on behalf of the trust's and bank's clients the Standby Letters of Credit at a price of 90% of their face value.

The investor receives 8% and the bank and trust receive 2% administration fees, once again the process is repeated and repeated.

Buy and sell, buy and sell.

To summarize:

The initial investor is an entity that is an investor trader in the money markets, familiar with all aspects of the process involved.

The secondary market are investors who are protected by the fund manager of the trust/banks and very content with the secure investment of virtually double current investment yields currently available throughout the U.S.A.

The process can be rolled as much as three times per week, giving the major benefit to the initial investor, hence the reason for the demand of Debenture Instruments and the volumes at which they are required.

Also, other Debentures are repo on the same basis, not to the same demand.
EXHIBIT 1 A
(Example Only)
(To be Approved by Buyer's Bank)


IRREVOCABLE CONDITIONAL BANK PURCHASE ORDER

To:  Account Holder
C/O:  Seller's Bank
Address:
City/State: 
Attention:  Bank Officer
Account Title:  Client Name
Account Number:
Routing Number:  (
Telex Number / AB:  (Include Appropirate Information)
Swift Number:  (
Telefax Number:
Subject:  Irrevocable Conditional Purchase Order

From:  Buyer's Bank
Officer:
Telex Number / AB:
Swift Number:
Telefax Number:

Issue Date:
Expiration:

Codes:

Contract Number:
Transaction Code:
Security Code:
Buyer's Transaction Code:
Buyer's Security Code:

Purchase Order Number

 

Dear Sirs,

We, ............. (Name of Bank)............., hereby present with full bank responsibility, our irrevocable, divisible, assignable and transferable Purchase Order in your favour for the account of .....................(Name of Seller).......... in the amount of ................. Million ($...................................) United States Dollars (face value) with ...................Million ($...................................) United States Dollars being the first Tranche for the purchase or authenticated Bank Instruments as described below.

The irrevocable Bank Purchase Order is a binding, fully performed due bill and is immediately callable on .............. (Remitting Bank)..................... for cash payment against your certified invoice and bank-issued callable custodial safekeeping receipt containing verifiable "cusip" numbers for the following Bank Instruments:

PURCHASE CONDITIONS:

FORMAT: Instruments shall be issued in an international format and conform in all respects with the uniform customs and practices for documentary credits as set forth by the International Chamber of Commerce, Publication 400 (1983), latest edition. The instruments are to be non callable prior to maturity and unconditionally guaranteed by the issuing bank as to the repayment of principal.

  1. Type of Bank Instruments:

  2. Rate of Interest:

  3. Term to Maturity:

  4. Denomination:

  5. Currency: United States Dollars

  6. Purchase Invoice Price:

  7. Total Purchase Amount: ........................ Million United States Dollars ($..........................) plus extentions as agreed by principal.

  8. Initial Tranche:  ......................... Million United States Dollars ($.............................)

  9. Tranche Schedule:  To be agreed by Parties

  10. Issuing Banks:  Top One Hundred World Banks, with normal exclusions.

SPECIAL CONDITIONS:

  1. This Bank Purchase Order is irrevocable, devisable, assignable and transferable and may be paid in increments corresponding to the purchase and delivery of each Bank Instruments in accordance herewith.

  2. A condition of this Purchase Order is that within one (1) international banking day of your receipt and verification of this bank instrument, ..... (Name of Seller's Bank) ....... shall deliver by Key-tested Telex to this bank and our Client's account number ........................................, your irrevocable commitment with full bank responsibility to provide the bank instrument(s) for purchase, and also your certified Payment Invoice containing "registration"/"cusip" numbers and collateral release codes which correspond with your bank issued, callable custodial safekeeping receipts.

  3. Within eight (8) banking hours and subject to our verification and authentication, we shall make payment in full against the invoice, by S.W.I.F.T. good, clean and clear funds to your Client's account ....................................................................................... .

  4. Within Seven (7) international banking days of payment, authentic Bank Instruments shall be physically delivered to this bank^for deposit in our Client's account or other accounts as may be designated (specify any particular delivery instructions).

  5. It is agreed and understood that the delivery of the above described Bank Instruments completes the total obligation of ...............................(Name of Seller)..................... and your Client.

  6. All communication between Banks and all documents relating to this transaction shall clearly reference the codes designated above, which codes shall not be altered or changed for the duration of this Bank Instrument.

  7. This is an operating Bank Instrument and is subject to uniform commercial codes as it relates to Bank Credit Instruments.

  8. This irrevocable, divisable, assignable, and transferable Purchase Order is valid for ............... (specific time period) ...................... or until the ............... day of ..................... 1993 at ............................... o'clok (am, pm) (time yone).

  9. Upon receipt of your bank invoice as provided under special condition two (2), this Bank Purchase Order shall remain valid, binding and in full force until the completion of this purchase transaction, including succeeding rollovers and extensions.

  10. We herewith explicitly authorize you to release the Beneficiary account holder a copy of this Purchase Order.

 

yours Truly,

 

Name of Buyer's Bank

 

/S/ AUTHORIZED OFFICER /S/ AUTHORIZED OFFICER
Name and Title Name and Title

(Bank Seal)
EXHIBIT 1 B
SPECIMEN TEXT
(To be approved by Buyer's Bank)
CONDITIONAL CASH BACKED SWIFT WIRE

MUST BE FIELD 72 WITH HARD COPY TO ACCOUNT HOLDER

DATE:
TO:
FROM:
SUBJECT:
REFERENCE:
VALUE DATE AND TIME:

WE, (BUYER'S BANK) HEREBY PRESENT OUR IRREVOCABLE, ASSIGNABLE, TRANSFERABLE, AND CALLABLE CASH BACKED SWIFT WIRE IN YOUR FAVOUR IN THE ACCOUNT OF (NAME OF ACCOUNT) IN THE AMOUNT OF USD (AMOUNT IN WORDS AND FIGURES) UNITED STATES DOLLARS, FOR THE PURCHASE OF AUTHENTICATED BANK INSTRUMENTS AS HEREIN CONTAINED By VERIFICATION OF REGISTRATION/ CUSIP NUMBERS CORRESPONDING WITH THE ISSUED CALLABLE CUSTODIAL SAFEKEEPING RECEIPTS WITH PRINCIPAL DELIVERY TO BE MADE THEREAFTER.

WE HEREBY CONFIRM THAT THE FUNDS ARE CLEAN, CLEAR AND OF NON-CRIMINAL ORIGIN AND ARE FREE FROM A LEGAL SOURCE.

THIS IRREVOCABLE SWIFT WIRE IS A BINDING FULLY PERFORMED DUE BILL AND IS IMMEDIATELY CALLABLE ON (NAME OF BANK WITH COMPLETE BANK CO-ORDINATES) FOR CASH PAYMENT AGAINST THE INVOICE FOR THE PURCHASE AND DELIVERY OF THE FOLLOWING BANK INSTRUMENTS AND BENEFICIARY LISTED BELOW:

NAME OF BENEFICIARY:
INSTRUMENT:
INTEREST RATE:

TERM:
AGE OF ISSUE:
FACE AMOUNT OF PURCHASE:

PURCHASE PRICE:
ISSUING BANKS:
DENOMINATIONS:
FIRST TRANCHE:

IT IS UNDERSTOOD AND AGREED THAT THE DELIVERY AND AUTHENTICATION OF THE ABOVE DESCRIBED BANK INSTRUMENTS CONCLUDES THE TOTAL OBLIGATION OF (NAME OF SELLER) AND PAYMENT SHALL BE MADE AS INDICATED ABOVE IN CASH By SWIFT WIRE/LEDGER TRANSFER.

THE IRREVOCABLE, DIVISABLE, ASSIGNABLE, TRANSFERABLE AND CALLABLE SWIFT WIRE TRANSFER IS VALID UNTIL (THE TIME IN HOURS) ON THE ................ DAY OF ....................., 1993, CENTRAL EUROPEAN TIME.

THIS IS AN OPERATING INSTRUMENT AND IS SUBJECT TO THE UNIFORM COMMERCIAL CODE AS IT RELATES TO BANK CREDIT INSTRUMENTS.

 

....................................................................................
BANK OFFICER SIGNATURE AND TITLE

 

....................................................................................
BANK OFFICER SIGNATURE AND TITLE

 

(Bank Seal)

Please note that you should consult with your financial and legal advisors before using the information on this web site. We provide the information in good faith but as the applicable laws may differ from country to country, we are not responsible for any actions because of this information.

EagleTraders.com does not offer bank debenture trading programs.

Recommended further reading:
Bank Promissory Notes, Bank Debentures, Medium Term Notes and High Yield Investment Programs
An Introduction to Bank Debenture Trading Programs
High yield investment: Bank debentures trading program