Basic Financial

Scam

A trader is a person who buys and sells securities, financial instruments, loans, commodities or other assets either from his own account or on behalf of others or both.  A trader may be a broker, a dealer, or a speculator.  Depending on the type of trading being done, a license may be required even if the trader is using only his own funds; however, if other people's money is at stake a license to trade is definitely required. In a fraudulent investment scheme, the Trader allegedly possesses incredible financial power, agreements with internationally recognized banks, contracts with private investment trusts and and investment houses, and the ability to make enormous profits from modest investments.  The investor is never, ever allowed to see the Trader's contracts as it would "compromise" the Trader.

 

Additionally, during the persuasion phase of a fraudulent investment scheme the victim is distracted from asking to see any authorizations whatsoever.  Financial con-artists (grifters) wrap their scheme with an aura of such secrecy, mystery, and exclusivity that the victim feels he has been granted a rare privilege by having been invited to join the investment pool.  He will not do anything to rock the boat.  If the victim is willing to invest extremely large amounts of cash or securities and insists on seeing a license, a phony one may be produced but again the victim is distracted from following up with outside verification.

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Fraudsters frequently use a blocked or reserved funds letter to quell investor worries, but the presence of this term should alert consumers to a possible scam. A blocked funds letter has some legitimate uses, but not in the banking sector. Investors should look for other signs of a scam, such as unusual terms or promises, to identify a fraudulent opportunity.

 

Legitimate Use : Governments and banks issue a blocked funds letter to stop the transfer of money out of a financial institution, but rarely does an individual deal with blocked funds. For instance, a government may block funds for political reasons, such as when the country goes to war with another country or during emergencies. A court may block funds because of the account owner's death or criminal activity. Some countries block foreign currency exchanges to control the value of their currency. Brokers, usually those outside of the U.S. and Europe, can legally trade in blocked funds.

 

Prime Bank Fraud : Con artists sometimes use a blocked funds letter to perpetrate investment fraud. In a typical scam, the fraudster claims he deals in a secret, highly lucrative and low risk market called "prime bank guarantees," or some other legitimate sounding security. The scam artist asks the initial victim to put money in a bank account to prove he has the available funds -- often in the millions of dollars. The fraudster then asks the victim to request a blocked funds letter from the bank, which requires the money stay in the account for at least a year, as proof of his ability to fund the investment. The bank usually agrees to issue this letter to please a valued customer, and the victim sees no risk because he is the only person on the account. The con artist uses the blocked funds letter to convince other victims to join him in a "surefire" investment.

 

The fraudster runs away with investor money and asks the initial victim for a trading fee of several thousand dollars. The first victim usually worries so much about the large amount of money in the bank account that he agrees to pay this fee. After weeks of waiting, the scam artist claims some bogus violation by the first victim that violates the trade and forfeits the fee. Tips: Investment fraud schemes have several names and buzzwords attached to them. For example, the scam artist may call the investment opportunity a high-yield trading or roll program, standby letter of credit or International Monetary Fund Backed Security. The scheme may have a shadowy figure leading the investment and faulty documentation, which might contain some legitimate information to further fool the investor.  

 

SWIFT MT-103 (Field 23)

 

SWIFT is a closed, private telecoms network whose subscribers are banks, merchant banks, securities houses and other qualified financial institutions. Banks send messages to one another on the SWIFT system using formats known as MTs (Message Types) numbered from MT100 to MT999, each for a different purpose.MT103 is the format banks use when they execute what is known to a layman as a wire transfer, cable transfer, funds transfer, telegraphic transfer or SWIFT transfer.

 

Suppose A has an account with Bank X and he needs to transfer money to B whose account is with Bank Y in another country. A goes to Bank X, fills out a remittance form with all particulars. Bank X debits A’s account and sends a SWIFT MT103 to Bank Y. Bank Y debits Bank X and credits B’s account and advises B that it has received a remittance. That is all there is to MT103. Nobody who does not work in the telex room of a bank needs to know any more than that. MT103 is a definite, authenticated, unconditional transfer of funds. In the above example Bank Y must credit B’s account, nothing more nothing less. There is no such thing as a Conditional MT103. It's another broker speak. 

 

"Field 23 - Instruction Code" is where the remitting bank (at the request of the remitter) puts in a simple code instructing the beneficiary's bank how to effect the payment, such as "Credit Account under Advice", "Telephone beneficiary on receipt", and such like. MT103 is a straight-through processing mechanism requiring very little manual intervention, except in simple tasks like above. 

 

MT103 CANNOT BE CONDITIONAL. FUNDS SENT WILL BE CREDITED TO THE BENEFICIARY. You cannot send an MT103 with a condition that the beneficiary's bank must receive, say certain documents, from the beneficiary before crediting his account. Such a request will be rejected by the remitting bank, and if sent in Field 23 (which allows for only a few standard codes) will be rejected and ignored by the beneficiary's bank who will credit the beneficiary's account anyway. Transactions that involve the exchange of money for documents are documentary collections (D/A, D/P etc.) and are processed in other ways, or under Documentary Letters of Credit. Different and specific SWIFT Message Types are designed for them. Banks are banks, they are not lawyers or trust companies. 

 

PRE-ADVISE MT103?  Never heard of a feature in SWIFT MT103 which can create a Pre-Advice, or to allow for a Pre-Advice to suspend the funds transfer pending certain event or condition to be met, although within the MT103 it could includes a field (this field is definitely not Field 23) which can contain up to 9000 characters that one ordering customer may want to pass on to a beneficiary customer in another structured format, such as EDIFACT or ANSI. That does not mean the funds are not transferred - by the time the message is sent, the 'straight-through processing' of the receiving bank of the MT103 would credit the beneficiary's account. 

 

 

 

Private placement : solution

 

The one constant in the life of your small business will be the need for a cash infusion to jump start sales, expand into new markets, or continue to sustain growth. While there are a multitude of financing sources of funding available to small business owners, each source has its limitations and requirements. For instance, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. Private placements are an attractive alternative for growing companies.

 

What is Private Placement? Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement.

 

According to Thompson Financial, over 416 billion was issued in the private placement market for 2002. As good as it sounds, the majority of those dollars came from pension funds, investment pools, banks and insurance companies amounting to just over 2,000 deals. However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public.

 

Benefits of Private Placement: High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.

Investors are more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.

Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).

Quicker form of raising money than usual venture capital markets.

 

Who is a Candidate for Private Stock Offerings? The ideal small business candidate is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

 

Where to Find Private Placements? The money from private placements will come from accredited investors defined by the SEC Rule 501 under Regulation D as:

an individual earning 200k per year.

a household with income of $300K per year or having a net worth over $1M.

or venture funds, some banks and other institutions.

Connect with bankers, attorneys, and accountants who can network your small business with a private investor.

 

What is Required for Private Placements?

A. sound business plan

B. private placement memorandum (PPM) disclosing the full facts of the investment and business

C. law firm or lawyer experienced in private placements.

With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

 

 

 

 

Notes

 

Although the term notes generally designates debt securities with an issued maturity of 1 year or less, medium-term notes (MTNs) are debt securities with maturities that range from 9 months to 30 years or longer. The Walt Disney Company issued a note with a term of 100 years! So notes is a misnomer, but it did describe them more accurately when General Motors Acceptance Corporation (GMAC) first issued them in the 1970's as notes with terms greater than commercial paper, but less than most bonds, so that GMAC could match the terms of the notes with its auto loans.

However, MTNs really didn't take off until SEC Rule 415 was enacted in March, 1982, that allowed a shelf-registration for securities. Under a shelf registration, new securities could be sold for up to 2 years without requiring a new SEC registration for each issue. This greatly reduced the cost of issuing MTNs, since many of these issues were small offerings that were made intermittently over time to match the needs of the issuer. Today, they have evolved into highly customizable debt securities that serve the special needs of both issuer and investor, and serves as a major source of funding for corporations, government agencies, institutions, and countries. Most MTNs are noncallable, unsecured, senior debt with fixed rates and investment grade ratings.

The main benefit of MTNs over bonds to both issuers and investors is the flexibility of its structure and documentation. MTNs can match MTN terms with liabilities of the issuer. MTNs can have floating or fixed rates; formulas that tie return to equity, commodity, or currency prices. They can even have calls, puts, other options built into them. They can be issued as zero coupons, or have step-up or step-down coupons, or inverse floating rates; or be denominated in a foreign currency, or pay interest based on an index. Interest payments can be monthly, quarterly, or semiannually.

Asset-backed MTNs could be collateralized by mortgages, equipment trust certificates, amortizing notes issued by leasing companies, or subordinated notes issued by bank holding companies. However, most MTNs are issued based on the creditworthiness of the issuer.

MTNs Compared To Bonds. The advantage of medium-term notes is simple: if an issuer can issue a bond that has the specific characteristics that an investor would want, then the issuer can pay a lower yield by providing those exact characteristics. However, this customization also fragments the market, where each part of the market is smaller than the whole. It is also more difficult to forecast demand for these specialized products, which is why MTNs are issued as a best-efforts underwriting, since most MTNs are sold in small amounts, either continuously or intermittently. The flexibility of MTNs also allows the issuer to take advantage of temporary market opportunities, since a new MTN with specific characteristics can be issued quickly.

MTNs also make reverse inquiries feasible. A reverse inquiry is a request by an investor for a security with specific characteristics that is not currently on the market. For instance, an investor could ask for a specific note that matures just when the investor has to pay a large expense or have a floating rate interest that is paid quarterly.

MTNs also allow discreet funding, since only the issuer, agent, and investor need to know about a transaction. Thus, the issuer can avoid a large public offering that may indicate that the company is financially distressed. Although medium-term notes have many advantages, the traditional method of bond underwriting still has its advantages. It is more cost effective to underwrite a large single offering, and the investment bank can make a firm commitment by buying the entire issue from the issuer and then sell it to the public. In this case, the risk of selling the entire issue is transferred from the issuer to the investment bank. Also, bonds from a large offering have greater liquidity in the secondary bond market.

The Medium Term Note Program. To create medium-term notes in the United States, a corporation, institution, or a government entity files a shelf registration with the SEC, typically for $100 million to $1 billion of securities. After the initial application is approved, the issuer files a general prospectus describing the MTN. The registration includes a list of investment banks—typically 2 to 4—to distribute the notes to investors.

The issuer's agents post offering rates with various maturities. Usually yields are expressed as a spread above another fundamental rate, such as the rate for Treasuries or the LIBOR. However, the issuer varies the spread according to its needs. For instance, if the issuer wants mostly 5 year notes, it will give those notes a higher spread, and less desirable notes, a lesser spread. As the need for a particular maturity lessens, the issuer will lower the spread of the notes for that maturity, thereby lessening the demand.

To issue medium term notes, most issuers use the services of investment banks, which charge an underwriting spread plus a fee for creating the structured products upon which many notes were based. Since about 2000, investment banks were also issuing their own notes based on their own credit.

Structured MTNs. The main advantage of medium-term notes is their flexibility for both issuer and investor. This flexibility can be extended by creating structured MTNs—combining MTNs with derivatives to satisfy the specific needs of the investor while reducing risk for the issuer.

For instance, through a reverse inquiry, an MTN issuer may want to borrow from an investor who will accept a lower yield in exchange for a floating interest rate, but the issuer doesn't want to assume interest rate risk, so the issuer may arrange a plain-vanilla interest rate swap with a counterparty, that allows the issuer to pay a fixed rate of interest to the counterparty in exchange for a floating rate payment, usually based on a spread above some key interest rate, such as the LIBOR. However, the issuer will not do this unless the investor accepts a yield low enough for the issuer to cover the costs of creating the structured notes, since these products have greater accounting and legal costs, as well as the costs to assess and monitor the credit of the swap counterparty.

Sometimes structured MTNs are created to take advantage of a temporary market condition. Investment bankers may know of clients with specific needs that can be met by a structured MTN. The bankers will contact their clients with their proposal. If the clients agree, the bankers can contact an issuer of an MTN who would accept the proposal.

Some of the unusual properties of structured MTNs include: floating rates based as a spread on some key interest rate, such as the prime rate or the LIBOR rate; an inverse-floating rate that moves inversely to a key interest rate; LIBOR differential notes that pays the spread above the LIBOR in 2 different currencies; dual-currency MTNs that pay interest in 1 currency and principal in another.

There are also structured MTNs that pay interest according to some index, such as an equity index or commodity index. Indeed, the new exchange traded notes being offered by some investment banks are structured MTNs that are traded on stock exchanges, just like stock. Currently, most of these notes pay an interest rate commensurate with an equity or commodity index minus fees that range from 0.4% to 1%.

Medium Term Notes Risk. About 1/3 of MTNs issued offer partial or complete principal protection. However, as with bonds, the principal protection is only as good as the creditworthiness of the issuer. If the issuer declares bankruptcy, then note holders will be unsecured creditors, and secondary market prices for the MTNs will decline substantially.

SWIFT

 

Many people talk about 'SWIFT MT 799 "platform”. That meant that they have a formula that uses SWIFT 799 to obtain credit facilities from Bank. From this facility they will enter the" PPP ". I will not discuss about PPP. I just want you know about SWIFT 799. Then I hope you can judge for yourself, whether SWIFT platform 799 is true or false.

SWIFT is an acronym which stands for ‘Society for Worldwide Interbank Financial Telecommunications’. Formed in 1973, SWIFT is a Belgian creation, and its main offices are still in Belgium to this day. SWIFT was formed in response to a growing need for an internationally sound communications network that could facilitate business transactions across borders effectively, quickly, and securely. When SWIFT was first formed it linked 239 banks in fifteen different countries. Now, SWIFT has grown to be a world wide organization which facilitates communications between banks, corporations, and securities institutions. SWIFT communications are now the global standard for international banking transactions, and as such are utilized millions of times daily. It is estimated that more than eight thousand banking institutions currently use the SWIFT messaging system for their transactions, and SWIFT systems are now in place in two hundred and eight countries.

SWIFT’s success has primarily been the result of understanding and responding to the unique demands of a global market. The SWIFT system utilizes standardized messages, which increase efficiency, and is fully automated, which means that the days of lost messages are all but over. International transactions depend on security, reliability, and accuracy. The SWIFT system provides all these elements. In addition to providing a safe and secure messaging system for the financial world, SWIFT also provides opportunities for companies to build revenue streams, and offers a wide range of services outside the messaging field. Some of these services include directories, market information, and market solutions.

SWIFT Codes are actually very easy to understand, in spite of their unfathomable appearance. The ‘MT’ at the beginning of the code stands for ‘Message Type’, and the number indicates one of the many standardized message formats which comprise the SWIFT messaging system.

The MT-799 is a free format SWIFT message type in which a banking institution confirms that funds are in place to cover a potential trade. This can, on occasion, be used as an irrevocable undertaking, depending on the language used in the MT-799, but is not a promise to pay or any form of bank guarantee in its standard format. The function of the MT-799 is simply to assure the seller that the buyer does have the necessary funds to complete the trade. The MT-799 is usually issued before letter of credit or bank guarantee is issued. An MT-799 is an automated message sent electronically from one bank to another, so you won’t really ‘see’ an MT-799 at all. The paperwork associated with an MT-799 will vary from bank to bank, though most banks follow a similar format.

In the U.S. and in some Asian nations, MT 760 are not allowed to be sent by any financial institution. So, the way around that is for the investor to obtain a cash back standby letter of credit and then, have the issuing bank send a SWIFT MT 720 under full banking responsibility. So, with that being said, whoever tells you that a "trader" can start trading as soon as the investor's bank send to the trader's bank a SWIFT MT 799, then that would be a sign that you are in contact with a broker that has no clue of it takes to get the trading transaction going. So what do you think?

Bond

Normally, a bond is a very simple investment instrument. It pays interest until expiration and has a single, fixed lifespan. It is simple, plain and safe. The callable bond, on the other hand, is the exciting, slightly dangerous cousin of the regular bond. Callable bonds have a "double-life", and as such they are more complex than a normal bond and require more attention from an investor. In this article we'll look at the differences between regular bonds and callable bonds, and then explore whether callable bonds are right for your investment portfolio. The Double Life Callable bonds have two potential life spans, one ending at the original maturity datem and the other at the "callable date."

At the callable date, the issuer may "recall" the bonds from its investors. This simply means the issuer retires (or pays off) the bond by returning the investors' money. Whether or not this occurs is a factor of the interest rate environment. Consider the example of a 30-year callable bond issued with a coupon of 7% that is callable after five years. Assume that five years later interest rates for new 30-year bonds are 5%. In this instance, the issuer would recall the bonds because the debt could be refinanced at a lower interest rate. Conversely, if rates moved to 10% the issuer would do nothing, as the bond is relatively cheap compared to market rates.

Essentially callable bonds represent a normal bond, but with an embedded "call option" This option is implicitly sold to the issuer by the investor, and entitles the issuer to retire the bonds after a certain point in time. Put simply, the issuer has the right to "call away" the bonds from the investor, hence the term callable bond. This option introduces uncertainty to the lifespan of the bond.

Callable Compensation. To compensate investors for this uncertainty, an issuer will pay a slightly higher interest rate than would be necessary for a similar, but non-callable bond. Additionally, issuers may offer bonds that are callable at a price in excess of the original par value. For example, the bond may be issued at a par value of $1,000, but be called away at a par value of $1,050. The issuer's cost takes the form of overall higher interest costs, and the investor's benefit is overall higher interest received.

Despite the higher cost to issuers and increased risk to investors, these bonds can be very attractive to either party. Investors like them because they give a higher-than-normal rate of return, at least until the bonds are called away. Conversely, callable bonds are attractive to issuers because they allow them to reduce interest costs at a future date should rates decrease. Moreover, they serve an important purpose to financial markets by creating opportunities for companies and individuals to act upon their interest-rate expectations.

Look Before You Leap. Before jumping into an investment in a callable bond, an investor must understand that these instruments introduce a new set of risk factors and considerations over and above those of normal bonds. Understanding the difference between yield to maturity(YTM) and yield to call (YTC) is the first step in this regard.

Normal bonds are quoted based on their YTM, which is the expected yield of the bond's interest payments and eventual return of capital. The YTC is similar, but only takes into account the expected rate of return should the bonds get called. The risk that a bond may be called away introduces another significant risk for investors - reinvestment risk.

Reinvestment risk, though simple to understand, is profound in its implications. Example - Reinvestment Risk : Consider two, 30-year bonds issued by equally credit-worthy firms. Assume Firm A issues a normal bond with a YTM of 7%, and Firm B issues a callable bond with a YTM of 7.5% and a YTC of 8%. on the surface, Firm B's callable bond seems most attractive due to the higher YTM and YTC.

Now, assume interest rates fall in five years so that Firm B could issue a normal 30-year bond at only 3%. What would the firm do? It would recall its bonds and issue new bonds at the lower interest rate. People that invested in Firm B's callable bonds would now be forced to reinvest their capital at much lower interest rates. In this example, they would likely have been better off buying Firm A's normal bond and holding it for 30 years. on the other hand, if rates stayed the same or increased, the investor would be better off with Firm B's callable bond.

In addition to reinvestment-rate risk, investors must also understand that market prices for callable bonds behave differently than normal bonds. Typically, as rates decrease bond prices increase, but this is not the case for callable bonds. This phenomenon is called "price compression" and is an integral aspect of how callable bonds behave. Since normal bonds have a fixed lifespan, investors can assume interest payments will continue until maturity and appropriately value those payments. Therefore, as rates fall, interest payments become more valuable over time and the price of the bond goes up.

However, since a callable bond can be called away, those future interest payments are uncertain. So, the more interest rates fall, the less likely those future interest payments become, as the likelihood the issuer will call the bond increases. Therefore, upside price appreciation is generally limited for callable bonds, which is another trade-off for receiving a higher-than-normal interest rate from the issuer.

Good Addition to the Portfolio? As is the case with any investment instrument, callable bonds have a place within adiversified portfolio. However, investors must keep in mind their unique qualities and form appropriate expectations. There is no free lunch, and the higher interest payments received for a callable bond come with the price of reinvestment-rate risk and diminished price-appreciation potential. However, these risks are related to decreases in interest rates and make callable bonds one of many tools for investors to express their tactical views on financial markets.).

Betting on Interest Rates. Effective tactical use of callable bonds depends on one's view of future interest rates. Keep in mind that a callable bond is composed of two primary components, a normal bond and an embedded call option on interest rates. As the purchaser of a bond, you are essentially betting that interest rates will remain the same or increase. If this happens, you would receive the benefit of a higher-than-normal interest rate throughout the life of the bond, as the issuer would never have an opportunity to recall the bonds and re-issue debt at a lower rate.

Conversely, if rates fall, your bond will appreciate less in value than a normal bond and might even be called away. Should this happen, you would have benefited in the short term from a higher interest rate, but would then be forced to reinvest your assets at the lower prevailing rates. As a general rule of thumb in investing it's best to diversify your assets as much as possible. Callable bonds offer one tool to marginally enhance the rate of return over your overall fixed-income portfolio, but they do so with additional risk and represent a bet against lower interest rates. Those appealing short-term yields, can end up costing you in the long run.

Know about the rule

Many people think about financial engineering is something simple. They read the information; they know but do not understand. For example, there are clients saying that he got the credit facility from the bank but for that he needed a bank guarantee. When I asked about evident of the bank's facility, it was just like a notice from the bank. The letter from the bank normally gives to anyone who had become customers of the bank. Then clients require BG / SBLC for lease. He was so sure it can repay their loans and at the same time securing bank guarantees from any risk. Strategy is to enter the private Placement Program.

There are two mistakes made by these clients as a result of lack of understanding of credit facilities and lease instrument

Credit facility
Banks do not give loans based on collateral but based on project feasibility. Bank is in charge of the development agent to develop your business. Necessary collateral after knowing all about the feasibility of the project and declared eligible to be funded. When clients were asked to provide collateral in the form of bank instrument is not difficult for banks to know that the bank's instruments cannot be tied up as collateral. Why? There standards procedure in the banking system to tie bank instrument securities. Namely through the confirmation from the correspondent bank and ask for issuing bank confirmed payment when due date. That means there will be a commitment between the bank’s to ensure everything, clean and clear. Leased instruments will not be able to pass this system So the leased instrument is a big mistake if you aim to get easy bank credit facility. WHY ?

When you see a contract to lease a bank instrument, you will notice that there are no representations or warranties made by the providers or brokers. This allows them to block an instrument in your favor with restrictions, and if you can’t use it for anything, it’s your loss. Even though they may have to “deliver” the instrument via SWIFT before the money is released from Escrow, there is no guarantee that this instrument will be delivered properly, or that it will still be applicable to the opportunity you were using it for. In essence, you are taking a BIG gamble, and if the provider of the loan, service, or private placement program doesn’t perform, (which is usually the case) then you are out the full fee.

Private placement
In Private Placement Investments, the use of Leased or Borrowed funds is forbidden. This is at least the case in the Private Placements Investments that deal with Medium Term Notes or any of them that deal with the Private Placement Trading of notes. The reason that you cannot use borrowed or leased funds and or instruments, in the private placement investments is because in Private Placement Investing they source the funds. If you were allowed to use Leased Instruments for example, everyone and their family would be investing in this highly exclusive wholesale side of the investment world, also known as Private Placement Investing. Private Placement Investing, whether you are talking pre IPO or Institutional Buy/Sell Contracts, is just that; Private. With it being Private, it is everything Private. Private Equity, Private Contracts, Private Disclosures and Private confidentiality clauses. It makes complete sense if you really sit back and analyze the whole picture

one factor in the whole picture is that it is Private Equity in these Private Placement Investments, or Private Placement Trading. The financial institutions are not allowed to do it amongst themselves, or they would just keep it as a higher financial tool amongst themselves. Being that they are not allowed to do it amongst themselves, which also makes complete sense, they need deposits on their books to be allowed to loan out money against them. Therefore, this is when the Private Placement Investor comes in and contracts with them to do just that. The Private Placement Investor doesn’t need to move his funds to that specific bank, he just cant deplete the account lower than the amount that is contracted to be used. This is the wholesale investment side of investments and is reserved for those who qualify, have the wherewithal, and play by the rules.

Actually, leased or purchase a bank instrument is the way the players who control a large asset (not cash money) to get cash into the program. So if you want to enter the program with leased asset, you need to lease to a party who is also the trader. This is your entry in the JV program for mutual benefit. You can move your funds (with underlying: leased/loan securities or purchase settlement) for the program through delivery guarantee from the provider/trader. To be able to deal with the provider either trader, you must make sure that you have qualified project with a good reputation before the bank.

 

 

Medium Term Notes (MTN’s)

 

One must be careful to differentiate among Prime Bank Notes (PBN’s), Prime Bank Debentures (PBD’s) and Medium Term Notes (MTN’s). The two former do not exist but MTN’s do. one must be careful to discern the difference(s) since some times PBN’s and PBD’s are linked together and the fraudster will package them as MTN’s. In an article entitled, “Anatomy of the Medium Term Note Market” published in the “Federal Reserve Bulletin”, Volume 7, Number 8, 1993 which appeared in a monthly publication of the Publications Committee of the Board of Governors of the Federal Reserve System, Washington, D.C. (you can log on to their website at www.federalreserve.gov, or phone at  202 452 3244), there is much discussion of MTN’s.

Following are some of the topics discussed:
♦ Mechanics of the Market
♦ Discreet Funding with MTN’s
♦ Reverse Inquiry in the MTN Market
♦ Principal Transactions
♦ EURO-MTN’s”

There is nothing in that bulletin that indicates the validity or credibility of the transactions that fraudsters promote in their High Yield Investment Programs (HYIP). Again, the fact that MTN’s exist does not under any circumstances suggest, imply nor prove that the HYIP programs that fraudsters promote utilizing MTN’s exist.

Here are a few capsulated comments extracted from that bulletin that are for informational purposes only!

“…MTN’s have emerged as a major source of funding for U.S. and foreign corporations, federal agencies, supra-natural institutions and foreign countries.”

“Although MTN’s are generally offered on an agency basis, most programs permit other means of distribution. For example, MTN programs usually allow the agents to acquire notes for their own account and for resale at par or at prevailing market prices.”

“The MTN market also provides corporations with the ability to raise funds discreetly because the issuer, the investor, and the agent are the only market participants that have to know about a primary transaction.”

“Another advantage of MTN’s is that investors often play an active role in the issuance process through the phenomenon known as reverse inquiry.” “…(here) the investor relays the inquiry to an issuer of the MTN’s through the issuer’s agent. If the issuer finds the terms of the reverse inquiry sufficiently attractive, it may agree to the transaction even if it was not posting rates at the maturity that the investor desires.”

“…in the distribution process…a larger share of MTN’s are sold on a principal basis, rather than on an agented basis. In a principal transaction, the MTN dealer purchases an MTN for its own account and later resells it to investors. In a “riskless principal” transaction, when the dealer buys the MTN, it has already lined up an investor that has agreed to the terms of the resale.”

“MTN’s have become a major source of financing in international financial markets, particularly in the Euro-market. Like Euro-bonds, Euro-MTN’s are not subject to national regulations, such as registration requirements. Although Euro- MTN’s and Euro-bonds can be sold through the world, the major underwriter and dealer are located in London, where most offerings are distributed.”

It is important to be repetitive here: the above excerpts are for informational purposes only and under no circumstances should one believe that HYIP programs that are promoted by fraudsters in the buying and selling of MTN’s are real. They are not!

 

Standby Letters of Credit

 

Standby letters of credit are bank instruments that are regulated by the International Chamber of Commerce (ICC) Uniform Customs and Practice, Publication No. 500, the International Standby Practices ISP98, ICC Publication No. 590 and the Uniform Commercial Code (UCC). The ICC 500 and the ICC 590 are sets of rules and the UCC is law.

Standby letters of credit are quite versatile. The ISP98 offers the following descriptive list, however, keep in mind that this is only a list of convenience and it could be expanded as needed depending on a specific function or application required.

♦ Performance Standby
♦ Advance Payment Standby
♦ Bid Bond/Tender Bond Standby
♦ Counter Standby
♦ Financial Standby
♦ Direct Pay Standby
♦ Insurance Standby
♦ Commercial Standby

Standby letters of credit are conditioned upon default or non-performance bythe applicant, the party who had the credit issued by his bank to the beneficiary.These instruments, of themselves, are not negotiable nor is the obligation theyrepresent readily transferable. The ICC 500 Article 48 b, states “A credit can be transferred only if it is expressly designated as “transferable” by the issuing bank” and, c, “The Transferring bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank.”

The ISP98 Rule 6.02 states “a. A standby is not transferable unless it so states, b. A standby that states that it is transferable without further provisionmeans that drawing rights: i. may be transferred in their entirety more than once, ii. may not be partially transferred, and iii. may not be transferred unless the issuer (including the confirmer) or another person specifically nominated in the standby agrees to and effects the transfer requested by the beneficiary.

As with the bank guarantee described above, fraudsters oftentimes will sell a standby letter of credit to an uninformed party for a small percentage of its face value. Never revealing that the credit is no longer valid since the applicant hasalready fulfilled his obligation to the beneficiary. Another facet of a fraudster’s scheme Is to offer investment opportunities through standby letters of credit and independent bank guarantees. Remember these instruments expire and of themselves are not negotiable, and, furthermore, the obligation that they represent is not readily transferable.

The fraudster will represent that these instruments are discounted, have coupons attached and pay interest. None of this is true! These instruments cannot be bought,sold or traded and there is absolutely no secondary market in which they can be traded. Any investment program that states it invests in discounted standby letters of mcredit or zero standby letters of credit is blatantly fraudulent

 

BANK GUARANTEE

 

Foreign banks issue bank guarantees much like US banks issue standby letters of credit. There are many types of bank guarantees and basically they serve the same overall purpose as the standby letters of credit, namely protection against nonperformance. Following is a list of the most common:

-TENDER GUARANTEE

-PERFORMANCE GUARANTEE

-MAINTENANCE GUARANTEE

-REPAYMENT GUARANTEE

-RETENTION GUARANTEE

-PAYMENT GUARANTEE OR PERSONAL GUARANTEE

It is with the Payment or Personal Guarantee, however, that fraudsters usually set their traps.

Important: Proper bank guarantees are issued subject to the International Chamber of Commerce (ICC) Uniform Rules for Demand Guarantees, Publication No. 458 (1992).

Let’s assume that Party A (the applicant) agrees to pay Party B (the beneficiary) a certain amount by a certain date and has his bank issue a guarantee on his behalf.

First, the guarantee must come from a reputable bank. The guarantee is subject to the rules of the country in which it was issued, the jurisdiction or province where the issuing bank is located and of even more importance, the bank and the ICC Uniform Rules for Demand Guarantees, Publication No. 458.

Although an applicant can instruct a bank to execute a guarantee on his behalf, the ICC458, Article 7a clearly states, “Where a guarantor has been given instructions for the issue of a guarantee but the instructions are such that, if they were to be carried out, the guarantor would by reason of law or regulation in the country of issue be unable to fulfill the terms of the guarantee, the instruction shall not be executed and the guarantor shall immediately inform the party who gave the guarantor his instructions by telecommunication…”.

Further to this, Article 27 states, “Unless otherwise provided in the guarantee or counter guarantee, its governing law shall be that of the place of business of the guarantor or instructing party (as the case may be), or, if the guarantor or instructing party has more than one place of business, that of the branch that issued the guarantee or counter guarantee”.

Article 28 clearly warns, “Unless otherwise provided in the guarantee or counter guarantee, any dispute between the guarantor and the beneficiary relating to the guarantee or between the instructing party and the guarantor relating to the counter guarantee shall be settled exclusively by the competent court of the country of the place of business of the guarantor or instructing party (as the case may be), or, if the guarantor or instructing party has more than one place of business, by the competent court of the country of the branch which issued the guarantee or counter guarantee”.

Now, let’s get back to the responsibility of Party A to Party B. A agrees to pay B, for example, $100,000 by December 30, 2001. If A defaults and does not pay B then B would take the guarantee and the drafts attached to the bank for payment, as would be indicated in the text of the guarantee. Now if A would pay B sometime before December 30, 2001, the guarantee would no longer be valid since A fulfilled his obligation to B in accordance with the terms of the guarantee. And, it is in this instance that fraudsters dupe the uninformed into buying a guarantee that is no longer valid.

For example, B (the fraudster) approaches Mr. X and offers him a bank guarantee whose period of validity is December 30, 2001. Concocts a story that he does not want to wait until December 30 for his money and offers X the guarantee for $50,000. X agrees since he would be paying $50,000 for a guarantee whose value, he believes, is $100,000. Unbeknown to X, A has already fulfilled his obligation to B, he will not be in default and therefore the guarantee cannot be presented to the bank on December 30. So, in this instance X has purchased a guarantee that is not valid since the applicant A had already fulfilled his obligation to B, the beneficiary.

Another scheme fraudster’s use is to transfer a bank guarantee to a third party when there is no provision in the guarantee for a transfer. In fact, there is no provision in the ICC 458 for a transfer of a bank guarantee. The closest provision to a transfer is in Article 4 where it addresses the assign ability of a guarantee: “The Beneficiary’s right to make a demand under a Guarantee is not assignable unless expressly stated in the Guarantee or in an amendment thereto. This Article shall not, however, affect the Beneficiary’s right to assign any proceeds to which he may be, or may become, entitled under the Guarantee.”

So, a fraudster who claims to have a bank guarantee, already in existence and transferable at a discount to a third party, whose identity he did not know prior to meeting him, must be telling an untruth, at best!

MTN Program

 

What are “medium-term note programs”?
Medium-term note (“MTN”) programs enable companies to offer debt securities on a regular and/or continuous basis.

Traditionally, the securities issued under these programs have filled the financing gap between short-term commercial paper, which has a maturity of nine months or less, and long-term debt, which has maturities of 30 years or more. As compared to other forms of debt securities, MTNs tend to have their own type of settlement procedures and marketing methods, which are similar in some respects to those of commercial paper.

Although medium-term notes typically have maturities of between two to five years, they are not required to have medium terms. In fact, it is common for companies to issue both short-term and long-term securities under an MTN program.

Why would a company have a medium-term note program?

Like a shelf registration statement, an MTN program enables a company to sell a wide range of debt securities without having to complete the SEC’s registration or review process for each issuance. See “How are MTN programs registered?” In addition, an MTN program uses a master set of disclosure documents, agreements with selling agents or dealers, and issuing and paying agency agreements to help minimize the new documentation that is needed for each offering.

Who develops MTN programs?

Historically, many MTN programs were developed by the commercial paper departments of investment banks. Securities from these programs were offered and sold on a principal or agency basis from a broker-dealer’s trading desk. The programs often were administered by a bank’s specialty group rather than through the typical relationship bankers.

What types of issuers establish MTN programs?

MTN programs typically are used by large companies that have an ongoing need for capital and that are eligible to file shelf registration statements for delayed and continuous offerings. Most large financial institutions, and many “industrial companies,” have an MTN program. A number of government-sponsored entities, such as Fannie Mae and Freddie Mac, also have MTN programs.

Are the debt securities in an MTN program ever guaranteed by an entity other than the issuer?

Yes. Particularly among financial institution issuers, it is common for an operating subsidiary (such as a bank subsidiary of a bank holding company) to have a higher credit rating on its indebtedness than the parent corporation (such as a bank holding company). Accordingly, many MTN programs are structured so that: the operating subsidiary is the actual issuer of the securities, and the parent holding company is the guarantor; or
the parent holding company is the issuer of the securities, and one or more operating subsidiaries are guarantors.

What types of offerings are completed using MTN programs?

In light of the convenience offered by shelf registration and MTN programs, issuers use MTN programs: to effect small and medium-sized offerings of debt securities to investors that seek specific terms (known as “reverse inquiry” trades) (see “What are “reverse inquiry” transactions, and how do they impact the MTN market?”); to effect large syndicated offerings of debt securities that might, in the absence of an MTN program, be offered through a shelf-takedown; to offer structured notes, such as equity-linked, currency-linked, and commodity-linked securities; and to operate a “retail note program,” in which an issuer offers debt securities with small minimum denominations to “retail” investors.

What types of securities normally are sold through medium-term note programs?

Historically, the most common type of security issued under an MTN program is a fixed-rate, non-redeemable senior debt security. However, MTN programs typically include other types of debt securities, including floating rate, zero coupon, non-U.S. denominated, amortizing, multi-currency, subordinated, or indexed securities. Common reference rates for floating rate securities issued under MTN programs include LIBOR, EURIBOR, the prime rate, the Treasury rate, the federal funds rate, and the CMS rate. Most MTN programs are rated “investment-grade” by one or more nationally recognized rating agencies.

Who sets the terms of medium-term notes?

Similar to the commercial paper market, the traditional market for MTNs is investor-driven. Dealers continuously offer MTNs within a specific maturity range, and an investor can negotiate to have the dealer meet its particular investment needs at a specific maturity level. See “What types of offerings are completed using MTN programs?”

Investors in MTN securities make their investment decisions based upon credit ratings, an evaluation of the issuer and its business, the maturity of the notes, and the yield on the notes.

MTN buyers include the institutional buyers of underwritten corporate debt securities. In the case of structured products and retail notes sold from an MTN program, individual investors also may be purchasers.

Are medium-term notes sold on a firm commitment basis or a best efforts basis?

It varies. The dealer’s traditional obligation is to sell the MTN securities on a “best efforts” basis. However, on occasion, competitive pressures result in a dealer purchasing MTN securities as principal. In addition, large syndicated MTN offerings often are effected on a firm commitment basis. In both cases, the MTN dealer is usually regarded as an “underwriter” for Section 11 purposes.

How are MTNs “posted” and sold?

Through its selling agents, an issuer of MTNs “posts” offering rates over a range of possible maturities: for example, nine months to one year, one year to eighteen months, eighteen months to two years, and annually thereafter. An issuer may post rates as a yield spread over Treasury securities having the same maturity. The selling agents provide this rate information to their investor clients and to regional dealers.

Issuers are likely to lower their posted rates once they raise the desired amount of funds at a given maturity. In addition, issuers will change their offered rates as market conditions and prevailing interest rates change. Issuers may effectively withdraw from the market by suspending sales or, alternatively, by posting narrow offering spreads over the comparable Treasury yields at all of the posted maturity ranges.

When an investor expresses interest in an MTN offering, the selling agent contacts the issuer to obtain a confirmation of the terms of the transaction. Within a range, the investor may have the option of selecting the actual maturity of the notes, subject to final agreement by the issuer.

What are “reverse inquiry” transactions, and how do they impact the MTN market?

Investors often play an active role in the MTN market through the “reverse inquiry” process. An investor may seek an investment in a specified principal amount, with a specified credit rating, and a specified maturity. If a security with the desired terms is not available in the corporate bond market, the investor may be able to obtain it in the MTN market through reverse inquiry. In this case, the investor will communicate the terms of the investment it is seeking to an issuer of MTNs through the issuer’s selling agent. If the issuer finds the terms of the reverse inquiry acceptable, it may agree to the transaction even if it was not posting rates at the desired maturity.

Reverse inquiry transactions play an important role in both “plain vanilla” debt issued in MTN programs and more exotic structured securities.

What is a “retail MTN” program?

Historically, some issuers would not issue MTNs except in fairly significant principal amounts, as bookkeeping and administrative costs can become disproportionately burdensome with smaller offerings. However, book-entry clearing through DTC and advances in computer bookkeeping decreased the cost of issuing debt securities in small denominations. As a result, a variety of issuers have registered MTN programs with minimum denominations of $1,000, or even less. Although most MTNs are still sold to institutional investors, reducing the minimum denominations has enabled issuers to reach smaller investors.

A “retail MTN program” is specifically designed to offer debt securities to the retail market, while maintaining administrative costs to issuers at acceptable levels. In order to achieve those objectives, the process of issuing retail MTNs may differ slightly from the process of selling MTNs to institutions.

In one type of retail MTN program, an issuer will post rates weekly with retail and/or regional brokers. During the week that these rates are posted, the brokerage firms market the securities to retail investors, who place orders in the applicable minimum denominations. At the end of the week, the retail and regional brokerage firms will contact the corporate issuer and indicate the aggregate amount of orders for notes at each maturity, and the corporation will issue one series of notes at each maturity. For example, several hundred retail investors could place orders for MTNs with maturities of two and five years, but the administrative costs for the corporate issuer would reflect only two issuances from the shelf registration.

Significant U.S. arrangers for retail MTNs include Incapital (and its InterNotes program) and Merrill Lynch.

The Working Group in an MTN Program

What is the role of the arranger of an MTN program?

The arranger of an MTN program serves a variety of roles, including:
-serving as principal selling agent for the MTN securities;
-advising the issuer as to potential financing opportunities in the MTN market;
-communicating to the issuer any offers from potential investors to buy MTNs;
-advising the issuer as to the form and content of the offering documents, including the types of securities to be included;
-helping the issuer draft the offering documents and related program agreements;
-negotiating the terms of the agreements on behalf of itself and the other selling agents;
-coordinating settlement of the MTN securities with the issuer, the trustee, and the paying agent; and
-making a market in the issued and outstanding securities issued under the program.

What is the role of the other selling agents in an MTN program?

The MTN program may have selling agents other than the arranger who offer the issuer’s securities. Having multiple selling agents encourages competition among the selling agents to market the issuer’s securities, and may lower the issuer’s financing costs for securities issued under the program. In addition, having more selling agents quote prices for the MTN securities may lead to more “reverse inquiry” transactions. See “What are “reverse inquiry” transactions, and how do they impact the MTN market?”

How do the selling agents conduct due diligence with respect to an MTN program?

Whether the selling agents are acting on a “best efforts” or “firm commitment basis” in connection with a takedown, they are subject to liability as “underwriters” under Section 11 of the Securities Act. See Are medium-term notes sold on a firm commitment basis or a best efforts basis? However, because takedowns from a program may be frequent, and often occur on short notice, the selling agents are not likely to be able to initiate and complete a full due diligence process at the time of each offering. Accordingly, it is fairly common for the selling agents on an active MTN program to conduct “ongoing due diligence” with respect to the issuer, so that their investigation is complete and up-to-date at the time of each takedown.

With respect to so-called “legal due diligence,” the issuer under an MTN program will often designate a law firm, known as “designated underwriters’ counsel,” to conduct ongoing legal due diligence, and to share its material findings with the relevant selling agents on a particular takedown.

What is the role of regional dealers in the MTN market?

At one time, the major New York-based investment banks distributed nearly all MTN securities to investors. As the market matured, regional dealers began to play a larger role in selling MTNs. Regional dealers receive information about MTN issuers’ offering rates from MTN selling agents. In turn, the regional dealers communicate this information to their investor clients.

When an investor buys an MTN through a regional dealer, the dealer typically receives a selling concession from the MTN selling agent. These placements through regional dealers improve efficiency in the market by broadening the potential investor base for MTNs.

What is the role of the trustee or paying agent in an MTN program?

The trustee or paying agent in an MTN program serves a variety of roles, including:
-processing payments of interest, principal, and other amounts on the securities from the issuer to the investors;
-communicating notices from the issuer to the investors;
-coordinating settlement of the MTN securities with the issuer and the selling agent;
-assigning security identification codes to the MTN securities (in the case of U.S. programs, the trustee typically obtains a block of CUSIP numbers for the relevant issuer’s program and assigns them on an issue-by-issue basis);
-processing certain tax forms that may be required under the program; and
-in the case of a trustee of a series of U.S.-registered notes, acting as representative of the investors in the event of any claim for payment if a default occurs.

Registration of Medium-Term Note Programs –Offering Documents

How are MTN programs registered?

MTN programs typically are registered on a shelf registration statement under Rule 415.
Issuers that are “primarily eligible” to use Form S-3 or Form F-3 may file a shelf registration statement under clause (x) of Rule 415(a)(1), permitting continuous or delayed offerings. MTN issuers not eligible to use Form S-3 or Form F-3 are limited to continuous offerings under clause (ix), may not wait to commence offers once the registration statement has been declared effective, and must be offering the securities on a continuous basis. Accordingly, MTN programs generally are limited to larger public companies, with at least a $75 million public equity float.

Companies can register MTN programs on Form S-1 or Form F-1. However, this is rarely done due to the potential need to update the MTN registration statement to reflect developments in the issuer’s business and finances.

Are MTN programs always registered with the SEC?

No. Some MTNs are offered in bank note programs exempt from registration under Section 3(a)(2) of the Securities Act of 1933, or in Rule 144A programs in which the securities are offered exclusively to qualified institutional buyers. In the past, some issuers operated programs that were conducted as private placements in continuous Section 4(2) programs. In addition, issuers may establish Regulation S programs in which the securities are offered outside the United States, such as in the case of European Medium-Term Note Programs (“EMTNs”), Global Medium-Term Note Programs (“GMTNs”), or Australian Medium-Term Note Programs (“AMTNs”). Two or more of these types of programs may be combined, such as an EMTN program that also provides for the issuance of securities to qualified institutional buyers in the United States under Rule 144A.

Non-U.S. issuers that wish to access the debt markets in the United States without registering under the Securities Act often establish a Rule 144A program and/or a Section 3(a)(2) program (if they are banks).

Typically, the offering circular and settlement process for non-registered MTN programs are somewhat similar to registered MTNs. The primary difference is the nature of the offerees.

What offering documents are used in an MTN program?

The issuer’s registration statement for an MTN program typically consists of:
-a “universal” shelf registration statement for debt and other securities; or
-a shelf registration statement providing only for debt securities; or
-a prospectus pertaining to the MTN program itself.

In the first two cases, after its registration statement becomes effective (or upon filing, in the case of a well-known seasoned issuer, or “WKSI,” filing an automatically-effective shelf registration statement), the issuer will prepare and file an “MTN prospectus supplement” under Rule 424(b) that describes the securities to be issued under the MTN program and provides the names of the selling agents. See “What is a prospectus supplement?” in these FAQs. Traditionally, the prospectus supplement sets forth the aggregate U.S. dollar amount of the securities that may be offered under the program. Many WKSIs no longer provide that amount, because a WKSI shelf-registration statement is not required to specify the aggregate amount of securities that will be issued.

The terms of a takedown from an MTN program are set forth in a “pricing supplement” that is filed with the SEC under Rule 424(b). The pricing supplement may be very short, especially in the case of “plain vanilla” securities. Alternatively, it may be very long, in the case of complex structured securities offered from an MTN program.

Since the SEC adopted Rule 159 in December 2005, many issuers have attempted to describe as many of the potential terms of the securities as possible in the base prospectus or the MTN prospectus supplement rather than in the pricing supplement. This disclosure strategy enables issuers to limit the information that needs to be provided to an investor at the time of pricing or in the pricing supplement. Such issuers are attempting to reduce the likelihood that an investor can claim that the information it received prior to its agreement to purchase the securities was inadequate without the information in the pricing supplement.

Under SEC Rule 424(c), the base prospectus and the MTN prospectus supplement need not be re-filed with the SEC via EDGAR at the time of a pricing with the applicable pricing supplement if those two documents have not changed since their previous filing. However, some issuers choose to re-file those documents together with the pricing supplement in order to provide investors more convenient access to all of the relevant disclosure.

What other offering documents may be used in an MTN offering?

In addition to the base prospectus, MTN prospectus supplement, and pricing supplement, an issuer and the selling agent may use several other disclosure documents in the offering process:

-Preliminary and Final Term Sheets: subject to the filing requirements of Rule 433 and other SEC rules relating to “free writing prospectuses,” an issuer or a selling agent may use preliminary and final term sheets to negotiate the terms of an offering with potential investors, to broadly market an offering, or to set forth the agreed-upon final terms of an offering. As per the discussion of Rule 159 above, providing a final term sheet at the time of pricing also may help bolster the position that the investor received all of the relevant required information at the time it entered into its agreement to purchase the securities.

-Free Writing Prospectuses: issuers and selling agents may use brochures, pamphlets, websites, and other types of documents to market potential offerings from an MTN program.

-Product Supplements: issuers of structured products from MTN programs often use a “product supplement” to describe the detailed terms, risk factors, and tax consequences of a particular type of product to potential investors.

-Underlying Supplements: some issuers of structured products from MTN programs use an “underlying supplement” to describe one or more equity or commodity indices that will be linked to the relevant security.

-Press Releases: particularly in the case of a large syndicated offering, the issuer may issue a press release after pricing to describe the transaction. For a registered offering, the content of such a press release is limited by Rule 134.

How do the offering documents differ for a non-registered MTN program offered in the United States?

Because Rule 144A and Section 3(a)(2) programs are not subject to the SEC’s registration requirements, these programs do not involve the filing of a registration statement. Instead, the principal document used to describe the securities and the issuer is an “offering memorandum,” which may be called an “offering circular.” In addition to a detailed “description of the securities” section, an offering memorandum will either include a description of the issuer’s business and financial statements, or incorporate them by reference from the issuer’s publicly-available documents in the United States or its home jurisdiction.

In addition, the issuer and the selling agents for these offerings may use a variety of term sheets to offer these securities, which are not subject to the filing requirements of Rule 433.

What additional exhibits are required in the registration statement for an MTN program?

If not otherwise filed with the registration statement, the issuer under an MTN program must also file:
-the distribution agreement with the selling agents;
-the indenture (or indentures) with the indenture trustee;
-an Exhibit 5.1 opinion as to the legality of the notes to be issued under the program;
-in the case of complex securities, an Exhibit 8.1 opinion as to the disclosure of the U.S. federal income taxes; and
-the form of the note or certificate representing the medium-term notes.

Issuers often file these documents as to the program as a whole at the time the MTN prospectus supplement is filed. However, depending upon the circumstances and the terms of the relevant offering, these documents may be filed at the time of a specific take-down.

Establishing a Medium-Term Note Program

What documents are used to establish an MTN program?

In addition to the disclosure documents (see “Registration of Medium-Term Note Programs – Offering Documents”), the following documents are typically used to establish an MTN program:
-one or more indentures with the indenture trustee (in the case of an SEC-registered program), or paying agency agreements with the paying agent (in the case of an unregistered program);
-a distribution agreement (or “program agreement”) between the issuer and the selling agents or dealers; and
-an “administrative procedures memorandum,” which describes the exchange of information, settlement procedures, and responsibility for preparing documents among the issuer, the selling agents, the trustee or paying agent, and the applicable clearing system in order to offer, issue, and close each series of securities under the MTN program.

Additional agreements for an MTN program may include:
-A calculation agency agreement: under this agreement, the calculation agent, which often is the trustee or the paying agent, agrees to calculate the rate of interest due on floating rate notes. This type of agreement also may be used in connection with structured notes to calculate the returns payable on the note. In the case of structured notes, a broker-dealer (usually, the arranger or one of its affiliates) is more likely to serve as calculation agent.

-A currency exchange rate agency agreement: under this agreement, an exchange rate agent (again, often the trustee or the paying agent) converts the payments made by the issuer on foreign currency-denominated MTN notes into U.S. dollars for the benefit of U.S. investors.
In addition, at the time an MTN program is established, the issuer generally is required to furnish a variety of documents to the selling agents, as would be the case in a typical underwritten offering:
-officer certificates as to the accuracy of the disclosure documents;
-legal opinions as to the authorization of the program, the absence of misstatements in the offering documents, and similar matters; and
-a comfort letter from the issuer’s independent auditors.

Depending upon the arrangements between the issuer and the selling agents, some or all of these documents will be required to be delivered to the selling agents on a quarterly basis as part of the selling agents’ ongoing due diligence process. See “How do the selling agents conduct due diligence with respect to an MTN program?” Some or all of these documents also may be required in connection with certain takedowns, such as large syndicated offerings.

What types of provisions are in the distribution agreement for an MTN program?

A distribution agreement (which may be called a “program agreement” or a “sales agency agreement”) is similar to an underwriting agreement in many ways, but is designed to provide for multiple offerings during the life of the program. Typical contents include:

-representations and warranties of the issuer as to the accuracy of the offering documents, the authorization of the program, and other matters;
-the steps to be followed if the MTN prospectus supplement is amended or the size of the program is increased;
-the steps to be followed, and the approvals required, if any free writing prospectuses are to be used;
-requirements as to the conditions precedent, documents, and deliverables for establishing the program and/or conducting takedowns;
-requirements as to any subsequent deliverables from the issuer to the selling agents, such as periodic comfort opinions, legal opinions, and officer certificates;
-provisions allocating program expenses among the issuer and the selling agents;
-indemnification of the selling agents for liabilities under the securities laws;
-provisions relating to the determination of the selling agents’ compensation, or a schedule of commissions; and
-provisions for adding additional selling agents, whether for the duration of the program or for a specific offering.

The representations and warranties under the distribution agreement typically are deemed to be made both at the time of the signing of the agreement and at the time of each takedown.

What kind of bond indenture is used for an MTN program?

In the case of a registered program, the indenture or indentures for an MTN program must be qualified under the Trust Indenture Act of 1939. The indenture may or may not be designed for specific use with an MTN program. The indenture is usually open-ended, and does not limit the amount of debt securities that can be issued. The indenture may have restrictive covenants, affirmative covenants, and events of default that vary depending upon the nature of the issuer.

What forms of notes are used for an offering under an MTN program?

The notes issued under an MTN program typically are in global form, with a single master certificate representing each series. In U.S. programs, an investor’s interest in the global note is held through a direct or indirect participant in the DTC system.
In a typical U.S. offering of debt securities that does not involve an MTN program, the form of note used to represent the securities is customized specifically for that offering. However, in the case of an MTN offering, it may be an unnecessary cost to create a customized form of note for each offering. Accordingly, an MTN program often will involve one or more forms of notes that consist of two key parts:

-detailed provisions that could apply to many different types of notes (fixed and floating; the calculation of different types of base rates); and
-a short leading page or cover page for the note that indicates (through “check boxes” and blank lines) which of those detailed terms are applicable to the specific issuance.
Although notes of this kind may be rather lengthy, this formulation enables the issuer and/or the trustee to create the forms of notes for actual take-downs more efficiently. Of course, in the case of more complex securities, such as structured notes, more customized forms of global notes often must be created.

Are MTN programs rated by rating agencies?

The issuer’s credit rating plays an important part of an investor’s decision to purchase MTNs. Accordingly, an issuer of MTNs usually will have either credit ratings for its indebtedness generally, or credit ratings that are specific to the MTN program. Most MTN programs carry an investment grade rating. The issuer will deliver copies of the applicable ratings letters to the arranger, and generally is required to inform the selling agents of any changes in its ratings.

Effecting an MTN Offering

How complicated is a takedown for a MTN program?
A takedown from an MTN program can be very simple. Each takedown only requires a few matters to be addressed, including:
-agreeing upon the terms of the takedown (frequently done orally, with written confirmation);
-in certain cases, such as a large syndicated takedown from an MTN program, delivering an updated comfort letter, legal opinions, and officers’ certificate to the selling agents;
-delivering the base prospectus, MTN prospectus supplement, and pricing supplement to investors (which may occur via “access equals delivery” under SEC Rule 172);
-completing a note, either in global or certificated form, which is done by the trustee or issuing and paying agent upon the issuer’s instructions (see “What forms of notes are used for an offering under an MTN program?”; and
-filing a pricing supplement under Rule 424 with the SEC.

What is disclosed in a “pricing supplement” for a MTN offering?
For a simple debt security, very little information is required in the pricing supplement. The pricing supplement will include the final terms of the offering, such as:
-the title of the securities;
-the issue date;
-the maturity date;
-the interest rate;
-the redemption dates, if any;
-the underwriter or selling agent; and
-the selling agents’ compensation for the offering.

How do MTN securities settle and clear?

MTN offerings settle and clear in the United States through the issuance of securities in global form. Beneficial interests in these global notes are held by direct and indirect participants of The Depository Trust Company (“DTC”). When an MTN is issued under the book-entry system, an agent bank for the issuer uses a computer link with DTC to enter the descriptive information and settlement details of the offering. The selling agent receives a copy of the computer record from DTC, and the investor receives a trade confirmation from the selling agent and periodic ownership statements.

Secondary market trades also are recorded with computer entries. Under the book-entry system, an issuer of MTNs, through the trustee or paying agent, makes a single wire transfer to DTC that covers all interest payments on each interest payment date, and only one transfer of funds on the maturity date to DTC.

This system differs from a “paper certificate” system, in which the issuer must make separate payments to each security holder. In addition to reducing the cost of securities issuances, the book-entry system reduces the likelihood of delayed delivery because of logistical problems, and reduces the chances of failed trades arising from paperwork errors.