Terminology

There are a number of unique terms which are important to understand and implement. 

To help our clients accelerate the learning curve, we created a “ Terminology List”.  Providing the most important terms for our private placements.

PRIVATE PLACEMENT ACRONYMS

BCL (Bank Comfort Letter):  A letter written by a bank officer on behalf of a customer, attesting to the current balance and good standing of an account holder.

BG (Bank Guarantee): A bank instrument. guaranteeing a certain face value for an investor, while collecting an annual interest before expiring upon maturity.

CD (Certificate of Deposit): A financial product offered by banks to account holders who agree to leave their funds on deposit for a pre-defined period. This allows investors to collect a higher annual interest while securing their money in a low-risk venture.

CIS (Client Information Sheet): One of the compliance documents typically required for private placement programs. This document asks for basic information such as the contact details, and line of business the applicant is in.

CMO (Collateralized Mortgage Obligation): A mortgage-backed, investment-grade bond that separates mortgage pools into different maturity classes. By creating a CMO. the bond issuer can collect immediate capital while the purchaser gets the bond at a discount from face value, and collects annual interest.  Though these bonds are frequently found in the private placement business, most of them are worthless since the financial crisis hit.

DTC (Depository Trust & Clearing Corporation):  DTCC provides clearing, settlement, and information services for equities, bonds, securities, money market instruments, and over-the-counter derivatives. This medium is used in private placement programs to transfer/assign assets to a trader, from an investor.

ITR (Irrevocable Trust Receipt):  A receipt confirming and detailing the deposit of specific assets into a trust.  Though the ITR contains all details of the asset, banks typically will not assign a value to it since the asset is NOT deposited in a credible bank, but rather a private trust.

JV (Joint Venture):  An agreement between two entities outlining compensation, fees, and the obligations of both parties in relation to a specific business venture.  This is the most common legal structure for private placement programs.

KYC (Know your Client):  In some cases, this form will substitute for the client information sheet. Just like the CIS. it requests contact details and other related information.  Also, this phrase is used when referring to the “Know your Client” law, which many investment markets enforce. It states that you must know your client well, and unless deceived, you can incur certain liabilities for future problematic actions of the client.

LOI (Letter of Intent):  A letter provided by investors interested in a private placement program, defining their unsolicited interest to enter the investment transaction.  This document can also be used for areas outside of private placement, especially where solicitation laws apply.

LTV (Loan to Value):  This is the loan value that a bank/lender will provide after evaluating an asset’s worth. Usually, this is used for hard/illiquid assets and is stated in % in relation to the asset’s appraisal value (Loan/Appraisal Value = LTV %).

MTN (Medium Term Note): A tradable and discountable debt instrument issued by banks, collecting an annual interest before expiring upon maturity with a specified face value.

NCND (Non-Circumvention, Non-Disclosure Agreement):  An agreement between two parties defining the boundaries and limitations of their relationship. Typically, this agreement is used by private placement  to “protect” from future circumvention.

POF (Proof of Funds):  The process of allowing another individual to temporarily show your assets as their own, with the fee dependent upon the time it’s utilized.  Also, this phrase can refer to a bank statement, or another financial document, proving the assets of a prospective investor.

PPM (Private Placement Memorandum):  A formal description of an investment opportunity that is created to comply with various federal securities regulations. This outlines all details of the “private placement” offered, as well the obligations of both parties involved.

PPP (Private Placement Program): A private investment program that trades discounted bank instruments (MTN /BG ) for profit in the secondary market.

RWA (Ready, Willing, and Able):  Phrase used by private placements confirming the readiness of an investor to satisfy requirements, and move forward with an opportunity.  This statement can also be made in the form of a document, which some programs may require.

SBLC (Stand by Letter of Credit):  A document issued as a guarantee of payment by a bank, on behalf of a client. This is used as payment of last resort if the client fails to fulfill a contractual commitment with a third party. In the private placement world, this term is often associated with fraudulent companies that offer bank instrument leasing and/or project funding “opportunities”.

SKR (Safe Keeping Receipt):  A document created by a bank, on behalf of its customer, which specifies all details of an asset, and confirms its current existence on deposit.

T-BILL (Treasury Bill):  A short-term debt obligation in the form of an interest accruing note, backed by the U.S. government with a maturity of less than one year.

T-NOTE (Treasury Note):  A marketable U.S. government debt security containing a fixed annual interest, and a maturity between one and 10 years.

T-STRIP (Treasury Strip):  This is a “zero-coupon” bond issued by the U.S government whose yield is based upon the difference between the discounted price it is purchased at, and its face value at maturity (ex. 10M Note, buy at 85% of face, worth 100% at maturity).

VOD (Verification of Deposit):  This is a signed document provided by a financial institution, verifying the current balance and history of an account holder.  This is similar to a BCL. but the verbiage may be different.

PRIVATE PLACEMENT KEY TERMS

Administrative Hold: . It refers to the investor’s bank reserving funds in favor of another individual, without actually encumbering or moving the asset.

Asset-Backed: Refers to a note or bank instrument which is collateralized by hard assets, not liquid assets.  This can be gems, gold, art, diamonds, or other rare valuables.

Assignment: Transferring ownership, or rights to use the collateral, to another individual for a specific period of time. Some traders require this for private placement investments.

Bank Instrument: A debt instrument issued by banks to access immediate liquidity, providing an annual interest and face value for the purchaser. BG ’s and MTN ’s are common examples.

Bank to Bank: A phrase typically used by brokers, referring to the private verification of assets from the investor’s bank officer, to the trader’s/seller’s bank officer.

Beneficiary: The individual listed as the owner of a debt instrument, such as a medium-term note (MTN s) or bank guarantees (BG s).

Best Efforts: This is a term used in any real private placement contract. It states that the trader, or investment manager, will use their best efforts to achieve high profits.  For example, a contract may say “profits will be achieved on a best efforts basis”.

Blocked Funds: A general phrase that refers to blocking liquid assets in favor of another person. This is most commonly achieved via swift MT 760. unless you are in the USA.

Cash Backed: Assets that are backed by cash, making them far more appealing for banks and private placement traders.

Collateral: An asset guaranteeing the line of credit the bank gives, which can be seized upon default from the loan terms.  Bank instruments, cash, and MT 760 ’s are some examples.

Commitment Holder: An individual/institution who is contractually obligated to purchase a bank instrument at an agreed-upon value.   Without “prior commitment”, the seller of the bank instrument would never have purchased the note because their intent was trading for profit.  This term is also similar to the phrase “exit buyer”.

Compliance: The process of completing due diligence on a new private placement investor. At this time, the investor must complete the required documentation, usually referred to as the “compliance package”.

Corporate Resolution: A compliance document that asks the client to formally state their relationship to the business entity they represent.

Cutting House: Term referring to a bank that creates, issues, and backs discounted bank instruments. The instruments are “cut”, and sold to traders at discounts, who then sell them at a higher price to “exit buyers”.

Discount: The idea that bank instruments can be purchased at a discount from face value, leaving the opportunity to profit from resale or the difference between face.

Due Diligence: Phrase refers to the process of qualifying people by verifying and investigating their background. This is used mutually by private placement traders and investors.

Escrow: An escrow service is a licensed and regulated company that collects, holds, and sends money, according to conditions specified by both the customer and service provider. Once the conditions of the customer are met, funds are immediately released to the service provider. Typically, in the private placement business, escrow is used to pay upfront fees for “sketchy” services such as leased bank instruments, funding opportunities, and others.

Euroclear: The world’s largest settlement system for securities transactions, covering bonds and equities, as well as bank instruments.  This important and efficient medium allows transactions to be completed remotely while ensuring safety for both the buyer and seller of the asset.

Exit Buyer: A term used very frequently, referring to the “buyer in place” purchasing the bank instrument at a higher value from the current owner.

Free and Clear: Also known as “unencumbered”, it means there are no liens or current debt obligations associated with that particular asset.

Fresh Cut: Phrase refers to a recently issued bank instrument that has had only one owner over the course of its existence. Usually, they are accessed at a steep discount from the face.

Funding: A shorter way to reference “project funding”, usually referred to by those with insufficient capital to fund their project through private placement programs.

Hypothecate: The process of assigning a monetary value to an illiquid asset, and then extracting liquidity in the form of a loan, using the illiquid asset as collateral.

In-Ground Assets: Land areas that have been appraised based upon geological assessments of the assets which lie beneath.   Many in the private placement business try to enter programs with land containing precious metals, energy materials, and more. Unfortunately, most have no luck due to the current worldwide liquidity crisis, and the high excavation costs to isolate the asset.

Intermediary: Anyone involved in a private placement transaction, either through introduction or compensation, who is NOT the trader or client.

Glossary of Private Placement Program Terms

Junk Bond: A bond issued by a company or institution which has poor financial integrity, making the bond effectively worthless.  Some examples that private placement brokers may encounter are Venezuelan bonds, Brazilian bonds, gold bearer bonds, certain corporate bonds, and many others.

Ledger to Ledger: This phrase refers to a transfer between two accounts held by the same bank. For example, a trader may have an HSBC account, and send the profits to a client with a different HSBC account.  This is far more efficient and avoids possible problems associated with external transfers.

Letter of Authorization: A compliance document required for all private placement investors. allowing the trade group to verify the investor’s assets bank to bank.  This is also known as the “Authorization to Verify”.

Line of Credit: Though it may sound fancy, it’s just a bank loan. Usually, in the private placement world, this refers to the loan given to the trader right before trading starts.

Managed Buy/Sell: Another synonym for private placement programs. It refers to the managed buying and selling of bank instruments by a private placement trader.

Mandate: Another term meaning someone is “direct” to an investment opportunity or client.  Usually, this term is used by very inexperienced brokers.

MT 103: This is an improved version of the original swift MT 100, which is similar to a wire transfer. Though it is a direct transfer, the MT 103 has a large number of options that describe conditions and instructions for how the payment should be made.

MT 760: This swift message is used to block funds in favor of someone other than the investor, collateralizing the asset while allowing for loans against it.

MT 799: This swift message is used between banks to communicate in written form, and is usually referred to as “pre-advice”. Typically, the MT 799 will be needed directly before the MT 760 Is issued.

Non-Depletion Account: A term used in private placement contracts which guarantees the funds of the client will never be depleted by the trader.

Non-Solicitation: A compliance document that protects the consultants by having the investor-state they were not solicited.

Paper: A synonym used by private placement brokers referring to bank instruments such as bank guarantees or medium-term notes.

Paymaster: An individual elected by intermediaries who will accept all commission payments on a private placement transaction, and then distribute them in accordance to the agreement between the parties.  This can be an attorney, one of the brokers, or anyone else the intermediaries feel comfortable with.

Piggyback Program: A newly created phrase referring to the concept of “pooling” investors to meet the minimum capital requirements of a private placement investment. For example, 10 investors with 10M would try to meet the 100M minimum which most private placement traders require. 

Ping: This term refers to a type of private placement program which allows investors to leave funds in their account, while the trading bank verifies the full balance is still present on a daily or weekly basis. Supposedly, traders can access a loan against this “ping”/verification of funds and start trading on the client’s behalf. Beware of these programs, as most never perform as promised.

Platform: Another synonym for private placement programs which refers to the corporate structure of the trade group.

Power of Attorney: A document signed by the account holder which gives authority for someone to act on their behalf, as specified in the agreement.

Program Manager: An individual who is “direct” to a trader with a private placement program, accepting all applications and questions from prospective investors.

Promissory Note: Basically, it’s an IOU given from one party to another, stating debt repayment obligations and terms. In all reality, it is really worth nothing to third parties.

Seasoned: Common term that refers to bank instruments, such as medium-term notes (MTN s) and bank guarantees (BG s), which have been owned by several different beneficiaries over their existence.

Shopping: When a representative sends out an investor’s compliance package to several “program managers” at the same time.  This is greatly frowned upon and can ruin relationships with real traders.

Signatory: An individual who legally represents the assets/services of another person, entity, or themselves, by executing all contractual agreements and related obligations.

Slightly Seasoned: A bank instrument that has been traded, having more than one owner over its lifespan before maturity.  This is usually a bank instrument that is discounted moderately, sold at a value of 70-85% of face.

Swift: A system of communication between banks, allowing account holders to block, transfer, or assign assets as per their request.  Examples are the swift MT 100, MT 103, MT 760. and MT 799 .

Tabletop: A term that refers to a face-to-face meeting between a buyer/investor, and a seller/trader.

Trade Program: A synonym of the term “private placement investment”

Trader: A person with a direct relationship to a bank that is issuing discounted bank instruments, which will later be sold to a pre-defined “exit buyer” at a higher value.

Trading Bank: This is the bank where the trader receives the collateral, or assignment thereof, from the investor. Also, this bank provides a line of credit to the trader.

Unencumbered: This means the referenced asset has no liens or debt obligations to any third party.