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Arbitrage and Leverage

Private Placement trading safety is based on the fact that the transactions are performed as arbitrage transactions. This means that the instruments will be bought and resold immediately with pre-defined prices. A number of buyers and sellers are contracted, including exit-buyers comprising mostly of large financial institutions, insurance companies, or extremely wealthy individuals.

The client's principal does not have to be used for the transactions, as it is only reserved as a compensating balance ("mirrored") against this credit line. This credit line is then used to back up the arbitrage transactions. Since the trading is done as arbitrage, the money (“credit line”) doesn't have to be used, but it must still be available to back up each and every transaction.

Program Structure

Normally, a trading program is nothing more than a pre-arranged buy/sell arbitrage transaction of discounted banking instruments. Theoretically, a client with a large amount of funds (on the level of $100-500M USD) could arrange his own program by implementing the buy/sell transaction for himself; however, in this case he needs to control the entire process, initiating contact with the banks and the exit buyers at the same time. This is not a simple task, considering the restrictions in place.

For a client it is much simpler (and usually more profitable) to enter a program where the trader and his trading group have everything in place (the issuing banks, the exit buyers, the contracts ready for the arbitrage transaction, the line of credit with the trading banks, all of the necessary guarantees / safety for the client, etc.). The client needs only to agree with the contract proposed by the trader, disregarding any other underlying issues. It is further advantageous for the client to enter a program with a substantially lower amount of money and benefit from the line of credit offered by the trading group.