Dear ,

Don't let anyone tell you the U.S. Dollar will die. The Federal Reserve Note will be replaced by a U.S. Treasury Note. SWIFT will be replaced by Blockchain and Quantum Financial System BUT the United States Treasury Note will remain the Global Reserve Currency long into the foreseeable future.

Digital money is not new, think ATM machines? However, Central Bank Digital Currency (CBDC) is new and a last ditch effort, of a failing Central Banking system, to retain control of a brilliant plan, that has run it's course and now reached it's end.

The Crypto-Asset Market is new and very volatile - BUYER BEWARE!

Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities

The Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) (collectively, the agencies) are issuing this statement on the liquidity risks presented by certain sources of funding from crypto-asset1-related entities, and some effective practices to manage such risks.

The statement reminds banking organizations to apply existing risk management principles; it does not create new risk management principles.2 Banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type, as permitted by law or regulation.

Liquidity Risks Related to Certain Sources of Funding from Crypto-Asset-Related Entities

• Deposits placed by a crypto-asset-related entity that are for the benefit of the crypto-asset-related entity’s customers (end customers). The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty. The stability of the deposits may be influenced by, for example, periods of stress, market volatility, and related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity. Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to crypto-asset-sector-related market events, media reports, and uncertainty. This uncertainty and resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity.
• Deposits that constitute stablecoin-related reserves. The stability of such deposits may be linked to demand for stablecoins, the confidence of stablecoin holders in the stablecoin arrangement, and the stablecoin issuer’s reserve management practices. Such deposits can be susceptible to large and rapid outflows stemming from, for example, unanticipated stablecoin redemptions or dislocations in crypto-asset markets. More broadly, when a banking organization’s deposit funding base is concentrated in crypto-asset-related entities that are highly interconnected or share similar risk profiles, deposit fluctuations may also be correlated, and liquidity risk therefore may be further heightened.

Effective Risk Management Practices

In light of these heightened risks, it is important for banking organizations that use certain sources of funding from crypto-asset-related entities, such as those described above, to actively monitor the liquidity risks inherent in such funding sources and establish and maintain effective risk management and controls commensurate with the level of liquidity risks from such funding sources. Effective practices for these banking organizations could include, for example:

• Understanding the direct and indirect drivers of potential behavior of deposits from crypto-asset-related entities and the extent to which those deposits are susceptible to unpredictable volatility.
• Assessing potential concentration or interconnectedness across deposits from crypto-asset-related entities and the associated liquidity risks.
• Incorporating the liquidity risks or funding volatility associated with crypto-asset-related deposits into contingency funding planning, including liquidity stress testing and, as appropriate, other asset-liability governance and risk management processes.
• Performing robust due diligence and ongoing monitoring of crypto-asset-related entities that establish deposit accounts, including assessing the representations made by those crypto-asset-related entities to their end customers about such deposit accounts that, if inaccurate, could lead to rapid outflows of such deposits. In addition, banking organizations are required to comply with applicable laws and regulations. For insured depository institutions this includes, but is not limited to, compliance with brokered deposits rules, as applicable, and Consolidated Reports of Condition and Income (also known as the Call Report) filing requirements.

By Biagio Campo

In recent years, the regulators and intermediaries have focused their efforts primarily on the ESG issue, ignoring other aspects that I believe are critical. The following are five proposals that could be implemented in the short term, but are unlikely to be developed without a specific regulatory request.

Non-pro-cyclical MiFID* market risk parameters –Various banks use value at risk (VaR) as the primary indicator for defining market risk in accordance with the MiFID regulation. However, in periods of market uptrend, this coefficient tends to underestimate the risk and overestimate it in the negative ones. If market risk parameters were correlated to valuation metrics unrelated to momentum, comparing their current value to the average value of the previous 5-10 years, the maximum risk exposure for the various MiFID profiles could be reduced in periods of overvalued indexes and increased in periods of undervalued markets. For equity investments, the cyclically adjusted price to earnings ratio (PE), price to book (PB), and price to cash flow (P/CF) should be used; for bonds exposure, the yield to worst (YTW), real interest rate, default rate, benchmark spread, absolute level of debt and its variation over time.

Risk parameters for MiFID concentration – Concentration risk should be completely reviewed and expanded to include a broader range of parameters, such as exposures to the single issuer/company and the group to which it belongs, the geographical area of incorporation and the sources/areas of revenues, the sector of activity and the sensitivity of profits to real-economy performance, for all positions held by clients, including mutual funds and ETFs of any category. Banks do not carry out the look through of the asset management instruments, as a result this would represent a huge turning point in risk management. The previously exposed market risk coefficients (PE, PB, P/CF, YTW, etc.) should also be used in order to have portfolios with a level of diversification in various aspects, including investment strategies.

Expected return disclosure – The disclaimer that past returns are not indicative of future performance cannot prevent savers from turning to products that have achieved higher returns. To limit this phenomenon, it would be useful to report the parameters relating to the portfolio's current positioning, as well as the return to 1, 3, and 5 years previously obtained, against the current level of PE, PB, P/CF, and YTW, clearly with different updating times, within the marketing and offering documents. This allows investors to focus on expected returns rather than past ones, reducing the distortive effects of inevitable periods of euphoria or pessimism.

Three-year consecutive fund performance advertising – Numerous studies show that the best mutual funds in any given period (typically the three-year time horizon is taken into consideration) are not confirmed as such in the following period of time. Furthermore, mean reversion is a well-documented phenomenon in many fields. However, the widespread practice of selling performance rather than investment strategies has not abated. Part of the fund managers commercial policy is to have a large number of instruments in their catalogue, on different markets, in order to always be able to offer products with excellent returns and possibly liquidate or merge the worst ones. In this regard, I would like readers to recall whether they have ever attended a road show or received a newsletter in which mutual funds below benchmarks were presented. The high number of fund advertisements in public places (buses, metro and railway stations, etc.) is an obvious indicator of our society's growing financialization. To limit the phenomenon of selling performance and increase the coherence of the advertising medium with the time horizon and the needs of retailers, if the fund managers report the fund's results in the advertisement, they should be forced to repeat the same type of advertising on the same channel for three consecutive years, periodically updating the performance. The risk of having to bear costs to promote products, possibly with double-digit drops, would undoubtedly cause fund managers to pay closer attention to marketing policies.

Investor return released – It is well known that savers underperform due to poor market timing. They can suffer losses during bull markets and on mutual funds that have provided positive returns for several consecutive years. The volatility and the risk adjustment metrics are difficult for retailers to understand. They only partially grasp the relationship between funding flows and fund results. In addition to the existing performance data, the average investor return could be disclosed in marketing materials and offering documents. As a result, investors would be more aware, and the professionalism of the fund manager sales channel would improve noticeably. These, in fact, would be led to better identify the distribution target and provide extremely precise information on the underlying strategy, both to investors and distributors, in order to avoid large disinvestments due to increased volatility. There is no shared methodology for calculating the investor return. Its calculation would undoubtedly be somewhat complicated at first, but it would result in a significant increase in terms of financial sector transparency.

** “The Markets in Financial Instruments Directive (MiFID) is a European regulation that increases the transparency across the European Union's financial markets and standardizes the regulatory disclosures required for firms operating in the European Union.” – “In 2018, the European Commission enacted a revised directive called MiFID II. First proposed in 2012, the revised directive was intended to restore confidence in the markets following the 2008 market crash. While MiFID was limited to equity stocks, MiFID II extended the requirements to issuers of all types of securities, including debt securities, derivatives, and structured instruments. The new regulation enhanced the transparency and reporting requirements of securities trades, reducing the use of dark pools and OTC trading. It also extended investor protection for all types of securities trades, whether the investor was located inside or outside of the European Union.” Source Investopedia.

All trading programs in the Private Placement arena involve trade with discounted debt notes in some fashion. Further, in order to bypass the legal restrictions, this trading can only be done on a private level. This is the main difference between PPP trading and ‘normal’ trading, which is highly regulated. This is a Private Placement level business transaction that is free from the usual restrictions present in the securities market. It is based on trusted, long-established private relationships and protocols. Normal trading activity is performed under the ‘open market’ (also known as the ‘spot market’) where discounted instruments are bought and sold with auction-type bids.

To participate in PPP trading, the trader must be in full control of the funds, otherwise he has no means of buying the instruments before reselling them. However, in addition to the widely recognised open market there is a closed, private market comprising a restricted number of ‘master commitment holders’. These are trusts, foundations and other entities with huge amounts of money that enter contractual agreements with banks to buy a limited number of fresh-cut instruments at a specific price during an allotted period of time. Their job is to resell these instruments, so they contract sub-commitment holders, who in turn contract exit-buyers.

This form of pre-planned and contracted buy/sell is known as arbitrage, and can ONLY take place in a private market (the PPP market) with pre-defined prices. Consequently, the traders never need to be in control of the client’s funds. No program can start unless there is a sufficient quantity of money backing each transaction. It is at this point that you, the client, is needed because the involved banks and commitment holders are not allowed to trade with their own money unless they have reserved enough funds, comprising money that belongs to clients, which is never at risk.

The ‘host’ trading bank is then able to loan money to the trader against your deposit. Typically, this money is loaned at a ratio of 10:1, but during certain conditions it can be as high as 20:1. In other words, if the trader can ‘reserve’ €100 million of client funds, then the bank can loan €1 billion against it, with which the trader can trade.

In all actuality, the bank is giving the trader a line of credit based on how much client funds he controls, since the banks can’t loan leverage money without collateral. Because bankers and financial experts are well aware of the ‘normal’ open market and of so-called ‘MTN-programs’, but are closed out of this private market, they find it hard to believe that it exists. Bankers in top-tier, global banks (where this trading takes place) are ignorant that this trading exists within their own institutions because it happens at a level far removed from their own mainstream corporate or retail banking operations.

Arbitrage and Leverage Private Placement trading safety is based on the fact that the transactions are performed as arbitrage. This means that the instruments will be bought and resold immediately with predefined prices. A number of buyers and sellers are contracted, including exit-buyers comprised mostly of large financial institutions, insurance companies, or UHNWI’s. The arbitrage contracts, provision of leverage funds from the banks and all settlements follow long-established and rapid processes. The issued instruments are never sold directly to the exit-buyer, but to a chain of market participants.

The involved banks are not allowed to directly participate in these transactions, but are still profiting from them indirectly by loaning money with interest to the trader as a line of credit. This is their leverage. Furthermore, the banks profit from the commissions involved in each transaction. The client’s principal does not have to be used for the transactions, as it is only reserved as a compensating balance (‘mirrored’) against the credit line provided by the bank to the trader. This credit line is then used to back up the arbitrage transactions.

Arbitrage trading does not require the credit line to be used, but it must still be available to back up each and every transaction. Such programs never fail because they don’t begin before arbitrage participants have been contracted, and each actor knows exactly what role to play and how they will profit from the transactions. The trader is usually able to secure a line of credit typically 10 to 20 times that of the principal (the client’s deposit). Even though the trader is in control of that money, the money still cannot be spent. The trader need only show that the money is unencumbered (blocked), and is not being used elsewhere at the time of the transaction.

Introduction to Private Placement Trading contact Invest Offshore