Sunday, November 8, 2009

Medium Term Notes (MTN’s) ?

One should be careful to distinguish between Prime Bank Notes (PBN's), Prime Bank Debentures (PBD's) and Medium Term Notes (MTN's). Both forms do not exist but MTN does. The difference has to be careful because sometimes PBN and PBD are intertwined and fraudsters will package it into MTN. In the article entitled "The Anatomy of the Medium-Term Money Market" published in the "Federal Reserve Bulletin," Volume 7, Number 8, 1993 which appears in the monthly publication of the Publications Committee of the Federal Reserve System Board of Governors, Washington, DC (you can log on to the website them at, or call on 202 452 3244), there's a lot of discussion about MTN.

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

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 capsulized 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 ?

A standby letter of credit is a bank instrument regulated by the Uniform Customs and Practice International Chamber of Commerce (ICC), Publication No. 500, International Standby Practices ISP98, ICC Publication No. 590 and the Uniform Commercial Code (UCC). The ICC 500 and ICC 590 are the rules set and the UCC is the law.

The standby letter of credit is quite flexible. ISP98 offers the following descriptive list, however, keep in mind that this is only a convenience list and can be expanded as needed depending on the specific functionality or application required.

Standby Performance
Prepaid Prepayment
Standby for Bid Guarantee / Tender Bond
Counter Standby
Financial Alert
Standby Pay Direct
Insurance Alert
Commercial Standby

The standby letter of credit is conditioned on default or non-performance by the applicant, the party having the credit issued by his bank to the recipient. These instruments are, by themselves, non-negotiable and the obligations they represent are not easily transferable. ICC 500 Article 48 b, states "Credit is transferable only if expressly designated as" transferable "by the issuing bank" and, c, "The Sending Bank is under no obligation to make such a transfer except to the extent and in a manner expressly agreed by the bank. . "

ISP98 Rule 6.02 states "a. Standby is not transferable unless stated so, b. A standby stating that it is transferable without further provisions means that the right to withdraw: i. can be transferred as a whole more than once, ii. partially transferable, and iii. cannot be transferred unless the issuer (including confirmer) or someone else specifically designated on standby agrees and affects the transfer requested by the recipient.

Like the bank guarantees described above, fraudsters will often sell standby letters of credit to uninformed parties for a small percentage of their face value. It has never been disclosed that the credit is no longer valid because the applicant has fulfilled his obligations to the recipient. Another facet of the fraud scheme is offering investment opportunities through standby letters of credit and independent bank guarantees. Bear in mind that these instruments are out of date and in themselves non-negotiable, and, furthermore, the obligations they represent are not transferable immediately.

Fraudsters will claim that this instrument is discounted, has a coupon attached and pays 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 claims investing in a discount standby letter of credit is a scam.