Private Placement Market
The day to day market available for discounted bank instruments like bonds, BG, SBLC, MTN, etc., is huge and involves “exit-buyers” and issuing banks. The exit buyers entail Pension Funds, financial institutions, etc., in the private placement market. When the similar activities are carried out in a bank, they are referred to as the “off-balance sheet activities”. These activities are responsible for bringing a lot of benefit of the banks. Basically, the off balance sheet activities carried out in a bank is contingent assets and liabilities, where the value is dependent on the outcome on which the claim, like an option, is dependent. These activities reflect within the balance sheet as memoranda items. The bank is not required to make considerations regarding binding capital constraints as there is lack of deposit liability.
The Private Placement Market is dissimilar to normal trading in many ways. In Private Placement Market, trading is involved with notes or discounted debt instruments and this is done only at a private level so as to bypass any legal constraints. This is the major difference from the normal trading which is highly regulated. In other words, the transactions in the Private Placement Market are carried out only at a private level, thus bypassing legal limitations that are an important feature of the securities market. In normal trading, there is basically an open market where discounted instruments can be bought or sold through offers and bids. The traders must have complete control over the funds in order to play in the normal trading market. If they lack the control, they cannot sell the instruments to others.
A specific inner circle exists in the private placement market. Here, only a limited number of master commitment holders exist. These are trusts that basically have a lot of money at their disposal and through contracts, they agree to buy a specific number of instruments at a standard price during a particular period of time. The main objective to sell fresh cut instruments and for this purpose, they contract sub-commitment holders, who, in their turn, look for exit buyers. Since the market runs on arbitrage transactions related to buying and selling with predetermined prices, there is no need for the traders to be in control of the funds of the investors. But, for a proper procedure to follow, it is imperative to have necessary money left after every transaction of buying and selling. Here is where the investors come into the picture. Own money cannot be used by the commitment holders and the banks for trading unless, they have enough market funds and the same belongs to the investors which is never put at risk.
The money can be lent by the trading banks to the traders at a ratio, which is usually 1:1. In certain conditions, the ratio can go as higher as 20:1. It is significant to understand that any trader who is responsible for controlling the funds of an investor is not the main player, but he plays in a market where myriad instruments are traded.