Commodity Buy/Sell Joint Participation in Trade Matching with Challenging Returns
NOTE: There may be more than one reseller involved in some transactions before it reaches the end user - each usually contributes a service or sometimes an upgrade to the product/commodity until the completion of the sale. The purchaser provides a bank letter of credit or other financial instruments from their bank so that when the product is delivered payment is secured and released to the seller (or re-seller agent) when all conditions of sale are met. The profit difference between the purchase to the final sale is then shared between the parties according to their JV participation agreement with each participant having provided a service, whether that service was providing the "financing" or otherwise.
How Profit is Calculated?
Example #1 - Oil and Petroleum Products:The sequence of events that take place from exploration to production then on to distribution and refining, to finished products is a long-term investment, but as with most commodities, there is a consumable element that has many opportunities to profit at each stage of product deliveries. Let's start with crude oil and realize that similar circumstances are applicable to all petroleum-related productivity. Once crude oil is available, the re-seller makes the purchase and forward sells to the refinery. The time element for JV participants, especially the Funds holder participant, is crucial.
BE AWARE:These opportunities for private funds participation in commodities may be set for a one spot buy/sell or have the funds standing for a longer-term contract, as the long-term contract stands the risk factors of consideration are minimized. However, a refinery has a preset for deliveries of their intake crude and exit refined product because they can not start and stop, they must have a steadily purchasing client making a JV participation opportunity difficult to secure for a longer period of time because they already have sales secured. The same issues apply either to crude oil supply or too refined product sales for the private participant, similar issues of risk and delays to see the return in the JV exist, but when found and sought out to be real can be lucrative.
Example #2 - Diamonds:Here the same investment opportunities take place. However, the delivery of product/commodity is much simpler as the diamonds can be carried in one's person under security measures yet the time for a transaction to close is much less - hence more turnover for more profit.
Example #3 - Electronically Traded Commodities:When applied to an electronic securities product, also a commodity, such as Medium Term Notes (MTNs) or mortgages, or Standby Letters of Credit instead of a physical commodity, additional benefits result, including certainty of profit commitments from all banks involved in the transaction, speed of transactions to close, and protection of capital via a secured and specified custodial security account that maintains participant funds at an initial level of deposit within the account.
Required Items to Establish the JV Participation
A) Trade RequestThe client requests to be taken forward to a matched buy/sell trading opportunity by providing initial documentation including 1) A Letter of Request from the Client 2) A tear sheet of the account statement indicating cash funds available 3) A Letter of authorization to verify the funds in the bank on a bank to bank communication 4) List of the project(s) to be funded with maximum anticipated cost estimate 5) Client Information statement providing compliance disclosure to "Know Your Client" to address the appropriate banking and finance regulations 6) Full-color copy of account holder's Passport and 7) Letter of Attestation if the account holder client is a Corporation then the trade group will additionally require the following: i.) Corporate Resolution naming appointment of the authorized signatory; ii) Certificate of Incorporation; and iii.) Passport copies of primary Directors and Shareholders of the Corporation
B) Funds ConfirmationBefore accepting or honoring a new client request as genuine, the trade group must check that both the funds/asset are recognized by the client's custodial banker holding the funds/asset. There is no exception to this requirement, regardless of the title or position of the new client. The trade group's reputation with their issuing banks and exits is more important than any single transaction or new client, and they will not jeopardize these relationships.
C) Trade AgreementOnce the client request is confirmed as a genuine request, the file is identified as LIVE and the trade group will provide every resource to make the participating business trade relationship a successful one.
D) Create Usable Protected Capital for TradeThe structure of this stage varies from client to client, as each client has their own unique funding position and level of matched trading experience, together with their new JV relationship with the trade group. Matched trading itself can only be executed with cash funds. Where an asset is proposed by the client, then additional steps need to be taken to monetize the asset into usable cash funds. Requests to utilize an "Administrative Hold" against cash only reveal a lack of understanding of the funding process. A trade bank MAY OR MAY NOT release a credit line to the trade group secured against an "administrative hold" of the funds, as this is may not be recognized as a viable security.