Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20
Global "Debt Mountain": Beware of This "New Peak" - 13th Nov 20
Overclocking Zen 3 Ryzen 5600x, 5800x, 5900x and 5950x to 4.7ghz All Cores Cinebench R20 Scores - 13th Nov 20
Is Silver Leading Bitcoin or is Bitcoin Leading Silver? - 13th Nov 20
How Elliott Waves Simplify Your Technical Analysis - 13th Nov 20
How to buy Bitcoins using debit/credit card? - 13th Nov 20
Will COVID Vaccine Kill Gold and Silver? - 12th Nov 20
Access to Critical Market Reports - 12th Nov 20
Stock Market Dow Futures Reach 30,000 on News of COVID-19 Vaccine Trials Success - 12th Nov 20
8 Terms & Conditions You Must Know Before Asking For Life Insurance Policy Quotes - 12th Nov 20
Gold Stocks Post 2020 US Election Outlook - 11th Nov 20
Champions’ League Group Stage Draw: All You Need To Know - 11th Nov 20
Stock Market Secular Trend - 11th Nov 20
Stock Market Correction Curtailed by US Election - 11th Nov 20
What Causes a Financial Bubble? - 11th Nov 20
Ryzen 9 5900X RTX 3080 - Scan.co.uk vs Overclockers.co.uk UK Custom PC System Builder Review - 10th Nov 20
Killing Driveway Weeds FAST with a Pressure Washer - Saving Block Paving from LOTS of WEEDs - 10th Nov 20
Trump Fired, Biden Hired, What Next?  - 10th Nov 20
Looking for a Personal Loan? Here Is What You Have To Know  - 10th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Rehypothecation of Collateral

Stock-Markets / Financial Markets 2013 Oct 09, 2013 - 10:47 AM GMT

By: BATR

Stock-Markets

Before you get a headache or a pain in your side, rehypothecation is not as difficult to understand as spelling the word. Definition of 'Rehypothecation':

“The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees.


In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09.

In the United States, rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client, under Rule 15c3-3 of the SEC.”

Well, now that it is clear, isn’t it? Still need a better explanation, watch the video Rehypothecation.

Look at the practice as a giant musical chairs orchestra, conducting a continuous symphony. As long as the tune plays, the multi pledged collateral is safe from foreclosure.

Consider that the entire fiat paper financial system is based upon a promise to pay. The original capital plus the interest juice is incorporated within the pledge from the borrower to the lender. However, in the real world only the super privileged and connected negotiate market rate or below, loans without collateral. For the rest of the garden-variety beggars that need to go hat in hand to scrounge money, they had better be willing to put up security for the note obligation.

Of course, unsecured credit card usury rates are the exception to manageable interest rates.

In the realm of high finance the rules for swinging deals takes on surreal implications when leveraging, gearing and syndication pooling share the risk by pledging security instruments to gain loan approval.

The complications are that such guarantees often do not hold unencumbered rights to the underlying security. Obtaining insurance coverage to warrant the value of the collateral is one way to satisfy the lender. Add to this expose the practice of re-insurance when the original underwriter books out their portions of the default risk to another more daring insurer.

While the security industry rules limit the percentage of rehypothecation, do not forget this is the same fraternity that invented the practices of derivatives and swaps.

Do you really believe that any set of rules will prevent the security brotherhood from comingling customer funds? Maybe putting Jon Corzine, the MF Global Holdings guru in charge of regulation enforcement would bring clarity to a complex system of double-dealing.

Sure, such an expert on circumventing the law would be the optimum sheriff to round up the rehypothecation bandits. Well, just understand the significance that the lawyers and barristers acknowledge, in the WGMR report.

"Cash is fully fungible, making it difficult to segregate from other assets, lawyers point out. Full title to the cash is given to the dealer, and all the customer has is a contractual claim for repayment of an equal amount of cash, meaning it would effectively rank as an unsecured creditor in the event of a default. In contrast, securities posted as collateral under a security interest arrangement can be segregated and traceable."

Oh golly, the smoking gun verbalized by the officers of the court . . .

The depositor relinquishes their ownership of funds to the security dealer. When the music is over, turn out the lights. Maybe the message from the Jim Morrison’s song is a warning to investors and borrowers alike. Just close the door on the opaque scheme to overestimate the underlying value of collateral security.

When the only recourse to recoup your losses rests upon an unsecure creditor status in a bankruptcy, the capital formation of the economic system ceases to function. Conversely, before the borrower rejoices that the financial institution takes a mortal hit to their balance sheet, the collapse of liquidity brings hardship to the entire economy.

Common sense in banking is gone. Indemnity protection in securities is worthless. If left to the financial elites to rescue the paper monitory structure, the gnomes of default will just rehypothecate the entire system by claiming the same ownership, of all-collateral as the financial dealers take full title to your cash.
This is how you have become the unsecured creditor of your own assets. When You Wish Upon A Star, Anything your heart desires – REHYPOTHECATION - Will come to you.

Source : http://www.batr.org/negotium/100913.html

Discuss or comment about this essay on the BATR Forum

http://www.batr.org

"Many seek to become a Syndicated Columnist, while the few strive to be a Vindicated Publisher"

© 2013 Copyright BATR - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors

BATR Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules