Rehypothecation in the European Union
The scandal of MF
Global demonstrated that
rehypothecation should be ban. Collateral transformation
can play an important role in financial transaction, but should not be source
of instability of the market. Reducing the cost of derivative trades with
rehypothecation methods create more risk, especially if the dealer defaults. In
a document dated May 15, 2013, The European Union demonstrated that restriction
of rehypothecation is a viable option. This new initiative will help strengthen
stability of the market and protect client assets.
In a recent article: “EU Weighs Curbs on Banks’ Use of
Client Assets as Collateral” (May 24, 2013), Bloomberg reported: “ The
European Commission is weighing whether firms should have to obtain formal
consent from their clients before being allowed to reuse assets to back other
trades. The consent would be enshrined in a “contractual agreement” between the
parties.”
“The reuse of clients’ assets poses a potential threat to financial
stability should one of a chain of firms that handled the securities go
bankrupt. Uncertainty about who holds an asset can fuel panic in times of
market stress.”
““Complex”
chains of collateral can make it difficult for investors to “identify who owns
what, where risk is concentrated and who is exposed to whom…this has
consequences for transparency and financial stability.”
