Friday, May 24, 2013

Rehypothecation in the European Union


                    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.”

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