Problems with rehypothecation: driving force behind cash collateralisation ?

[Prajwala]

Hello David,

Can you please explain why there may not be any risk of rehypothecation with cash collateral? (referring to last para of page 155 in T6 pdf)

The cash posted as collateral can be used by receiver to lend, purchase other assets or re-post as collateral for it's own negative MtM with another counterparty

Thanks and Regards,
- Prajwala

 

[David Harper CFA FRM]

Hi Prajwala,

That section of the notes (being totally unseasoned) is basically verbatim from Gregory's Chapter, FYI.

(Just curious, what is the source of, emphasis mine? "The cash posted as collateral can be used by receiver to lend, purchase other assets or re-post as collateral for it's own negative MtM with another counterparty" ... do i have that some where? there is a difference between post and re-post)

In regard to Gregory's last para, the source is this paper:
https://www.dropbox.com/s/rnxli908o978rzm/Singh_Aitken_SSRN-id1366171.pdf

Here is the relevant, I think, portion (emphasis mine):

"Rehypothecation is allowed only on margin securities in the United States. Fully-paid securities, which are the securities for which a customer has actually made full payment, are generally held in the cash account and are not permitted to be rehypothecated. Excess margin securities, which are that portion of a customer’s margin securities having a market value that exceeds 140 percent of the customer’s debit balance to the broker-dealer, are also not permitted to be rehypothecated. Margin securities, which are customer securities held in a margin account and for which the customer has notmade full payment, are not subject to the possession and control requirement, so a broker-dealer can use these securities in its own business—including rehypothecation—subject to certain limitations." -Singh and Aitken (2009)

 

[Prajwala]

Thanks for clarifying David.

PS:
Sorry for not being clear in my question.
The sentence from T6 notes is "The problems with rehypothecation is another driving force behind cash collateralisation becoming increasingly the standard"
The sentence "cash posted as collateral can be used by receiver to lend, purchase other assets or re-post as collateral for it's own negative MtM with another counterparty" is my question (asking clarification)

Regards,
- Prajwala