"Spread Bet" Early Market Opening Indications: Stocks Tumble, Europe Crashes | Zero Hedge

"Spread Bet" Early Market Opening Indications: Stocks Tumble, Europe Crashes | Zero Hedge



Stock markets will crash on Monday, showing the fear of contagion in the markets, if we are to believe these futures numbers.  The Bank of International Settlements has said this, so there could be contagion:



 Rehypothecation and reuse of collateral assets







Rehypothecation refers to the right of financial intermediaries to
sell, pledge, invest or perform transactions with client assets they
hold; and it allows prime brokers and other financial intermediaries to
obtain funding using their client collateral. Collateral reuse, in turn,
usually covers a broader context where securities delivered in one
transaction are used to collateralise another transaction, including the
ability to reuse collateral through change in (temporary) ownership.
Yet the terms rehypothecation and reuse of securities are often used
interchangeably; they do not have distinct legal interpretations.







Certain types of collateral rehypothecation (and reuse) can play an
important role in financial market functioning, increasing collateral
velocity and potentially reducing transaction and liquidity costs.
Rehypothecation decreases the (net) demand for collateral and the
funding liquidity requirements of traders, since a given pool of
collateral assets can be reused to support more than one transaction.
This lowers the cost of trading, which is beneficial for market
liquidity.







Securities lending-type transactions (including collateral swaps),
which have been structured as collateralised loans, would not exist
without rehypothecation. In the repo market, participants would not be
able to cover short positions without the ability to reuse collateral.
However, repos do not directly rehypothecate collateral because they are
structured as a sale and repurchase transaction.







While certain types of rehypothecation can be beneficial to market
functioning, if collateral collected to protect against the risk of
counterparty default has been rehypothecated, then it may not be readily
available in the event of a default. This, in turn, may increase system
interconnectedness and procyclicality, and could amplify market
stresses. Therefore, when collateral is rehypothecated, it is important
to understand under what circumstances and the extent to which the
rehypothecation has occurred; or in other words, how long the collateral
chain is.









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