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Part 2: Hyper-Hypothecation Madness

Wednesday, December 14, 2011
Part 2: Hyper-Hypothecation Madness

“A prime broker need not even require that an investor sign all agreements with a European subsidiary to take advantage of the re-hypothecation loophole. As a result of these peripheral agreements, all or most of clients’ assets find their way down to a ‘Consent To Loan Or Pledge: You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control.’ With these transactions taking place off-balance sheet it is difficult to pin down the exact entity used to re-hypothecate such large sums of money. Matters get even worse when we consider what has for the last 6 years counted as collateral under re-hypothecation rules. Despite the fact that there may only be a quarter of the collateral in the world to back these transactions,

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