Commentaries

Keeping Wall Street’s hands off the collateral

Matthew Goldstein

Aug 27, 2009 13:56 UTC

The idea of prohibiting derivatives dealers from reusing and redeploying the trillions of dollars in collateral they’ve taken in from trading parnters is gathering steam.

Earlier this week, I advocated an outright ban on this Wall Street practice called rehypothecation. I noted that one of the flaws with the Obama administration’s plan for regulating derivatives is that it’s silent on the issue of whether derivatives dealers can continue to reuse the collateral they get as guarantees on trades anyway they see fit. 

In the Lehman Brother bankruptcy, one of the big unresolved issues is tracking down collateral Lehman took in as guarantees on derivatives trades and then used as collateral for its own transactions.

Last week, Gary Gensler, chairman of the Commodities Futures Trading Commission, sent a letter to a number of congressmen urging changes in Obama administration’s derivatives plan. One thing Gensler advocated was a measure that would require derivatives dealers to segregate customer collateral in seperate accounts just the way futures dealers must do. Gensler says doing so would make it easier to deal with the failure of a derivatives dealer.