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Essentially all securities “owned” by the public in custodial accounts, pension plans and investment funds are now encumbered as collateral underpinning the derivatives complex, which is so large—an order of magnitude greater than the entire global economy—that there is not enough of anything in the world to back it. The illusion of collateral backing is facilitated by a daisy chain of hypothecation and re-hypothecation in which the same underlying client collateral is re-used many times over by a series of secured creditors. And so it is these creditors, who understand this system, who have demanded even more access to client assets as collateral.
…it is now assured that in the implosion of “The Everything Bubble”, collateral will be swept up on a vast scale. The plumbing to do this is in place. Legal certainty has been established that the collateral can be taken immediately and without judicial review, by entities described in court documents as “the protected class.” Even sophisticated professional investors, who were assured that their securities are “segregated”, will not be protected.
These are the key facts:
• Ownership of securities as property has been replaced with a new legal concept of a “security entitlement”, which is a contractual claim assuring a very weak position if the account provider becomes insolvent.
• All securities are held in un-segregated pooled form. Securities used as collateral, and those restricted from such use, are held in the same pool.
• All account holders, including those who have prohibited use of their securities as collateral, must, by law, receive only a pro-rata share of residual assets.
• “Re-vindication,” i.e. the taking back of one’s own securities in the event of insolvency, is absolutely prohibited.
• Account providers may legally borrow pooled securities to collateralize proprietary trading and financing.
• “Safe Harbor” assures secured creditors priority claim to pooled securities ahead of account holders.
• The absolute priority claim of secured creditors to pooled client securities has been upheld by the courts.
Collateral transformation is simply the encumbrance of any and all types of client assets under swap contracts, which end up in the derivatives complex. This is done without the knowledge of the clients, who were led to believe that they safely owned these securities, and serves no beneficial purpose whatsoever for these clients. And here it is! Here is the automated, market-wide sweeping of collateral to CCPs and central banks in a time of market stress: In times of market stress, rapid deployment of available securities may be crucial in mitigating systemic issues. For instance, with better visibility of available securities and better access to them, firms may be better positioned to rapidly deploy securities to meet margin needs at CCPs in times of increased market volatility or to pledge to central banks in emergency situations to gain increased access to the lender of last resort. . . .The automation and standardisation of many operations related to collateral management . . . on a market-wide basis . . . may enable a market participant to manage increasingly complex and rapid collateral demands. And so as we have seen here irrefutably, the objective is to utilize all securities as collateral and hence to have the real practical means to take all securities as collateral.
Q (E.U.): Is the investor protected against the insolvency of an intermediary and, if so, how?
A (N.Y. Fed): . . . an investor is always vulnerable to a securities intermediary that does not itself have interests in a financial asset sufficient to cover all of the securities entitlements that it has created in that financial asset . . .If the secured creditor has “control” over the financial asset it will have priority over entitlement holders . . .If the securities intermediary is a clearing corporation, the claims of its creditors have priority over the claims of entitlement holders.
So, there we have it. In the collapse of the clearing subsidiaries of DTCC, it is the secured creditors who will take the assets of the entitlement holders. This is where it is going. It is designed to happen suddenly, and on a vast scale.
Ask yourself: if they don’t want your money, and they don’t really want or need your stuff, and they’re not trying to help you, what do they want? What’s the point of all of their efforts? This may be difficult to hear: It was deliberate strategy. It was about ultimate, complete power, allowing no centers of resistance. And so, it was about deprivation. It was about subjugation—and it still is, in more ways than we know.
It has been promised that there will be no taxpayer bailout this time—as if that is a good thing. Why? Simply because this will allow the banks to be closed rather than nationalized. Then all deposits and assets will be taken by the “protected class” of secured creditors. This is where it is going.