The words & # 39; R & # 39; and & # 39; C & # 39; insert the vocabulary of Bitcoin enthusiasts

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Rehypothecation and commingling enter the vernacular bitcoin, thanks to the voice of Wall Street Photographer: Ron Antonelli / Bloomberg

Rehypothecation Vocabulary of bitcoin enthusiasts Soon, yes they will move languages ​​as freely as the term "fiat currency" does today, thanks to the entrance of the Wall Street incumbents into bitcoins, because the reipotection and admixture are widespread practices of Wall Street that allow the financial system to create more claims on an underlying asset compared to the underlying assets, able to compensate for the scarcity applied by Bitcoin's algorithm and, other things being equal, to suppress the price.

Re-spinning and admixture are terms "inside of baseball "used and applied by a small group of people working in remote corners of Wall Street credit and credit management departments, m Due to the entry of ICE (parent of the NYSE) into physically established bitcoin futures, these terms are now relevant to bitcoiners.

Background

Before you dive, here are some background. Before the financial crisis of 2008, credit risk was widely distributed among the banks of the financial system. Many banks failed or needed bailouts during the financial crisis. After the financial crisis, the regulatory response was the centralization of credit risk, to concentrate it in the core of the financial system, which is where it is today. The politicians felt that the risk could be better monitored and managed if it were centralized in a small number of institutions that regulators could observe more closely.

In other words, "too big to fail" did not go away. He just changed geography. It now resides in the heart of the financial system, in its exchanges, in clearing houses and in the counterparties of central derivatives. These centralized institutions in their various forms – together, we shorten them as CCPs – are now in the middle of customer transactions and take on the risk of counterparties that the banks bilaterally exchanged with one another. Because they are at the center of the system, these CCPs are literally too big to fail.

In short, much of the credit risk in the financial system is now in the CCPs.

ICE is one of the largest CCP operators in the world.

And ICE is now entering bitcoin.

The "C" Word, in Plain English

Commingling means that the CCP or custodian will keep the client's collateral (bitcoin, in this case) in a mixed account, or "omnibus" rather than segregating them for each client in their portfolios.

In simplistic terms, admixture reduces the likelihood of the CCP stalling but increases the severity of losses if it always does. Commingling means that today's obligations can be regulated with guarantees received yesterday, so it reduces the probability of a deficit today. It also means that different types of collateral (bitcoins, cash, US Treasury securities, etc.) can replace one another because the counterparties only register the network of all their balances, not the other. gross amount on each transaction.

Bitcoiner cry for admixture. Huge "honeypot" for hackers! Bitcoin is a digital bearer asset and Wall Street has no experience in managing those! Whenever private keys are discovered, the risk of hacking increases! Bitcoin is designed to settle in chain and coarse, uncompensated, off-chain and delayed! And can anyone really understand the risks of blocking bitcoins in Wall Street's moving and delayed business model ?!

Commingling is a standard in Wall Street collateral agreements, and you can see examples & nbsp; here and here . In particular, paragraph 6 (c) of the Credit Support Annex (CSA) to the Master Agreement ISDA (International Swaps and Derivatives Association) – a ubiquitous contract does not change almost anyone – allows the protected party to:

"sell , pledge, reimpiego assign, invest, use, commingle or otherwise dispose, or otherwise use in its business, any published Collateral that holds … "

Net – net, admixture in omnibus accounts means that the counterparties have no transparency in the place where collateral is committed and there is no way to check whether the liabilities of a CCP exceed the amount of the assets in the omnibus account ( in aggregate or for a particular type of activity). And these credit risks can easily be created within CCPs without the possibility of detecting them, thanks to the word "R".

The word "R", In Plain English

Rehypothecation, in simple terms, translates into several parts that report on their own balance that possess the same resource. It is the process by which a lender receives an asset as collateral for a loan, and then promotes that guarantee to cover his exposure to a separate party, which then promises the same guarantee to a different party, and so on and so forth. The length of the collateral chains can be longer parts, and there is no way to track that length in real time, that is to say, it is not a way to determine how many reserved resources have been created internally. of the financial system. [19659003] Accounting for reimbursements under US GAAP allows each of these parties to register ownership of the same asset provided that each registers a different dollar of debt on its balance sheet ( here & # 39; sa great illustration of how it works).

Accounting is the reason why I sometimes call insidious and subtle reassignment. Individual financial institutions appear solvent: they hold a resource against their debt. But, on a systemic level, there is no way to exclude the double / triple / quadruple / quintuple count of that same resource to understand how solvent the financial system is in aggregate or whether a single institution is, in effect, solvent if all double counting has been canceled.

Some regulators are concerned about the problems of financial stability caused by the re-imputation of guarantees, such as the president of the FSA and of the Fed Jerome Powell. And the president of the CFTC, J. Christopher Giancarlo, has warned for years. Here is a good example of a speech of 2016 in which Giancarlo detailed "the practical impossibility of a single national regulator to collect sufficient quality data … to recreate a real-time register of the portfolio of highly complex global trade exchanges of all market participants. "

In the Q & amp; A later, he & nbsp; continued : & nbsp; " In the heart of the financial crisis, perhaps the most critical element was the lack of visibility in the counterparty credit exposure of a major financial institution to another. & nbsp; Probably the most glaring omission that had to be addressed was that lack of visibility, and here we are in 2016 and we still do not have it. "


Manmohan Singh of the IMF
is the leading expert in guarantee chains. He flipped the footnotes of the financial statements of banks around the world, trying to quantify the risk discussed by Giancarlo, and estimates that the guarantees are used 1.8 times (starting from the end of 2015, the most recent data available ). & nbsp; This means that only one of the 2,8 people who think they own an American Treasury title, for example, actually owns it [19659026] – that is, the original owner of the title and the 1.8 parts to which the security was repaid. The data from Singh show that the number 2.8 has improved since the financial crisis, when 4 parties claimed to own the same resource. Here here & nbsp; here & nbsp; here & nbsp; and & nbsp; here are among the many Singh on this subject. & nbsp; Singh has & nbsp; recommended that the financial stability assessments of regulators be adjusted to support "promised guarantees or the associated reuse of such assets", but politicians have not held wise advice

Conclusion

The words "R" and "C", rehypothecation and commingling, are antithetical to how Bitcoin works as they are an integral part of how Wall Street works. Many institutional investors simply can not avoid these practices due to outdated regulations, such as the SEC custody rule and the obligation to use central clearing, though some, such as Christopher's #SmartCustody's efforts Allen, they are trying to give institutions real alternatives, hoping to create momentum to change those obsolete rules. The risks associated with the re-attribution and admixture of bitcoins are very different from those of other financial assets.

Nobody wants an accident on Wall Street, and especially not one who will be blamed for bitcoins. Never. And it is easy to prevent one

How? The ICE could simply agree not to reinsert or switch its customers' bitcoins. If it did, there would never be problems.

But that's not how CCPs work. Rehypothecation and commingling are the main components of how CCPs make money, if they did not, CCPs would have to charge a lot more money for the risks they take. Furthermore, there are fat profit margins when relegating collateral, especially for "difficult to borrow" or "special" types of asset types. Bitcoin is the epitome of "difficult to borrow" because of its natural scarcity and because so many 17 million bitcoins in circulation are dumped in cold storage. The reason why the CCP would like to come in is clear.

But there is more: the centralization of risk in the financial system is not only in the central counterparts: even the custodians of resources centralize the risk, and they too mingle and re-engage. Because of the SEC custody rule, most institutional investors use custodians of third party assets. ICE also intends to become a crypt custodian, and Goldman Sachs could follow. Farther down with regards to institutional assignment for crypto in a separate post

In summary, the regulations force many institutional investors to store assets centrally and negotiate with central counterparties – they can not really exchange the peer- to-peer in the same way bitcoin owners can, and everyone except hedge funds and larger state pension funds probably can not self-entrust their bitcoins.

There are many problems for the CFTC, SEC and the Fed to consider for Wall Street's reipotidation and bitcoin mixing. Preventing problems is easy, but preventing them would require changes at sea to understand how Wall Street does business, and this is almost certainly wishful thinking.

That's why "commingling" and "rehypothecation" are coming in bitcoins.

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Rehypothecation and commingling enter the vernacular bitcoin, thanks to the voice of Wall Street Photographer: Ron Antonelli / Bloomberg

Rehypothecation, commingling These two words are entering the vocabulary of bitcoin enthusiasts. "fiat currency", thanks to the entrance of bitcoins in the incumbents of Wall Street, because the re-spinning and admixture are widespread practices of Wall Street that allow the financial system to create more credits towards an underlying asset than those below can compensate for the scarcity applied by Bitcoin algorithms and, other things being equal, suppress its price.

Reintegration and admixture are "insidious" and baseball "terms related to the collateral used and applied by a small group of people working in remote corners of Wall Street credit and credit risk management departments. But, due to the entry of the ICE (parent of the NYSE) into physically established bitcoin futures, these terms are now relevant to bitcoiners.

Background

Before you dive, here are some background. Before the financial crisis of 2008, credit risk was widely distributed among the banks of the financial system. Many banks failed or needed bailouts during the financial crisis. After the financial crisis, the regulatory response was the centralization of credit risk, to concentrate it in the core of the financial system, which is where it is today. The politicians felt that the risk could be better monitored and managed if it were centralized in a small number of institutions that regulators could observe more closely.

In other words, "too big to fail" did not go away. He just changed geography. It now resides in the heart of the financial system, in its exchanges, in clearing houses and in the counterparties of central derivatives. These centralized institutions in their various forms – together, we shorten them as CCPs – are now in the middle of customer transactions and take on the risk of counterparties that the banks bilaterally exchanged with one another. Because they are at the center of the system, these CCPs are literally too big to fail.

In short, much of the credit risk in the financial system is now in the CCPs.

ICE is one of the largest CCP operators in the world.

And ICE is now entering bitcoin.

The "C" Word, in Plain English

Commingling means that the CCP or custodian will keep the client's collateral (bitcoin, in this case) in a mixed account, or "omnibus" rather than segregating them for each client in their portfolios.

In simplistic terms, admixture reduces the likelihood of the CCP stalling but increases the severity of losses if it always does. Commingling means that today's obligations can be regulated with guarantees received yesterday, so it reduces the probability of a deficit today. It also means that different types of collateral (bitcoins, cash, US Treasury securities, etc.) can replace one another because the counterparties only register the network of all their balances, not the other. gross amount on each transaction.

Bitcoiner cry for admixture. Huge "honeypot" for hackers! Bitcoin is a digital bearer asset and Wall Street has no experience in managing those! Whenever private keys are discovered, the risk of hacking increases! Bitcoin is designed to settle in chain and coarse, uncompensated, off-chain and delayed! And can anyone really understand the risks of blocking bitcoins in Wall Street's edible and delayed business model ?!

Commingling is a standard in Wall Street collateral agreements, and you can see examples here and here. In particular, paragraph 6 (c) of the Credit Support Annex (CSA) to the Master Agreement ISDA (International Swaps and Derivatives Association) – a ubiquitous contract does not change almost anyone – allows the protected party to:

"sell , pledge, reimpiego assign, invest, use, commingle or otherwise dispose, or otherwise use in its business, any published Collateral that holds … "

Net – net, admixture in omnibus accounts means that the counterparties have no transparency in the place where collateral is committed and there is no way to check whether the liabilities of a CCP exceed the amount of the assets in the omnibus account ( in aggregate or for a particular type of activity). And these credit risks can easily be created within CCPs without the possibility of detecting them, thanks to the word "R".

The word "R", In Plain English

Rehypothecation, in simple terms, translates into several parts that report on their own balance that possess the same resource. It is the process by which a lender receives an asset as collateral for a loan, and then promotes that guarantee to cover his exposure to a separate party, which then promises the same guarantee to a different party, and so on and so forth. The length of the collateral chains can be longer parts, and there is no way to track that length in real time, that is to say, it is not a way to determine how many reserved resources have been created internally. of the financial system. [19659003] Repo accounting under US GAAP allows each of these parties to register that they own the same asset on the condition that each registers a different dollar of debt in its balance sheet (here is a great illustration of how it works).

Accounting is because I sometimes call insidious and subtle reassignment. Individual financial institutions appear solvent: they hold a resource against their debt. But, on a systemic level, there is no way to exclude the double / triple / quadruple / quintuple count of that same resource to understand how solvent the financial system is in aggregate or whether a single institution is, in effect, solvent if all double counting has been canceled.

Some regulators are concerned about the problems of financial stability caused by the re-imputation of guarantees, such as the British FSA and Fed chairman Jerome Powell. And the president of the CFTC, J. Christopher Giancarlo, has warned for years. Here is a good example of a 2016 speech, in which Giancarlo described "the practical impossibility of a single national regulator to collect sufficient quality data … to recreate a real-time registry of highly global swap exchange portfolios. complex of all market participants. " [19659003] In the Q & A afterwards, he continued: " At the center of the financial crisis, perhaps the most critical element was the lack of visibility on the counterparty credit exposure of a large institution. financial debt to another. Probably the most glaring omission that needed to be addressed was the lack of visibility, and here we are in 2016 and we still do not have it. "

IMF
Manmohan Singh is the first expert in collateral chains. He flipped the footnotes of the financial statements of banks around the world, trying to quantify the risk discussed by Giancarlo and estimates that the guarantees are re-used for 1.8 times (starting from the end of 2015, the most recent data available ). This means that only one of the 2,8 people who think they own a US Treasury stock, for example, actually owns it ie, the original owner of the bond and the 1.8 parts to which the link has been re-engaged. The data from Singh show that the number 2.8 has improved since the financial crisis, when 4 parties claimed to own the same resource. Here, here, here, here and here are among the many penetrating writings of Singh on this subject. Singh recommended adapting the financial stability assessments of supervisory bodies to extrapolate "committed guarantees or the associated reuse of such assets", but politicians failed to take account of his wise advice

Conclusion

"R" and the words "C", rehypothecation and commingling, are antithetical to how Bitcoin works as they are an integral part of how Wall Street works. Many institutional investors simply can not avoid these practices due to outdated regulations, such as the SEC custody rule and the requirement to use central clearing, although some, such as Christopher Allen's #SmartCustody efforts, are trying to give institutions real alternatives, hoping to create momentum to change those obsolete rules. The risks associated with the re-attribution and admixture of bitcoins are very different from those of other financial assets.

Nobody wants an accident on Wall Street, and especially not one who will be blamed for bitcoins. Never. And it is easy to prevent one.

How come? The ICE could simply agree not to reinsert or switch its customers' bitcoins. If it did, there would never be problems.

But that's not how CCPs work. Rehypothecation and commingling are the main components of how CCPs make money, if they did not, CCPs would have to charge a lot more money for the risks they take. Furthermore, there are fat profit margins when relegating collateral, especially for "difficult to borrow" or "special" types of asset types. Bitcoin is the epitome of "difficult to borrow" because of its natural scarcity and because so many 17 million bitcoins in circulation are dumped in cold storage. The reason why the CCP would like to come in is clear.

But there is more: the centralization of risk in the financial system is not only in the central counterparts: even the custodians of resources centralize the risk, and they too mingle and re-engage. Because of the SEC custody rule, most institutional investors use custodians of third party assets. ICE also intends to become a crypto-keeper and Goldman Sachs could follow him. Farther down with regards to institutional assignment for crypto in a separate post

In summary, the regulations force many institutional investors to store assets centrally and negotiate with central counterparties – they can not really exchange the peer- to-peer in the same way bitcoin owners can, and everyone except hedge funds and larger state pension funds probably can not self-entrust their bitcoins.

There are many problems for the CFTC, SEC and the Fed to consider for Wall Street's reipotidation and bitcoin mixing. Preventing problems is easy, but avoiding them would require changes at sea on how Wall Street does business, and this is almost certainly wishful thinking.

That's why "commingling" and "rehypothecation" are coming in bitcoins.

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