/biz/ - Business & Finance

https://youtube.com/watch?v=dk3AVceraTI

Someone posted this video a couple months ago and I’ve been trying to deboonk it since. His main thesis seems to be that banks will use your funds to collateralize derivatives transactions which ultimately up the ladder the CCP is the highest entity that coalesces this collateral, and that they reserve the right to demand more collateral from the banks and haircut or negate any profits the banks might receive from that transaction, so in a collapse scenario you might think you’re raking in the cash but actually you own nothing, or realistically banks who have collateralized your unencumbered funds with hedged trades to collect a free spread will find their hedges reduced to nothing, further putting the pinch on everything.

Some things to consider for me are 1, his basis of this seems to be Lehman Vs. JP Morgan in 2008 in which the default of Lehman caused JP Morgan to liquidate in the money CDS contracts and redistribute the collateral on an accelerated payment schedule to the counterparty with priority over Lehman, despite Lehman being in the money. This does not seem to jive with the “great takings” theory that it means the CCP’s can scoop up everyone’s assets legally, it seems you can still try the CCP in court if you do not have a qualifying early termination or advancement clause trigger from your contract. 2, this already seems to be the suggested “end of waterfall” default resource, per ISDA they believe all clearing members with net VM gains should be liable to have those gains clawed back. https://www.isda.org/a/jTDDE/ccp-loss-allocation-waterfall-0807.pdf

So really, I’m not entirely convinced if a CCP were to start on the default waterfall that they have any legal recourse to claw back VM actually.

Thoughts appreciated