The Obama administration’s plan for reining in derivatives leaves
unchecked one of Wall Street’s dirty little secrets: the ability of a
derivatives dealer to redeploy cash collateral that gets posted by one
of its trading partners.
On Wall Street, this practice of taking collateral and reusing it is
called rehypothecation. In essence, it’s a form of free money for
derivatives dealers to use as they please — even to repost it as
collateral to finance their parent company’s own borrowings.
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