The Great Taking by David Rogers Webb: Chapter V. Collateral management

 

V. Collateral management

People should either be caressed or crushed. If you do them minor damage they will get their revenge; but if you cripple them there is nothing they can do. If you need to injure someone, do it in such a way that you do not have to fear their vengeance.

Niccolo Machiavelli

Associated with the imperative that certain secured creditors must be given legal certainty to client assets, globally, without exception, is the further assurance of near instantaneous cross-border mobility of legal control of such collateral.

As we will see, the objective is to utilize all securities as collateral, and hence to have the real practical means to take all securities as collateral. Comprehensive “collateral management” systems have been implemented, which assure the transport of all securities cross-border through the mandated linkage of CSDs to ICSDs and on to the CCPs, where the risk of the derivatives complex is concentrated. The supposed “demand” for this enormous undertaking is not being driven by true market forces, but by regulatory contrivance.

A report published in 2013 by the Committee on the Global Financial System at the Bank for International Settlements entitled Asset encum- brance, financial reform and the demand for collateral assets [18] states the following:

Regulatory reforms and the shift towards central clearing of derivatives transactions will also add to the demand for collateral

26

V Collateral management 27

assets. But there is no evidence or expectation of any lasting or widespread scarcity of such assets in global financial markets.

Another report by the same committee, entitled Developments in collat- eral management services [19], states (on page 16):

. . . some changes that may raise demand for collateral have not been phased in yet, since jurisdictions operate on different time- lines for mandatory central clearing and margin requirements for non-centrally cleared trades. Multiple market participants noted that implementation of mandatory clearing requirements has not yet advanced to the point where those market participants are experiencing shortfalls in collateral readily available to pledge . . .

and furthermore, on page i:

Motivated by expected increases in demand for collateral stem- ming from regulatory changes . . . collateral management ser- vice providers are evolving their service offerings in an effort to improve efficiencies and enable market participants to meet collateral demands with existing and available securities.

Thus, while there was no evidence of scarcity of collateral and market participants were not experiencing shortfalls, “demand for collateral assets”, was being artificially created and intensified by regulatory fiat. It was absolutely not market-driven.

This was designed and deliberately executed to move control of collat- eral to the largest secured creditors behind the derivatives complex.

Derivatives are financial contracts on everything imaginable and even unimaginable for most of us. They may be modeled on real things, but are not the real things themselves. They are un-tethered from physical reality . . . but can be used to take real things as collateral. This is the subterfuge, the endgame of it all.

On its pages 8-11, the cited report [19] discloses the objectives of these collateral management systems, providing further confirmation that it is the linking of CSDs and ICSDs which provides cross-border mobility of collateral from the “collateral giver” to the “collateral taker” (yes, they really explicitly use those terms):

28

V Collateral management

First, many of the largest custodians have implemented, or have plans to implement, a custodial platform that is global in nature. This will be a single system or set of connected systems that allows a customer a single view of all its available collateral held by the custodian, regardless of location. . . .

The desired end goal of all these efforts is to get as close as possible to a single view of all available securities, regardless of where they are held, in real time. This aggregation of supply information is a necessary prerequisite for the efficient deployment of available securities to meet collateral obligations. . . .

ICSDs enable their participants to obtain aggregate views on the entirety of the latter’s securities holdings held with the ICSD, including securities held by ICSD participants via link arrange- ments.

The report illustrates the relationships between the ICSD and its partic- ipants in a diagram, which is included below as Figure V.1 on page 31. The text continues:

Diagram 5 [Figure V.1] illustrates the services available at ICSDs, whereby a customer (collateral giver) is a participant in the ICSD and holds its securities in the ICSD, including via link arrange- ments between the ICSD and local CSDs. The ICSD, as CMSP [Collateral Management Service Provider], having established di- rect or indirect (ie via a custodian participating in the local CSD) links with local CSDs, has information on and can access the entirety of a participant’s securities for collateral management purposes.

At this point, the report clarifies in a footnote:

The entirety of a participant’s securities includes the participant’s securities that were issued and are held at the ICSD and the participant’s securities that were issued and are held, via ICSD link arrangements, at a linked CSD.

The report then turns to the role of the “collateral takers”:

V Collateral management 29

The collateral takers are also participants in the ICSD. Both the collateral giver and the collateral takers provide information to the ICSD as CMSP regarding collateral obligations. With this information, the ICSD runs its optimisation process and may automatically generate collateral allocation instructions for the collateral giver/takers based on the results . . . the ICSD will also process the movement of securities on the books of the ICSD, since counterparties included in the optimisation and allocation process are participants in the ICSD. If the collateral giver does not have sufficient securities in the ICSD environment, it can source collateral by . . . transferring securities from its own account at the linked CSD to its securities account in the ICSD with a free-of- payment (FoP) settlement occurring in the linked CSD.

Note that transferral of the people’s assets is to be made free-of- payment (FoP)! They meant not just “free mobility of collateral”, but, quite literally, “free collateral.” How nice!

Through collateral transformation, the objective is to utilize all securi- ties as collateral [19, p. 15]:

As supply and demand dynamics for collateral continue to evolve, it is possible that efforts to make more efficient use of existing collateral will not be sufficient to fully satisfy individual obligations. If that is the case, some market participants may need to exchange available, but ineligible, securities for other securities that meet eligibility criteria in order to fulfill their collateral obligations. Undertaking transactions to achieve this outcome has been defined as “collateral transformation.”

Collateral transformation is simply the encumbrance of any and all types of client assets under swap contracts, which end up in the deriva- tives 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 collat- eral to CCPs and central banks in a time of market stress [19, p. 19]:

In times of market stress, rapid deployment of available securities may be crucial in mitigating systemic issues. For instance, with

30

V Collateral management

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.

Comprehensive “collateral management” systems have been imple- mented which assure the transport of all securities cross-border through the mandated linkage of CSDs to ICSDs to the CCPs (where the risk of the derivatives complex is concentrated), and on to the anointed secured creditors which will take the collateral when the CCPs fail, having assured for themselves that their taking of assets cannot be

“legally” challenged.

Inevitably following the “Everything Bubble” will be the “Everything Crash.” Once prices of essentially everything crash and all financial firms rapidly become insolvent, these collateral management systems will automatically sweep all collateral to the Central Clearing Counter- parties (CCPs) and Central Banks.

The trap, into which all nations have been herded, is ready and waiting to be sprung.

There will be an epic end point to the decades of seemingly out-of- control financialization, which served no beneficial purpose for human- ity, but the devastating effects of which are apparent even now.

It has been a deliberate strategy executed over decades. This was the purpose of inflating the global bubble entirely out of proportion with any real world thing or activity, which must end in disaster for so many, with no pockets of resilience allowed to remain in any country.

V Collateral management 31

Figure V.1 Multiple jurisdictions, ICSD as collateral management service provider with links to other CSDs. Adapted from Diagram 5 in [19]. Explana- tions provided in the original: Link = The ICSD has direct or indirect links with other CSDs. Securities held by ICSD participants via these link arrangements are included in the respective collateral pool of the ICSD participant and avail- able to the ICSD as CMSP. 1 = The collateral giver and collateral takers send notification to the ICSD regarding their triparty transactions. 2 = The ICSD will determine the optimal use of available securities and generate the underlying collateral allocation instructions; collateral transfer is settled on the books of the ICSD.