Word of the day is Rehypothecation, or how Citadel is trying to be Lehman Brothers on top of Madoff

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From 2008, they never learn…

LibertyView Capital Management Inc. of Hoboken, New Jersey, owned by Lehman’s Neuberger Berman unit, told investors on September 26 it had suspended “until further notice” attempts notice” attempts to calculate the value of its funds. LibertyView was not included in the Sept. 29 sale of Neuberger to Bain Capital LLC and Hellman & Friedman LLC.

PricewaterhouseCoopers, Lehman’s bankruptcy administrator in the U.K., where its European prime brokerage was based, doesn’t know how much money is at stake. PwC said last month it’s trying to recoup about $8 billion in cash that Lehman’s parent company allegedly withdrew from its European unit before the collapse. It will take weeks, if not longer, to sort out the mess, according to PwC.

Oak Group used Lehman’s unit in London because it allowed the fund to borrow more than US prime brokers, James said. Operating under different regulatory requirements, European prime brokers have been more generous than their US counterparts, sometimes even within the same parent company, said Michael Romanek, principal at Rise Partners Ltd., which arranges financing for funds from London. “A lot of US managers would rather deal with Europe than New York,” said Romanek. “Rarely do you see it go the other way.” James’s account had pledged equity securities as collateral that Lehman then lent to other investors under a practice known as rehypothecation. It’s the fate of that collateral that worries many Lehman hedge-fund clients.

Read that again! These guys rehypothecate shares on top of internalizing orders with PFOF (Madoff)

James’s account had pledged equity securities as collateral that Lehman then lent to other investors under a practice known as rehypothecation. It’s the fate of that collateral that worries many Lehman hedge-fund clients.

Then… 2009

MR. NAGEL: On behalf of Citadel Investment Group, I’d like to thank the Commission and the staff for the opportunity to be here today. At Citadel, we have over 19 years of experience as an active securities lending market participant.

And to support our private fund and market making businesses, we’ve built infrastructure that allow us to deal directly with the primary sources of securities loans, supply and demand, rather than rely entirely on intermediaries. Based on this experience, we believe that a well-functioning securities-lending market benefits all investors.

Owners of securities can generate additional income or obtain financing by lending securities. Securities lending also contributes to tight bid-offer spreads and market liquidity by enabling the orderly settlement of short sales.

At the Commission’s May Short Sale Roundtable, I explained Citadel’s view that short selling benefits all investors and our economy by promoting liquidity and price discovery, and serving as a risk management tool for investors.

While the securities lending market has made great strides in recent years, we believe there is still substantial work to be done before the securities lending market can reach its full potential. Despite its growing size, the securities lending market remains relatively opaque because there is little centralized collection or dissemination of loan pricing data.

Many securities loans are still bilaterally negotiated between market intermediaries on the phone or by email and each party to a securities loan generally faces the credit risk of the other party for the duration of the loan.

Until recently, no centralized venue existed where borrowers and lenders could readily find each other and transact directly

In the U.S., margin regulations allow a customer to buy securities and they can pay for half of it and borrow the other half from their broker dealer. The portion of the securities that they don’t pay for when they buy the securities — the piece that they’ve, in effect, bought on margin — the broker dealer is allowed to use those securities to help raise cash to replenish its own bank account for the money its lent to the customer. That term is rehypothecation — I’m sorry, it’s a very long word — but it means basically to borrow securities in this case.

And the broker dealer can take those rehypothecated securities, those securities that were bought on margin, and pledge them to a bank to borrow money to replenish its cash supply, or it can lend securities to another party, and by doing so it replenishes its cash supply

That last part is important, the list of prime brokers/custodian’s that Citadel has access to means they could weave one giant web with themself/VIRTU

Here’s Citadel’s 2019 financial statement, saying this.

Collateralized Transactions The Company enters into reverse repurchase agreements, repurchase agreements and securities borrowed and securities loaned transactions to, among other things, acquire securities to cover short positions and settle other securities obligations and to finance certain of the Company’s activities. The Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into master netting agreements and collateral arrangements with counterparties. In the event of a counterparty default (such as bankruptcy or a counterparty’s failure to pay or perform), these agreements provide the Company the right to terminate such agreement, net the Company’s rights and obligations under such agreement, buy-in undelivered securities and liquidate and set off collateral against any net obligation remaining by the counterparty.

During the year ended December 31, 2019, the Company had reverse repurchase and repurchase agreements with Citadel Securities Institutional LLC (“CSIN”), an affiliated broker and dealer, and Citadel Securities Swap Dealer LLC (“CSSD”), an affiliated swap dealer (Note 6), and non-affiliates. Securities borrowing and lending transactions are collateralized by pledging cash or securities, which typically include equity securities and are collateralized as a percentage of the fair value of the securities borrowed or loaned. Reverse repurchase and repurchase agreements are collateralized primarily by receiving or pledging securities, respectively.

Typically, the Company has rights of rehypothecation with respect to the securities collateral received under reverse repurchase agreements and the underlying securities received under securities borrowed transactions. As of December 31, 2019, substantially all securities received under securities borrowed transactions have been delivered or repledged.

The counterparty generally has rights of rehypothecation with respect to securities collateral pledged by the Company for securities borrowed by the Company. The counterparty generally has rights of rehypothecation with respect to the securities collateral received from the Company under repurchase agreements and the securities loaned from the Company to such counterparty. Also, the Company typically has rights of rehypothecation related to securities collateral received from counterparties for securities loaned to those counterparties.

The Company monitors the fair value of underlying securities in comparison to the related receivable or payable and as necessary, transfers or requests additional collateral as provided under the applicable agreement to ensure transactions are adequately collateralized.

Here’s Dennis Kelleher talking about rehypothecation during the GameStop hearing calling it “a house of cards”

ELIAPE:

They call a bank and get a margin loan, half the securities they get with it can be rehypothecated. They, have those agreements with themselves. So they get one loan, and then get the same share multiple times, giving themselves money in the process.

During the year ended December 31, 2019, the Company had reverse repurchase and repurchase agreements with Citadel Securities Institutional LLC (“CSIN”), an affiliated broker and dealer, and Citadel Securities Swap Dealer LLC (“CSSD”), an affiliated swap dealer (Note 6), and non-affiliates. Securities borrowing and lending transactions are collateralized by pledging cash or securities, which typically include equity securities and are collateralized as a percentage of the fair value of the securities borrowed or loaned.

One can use it to ‘fulfill’ naked shorts, one can use it to short the ticker, one can use it to sell at market, not on a dark pool to crash the price.

All they need is a shady bank, or 5 to help them. Bank makes a kickback for how many places buy it, they don’t care that all forms of Citadel are using it to crash the price in the name of “liquidity”

In the U.S., margin regulations allow a customer to buy securities and they can pay for half of it and borrow the other half from their broker dealer. The portion of the securities that they don’t pay for when they buy the securities — the piece that they’ve, in effect, bought on margin — the broker dealer is allowed to use those securities to help raise cash to replenish its own bank account for the money its lent to the customer. That term is rehypothecation — I’m sorry, it’s a very long word — but it means basically to borrow securities in this case.

And the broker dealer can take those rehypothecated securities, those securities that were bought on margin, and pledge them to a bank to borrow money to replenish its cash supply, or it can lend securities to another party, and by doing so it replenishes its cash supply

They also can all use the same share as collateral for more loans, to do it again.

Good thing there’s not a shit ton of margin debt they could be doing this with huh?

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