[The Banker Innovation in Banking Technology Awards 2010]
Chair’s Choice and Innovation in Custody and Securities ServicesWinner: JPMorgan (Worldwide Securities Services)
Project: Rehypothecation Program
The process of rehypothecation allows institutions – in many cases hedge fund clients – to extract greater value from their collateral by reusing this collateral elsewhere in the market, increasing liquidity and reducing collateral costs. But the little-known practice gained a bad press in the aftermath of Lehman Brothers’ collapse, as many hedge funds discovered their assets to be legally trapped within the bank’s insolvent estate.
Against this backdrop, JPMorgan’s forward-thinking Rehypothecation Program stood out, directly addressing market misgivings regarding the practice while simultaneously allowing the practice to be safely extended to the benefit of clients. Winner of both this year’s Chair’s Choice and Innovation in Custody and Securities Services, JPMorgan Rehypothecation Program supports the multi-asset class, unlimited re-use of collateral.
The record £33.3m [FSA] fine imposed on JPMorgan for failing to keep billions of dollars of client money in separate accounts underscores an industry-wide problem that has embarrassed UK regulators and is likely to lead to several more enforcement cases.
The Financial Services Authority has required banks, brokers and insurance companies to segregate client assets since 2002, and it also requires auditors to certify that the assets are being handled properly.
But events of the past few years have proved those guarantees to be hollow. In 2008, the collapse of Lehman Brothers left clients in the lurch and unable to recover their money without a protracted court battle.
Ouch.
Related links:
HSBC’s hedge fund hope – FT Alphaville
Safety first for broker clients - WSJ Heard on the Street
And the award for most impressive sovereign funding goes to… – FT Alphaville
Deleveraging after Lehman — evidence from reduced rehypothecation – IMF working paper