Right, that’s what’s confusing. To rephrase, I’m hearing that brokers can execute some primitive operation <lock up> which correctly and credibly persuades the financial market that $X is available to settle a transaction.
But <lock up> is only a “valid operation” when executed with “the broker’s own funds”. Why? To whom would “locking up $X from broker funds” be a valid operation, but “locking up $X from client funds” wouldn’t be?
Your comments are saying “that’s just how it is”, but that’s not a reason. Is it a wholly arbitrary operation handed down from on high that accomplishes nothing? Is it a matter of the financial system not being able to trust client-originating money?
>Is it a matter of the financial system not being able to trust client-originating money?
Yeah pretty much. If every trader had their funds sitting in one place (with the clearinghouse or the fed), then the clearinghouse wouldn't need a deposit system since they can easily validate whether everyone has the funds.
>I still don’t get the model whereby <lock up> is unsafe with client funds but not broker funds.
"unsafe" is the wrong word here. That would imply the clearinghouse doesn't think the collateral is as good if it came from the customer rather than the broker. This isn't the case. The requirement to use broker funds is not to protect the clearinghouse, it's to protect the customer in case the clearinghouse seizes the collateral (as they're allowed to do) when things go south. By using broker (or their creditor's funds), the customer's funds aren't at risk.
So ... the clearinghouse is perfectly capable of seizing collateral and running off without delivering the promised shares, but client funds "aren't at risk" when the broker puts up separate collateral, even though the clearinghouse could seize that just the same?
Why wouldn't they be? You said the clearinghouse could seize the client purchase funds just as well as the collateral. Why couldn't they seize both? At the very least, it's a bizarre threat model that the clearinghouse can seize both, but it will only ever seize collateral (which is what your claim requires to make sense).
That is, it's some kind of capricious being capable of seizing and willing to seize any money trusted to them, with no recourse, but somehow the presence of collateral makes it all better, even though that could be seized too.
>Why wouldn't they be? You said the clearinghouse could seize the client purchase funds just as well as the collateral. Why couldn't they seize both?
Regulations? Presumably customer funds are segregated from company funds, so the company and the clearinghouse can't raid it if they need money.
>At the very least, it's a bizarre threat model that the clearinghouse can seize both, but it will only ever seize collateral (which is what your claim requires to make sense).
>That is, it's some kind of capricious being capable of seizing and willing to seize any money trusted to them, with no recourse, but somehow the presence of collateral makes it all better, even though that could be seized too.
by "seize" I don't mean the clearinghouse can walk into the offices (or bank accounts) of any of their member and grab whatever they want. They're seizing (or more accurately, refusing to return) the deposit that the member sent on the day of trade.
>Regulations? Presumably customer funds are segregated from company funds, so the company and the clearinghouse can't raid it if they need money.
Okay, and again, if "regulations" are enough for one case, why not the other? If a "regulation" can prevent the clearinghouse from holding on to asset they're not entitled to, why not use that instead of requiring the broker to put up money that will compensate the customer when the CH holds on to an asset they're not entitled to?
>by "seize" I don't mean the clearinghouse can walk into the offices (or bank accounts) of any of their member and grab whatever they want. They're seizing (or more accurately, refusing to return) the deposit that the member sent on the day of trade.
>Okay, and again, if "regulations" are enough for one case, why not the other? If a "regulation" can prevent the clearinghouse from holding on to asset they're not entitled to, why not use that instead of requiring the broker to put up money that will compensate the customer when the CH holds on to an asset they're not entitled to?
But the clearinghouse is entitled to it. The clearinghouse member's collateral is used to make up the difference (the credit risk) should the member fail to pay the required amount on the day of settlement. If you prohibit the clearinghouse from seizing it, then that kills the point of the collateral.
Yes, obviously the CH should seize assets they’re entitled to. I think that you forgot we were talking about the case where they seize money they’re not entitled to. (Which is how we got to talking about the need to protect the client from that, and why the broker has to put up the extra collateral, and how “regulations” stop that money from being misappropriated but somehow not the client funds.)
I think we’re going in circles. And if I may give some unsolicited feedback, if I understood this topic as well as you’re claiming to, I probably would have given answers that avoided reaching that point. If I didn’t, I would have confessed as much, earlier in the thread, once I started giving your answers.
But <lock up> is only a “valid operation” when executed with “the broker’s own funds”. Why? To whom would “locking up $X from broker funds” be a valid operation, but “locking up $X from client funds” wouldn’t be?
Your comments are saying “that’s just how it is”, but that’s not a reason. Is it a wholly arbitrary operation handed down from on high that accomplishes nothing? Is it a matter of the financial system not being able to trust client-originating money?