Implode-o-Meter News - Fed Proposes New "Bail In By Stealth" Collateral Rule

In its essence, this "collateral freeze" regulation will eventually morph into a de facto bail-in mechanism and serves the purpose of transferring wealth from the banks' counter-parties to the banks. Â At the very least, this collateral freeze regulation adds yet another layer of moral hazard into the banking system, as banks are incentivized to underwrite even riskier derivatives transactions with knowledge that the risk of collapse is further minimized.
Interestingly, this new law is "asymmetrical." If the bank fails, it gets to keep all counter-party collateral locked-up. Â But if the bank's counter-party fails, that counter-party has no ability to freeze the collateral it put up with the bank. The bank has possession of that collateral. Â This is what happened in the MF Global collapse, where JP Morgan seized all of MF Global's collateral, at the detriment of MF Global's customers. Â At the time JPM's move was illegal but the judicial system looked the other way.

Relevant:

Fed Proposes New "Bail In By Stealth" Collateral Rule