A Guide To Asset Rehypothecation With Blockchain Training Ppt

Slide 1

This slide provides an overview of asset rehypothecation, a typical technique in which FIs securitize existing collateral to lower pledging security costs in future deals. Due to the lack of traceable transaction and ownership history, ownership structures and asset composition can become confusing when assets are rehypothecated, increasing counterparty risk and asset valuation uncertainty.

Slide 2

This slide lists the present process of asset rehypothecation. A consumer obtains a bank loan to purchase a property. In exchange, the consumer pledges the house to the bank as security and authorizes rehypothecation to get a lower interest rate on the loan. 

Slide 3

This slide provides issues that plague the current process of asset rehypothecation.

Instructor Notes:

• Inadequate reporting to the regulator: Reporting standards in secondary trading marketplaces do not specify the transaction history of the asset
• Counterparty dangers: Investors are unaware of any additional counterparties with ownership rights to the asset
• Inadequate transparency: Regulators lack the capacity to trace securities when they are rehypothecated in the market. Enforcing compliances then becomes near-impossible to execute, as the regulator has been blindsided
• Uncertainty about the security value: With transaction history not kept, each deal leveraging a percentage of the collateral makes determining the asset's underlying worth more difficult
• A pattern of failure: If any of the participants fail, a portion or possibly the entire transaction chain is impacted, which may have undesired implications on related activities in the financial system

Slide 4

This slide illustrates how blockchain technology can overcome the current asset rehypothecation process — starting from The bank obtaining tokenized collateral to record the underlying asset's transaction history on DLT. Once predefined regulatory rehypothecation constraints are met, the smart contract allows/executes subsequent hypothecation of the asset.

Slide 5

This slide lists seven advantages of blockchain technology implementation in asset rehypothecation

Instructor Notes: 

• Transparency: Investors can see the collateral value, risk position, and ownership history. All of these help people make better investment decisions
• Reducing Counterparty risk: Counterparties are graded based on transaction history, allowing investors to hedge their risk by picking the best counterparty for risk profile
• Automated processing: DLT improves processing efficiency by eliminating manual operations and their related expenses
• Embedded regulation: Regulators have a clear perspective of the asset history, allowing them to enforce regulatory limits
• Automated monitoring and enforcement: Smart contracts prevent assets from being rehypothecated without regulatory oversight
• Financial Security: With effective regulatory oversight and the availability of a clear transaction history , the risk of a systemic failure is significantly lowered, in case of a loan default in the event of a default
• Disintermediation: A smart contract simplifies fund transfer as expensive intermediaries are removed from the system