oysterberry

Can you explain why the collateral required is higher (if no one has any insolvency issues)?

If you watch the video I posted in the parent comment with the webull ceo, he states the exact scenario where brokers have no problem margin calling a small retail account, but for a big firm and big losses it's problematic, and so do you have more to add than the webull ceo on this topic?

I encourage the discussion and the information you added. Prime brokerages may be able to absorb the damage and thus are able to post the collateral needed, but then if the smaller brokerages like robinhood also need to post the same collateral while having smaller risk of clearing problems, isn't that the problem of the risk spreading?

A more succinct explanation:

Hedge fund has huge unrealized loss that may bankrupt them if they try to buy the shares that they shorted back.

Their broker realizes too late, and if they margin call them now, the hedge fund might not have enough money to pay for the shorts. Thus, the broker will need to pay.

DTCC realizes this, and ups the collateral requirement so that the broker / clearing house has to insure someone will pay (whether it's the broker or hedge fund).

Because DTCC works with all the clearing houses and brokers, the risk from the hedge funds is suddenly everyone's problem to deal with together. By trying to deal with it, they close down trading for retail, and coincidentally aid the hedge funds short position.

Maybe the answer to this is DTCC needing to have collateral requirements per clearing house or broker where they think the risk is highest (the bankrupting hedge funds). Maybe it's regulation to not allow such high leverage or force margin calls faster so the losses can't be too big to fail. Hopefully something is done to fix it!

Yes this is true, and sometimes they don't even need to collect because they can write off the small loss (this is explained in the video from the webull ceo).

But the lenient margin requirements let them hang themselves when they can't collect because the losses are too big and will bankrupt the hedge fund. So now they are too big to fail, it's not only the hedge funds problem that they made a bad trade, it is now DTCC and the brokers problem that the hedge fund made a bad trade.

It is not a conspiracy but the system is broken.

Everyone seems to be missing the point of WHY collateral requirements have gone up. It is not because of volatility of the price movement, but volatility of whether the trade will clear.

The reason the trade might not clear is because of hedge funds or market makers that might go bankrupt, and not have the capital to pay for the shorts that they need to buy back. The collateral is there so that if the hedge fund can't pay, the clearing house or broker must pay. What seems to have happened is somewhere along the line a broker did not margin call the hedge funds fast enough, and DTCC with their collateral requirements has spread the risk from that one broker or clearing house to all of the brokers. In essence, the hedge funds losses are in a way "too big to fail" now because of the way the risk was spread.

In this system, everyone is working to protect themselves (thus not conspiracy), which in turn happens to be screwing over retail. The big issue is the broker somewhere or risk management team that did not force the short sellers to buy back their shares when it was still possible to do so without affecting the brokerages. They missed the time and now the losses might be too large to absorb.

Meanwhile, they have no problem margin calling retail. Robinhood might be faced with an impossible situation they didn't cause, but they also aren't pointing the finger at the culprits and where the problem started, which is some entity allowing the hedge funds to be over leveraged and then not de-risking from that leverage fast enough when the trade went against them.

A lot of this is explained by the webull ceo in this video: https://www.youtube.com/watch?v=4RS4JIEVyXM&feature=youtu.be