The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold

Tyler Durden's picture

That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.

Probably the core primary consequence of this discovery, which obviously has a factual basis, or else it would not lead to an actual lawsuit between two "reputable" firms (aka ponzi participants), is whether gold in the GLD warehouse, supervised by HSBC, is truly theirs, or has it all been hypothecated from some other broker who never really had the asset or the liquidity, and so on in what effectively can be an infinite chain of repledging one asset to countless counterparties. Because if there is on cockroach...

Suffice to say, expect either a prompt settlement in this lawsuit, or a fervent denial by all parties involved that any gold was misplaced. Because here is the punchline: each physical gold or silver bar has a unique deisgnator that should never be replicated, yet this is precisely what happened to lead to the lawsuit! In a non-banana world, there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold (or there was counterfeiting involved) and was never caught... until MF Global finally expired of course. 

So in other words, is this the eureka moment when everyone realizes that any gold, be it paper or physical, is either a irrelevant electronic binary claim held in some semiconductor, or at best an asset in some vault, that the brokerage next door suddenly also has claims over?

The end result is that the biggest loser is Joe Sixpack who bought the gold, and decided to keep it in a bank warehouse for "safekeeping" only to realize said gold will never be seen or heard of again.

From Bloomberg:

Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and client Jason Fane of Ithaca, New York, London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said, asking a judge to decide who the rightful owner is.


HSBC has received conflicting instructions regarding ownership and disposition of the property,” it said. “Accordingly, HSBC is exposed to multiple liabilities with respect to the disposition of the properties.”


According to Fane’s letter, the five Comex gold contracts are for an average of 99 ounces of gold each.


Giddens, who is liquidating the brokerage, has transferred about 38,000 commodity accounts to other firms. Three transfers of collateral made and pending will give commodity customers more than $4 billion of their assets, according to court filings.

The punchline:

The judge handling the bankruptcy said today he would deal in January with issues about distributing physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t get their share of the payouts because bars can’t be broken into pieces.

...indeed there is a reason why people say gold can not be diluted.

As for our advice: move any gold out of the LBMA or CME warehouse system immediately. And only treat any GLD investment as a day trading vehicle that can and will be lost the second there is a global liquidity or solvency freeze, because that particular asset will be wiped out as easily as "C:\format C:"

The brokerage case is Securities Investor Protection Corp. v. MF Global Inc., 11-02790, U.S. District Court, Southern District of New York (Manhattan). The parent’s bankruptcy case is MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan).


Update: as reader D points out, none of this should come as a surprise: after all the UK financial regulator, the FSA, already warned about each step of this unwind back in March 2010.

3.1 In this chapter we consider restricting two practices we believe pose an unacceptable risk to protecting client money and assets, and financial stability.

a) Restricting the placement of client money deposits within a group


3.2 Please note that our policy proposals in this section apply to UK authorised firms that place client money in client bank accounts held with a group bank, credit institution or qualifying money market fund. These requirements will not apply to incoming EEA firms conducting investment business, as under MiFID regulating client assets is a home state responsibility. We will consider extending these proposals to general insurance intermediaries when we begin reviewing CASS 5 – Insurance Mediation Activity in the first quarter of 2011.

Intra-group client money deposits

3.3 CASS contains guidance requiring firms to conduct an appropriate level of due diligence on institutions with which client money is held and to ensure deposits are appropriately diversified. We currently allow firms to hold client money with a deposit taker within the same group as the firm subject to appropriate due diligence and diversification.

3.4 There is no standard market practice for depositing client money within a group structure. For example, a number of investment firms take an explicit decision to hold client money deposits outside of the group, while other firms deposit significant amounts intra-group. Existing handbook provisions seek policy outcomes that ensure an appropriate level of diversification is achieved to protect clients’ money.

3.5 CASS contains provisions regarding a firm’s selection of a bank, credit institution or qualifying money market fund. A firm must exercise all due skill, care and diligence in selecting, appointing and periodically reviewing the institution where the client money is deposited and arrangements for holding this money. Handbook guidance also provides a list of matters a firm should consider in the process.

3.6 The money deposited at a group bank is held on trust by the firm for the firm’s clients, but it is treated as an ordinary banking deposit at the bank. Put another way, all client money at the end of a chain will eventually be held as a deposit. There is always a risk that a bank with which the deposit is held will enter insolvency proceedings and at this point it becomes possible that not all money deposited in client bank accounts as client money will be available for return to the underlying clients. Accordingly, the regime does not envisage a 100% return to clients in the event that client money is lost due to a bank’s insolvency, with CASS providing that clients will generally share rateably in the loss.

3.7 The issue under consideration is not that the funds are held as a deposit, but that when held within a group, there is an increased contagion risk that both the investment firm and the group bank or affiliate will fail simultaneously (or one will fail shortly after the other).

3.8 The resulting risk is that a firm will place an inappropriate amount of client money intra-group, usually as a source of liquidity, which has a lower cost of capital than external sources. Furthermore, as a group’s financial position deteriorates, there is a risk that firms within the group will deposit more client money intra-group to fund operations. This may give clients an inappropriate level of exposure to the bank’s credit risk. It also may lead to clients unfairly bearing the risk of the group as a whole, rather than just the individual firm. The existing sourcebook provisions which address this mismatch of firms’ and their clients’ incentives can be strengthened so the risk to clients is mitigated in the event of a firm’s default.

3.9 Imposing a hard limit on the proportion of client money which can be held intra-group is attractive and will mitigate concentration risk. However, limiting the level of client monies held within a group may increase overall credit risk where outside options are less highly rated. We have considered consulting on the basis of a 20% limit in order to fully identify stakeholders’ concerns, particularly if there is a knock-on effect on liquidity.

3.10 We have worked with firms during 2009 to reduce the concentration of client money held intra-group. During pre-consultation firms estimated that the proposals would result in an increase of approximately 10–25 basis points for additional costs, together with removing stable funding and increasing compliance and operational overheads.

3.11 Accordingly, we propose limiting the amount of client money held by a firm which can be deposited in intra-group client bank accounts to 20%. We understand firms may require some flexibility in holding money intra-group (for example, where a firm’s client specifically requests their money is held with that specific institution) and propose to address this on a case by case basis. We also propose changing existing guidance into a rule to provide a clear basis for our expectations.

3.12 We take this opportunity to highlight that our proposal to re-introduce a client money and asset return to the FSA (see below) which includes content regarding intra-group client money deposits.

b) Prohibiting the use of general liens in custodian agreements


3.13 Our proposals apply to all UK authorised investment firms and overseas branches of these UK firms. These requirements will not apply to incoming EEA fiirms conducting investment business as under MiFID regulating client assets is a home state responsibility.

3.14 Some firms in the UK appear to have inappropriately allowed custodians and subcustodians to include general liens covering, for example, group indebtedness to the custodian or sub-custodian in contractual agreements, or they have failed to pay due regard to this issue. As we have observed from LBIE’s insolvency, liens have contributed to significant delays or obstacles in an IP’s ability to recover  assets from depots not under their direct control.

3.15 CASS 6.3.3G requires a firm to consider the terms of its agreements with third parties with which it will deposit a client’s safe custody assets. As part of this guidance, the firm should consider restrictions over the third party’s right to claim a lien, right of retention or sale over any safe custody asset in the account, as well as identifying client assets separately from assets belonging to the firm.

3.16 We believe the sourcebook can be enhanced with hard rules rather than guidance in this regard. This would enable us to effectively monitor compliance and take enforcement action where appropriate.

3.17 Accordingly, we are consulting on the basis of changing the existing guidance into a rule. We propose creating a rule that prohibits using general liens over client assets which are held under custodian agreements, except to cover the situation when a firm (or if the client has a direct relationship with the custodian, the client) does not pay custodian fees and charges to the third party holding the custody assets.


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GeneMarchbanks's picture

It all ends in cash settlements. Or war.

GeneMarchbanks's picture

Let me just add that the GATA boys are watering/foaming at the mouth whilst having raging erections...

Barbarous Relic's picture

Me, bitchez!  

But only the physical kind.  

Turd Ferguson's picture

Hmmm. I wonder what Andy Maguire would have to say about this?

Oh regional Indian's picture


Butt, yes, now the top-rung cannibalization begins. An interesting phase, as this is shit being tossed much closer to the fan too. Source shit so to speak.

Could it be that Gold, generally is going to suffer a massive ownership question (fractally much like the RE situation in the US) and could that jam the market? 

Thing is, gold market can be jammed. Industrial demand will keep the silver market alive.

Something to ponder.



tmosley's picture

It'll do more than that.  It's going to send it close to parity, at least.  No real reason to think it won't overshoot by a factor that will stun the whole world.

That doesn't mean that the paper prices for both won't be zero, or close to it.

Mr Lennon Hendrix's picture

What are you writing about?  Pairty of what? 

tmosley's picture

Silver will go to parity with gold.

gmrpeabody's picture

All your gold are belong to us!

JPM Hater001's picture

I am going into the weekend with such a warm fuzzy feeling like everything is going to actually go my way for once.

I love you silver bar.

I love you too silver round. 

And yes, even you you old raggedy 1932 Quarter that'll still buy me a gallon of gas.

*Um, sorry you had to see that. <blush>

trav7777's picture

..but if you start pulling your cash out, they call you a terrist for inciting a bank run and then they seize it because it's obviously the proceeds of criminal or terristic activities.

CharlieSDT's picture

You can buy a gallon of gas with a dime, you dont need a quarter.  The quarter should be worth a two girl lap dance after full price discovery.

FEDbuster's picture

If you can't hold it or touch it, you don't own it.  Buy a damn gun safe, get some guns and gold and when the Federales come for your guns and gold.....  Out of my cold dead hands, molon labe.

Problem Is's picture

"See me! Feel me!"
"Touch me! Hold me!"

My Silver Maple Leaf(ves) loves me...

Leaf side up so I don't have to look at Charles bag hole mother of course...

AldousHuxley's picture

You know financial crisis is bad when bankers are suing each other....


HSBC sues MF Global

Rothchild ibanksters sue Nazi gold UBS

Credit Unions suing JP Morgan

Holocaust victims working in banking still suing Deutschbank



jackinrichmond's picture

 hmm..  i'm wondering what time my bullion dealer opens tomorrow  :)

Mauibrad's picture

Physical gold and silver, bitchez!  Just seein' how thin I can get this thing. :-)

chumbawamba's picture

Still several inches from where I stand, little boys.

I am Chumbawamba.

secretargentman's picture

Well this is going to be bearish for gold...  I mean who wants to own an asset if you're not even sure whether you own it.


Physical gold buried in your backyard, however, is a different matter. 


Strong hands will pay off.

xela2200's picture

If you can buy it with a dime, it means silver is undervalued. Oil has become scarcer than silver during the same period of time. Therefore, it should be worth a silver quarter and not a silver dime as it once did. How much will the last gallon of oil should be worth in silver terms?

tmosley's picture

I guess you haven't heard about the utter devestation of silver stocks.


RafterManFMJ's picture



I lost my gold, silver, guns, ammo, food supply and virgininty in a boating accident. Whoosh! You shoulda seen my shoes!

The Navigator's picture

For about $2k you can buy a Cal25 (plus another $200 for a VHF radio) and go sailing and dial 911 for a rouge wave. Be sure to add an EPIRB and a survival floatation suit and your story may stand up.

But beware, this story is going to get old as more and more gold goes missing. Amateur sinkings will be easily discernible in shallow waters.

Semper Peratus, The Navigator

onthesquare's picture

It cannot go missing if it never existed.  Abbot and Costello can explain the whole thing.

Bendromeda Strain's picture

If you claim a rouge wave, they will know you makeup the story...

chumbawamba's picture

Just tell them your name is Moses.


TheFourthStooge-ing's picture

Bendromeda Strain correctly ascertained:

If you claim a rouge wave, they will know you makeup the story...

That's downright mascary.


Mr Pink's picture

You're busted Rafterman. Everyone knows that virginity floats!

Doña K's picture

That reminds me that a 15 year old with the IQ of a Kardasian, when she was asked if she was a virgin, she thought for a few seconds and said: "Not yet."

xela2200's picture

But you didn't loose your life :-)

Chuck Walla's picture

And SEIZE you because they just said they could, if youze a terrorist!

Ahmeexnal's picture

A 1932S quarter will buy you a whole lot more than just a gallon of gas. All coins are equal, but some are more equal than others.

fonestar's picture

We tried to warn you people who thought physical and paper metal was one and the same.  You didn't listen to us and so, if you even have any time left to take possesion, hopefully you will listen to Olivia Newton-John:

Hard1's picture

Hahahahaha brilliant link

Let's get ...physical, physical
I wanna get physical
Let's get into physical

DaveyJones's picture

two in the celebrity bush

AldousHuxley's picture

gold in the hand is worth two in ETFs.

LawsofPhysics's picture

It's about bloody time.  Sweet.

tmosley's picture

You keep using that word.  I do not think it means what you think it means.

Badabing's picture


Its all a mater of figure of speech or how you look at it. Like you can say, that’s the shit or that’s the bomb, but you cant say that’s the shit bomb. It just doesn’t sound right. Or you can say that’s phat,  or like butter, but you cant say butter phat. And under no circumstance ever ever say shit bomb butter phat!

bob_dabolina's picture

There are a few shit bombs on this thread tonight. 

Or perhaps the posters are just shit bombed.