26 banking trade associations send letter AGAINST the SEC's proposed Custody Rule: "The segregation of client assets requirement would effectively prohibit prime brokers from providing margin financing by rehypothecating client assets"

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TLDRS:

26 banking trade associations send letter AGAINST the SEC's proposed Custody Rule: "The segregation of client assets requirement would effectively prohibit prime brokers from providing margin financing by rehypothecating client assets"
"Requiring qualified custodians to hold client cash in segregated, off-balance sheet accounts would fundamentally disrupt the core banking model of taking deposits, providing credit, and facilitating payments."

First, it would compel qualified custodians to segregate client assets, including cash deposits, variation margin, and contractual obligations, in a manner that is at odds with the existing regulatory frameworks that cover the related institutions and instruments.
Second, it would create an overly broad definition of “custody” that includes many adviser practices that are already heavily regulated, resulting in unnecessary burden and inefficiency.
Third, it would expand the existing custody rule’s application from “funds and securities” to all positions held in a client account, including loans, derivatives, and other financial contracts held for investment purposes and physical assets, such as physical commodities, real estate, artwork, and precious metals.
Fourth, it would compel advisers to enter into contractual agreements with clients’ custodians and would impose on those custodians a host of new commercial and operational requirements that may be impossible to fulfill and will disrupt today’s system that works well.

Requiring qualified custodians to hold client cash in segregated, off-balance sheet accounts would fundamentally disrupt the core banking model of taking deposits, providing credit, and facilitating payments. For individuals, businesses, and communities, mandatory cash deposit segregation would reduce banks’ ability to provide credit. For investors and other market participants, segregation would slow down payment and settlement cycles, increase cost of funding and credit, and increase operational risks and trade failures.
The segregation of client assets requirement would effectively prohibit prime brokers from providing margin financing by rehypothecating client assets even when the prime broker has the client’s consent to do so. This could result in repricing of these products for clients advised by registered investment advisers, materially impact liquidity in the market, and significantly reduce returns.