0. Preface

I'm not a financial advisor - and I am not providing you financial advice. This is all my interpretation of what is going on.

TL;DR: The market is an overleveraged and rehypothecated bomb. The banks have been fighting a liquidity/collateral crisis since the end of March due to the government emergency liquidity programs ending and inflation starting to kick in. The repo market could blow up at any moment from a lack of collateral and short squeeze the US Treasury market itself. The entire market is hanging by a thread and the DTC, ICC, and OCC are prepared for the fallout. There are big players in the Crypto market and if they default due to this repo market bomb, massive selloffs can occur, pulling everything down in the stock market, repo market, and crypto market all at once.

I know this is gloom and doom post but this is backed up by some scary rules that were passed by the market operators and some data on the repo market. Do your own research for sure, but I'm trying to help summarize what's going on here to help you start your journey.

1. The DTC, ICC, and OCC Are Ready For Member Defaults

The DTC, ICC, and OCC are all major clearing corps of the market. They all are their own beasts in and of themselves. For simplicity, we'll label them as such:

DTC = stocks

ICC = default swaps

OCC = options

When I say member default, this means that the member defaulted on something - such as their net long and short positions have brought them negative long enough to be margin called and liquidated. Ever hear of banks defaulting in 2008? That means they were about to be wiped from existence, until the Fed stepped in and bailed them out.

The DTC, ICC, and OCC all pretty much share the same members. Market Makers and Banks. Except of course the ICC which only has Banks as members. All three of them have passed similar rules regarding member defaults. The last of which was for the OCC which went into effect as of Wednesday, May 19th.

If a member defaults in the ICC, they most likely default in the DTC and OCC as well. Same relationship the other three ways as well. The DTC, ICC, and OCC do not want to be left paying up for the defaulting member's debts in the event of a default. They also want to contain the nuke of a defaulter as much as possible so that it doesn't completely obliterate the market.

Remember Archegos? They abused a shitload of leverage and they were a small firm. They made a pretty significant impact on the market and a crater in many banks. Imagine how bad leverage must have been abused by all the large firms which are STILL standing today. Imagine what will happen if a very large firm with equivalent or larger margin goes bust and defaults. How about a handful of them going bust? How about if a bank goes bust and these firms and Hedgefunds cant get loans they're currently using to stay net positive and not default? Bad shit happens.

To prepare for the market nuke, the DTC, ICC, and OCC have passed rules/plans to deal with defaulting members.

I won't go into super detail here. Just a brief summary of the important rules the DTC, ICC, and OCC have passed:

• DTC-004: Wind-down and auction plan. In effect.
• ICC-005: Wind-down and auction plan. In effect.
• OCC-004: Auction plan. In effect.

Every single one of them now has some form of rule which allows the defaulting members assets to be auctioned off and to deal with mass amounts of members defaulting (wind-down plan). This allows other members of the DTC, ICC, or OCC to buy the defaulters assets at a discount while in turn funding the defaulting member's short positions. This is in place of straight up liquidation on the open market [Note: There is no auction plan for crypto. So straight market orders and liquidation can occur].

It's a way to contain the nuke, but it might not be enough due to, again, the massive amounts of leverage in the market and the potential of an absurd amount of naked short selling that has occurred across the entire stock market and US Treasury Bond market. The stock market might be able to prop itself up.

The key takeaway is that all three of them, the DTC, ICC, and OCC are ready to pull the plug on Banks, HedgeFunds, Firms, etc. They have been planning for this coming for a while now. The moment a member defaults in the DTC, ICC, or OCC, it will cascade to the other clearing corps and cause them to default over there as well. ALL of the stocks, options, and swaps of defaulting members are up for auction - and liquidation in all other investments occurs.

2. The Repo Market Bomb

The whole market is an overleveraged and rehypothecated bomb. Rehypothecation is essentially derived from naked shorting - it means that two or more entities might have the same asset, so the owner is unknown. Naked shorting has been abused for decades, and its very possible that a single asset might have been rehypothecated many times over. Such as extreme levels of 20x even.

The Fed had emergency "Liquidity programs" for Banks due to Covid. And those expired as of March 31, 2021.

​

https://www.reuters.com/article/us-usa-fed-facilities/fed-says-extending-four-emergency-liquidity-programs-to-march-31-2021-idUSKBN28A1YG

I might trigger some of you here - but the HedgeFunds took advantage of the pandemic and the emergency programs to go absolutely wild naked shorting and rehypothecating assets to try to bully companies out of existence (meme stocks). They added much, much more to this overleveraged / rehypothecated bomb situation and a literal death clock started once those emergency programs lifted. Those meme stock companies are WAY too far away from where they should be in price for this to not be an issue. This is just one factor to the problem though - its presenting a liquidity crisis for a few HedgeFunds and firms.

The Fed has been printing tons and tons of money through COVID relief bills which in turn, helps drive up inflation, which then leads into the issue we're seeing with the repo market now. I'll discuss why inflation matters shortly.

Check this out. This is what the repo market has been experiencing since March. This might initially scream a repo market liquidity crisis to you, but it is most likely a collateral crisis of the repo market.

Repo Rate Increases 2019 - Present

This is showing you how much borrowing is going on in the repo market right now on a DAILY basis. I believe we just surpassed ~$320 BILLION being borrowed. And it continues to increase every business day.

He says "QE". What is QE? Well, it's dealing with the repo market. In the repo market, you have a pool of cash that can be loaned out by posting collateral. These trades have currently been overnight trades, meaning that the cash is returned the next day. For example, a HedgeFund can get a cash loan by posting collateral to a bank.

Now in regards to QE... If tons of cash is borrowed by lots of entities, then the supply of cash goes down, and the interest rate on the repo "loans" goes up. In order to keep the interest rate low, the Fed performs something called "Quantitative Easing" (QE):

1. The Fed wants to keep the interest rate in the repo market down. The interest rate will go up if there's too much borrowing and not enough cash in the repo market.
2. The Fed must print money into the repo market to push the interest rates down.
3. In order to print money into the repo market, the Fed will pull Treasury Bonds (collateral) out of the market.
4. More money is printed into the economy/repo market while interest rates are held down. But they have also sucked out treasury bonds from the repo market. Meaning there is now less collateral for HedgeFunds and Firms to get loans with.
5. Performing this exacerbates the problem of the repo market bomb because it's delaying the inevitable by making it a larger and larger bomb rather than letting the banks, hedgefunds, etc. default. They're also printing tons of money into the repo market risking more inflation.

Right now, the total repo borrow rate is growing at ever increasing amounts because of mass amounts of borrowing by Banks because they believe that inflation is going to kick in. So the banks are going to continuously pay more and more and more money to the HedgeFunds and Firms with these overnight loans in order to borrow their bonds from them. When they borrow these bonds, the banks can then short sell them into the treasury market because they think inflation will kick in and drop the price of the bonds and they can later buy them back at a cheaper price.

But remember - the Fed is performing QE by sucking up collateral from the market. They might be heading towards a situation where there is a lack of supply of collateral in the repo market. They can't continue to do this because they'll run out of reserves (cash to push into the repo market) and also risk hyperinflation.

We had a warning sign in March 2021 of the lack of collateral supply because the interest rate in the repo market suddenly swung negative. That means that there is a higher demand for collateral than there is supply. It has since then gone back positive (a meager +0.01%), but could flip downward again severely at any moment.

When there is a lack of collateral in the market, this could then trigger a spike in price of US Treasury Bonds because they're now in high demand. The Banks who had borrowed the bonds to short into the Treasury Market might now default due to the rising prices. This literally causes a short squeeze on the US Treasury Market because the Banks would now have to buy back up all of the bonds that were shorted into the market at any price.

The worst part is that there has been rehypothecation of these US Treasury Bonds. It is also very likely to have occurred in extreme amounts, meaning there's massive instability of fake collateral in the system along with overleveraged HedgeFunds and Firms still standing. The banks are more or less owned by the overleveraged entities and could be screwed.

To recap / in summary, it's now been the act of tossing a hot potato back and forth between the Fed, banks, and HFs on a collateral crisis and attempting to profit off of inflation:

1. HFs have gone wild rehypothecating treasury bonds and even though one copy of a treasury bond exists, a dozen or more firms and HFs could "own" the same bond. They can post these as collateral into the repo market for cash.
2. Banks want HFs treasury bonds in exchange for cash because they think they can profit off of them due to the fear of inflation, which drives treasury bond values down, so there is a demand for collateral. The banks pay the HFs to borrow their bonds at higher and higher amounts because of the demand for the collateral.
3. The banks borrow the treasury bonds to short into the treasury market and deliver the cash to the HFs. They expect to buy the bonds back later at a lower price because they think inflation will kick in and rates will go up. Inflation drives the value of the treasury bonds down.
4. The payments from the banks keep going up as demand rises = larger and larger daily repo amounts. The banks will pay more and more to borrow the collateral each time.
5. The treasury bonds on the treasury market slowly get eaten up by the Fed so that they can print money into the repo market to keep repo interest rates down through QE. Supply of collateral drops. As this continues, the repo rate can flip negative because of too much money and too little collateral, signaling higher demand than supply of collateral.
6. This continues until suddenly there's a supply shock in treasury bond collateral, causing the treasury bond prices to go up in price. No supply of collateral = no cash can be borrowed from banks = collateral crisis.
7. The banks that borrowed the bonds and shorted them into the treasury market might now have to buy them back up at ANY price because they shorted expecting to buy back at a cheaper price, but the prices have gone up and they've defaulted. (Think the same situation with meme stocks from earlier this year).
8. A literal short squeeze occurs on the treasury market itself and banks default.
9. The banks default from having to purchase up the treasury bonds that were shorted into the treasury market. This causes a cascade of defaults to all the HFs and firms that actually needed money from the repo market because they can't get the cash they need any more.
10. No collateral in the repo market shuts down the transfer of money to the world.
11. Shit hits the fan until the Fed + global powers figure out a solution.

If you go back up to the chart of repo borrowing, you'll see that COVID levels surged end of March. Things were probably about to bust back then due to lack of collateral. But how did they delay it from popping in 2020? They pumped more collateral into the market. How do they pump more collateral into the market? By creating things like the COVID relief bills for trillions of dollars. This allows them to post TONS of collateral into the market to try to delay the bomb. The repo market ramping up again shows that the collateral issue is most likely back. It's now coming to fruition of not just the 2020 bomb being delayed, but possibly a massive bomb that has been brewing ever since 2008.

At any moment, the liquidity bomb can pop and drag the whole system down. I definitely recommend George Gammon's Summary. It's frightening if this actually all occurs.

3. Ties to the Crypto Market

Now, what has been happening in the Crypto market? It has not been pretty for a few weeks. Large players may have been slowly liquidating their holdings over the past few months to get the most profit out of them. (Don't sell all at once, sell slowly, similar to DCA). Many other large players may have exited very rapidly earlier this week due to the possibility of an upcoming storm. There was also a liquidity requirement for the OCC members to post a cumulative ~$600 Million by the morning of May 19th. Remember what happened to Crypto the night before? And minutes before the opening bell of the markets when this liquidity requirement was due? Crypto TANKED.

You can't deny that there are LARGE players in the Crypto Market. It is very possible that WHEN members of the DTC, ICC, and OCC default, possibly due to the repo market bomb, that there will be sudden massive drops in the Crypto market and Stock market due to liquidation. Remember that there is a ton of leverage in the market right now and large players do not have to disclose their Crypto holdings. So who knows what percentage of coins are held by these guys.

I say WHEN members default because why else would the DTC, ICC, and OCC pass these rules? They are expecting big fallouts. Possibly VERY soon.

The ICC is also going to provide heavy discounts (~25%) on swaps starting June 1, 2021 and ending December 31, 2021, unless extended further. Interesting - why would they provide discounts on swaps so soon in a booming market? Probably because they're expecting a large drop by June 1, and they need to entice new (or old) customers.

With one final note as to why it could be VERY soon, Congress is holding a hearing with big bank CEOs next week. From my understanding, the last time this happened was after the 2008 crash.

https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=407635

Once again. I am NOT a financial advisor. This is all my interpretation and opinion. Do your own research and take my post with skepticism. Cheers guys.