Re-hypothecation transactions are off-balance sheet and are therefore unrestricted by balance sheet controls.

FORBES: Why MF Global Really Went Bankrupt

What this creates is chains of counterparty risk, where multiple re-hypothecation borrowers use the same collateral over and over again.

FORBES: Why MF Global Really Went Bankrupt

As mentioned above, the chain of re-hypothecation is widespread, with major financial institutions across the globe all counterparties to one another.

FORBES: Why MF Global Really Went Bankrupt

This churning of collateral means that re-hypothecation transactions have been creating enormous amounts of liquidity, much of which has no real asset backing.

FORBES: Why MF Global Really Went Bankrupt

With collateral being re-hypothecated to a factor of four (according to IMF estimates), the actual capital backing re-hypothecation transactions may be as little as 25%.

FORBES: Why MF Global Really Went Bankrupt