Derivative Definition 12 U.S.C. 84(B)(3). Fiction Becomes Fact.

Debts were never securitized but information about them was securitized, to wit: based upon the third place finish in a horse race you never went to and your bet that two of the horses would snort twice as they crossed the finish line you were paid money.

That doesn’t mean you own the horse, the finish line or the race track. It also doesn’t mean the race ever occurred. You still get paid if someone announces, in their sole discretion, the details of the fictitious race in a manner consistent with the terms of the written document setting forth the terms of your bet.

the devil is in the details.

(3)the term “derivative transaction” includes any transaction that is a contract, agreement, swap, warrant, note, or option that is based, in whole or in part, on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one or more commodities, securities, currencies, interest or other rates, indices, or other assets.

12 U.S.C. § 84

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Note that the definition is so broad that includes anything that is asserted to have some relationship with anything else. It is not tied to any debt, receivable or financial transaction. This is different from the definition everyone has in mind which is that a derivative is an instrument deriving its actual value from the ownership or receipt of funds arising from an obligation to pay money.

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What’s the difference? Simple. The definition that everyone thinks they understand is not the definition under law.

The definition that everyone thinks is the case would have investors paying money in exchange for pieces of your debt. That never happens. 

The definition could also be argued to mean that it includes investors paying for certificates that require passing interest and principal payments through to the investors. A close look at the real documentation shows that this also is never the case. And any claim to the contrary has already been turned down in court actions between the investors and players in “securitization.”

CONCLUSION: Debts were never securitized but information about them was securitized, to wit: based upon the third place finish in a horse race you never went to and your bet that the horse would snort twice as it crossed the finish line you were paid money.

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