[NovemberWhiskey]

>Btw the requirement to not use customer collateral is enforced by the DTCC and not at a brokerage level discretion.

No, it's an SEC rule.

Broker dealers can fail, sometimes due to malfeasance but sometimes simply due to bad management or even bad luck.

In a system with a central clearing counterparty (in this case, the NSCC/DTCC), that organization mutualizes those risks by acting as "the seller for every buyer and the buyer for every seller": the process of novation splits each trade between buyer and seller into two. i.e. the seller sells to the NSCC and the buyer buys from the NSCC. Effectively the NSCC is guaranteeing the trades.

The collateral is effectively a security deposit that varies in size depending on how much risk a particular broker dealer is bringing into the system as a whole.

Does it make sense yet why this can't be done with client money?