View source for Rehypothecation

{{anat|pb|
{{image|Wapner|png|}}
{{subtable|{{rehypothecation capsule}}}}}}{{pbprov|Reuse}} — often labeled {{pbprov|rehypothecation}}<ref>Normal [[hypothecation]], by the way, is a term you don’t often see (and which means simply to [[pledge]] assets by way of [[security]] for a [[debt]]).</ref> (the two are ''legally'' very different but ''economically'' very the same things) — is the right a [[prime broker]] has over its client’s {{pbprov|custody assets}} to raise money with them in the market — by ''selling'' them, in a nutshell — to offset its lending costs, against an promise to return [[equivalent]] assets (which it must go and get, by buying them in the market) when the client wants them back.

===Anorak’s corner: The difference between “reuse” and “rehypothecation”===
The English law “[[right of use]]” is quite straightforward. Under it, contractually, a custodian may transfer a custody asset into its own name absolutely, against an obligation to “return” an “[[equivalent]]” asset into custody when the client needs it, so sell it. This converts the “custody” relationship over the assets — one of trustee and beneficiary — into one of indebtedness. Once the reuse transfer has happened, the custodian — now ''not'' a custodian, of course — may deal with the asset as it wishes, and ''whether or not it sells it into the market'', but has a liability to return an equivalent asset, and when it does, the custody and security relationship resume over that asset.
 
So far so good. But now we board our liner at Southampton and head for the New World. Here things are never easy. There is a [[nonsense on stilts|strain of American jurisprudence]] that we might mischievously call “[[Nonsense on stilts|Benthamite]]” in that it admits of [[paradox]] — that ''revels'' in it — and rehypothecation is one of its higher tide marks. To “[[rehypothecate]]” an asset is to take it and sell it outright ''without depriving its owner of legal title to the asset''. Now of course, to someone brought up munching pithy [[Latin]] aphorisms like ''[[nemo dat quod non habet]]'' for breakfast, as all English lawyers were, that doesn’t make literal sense. U.S. attorneys, I fancy, know it. They will regard you beadily should you ask them to explain it, and will decline to do so. It just is. The best I can do is point to a section on the ICMA website which itself sounds rather baffled:
{{quote|
''... the collateral-giver remains the owner but only until the collateral-taker exercises his right of rehypothecation. When this right is exercised, there is a material change in the legal relationship between the parties. The pledge is extinguished and the collateral-giver loses his title to the collateral, which is transferred to the third party to whom the collateral has been rehypothecated. In exchange, the collateral-giver is given a contractual right to the return of the same or similar collateral but this claim is intrinsically unsecured.}}

That sounds to me, readers, like [[title transfer|title-transfer]] [[reuse]] — perhaps only at the point it leaves the custodian’s hands and not before, granting a scintilla of additional protection, but really not much.
=== Reuse generally===
It is a fundamental part of a [[prime brokerage]] business. This is how a [[prime broker]] funds its costs of lending to its Hedge Fund clients, which allows them to gain [[leverage]], buy the assets and conflate [[alpha]] with [[vega]]: it is ''not'' a [[credit risk mitigation technique]] (for that see {{pbprov|security}} and {{pbprov|margin}}.

It seems a rather drastic right until you put it in context:

*Usually, the client will only own the custody assets in the first place because its [[prime broker]] has lent it the money to buy them. [[Hedge fund]]s like to buy on [[margin]] so they they can (ahem) [[leverage]] their [[Leveraged alpha|alpha]].
*Running a [[prime brokerage]] business — lending to clients and then holding assets they buy with their loans in [[custody]] for them, is an expensive business. If the [[prime broker]] can raise finance against those  (for example by using them as [[collateral]] under a [[securities financing]] programme) it can improve its [[balance sheet]] position, repay its internal treasury department the funds they made available at eye-watering rates, therefore markedly cheapening their own cost of lending and avoiding [[custody]] charges. Both of these mean it can price its loans more attractively to its clients.

There is a world of difference between [[rehypothecation]] and [[agent lending]], even though [[UCITS V]] threatens (vaguely) to regard them as [[22(7) - UCITS V Provision|different varieties of the same thing]].

===Where you  DO see a right of [[rehypothecation]]===
====Prime brokerage arrangements====
A [[prime broker]] lends its client money to buy assets, and holds those assets in [[custody]], taking security over them as [[surety]] for repayment of its loan — a “[[margin loan]]”. As [[custodian]], the [[prime broker]] has legal title but not [[beneficial interest]] in the asset. Therefore the term [[rehypothecation]], to describe the process whereby the [[prime broker]] takes that asset and sells it to defray the cost of financing it, with a [[contingent obligation]] to redeliver something identical back on request, is not an outrageous distortion of the facts of what is happening.
====[[New York law]]-style [[credit support]] arrangements====
''For the specific provision in the {{nyvmcsa}}, and tart commentary thereon, see: {{nyvmcsaprov|Use of Posted Collateral (VM)}}''

''Re''hypothecation achieves the chimaerical effect of allowing the recipient of ''[[pledge|pledged]]'' [[collateral]] — i.e., [[collateral]] the holder doesn’t ''own'', but simply possesses with a [[security interest]] — to sell that [[collateral]] outright to a third party, on condition that it remains liable the original pledgor to return an identical (“[[fungible]]”) asset at the conclusion of the [[pledge]]. 

Challenging, you would think, because “''[[nemo dat quod non habet]]''” — you can’t give someone else title to something you don’t yourself own. But somehow, under [[New York law]], one manages it. It is part of the [[Uniform Commercial Code]]. Once pledged [[collateral]] has been rehypothecated, to [[Jolly Contrarian|this correspondent’s]] best guess it is exactly as it would be had the [[pledgor]] transferred by outright [[title transfer]] in the first place: The pledgor has full [[credit risk]] to the [[pledgee]] for the return of an [[equivalent]] collateral asset.

The [[English law]] equivalent in a [[prime brokerage]] arrangement is to interpose an intermediate step, in which the [[pledgee]] may take title outright title to the [[pledged asset]] itself, whence ''habet'', and accordingly ''aliquis dat'' it ''outright'' to a third person.

====US market-standard {{msla}}====
The collateral leg of a {{msla}} is a pledge which generally has a right of rehypothecation, allowing the collateral holder to reuse the collateral in the market. Like the {{nyvmcsa}} this entirely defeats the point of creating a pledge structure, but who are we, with our decidedly movable force of namby-pamby ''logic'', to quibble with the quite irresistible force of the US market practice?

===Where you ''don’t'' see it===
===={{pgmsla}}====
Under a [[pledge GMSLA]] used for [[agent lending]]. Because, like, why ''would'' you? The whole point is to immobilise collateral and keep it out of the lender’s [[bankruptcy estate]]
====[[UCITS]] funds====
{{ucits and reuse}}
====[[Title transfer collateral arrangement]]s generally====
Under a [[title transfer collateral arrangement]] (as opposed to a [[pledge]]) the [[collateral]] a {{sex|lady}} receives is hers to do with as she pleases, as long as she returns something “[[equivalent]]” when the time it right.<ref>If someone tells you they wish to [[rehypothecate]] collateral they’ve taken under a [[title transfer collateral arrangement]], quickly find a sleeve you can laugh up.</ref>If she receives a [[security interest]] over collateral then, unless she has a separate [[right of use]] over the asset, she cannot sell it — it not being hers to sell — but must return the self-same thing.

{{voting rehypothecated securities}}

{{sa}}
*{{nyvmcsaprov|Use of Posted Collateral (VM)}}
*[[Rehypothecation]]
*Art {{ucits5prov|22(7)}} [[UCITS V]]
{{ref}}