Rehypothecation: Difference between revisions
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''Re''hypothecation achieves the chimaerical effect of allowing a recipient of ''[[pledge|pledged]]'' [[collateral]] — i.e., [[collateral]] the recipient doesn’t actually own, but simply possesses with a [[security interest]] — to sell that [[collateral]] outright in the market to a third party, on condition that it remains liable to return an indentical (“[[fungible]]”) asset at the conclusion of the [[pledge]]. Challenging, you would think, because “''[[nemo dat quod non habet]]''” — you can’t give title to something you don’t yourself own. But somehow, under {{tag|US law}}, one manages it. It is part of the [[Uniform Commercial Code]]. | ''Re''hypothecation achieves the chimaerical effect of allowing a recipient of ''[[pledge|pledged]]'' [[collateral]] — i.e., [[collateral]] the recipient doesn’t actually own, but simply possesses with a [[security interest]] — to sell that [[collateral]] outright in the market to a third party, on condition that it remains liable to return an indentical (“[[fungible]]”) asset at the conclusion of the [[pledge]]. Challenging, you would think, because “''[[nemo dat quod non habet]]''” — you can’t give title to something you don’t yourself own. But somehow, under {{tag|US law}}, one manages it. It is part of the [[Uniform Commercial Code]]. | ||
The equivalent concept doesn’t exist under [[common law]]: under [[English law]] [[title transfer collateral arrangement]] the collateral a lady receives is | The equivalent concept doesn’t exist under [[common law]]: under [[English law]] [[title transfer collateral arrangement]] the collateral a lady receives is hers to keep and 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 she cannot sell it — it not being hers to sell — but must return the self-same thing. | ||
Once pledged [[collateral]] has been rehypothecated, to [[Amwell J|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 the collateral asset. | Once pledged [[collateral]] has been rehypothecated, to [[Amwell J|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 the collateral asset. | ||
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*Under an {{1994csa}} it may be switched on or off. | *Under an {{1994csa}} it may be switched on or off. | ||
*{{tag|Prime brokerage}} documentation may allow it (but only where the collateral is only pledged in the first place). | *{{tag|Prime brokerage}} documentation may allow it (but only where the collateral is only pledged in the first place). | ||
{{ref}} | {{ref}} | ||
Revision as of 22:05, 17 September 2017
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Prime Brokerage Anatomy™
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Rehypothecation is an important concept in collateral management: more important than ordinary hypothecation, a term you don’t often see (and which as far as I know simply means to pledge assets by way of security for a debt).
Rehypothecation achieves the chimaerical effect of allowing a recipient of pledged collateral — i.e., collateral the recipient doesn’t actually own, but simply possesses with a security interest — to sell that collateral outright in the market to a third party, on condition that it remains liable to return an indentical (“fungible”) asset at the conclusion of the pledge. Challenging, you would think, because “nemo dat quod non habet” — you can’t give title to something you don’t yourself own. But somehow, under US law, one manages it. It is part of the Uniform Commercial Code.
The equivalent concept doesn’t exist under common law: under English law title transfer collateral arrangement the collateral a lady receives is hers to keep and do with as she pleases, as long as she returns something equivalent when the time it right.[1]If she receives a security interest over collateral she cannot sell it — it not being hers to sell — but must return the self-same thing.
Once pledged collateral has been rehypothecated, to 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 the collateral asset.
Where you see a right of rehypothecation
- Under an 1994 NY CSA it may be switched on or off.
- Prime brokerage documentation may allow it (but only where the collateral is only pledged in the first place).
References
- ↑ 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.