Rehypothecation: Difference between revisions
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''Re''hypothecation 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, provided 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]]. (Note that the equivalent concept doesn't exist under [[common law]] - [[English law]] collateral arrangements are typically done under [[title transfer]] (for example the {{isda}} {{csa}}, in which case a right of rehypothecation isn't required, since it is an inplication of owning legal title that you may deal with an asset absolutely, or by [[pledge]] (for example the {{isda}} {{csd}}, in which case you can only give as good as you get). | ''Re''hypothecation 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, provided 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]]. (Note that the equivalent concept doesn't exist under [[common law]] - [[English law]] collateral arrangements are typically done under [[title transfer]] (for example the {{isda}} {{csa}}, in which case a right of rehypothecation isn't required, since it is an inplication of owning legal title that you may deal with an asset absolutely, or by [[pledge]] (for example the {{isda}} {{csd}}, in which case you can only give as good as you get). | ||
Once pledged collateral has been rehypothecated, to this correspondent's best guess it is exactly as it would be had the [[pledgor]] title transferred it in the first place: The pledgor has full credit risk to the [[pledgee]] on its insolvency. | |||
To be contrasted, vehemently, with a {{tag|title transfer collateral arrangement}}, under which collateral a lady receives is her keep and do with as she pleases, as long as she returns something [[equivalent]] when the time it right. If someone tells you they wish to rehypothecate collateral they've taken under a title transfer collateral arrangement, find a sleeve you can quickly laugh up. | To be contrasted, vehemently, with a {{tag|title transfer collateral arrangement}}, under which collateral a lady receives is her keep and do with as she pleases, as long as she returns something [[equivalent]] when the time it right. If someone tells you they wish to rehypothecate collateral they've taken under a title transfer collateral arrangement, find a sleeve you can quickly laugh up. | ||
===Where you see a right of rehypothecation=== | ===Where you see a right of rehypothecation=== | ||
*{{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). |
Revision as of 13:00, 16 August 2016
Rehypothecation is an important concept in collateral management - arguably more important than "hypothecation" which is 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, provided 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. (Note that the equivalent concept doesn't exist under common law - English law collateral arrangements are typically done under title transfer (for example the ISDA 1995 CSA, in which case a right of rehypothecation isn't required, since it is an inplication of owning legal title that you may deal with an asset absolutely, or by pledge (for example the ISDA English law CSD, in which case you can only give as good as you get).
Once pledged collateral has been rehypothecated, to this correspondent's best guess it is exactly as it would be had the pledgor title transferred it in the first place: The pledgor has full credit risk to the pledgee on its insolvency.
To be contrasted, vehemently, with a title transfer collateral arrangement, under which collateral a lady receives is her keep and do with as she pleases, as long as she returns something equivalent when the time it right. If someone tells you they wish to rehypothecate collateral they've taken under a title transfer collateral arrangement, find a sleeve you can quickly laugh up.
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).