Rehypothecation

Compare with title transfer and reuse. Often used in place of the better term reuse, rehypothecation is a specific US law means of achieving reuse of pledged assets. It is not strictly accurate when applied to English law contracts where a PB takes collateral by title transfer in the first place, therefore owns it absolutely, and does not therefore need a right to rehypothecate it.

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Rehypothecation, or “rehypo”, is an important part of margin lending: 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).

New York law-style credit support arrangements

Rehypothecation achieves the chimaerical effect of allowing a recipient of pledged collateral — i.e., collateral the recipient 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 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.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.

Prime brokerage arrangements

In a prime brokerage arrangement, the prime broker has financed the purchase of a client’s asset, and it holds that asset in custody, with security over it as surety for repayment of the amount it lent the client to buy it in the first place. As custodian, the prime broker has legal title but not beneficial interest in the asset. So it is rather as if the client had “pledged” the asset under a New York law CSA to the prime broker. 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.

Where you see a right of rehypothecation

• Under an 1994 NY CSA it may be switched on or off.
• Under the US Market standard Master Securities Lending Agreement.
• Prime brokerage documentation may allow it (but only where the collateral is only pledged in the first place).

Where you don’t

• Under a pledge GMSLA. Because, like, why would you?