Rehypothecation: Difference between revisions

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).  

''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 transfer]]red it in the first place: The pledgor has full credit risk to the [[pledgee]] on its insolvency.