Rehypothecation: Difference between revisions

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 {{anat|pb|{{subtable|{{rehypothecation capsule}}}}}}''Compare with [[title transfer]]''
-Often used in place of the better term “{{pbprov|reuse}}”, {{pbprov|rehypothecation}} is a [[New York law]] term for the right to [[reuse]] pledged assets. It is not strictly accurate when applied to [[title transfer collateral arrangements]] as the collateral taker owns the asset absolutely, and does not therefore need a right to “[[rehypothecate]]” it.''
+{{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> — is the right a {{pbprov|prime broker}} has over its client’s {{pbprov|custody assets}} to take those assets and sell them in the market to offset its lending costs, against an obligation to return equivalent assets (which it must buy in the market) when the client wants them back.
-{{pbprov|Rehypothecation}}, or “{{pbprov|rehypo}}”, is an important part of {{pbprov|margin lending}}.<ref>More important than ordinary [[hypothecation]], a term you don’t often see (and which means simply to [[pledge]] assets by way of [[security]] for a [[debt]]).</ref> It means the [[prime broker]]) may take assets that it holds in [[Custody asset - CASS Provision|custody]] for its clients and sell or lend them in the market, against an obligation to return [[equivalent]] assets on demand. It is like a kind of [[Stock lending|stock borrow]] facility, where the [[prime broker]] can help itself to the client’s assets, subject to pre-agreed contractual limits, usually including a limit to a certain percentage of the client's [[indebtedness]] — which can be as high as 140%, but is rarely higher — to the [[prime broker]]. It seems a rather drastic right, until you put it in context:
+It is a fundamental part of a [[prime brokerage]] business. This is how a {{pbprov|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]].