Rehypothecation: Difference between revisions

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-{{a|glossary|}}{{anat|pb|}}''Compare with [[title transfer]] and {{pbprov|reuse}}.''
+{{anat|pb|
+{{image|Wapner|png|}}
+{{subtable|{{rehypothecation capsule}}}}}}{{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> (the two are ''legally'' very different but ''economically'' very the same things) — is the right a [[prime broker]] has over its client’s {{pbprov|custody assets}} to raise money with them in the market — by ''selling'' them, in a nutshell — to offset its lending costs, against an promise to return [[equivalent]] assets (which it must go and get, by buying them in the market) when the client wants them back.
-Often used in place of the better term “{{pbprov|reuse}}”, {{pbprov|rehypothecation}} is a New York law means of achieving [[reuse]] of pledged assets. It is not strictly accurate when applied to [[title transfer collateral arrangements]] as the collateral taker in that case owns the asset absolutely, and does not therefore need a right to “[[rehypothecate]]” it.''
+===Anorak’s corner: The difference between “reuse” and “rehypothecation”===
+The English law “[[right of use]]” is quite straightforward. Under it, contractually, a custodian may transfer a custody asset into its own name absolutely, against an obligation to “return” an “[[equivalent]]” asset into custody when the client needs it, so sell it. This converts the “custody” relationship over the assets — one of trustee and beneficiary — into one of indebtedness. Once the reuse transfer has happened, the custodian — now ''not'' a custodian, of course — may deal with the asset as it wishes, and ''whether or not it sells it into the market'', but has a liability to return an equivalent asset, and when it does, the custody and security relationship resume over that asset.
+So far so good. But now we board our liner at Southampton and head for the New World. Here things are never easy. There is a [[nonsense on stilts|strain of American jurisprudence]] that we might mischievously call “[[Nonsense on stilts|Benthamite]]” in that it admits of [[paradox]] — that ''revels'' in it — and rehypothecation is one of its higher tide marks. To “[[rehypothecate]]” an asset is to take it and sell it outright ''without depriving its owner of legal title to the asset''. Now of course, to someone brought up munching pithy [[Latin]] aphorisms like ''[[nemo dat quod non habet]]'' for breakfast, as all English lawyers were, that doesn’t make literal sense. U.S. attorneys, I fancy, know it. They will regard you beadily should you ask them to explain it, and will decline to do so. It just is. The best I can do is point to a section on the ICMA website which itself sounds rather baffled:
+{{quote|
+''... the collateral-giver remains the owner but only until the collateral-taker exercises his right of rehypothecation. When this right is exercised, there is a material change in the legal relationship between the parties. The pledge is extinguished and the collateral-giver loses his title to the collateral, which is transferred to the third party to whom the collateral has been rehypothecated. In exchange, the collateral-giver is given a contractual right to the return of the same or similar collateral but this claim is intrinsically unsecured.}}
-{{pbprov|Rehypothecation}}, or “{{pbprov|rehypo}}”, is an important part of {{pbprov|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]]).
+That sounds to me, readers, like [[title transfer|title-transfer]] [[reuse]] — perhaps only at the point it leaves the custodian’s hands and not before, granting a scintilla of additional protection, but really not much.
+=== Reuse generally===
+It is a fundamental part of a [[prime brokerage]] business. This is how a [[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}}.
-{{rehypothecation capsule}}
+It seems a rather drastic right until you put it in context:
-===Where you  DO see a right of rehypothecation===
+*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]].
+*Running a [[prime brokerage]] business — lending to clients and then holding assets they buy with their loans in [[custody]] for them, is an expensive business. If the [[prime broker]] can raise finance against those  (for example by using them as [[collateral]] under a [[securities financing]] programme) it can improve its [[balance sheet]] position, repay its internal treasury department the funds they made available at eye-watering rates, therefore markedly cheapening their own cost of lending and avoiding [[custody]] charges. Both of these mean it can price its loans more attractively to its clients.
+There is a world of difference between [[rehypothecation]] and [[agent lending]], even though {{tag|UCITS V}} threatens (vaguely) to regard them as [[22(7) - UCITS V Provision|different varieties of the same thing]].
+===Where you  DO see a right of [[rehypothecation]]===
 ====Prime brokerage arrangements====
-In a {{tag|prime brokerage}} arrangement, the [[prime broker]] has financed the purchase of a client’s asset, and it holds that asset in [[custody]], with {{tag|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]] {{t|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.
+A [[prime broker]] lends its client money to buy assets, and holds those assets in [[custody]], taking security over them as [[surety]] for repayment of its loan — a “[[margin loan]]”. As [[custodian]], the [[prime broker]] has legal title but not [[beneficial interest]] in the asset. 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.
 ====[[New York law]]-style [[credit support]] arrangements====
 ''For the specific provision in the {{nyvmcsa}}, and tart commentary thereon, see: {{nyvmcsaprov|Use of Posted Collateral (VM)}}''
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 ====US market-standard {{msla}}====
-The collateral leg of a {{msla}} is a pledge which generally has a right of rehypothecation, allowing the collateral holder to reuse the collateral in the market. Like the {{nyvmcsa}} this ebntirely defeats the point of creating a pledge structure, but who are we, with our decidedly movable force of namby-pamby ''logic'', to quibble with the quite irresistible force of the US market practice?
+The collateral leg of a {{msla}} is a pledge which generally has a right of rehypothecation, allowing the collateral holder to reuse the collateral in the market. Like the {{nyvmcsa}} this entirely defeats the point of creating a pledge structure, but who are we, with our decidedly movable force of namby-pamby ''logic'', to quibble with the quite irresistible force of the US market practice?
 ===Where you ''don’t'' see it===
@@ Line 34: / Line 48: @@
 {{sa}}
 *{{nyvmcsaprov|Use of Posted Collateral (VM)}}
+*[[Rehypothecation]]
+*Art {{ucits5prov|22(7)}} {{t|UCITS V}}
 {{ref}}