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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, on condition that 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, on condition that 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. | Once pledged [[collateral]] has been rehypothecated, to [[Amwell J|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. | ||
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 | To be contrasted, vehemently, with a {{tag|title transfer collateral arrangement}}, under which the 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]], quickly find a sleeve you can laugh up. | ||
===Where you see a right of rehypothecation=== | ===Where you see a right of rehypothecation=== | ||
*Under an {{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). | ||