Rehypothecation: Difference between revisions

{{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 {{pbprov|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.

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}}.

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.