Reuse
“Reuse” is the right (typically held by a prime broker) to take assets that it holds in custody for its clients and resell them, against an obligation to return equivalent assets on demand. It is like a kind of 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.
In the US this is known as a right of “rehypothecation” — though that is something subtly different, and markedly stupider Template:Imho.
Reuse 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 the prime broker has lent it the money to buy them. Hedge fund clients like to buy on margin so they they can (ahem) leverage their alpha.
- running a prime brokerage business, and holding in custody in particular, is an expensive business. If the prime broker can reuse assets it would otherwise have sitting in custody (either as collateral under its own securities financing programme) it can improve its balance sheet position and avoid custody charges. Both of these mean it can price its offering more attractively to the client.
See also
|
Hedge Funds & Prime Brokerage Anatomy™
{{{2}}}
|