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Rehypothecation: Difference between revisions
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[[Rehypothecation]] is an important concept in [[collateral management]]: 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]]). | [[Rehypothecation]] is an important concept in [[collateral management]]: 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]]). | ||
''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]]” | ''Re''hypothecation achieves the chimaerical effect of allowing a recipient of ''[[pledge|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 {{tag|US law}}, one manages it. It is part of the [[Uniform Commercial Code]]. | ||
The equivalent concept doesn’t exist under [[common law]]: under [[English law]] [[Title transfer collateral arrangement|collateral arrangements]] 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.<ref>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.</ref> | |||
Once pledged [[collateral]] has been rehypothecated, to [[Amwell J|this correspondent’s]] best guess it is exactly as it would be had the [[pledgor]] transferred by outright [[title transfer]] in the first place: The pledgor has full [[credit risk]] to the [[pledgee]] for the return of the collateral asset. | |||
===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). | ||
{{ref}} | |||