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Rehypothecation: Difference between revisions
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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. | 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 strain of American jurisprudence that 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: | 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: | ||
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''... 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.}} | ''... 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.}} | ||