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→Rehypothecation and reuse in a {{nutshell}}
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''Economically'', to “rehypothecate” an asset you have been pledged is to take full legal and beneficial title to it, against an obligation to return an [[equivalent]], [[fungible]] asset at a later date. This means you can sell the asset in the market, thereby realising funds with it, or use it as [[collateral]] in a market transaction elsewhere. | |||
''Economically'', to “rehypothecate” an asset you have been pledged is to take full legal and beneficial title to it, against an obligation to return an [[equivalent]], [[fungible]] asset at a later date. This means you can sell the asset in the market, thereby realising funds with it, or | |||
[[Legal beagle]]s will be fascinated, while no | [[Legal beagle]]s will be fascinated, while no one else will care, that in a New York law “rehypothecation” construct, the pledgor retains title to the rehypothecated asset at all times, even when it is sold outright in the market, whereas in an English law “re-use” construct, title to the asset passes outright to the person re-using it, and is replaced by a debt obligation to return an [[equivalent]] asset. Economically the two constructs are the same; it is just that the NY one makes ''no logical sense at all'', while the English one makes perfect sense. Don’t @ me Americans: you know this is true. | ||
Assets a counterparty posts you as [[collateral]] — especially as [[variation margin]] — are meant to be [[credit support]] for the amount that counterparty would owe you (your “[[exposure]]”) if you [[closed out]] the transaction today — the [[replacement value]] of the transaction, so to say. | Assets a counterparty posts you as [[collateral]] — especially as [[variation margin]] — are meant to be [[credit support]] for the amount that counterparty would owe you (your “[[exposure]]”) if you [[closed out]] the transaction today — the [[replacement value]] of the transaction, so to say. | ||
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Now if only you could use these assets as [[collateral]] you owe someone else, or convert them into cash to repay your treasury department — like you could if that collateral was [[Title transfer collateral arrangement|title-transfer]]red to you — wouldn’t ''that'' be a fine thing? Well, as long as the collateral is only [[pledge|pledged]] to you, you ''can’t'': it isn’t your asset to sell. | Now if only you could use these assets as [[collateral]] you owe someone else, or convert them into cash to repay your treasury department — like you could if that collateral was [[Title transfer collateral arrangement|title-transfer]]red to you — wouldn’t ''that'' be a fine thing? Well, as long as the collateral is only [[pledge|pledged]] to you, you ''can’t'': it isn’t your asset to sell. | ||
But this is exactly what [[rehypothecation]] allows you to do. But at a cost: the [[pledgor]], who used to own the asset and could reclaim it in your [[insolvency]] (on settling its outstanding [[indebtedness]] to you) now becomes your [[unsecured creditor]] for the return of the “[[equivalent]]” asset. If you go bust, the [[pledgor]] must file a claim like all other creditors for the net value of the asset. | But this is exactly what [[rehypothecation]] allows you to do. But at a cost: the [[pledgor]], who used to own the asset and could reclaim it in your [[insolvency]] (on settling its outstanding [[indebtedness]] to you) now becomes your [[unsecured creditor]] for the return of the “[[equivalent]]” asset. If you go bust, the [[pledgor]] must file a claim like all other creditors for the net value of the asset. This is why the [[pledgor]] will be grateful for the effects of [[close-out netting]]. <br> | ||