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Template:Rehypothecation capsule: Difference between revisions
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Now if you think about assets that a counterparty has posted to you as [[collateral]]; especially as [[variation margin]], these are meant to be [[credit support]] for your [[exposure]] to that counterparty; that “[[exposure]]” being the amount that counterparty would owe you if you [[closed out]] the transaction today — the [[replacement value]] of the transaction, so to say. | Now if you think about assets that a counterparty has posted to you as [[collateral]]; especially as [[variation margin]], these are meant to be [[credit support]] for your [[exposure]] to that counterparty; that “[[exposure]]” being the amount that counterparty would owe you if you [[closed out]] the transaction today — the [[replacement value]] of the transaction, so to say. | ||
This is all well and good from a [[Credit risk|credit]] perspective, but there is a [[Cost of funding|funding]] angle, too. That [[exposure]] is rather like [[indebtedness]] — it is as if you have lent your counterparty that [[money]] | This is all well and good, from a ''[[Credit risk|credit]]'' perspective, but there is a [[Cost of funding|funding]] angle, too. That [[exposure]] is rather like [[indebtedness]] — it is as if you have lent your counterparty that [[money]]. If you are a [[prime broker]], you probably ''have'' lent your counterparty that money. This is money your treasury department would doubtless like to use elsewhere, and it will gleefully, usuriously, pass to you the opportunity cost of it not being able to do so. | ||
Well, this is 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]] (subject to discharging 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. Which is why the [[pledgor]] will be grateful for the effects of [[close-out netting]]. <br> | Now if only you take these assets and use them as [[collateral]] to someone else as [[variation margin]] for ''their'' [[exposure]] to ''you'', or convert the asset into cash you can use to repay the extortioneers in 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. | ||
So 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]] (subject to discharging 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. Which is why the [[pledgor]] will be grateful for the effects of [[close-out netting]]. <br> | |||