Clear DefinitionsRehypothecation
1 min read
Pronunciation
[ree-hy-poth-i-key-shuhn]
Analogy
Rehypothecation is like a pawnshop re-loaning your pledged item to someone else while still holding your original claim.
Definition
The practice where financial institutions reuse collateral pledged by clients to secure their own borrowing or other obligations.
Key Points Intro
Rehypothecation can enhance liquidity but introduces added counterparty risk.
Key Points
Liquidity provision: allows institutions to leverage client collateral
Multiple pledges: same collateral can back several obligations
Leverage amplification: increases systemic leverage and funding sources
Counterparty risk: clients depend on institution’s solvency
Example
A brokerage rehypothecates client securities to borrow funds for its trading desk, subject to agreed collateral reuse limits.
Technical Deep Dive
Margin agreements define rehypothecation rights and reuse caps. Collateral management systems track ISIN-level positions and collateral chains. Blockchain-based solutions propose tokenized collateral with transparent on-chain provenance and enforce reuse limits via smart contracts.
Security Warning
Excessive rehypothecation without proper limits can trigger insolvency contagion if collateral is over-pledged or the institution defaults.
Caveat
Jurisdictional rules vary (e.g., US caps reuse at 140%); client consent and disclosure are critical.
Rehypothecation - Related Articles
No related articles for this term.