Definition of rehypothecation

This is where collateral which has been posted by hedge funds against loans they have taken out is used by investment banks for their own purposes. [1]

Rehypothecation is the practice of using the assets held as collateral for one client in transactions for another. [2]  This allows the prime broker to re-lend client securities held as collateral. [3]

Like many other providers of broking services to hedge funds, the European arm of Lehman Brothers was fond of using collateral posted by its clients as collateral for activities of its own. The practice seemed harmless until the broker went bust, leaving hundreds of funds facing a long struggle to claw back assets. [4]

Relatively standard practice for many prime brokers pre-Lehman Brothers, the investor was compensated by being offered lower cost of financing for money borrowed.  The practice has not disappeared, but asset managers are much more thoughtful about whether to allow it. [5]

FT Articles & Analysis

No articles are associated with this term