Rehypothecation

AAA

DEFINITION of 'Rehypothecation'

The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees.







INVESTOPEDIA EXPLAINS 'Rehypothecation'

In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09.



In the United States, rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client, under Rule 15c3-3 of the SEC.




RELATED TERMS
  1. Pledged Asset

    An asset that is transferred to a lender for the purpose of securing ...
  2. Prime Brokerage

    A special group of services that many brokerages give to special ...
  3. Credit Crunch

    An economic condition in which investment capital is difficult ...
  4. Broker

    1. An individual or firm that charges a fee or commission for ...
  5. Hypothecation

    The established practice of a borrower pledging an asset as collateral ...
  6. Debit Card

    An electronic card issued by a bank which allows bank clients ...
Related Articles
  1. Forex Education

    Forex Leverage: A Double-Edged Sword

    Find out how this flexible and customizable tool magnifies both gains and losses.
  2. Options & Futures

    How Does Your Margin Grow?

    Risk-management tool SPAN margin boosts profitability prospects by helping to determine when to exit a trade.
  3. Options & Futures

    Margin Trading

    Find out what margin is, how margin calls work, the advantages of leverage and why using margin can be risky.
  4. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  5. Personal Finance

    Careers: Equity Research Vs. Investment Banking

    Equity research is sometimes viewed as the unglamorous, lower-paid cousin to investment banking. In this article, we compare the two careers.
  6. Stock Analysis

    Morgan Stanley's Profitablity: Bank on It (MS)

    The economy offers few certainties, but Morgan Stanley's profitability might be one of them.
  7. Investing

    Jamie Dimon Biography

    Jamie Dimon must be the most fearless man on Wall Street.
  8. Investing

    7 Reasons You Will Make a Good Investment Banker

    Many seek at the door of investment banking, but few can enter. Possessing these seven traits will help you land a job and succeed in investment banking.
  9. Investing

    7 Reasons Investment Banking Is Not for You

    Even if you possess the education, experience and enthusiasm to land a coveted investment banking gig, here are seven reasons to find another career.
  10. Active Trading Fundamentals

    The Biggest Private Equity Firms in New York City

    Discover the top four largest private equity firms, including Goldman Sachs, headquartered in New York City, as ranked by total assets raised since 2010.
RELATED FAQS
  1. A hypothecation agreement allows a broker-dealer to

    A. approve the client for "hot" IPOs. B. hold the margined securities in a street name loan - using the securities as collateral ... Read Full Answer >>
  2. What is the difference between leverage and margin?

    In financial terms, leverage is reinvesting debt in an effort to earn greater return than the cost of interest. When a firm ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. Why do commercial banks borrow from the Federal Reserve?

    Commercial banks borrow from the Federal Reserve primarily to meet reserve requirements when their cash on hand is low before ... Read Full Answer >>
  5. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  6. What role does a correspondent bank play in an international transaction?

    A correspondent bank is most typically used in international buy, sell or money transfer transactions to facilitate foreign ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  2. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  3. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  4. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  5. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
  6. Marlboro Friday

    A reference to Friday, April 2, 1993, when Philip Morris, the maker of Marlboro cigarettes, announced that it would be cutting ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!