Rehypothecation

Rehypothecation is a method to enable funding or to enhance its cost by re-using valuable assets that have been posted by clients to collateralise own borrowings.

In practice rehypothecation is most prevalent in the professional securities market where a financial market participant reuses the collateral pledged by the counterparty for its own use (such as borrowing or short selling). It is possible because in financial markets the practical implementation of hypothecation is a simple title transfer of the security against cash – together with the promise of opposite transaction in the future (a repo transaction). This ability is an important feature of fungible securities when used as collateral. A central registry, when there is one for the security type in question, further facilitates the process. Securities when pledged simply change hands when pledged, since it is so easy to do so.