Definition of Rehypothecation

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TeachMeFinance.com - explain Rehypothecation




historic definition...

Rehypothecation -- The hypothecation again of collateral already hypothecated. Rehypothecation, except by consent of the owner of the collateral, is illegal. When a customer deposits with a broker securities instead of money as margin he hypothecates the securities with the broker. In effect he obtains a loan on them. The margin represents the loan. He signs an agreement with the broker whereby the broker is permitted to rehypothecate the securities is permitted to use them as collateral in obtaining a loan for himself. If the broker defaults on the loan he has obtained on the securities and the securities are sold to satisfy the loan the owner of the securities (the broker's customer) cannot recover the securities. He is without recourse except that he may proceed against the broker to recover the difference between the value of the securities and what he may owe the broker in margin or otherwise. Also, when stocks (or bonds ) are bought on margin the broker's customer gives the broker the right to hypothecate them. This is necessary as the customer is the real owner of the securities they are bought for his account and risk.



About the author

Mark McCracken

Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English".


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