TeachMeFinance.com - explain Rehypothecation
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.
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