when assets have been rehypothecated the original owner may turn into an unsecured credit and not reclaim assets during bankruptcy proceedings 
rehypothecation vs hypothecationrehypothecation happens if a customer leaves a number of securities with a broker as a deposit most often in a margin account and the broker then uses the securities as a pledge for the margin on his own margin account or as backing for a loan hypothecation occurs when a borrower promises the right to an asset as a form of collateral in exchange for funds one common example occurs in the primary housing market where a borrower uses the home he is purchasing as collateral for a mortgage loan even though the borrower asserts a level of ownership over the property the lender can seize the asset if payments are not made as required similar situations occur in other collateralized loans such as a vehicle loan as well as with the setup of margin accounts to support other trading actions with rehypothecation the asset in question has been promised to an institution outside of the borrower s original intent for example if a piece of real estate functions as collateral on a mortgage loan and the lender pledges the asset to another financial institution in exchange for a loan if the mortgage lender fails the second financial institution may make a claim on the real estate protecting against rehypothecationthere s a few ways individuals can protect against rehypothecation and preserve their claim to assets during liquidations the most straightforward way relating to brokerage accounts is not open a margin account and utilize a cash account this account should not be allowed to have any margin capability although this type of account will be limited in what it can do this account may only be able to place stock trades using buy or sell orders it may also be able to purchase derivative products however you ll only be limited to the cash levels on hand within the account to cover settlements these types of accounts can never face a margin call as there are no margin requirements to satisfy there may be cases where owners of assets may opt in or opt out of allowing a custodian to pledge their assets in most cases these types of agreements are baked into the service agreement of the company if you do not agree most often the company especially if they are large and operate online may not extend to you service for one off transactions in which you wish to protect your collateral you may explicitly restrict rehypothecation of your collateral in the contract advantages and disadvantages of rehypothecationrehypothecation often makes it cheaper for individuals to incur debt borrowers who rehypothecate are often given rebates or lower costs of debt as opposed to traditional loans therefore though there may be more risk individuals often face less charges to raise capital this concept is especially important for financial institutions that rely on short term working capital to thrive but financial securities to maximize profits banks brokers or other financial institutions may navigate a liquidity crunch and access capital by rehypothecating client funds not only can this leverage strategy introduce liquidity it is conceptually a more efficient use of funds and promotes profitability the largest downside of rehypothecation is keeping potential customers in the dark when banks or brokers rehypothecate they may go behind their clients backs to use funds in the client s accounts some clients may not prefer that treatment of their assets especially if they are risk adverse or do not want their assets misused for speculative endeavors there are also leverage considerations that increase that risk of default overleveraged investments often face covenants when specific conditions are met trading accounts may receive a margin call or face debt default as a row of dominos fall after a single collapse a single margin call may cause other debts to fail their account maintenance requirements setting off a chain reaction that places the institution at higher risk of overall default often leads to lower costs to borrow fundshelps promote efficient use of capital in markets and institutionsgenerates higher profitability when rehypothecation is successfulallows risk seeking investors to leverage capitalresults in potentially not transparent practicesmay be unsettling to customers who do not want their assets touchedoften increases the risk of defaultmay entice bad actors to misuse assetsexamples of rehypothecationrehypothecation is often used in the financial sector allowing traders and investors access to more liquid assets such as capital that can be directly invested in assets or securities of their choosing for example imagine a trader who owns 100 shares of microsoft stock if the investor wants to buy shares ofa different company but can not afford to so they can open a margin account using the margin account the investor can post their microsoft shares as collateral to take out a loan then they can use those loan proceeds to buy more shares in theory the investor can continually post the most recently acquired shares as collateral then secure financing against those assets one of the more popular real examples of rehypothecation was the activity of mf global and its bankruptcy in 2011 mf global made a speculative bet in euro zone bonds financed via an off balance sheet arrangement it is suspected that mf global essentially used client funds as collateral to then secure funds that were used to back its trades the benefit for customers is they are often incentivized by cheaper fees as the company may be able to pass along lower expenses to the client as they do not need to take out debt one major regulation was limits up to the liability amount and it is suspected that mf global took advantage of international limits that were greater or limitless compared to that of the u s 