what is rehypothecation 
rehypothecation is a practice whereby banks and brokers use 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 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 understanding rehypothecationrehypothecation was a common practice until 2007 but 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 rehypothecation occurs when a lender uses an asset supplied as collateral on a debt by a borrower and applies its value to cover its own obligations in order to do so the lender may have access to a variety of assets promised as collateral including tangible assets and various securities this innovative cycle of leveraging another party s assets as collateral generates a type of derivative that can expound positive results or bankrupt companies quickly should the strategy fail most often brokers rehypothecate assets as they need temporary working capital these parties often have illiquid assets they own yet have operating requirements that demand cash clients must be aware of rehypothecation as it is technically their own assets that have been pledged for someone else s debt this creates complicated creditor issues where an investors shares may longer be in their possession due to their custodian s default 