Glossary Term

Rehypothecation

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Rehypothecation is essentially using other people’s collateral as collateral for your own borrowing. It happens when a financial institution uses the collateral of its clients (usually posted with the institution in order to secure a loan or margin position) as collateral for its own borrowing with another financial institution. Rehypothecation has been blamed as being one of the causes of the financial crisis of 2008. Capital was rehypothecated so many times over that when certain high-risk securities began to fail (in this case mortgage backed securities and credit default swaps). It caused a cascade of liquidations that almost brought down the banking system.

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What is rehypothecation? A Traders Expert explanation

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