But the phenomenon of increased rehypothecation during periods when
pledged collateral--that is to say, the rate of rehypothecation
Perhaps the multiple re-using of collateral can be best understood by looking at institutions' financial statements: "Off-balance sheet item(s) like 'pledged-collateral that is permitted to be re-used,' are shown in footnotes simultaneously by several entities, i.e., the pledged collateral is not owned by these firms, but due to rehypothecation
rights, these firms are legally allowed to use the collateral in their own name" (Singh, Aitken, 2010, p.
(Even realized gains become based on duped market prices derived from pricing metrics utilizing information tainted by mark-to-market.) The complete picture would add in subsequent premature gains from 1) the increased capital flowing in to chase returns amplified under mark-to-market, 2) rehypothecation
activity arising from collateral pledged on mark-to-market gains, and 3) commodity overpricing gains because of the artificial housing material demand.
: "Hypothecate" means to pledge collateral.
Minimum haircuts would not prevent all runs: they would, however, limit leverage and reduce rehypothecation
Manmohan Singh and Peter Stella report a high level of rehypothecation
refers to the practice of an institution lending securities that its clients have pledged as collateral.
Second, from the contractual perspective, transactions are often embedded with certain credit rating downgrade triggers requiring the posting of additional collateral or imposing more constraining restrictions on rights of rehypothecation
. Other contractual risks exist as well, such as the potential for a client to replace existing collateral posted with a currency or security that cannot readily be reposted to a matched derivative position, however, this risk would only be present to the extent that the dealer bank takes a sort of contractual basis risk by accepting divergent collateral types on matched trades.
the commingling and rehypothecation
of margin securities.
"Deleveraging after Lehman: Evidence from Reduced Rehypothecation
." IMF Working Paper no.
principles, initially focusing on rehypothecation
, a distortion whose