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With each failure of a financial institution, a new term seems to find its way out of thousand page long regulations and onto the front pages. When Lehman brothers collapsed, re-hypothecation was introduced to the front page. In the weeks following MF Global’s collapse, re-hypothecation is back. It’s been covered extensively, initially by Reuters, with additional reporting from Zero Hedge (link, link) and FTAlphaville (link, link).

What is re-hypothecation? Well, hypothecating something again, duh.

But really, hypothecation is the technical term for a borrower pledging collateral. Re-hypothecation occurs when a bank or broker re-uses assets pledged as collateral by customers as collateral for its own borrowing.

Example: You give a bank collateral. The bank takes that collateral and uses it again. Your collateral is not longer controlled by the bank you gave it to. It’s controlled by the bank that the bank you gave it to gave it to. That’s re-hypothecation. And it is legal under SEC Regulation T and included in standard customer account agreements with broker dealers.

The problem? If you bank goes under, the other bank has the first right to the collateral you pledged.

via What Is Re-Hypothecation, And Does It Explain Why So Much MF Global Money Is Missing? – Business Insider.

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