Explain the Difference between ‘Hypothecation’ and ‘Rehypothecation’.
Hypothecation is the process where a client pledges their own assets as collateral to a broker to secure a loan (e.g. for margin trading). The client retains ownership but grants the broker a lien.
Rehypothecation is the subsequent action where the broker takes those hypothecated assets and re-pledges or reuses them for their own financing or trading activities. Hypothecation is the initial pledge; rehypothecation is the secondary reuse by the broker.
Glossar
Rehypothecation Implications
Risk ⎊ Rehypothecation implications introduce significant systemic and credit risk into the crypto derivatives ecosystem by allowing a prime broker to reuse client collateral for its own financing or hedging activities.
Rehypothecation Risks Explained
Risk ⎊ Rehypothecation risk arises when a custodian or prime broker reuses client assets, typically collateral, for its own purposes, such as lending or securing its own liabilities.
Rehypothecation Legal Limits
Restriction ⎊ Rehypothecation Legal Limits impose explicit restrictions on the maximum percentage or type of client collateral that a prime broker or custodian can reuse for financing activities.
Digital Asset Rehypothecation
Leverage ⎊ Digital asset rehypothecation is the financial practice where a prime broker or derivatives platform re-uses client collateral to secure additional loans or engage in proprietary trading, effectively increasing systemic leverage.
Rehypothecation Leverage
Mechanism ⎊ Rehypothecation leverage is created when a financial institution reuses client collateral to secure its own transactions or lend to other parties.
Prohibition on Rehypothecation
Rule ⎊ Prohibition on Rehypothecation is a regulatory rule that strictly forbids a financial intermediary, such as a prime broker or derivatives clearing house, from reusing client collateral for its own purposes, including leveraging proprietary trades or securing other loans.
Re-Hypothecation Prohibitions
Regulation ⎊ Re-hypothecation prohibitions are a set of regulatory guidelines designed to prevent financial intermediaries from reusing client collateral for their own purposes.
Broker Leverage
Ratio ⎊ Broker leverage fundamentally represents the multiplier applied to a trader's capital, enabling control over a significantly larger notional position in cryptocurrency derivatives or options.
Asset Transfer Mechanisms
Execution ⎊ Asset transfer mechanisms, within cryptocurrency and derivatives, represent the codified processes enabling the change of ownership of digital assets or contractual rights.
Margin Call Procedures
Automation ⎊ Efficient execution of margin calls, often via smart contracts, minimizes the time lag between a margin breach and collateral injection or liquidation.