How Does the Process of ‘Rehypothecation’ Affect a Prime Broker’s Client Assets?

Rehypothecation is the practice where a prime broker uses a client's collateral (securities or cash) for its own purposes, such as collateral for its own borrowings or for short-selling. This increases the broker's leverage and profitability.

However, it exposes the client to greater risk because if the prime broker defaults, the client may not be able to recover their rehypothecated assets, as they are no longer segregated.