How Does the Risk of Rehypothecation Change for a Client with a Fully Paid-for Security versus One Held on Margin?
The risk of rehypothecation is essentially zero for a fully paid-for security held in a cash account, as regulations strictly prohibit the broker from reusing these assets. For a security held on margin, the risk is present and is directly related to the client's margin debt.
The broker has the right to rehypothecate a portion of the margined securities, exposing those assets to the broker's credit risk.
