What Is “Rehypothecation” and How Does It Relate to Custodian Risk?

Rehypothecation is the practice where a custodian or broker uses a client's assets, which were posted as collateral or held in custody, for their own purposes, such as lending or collateralizing their own trades. This introduces significant counterparty risk.

If the custodian becomes insolvent, the client may not be able to recover their assets, as they are now entangled in the custodian's balance sheet.