Thanks xbig. Excerpt from Wiki on "hypothecation". Read to the bottom.
Hypothecation and re-hypothecation, respectively, are commonly used to describe the means by which securities brokers and dealers first extend credit on margin to their customers using pledged securities as collateral, and then pledge the client-owned securities held in the client's margin account as collateral for the brokerage's bank loan. In this example, hypothecation describes the posting of collateral to secure the customer's obligation to the broker; rehypothecation is the pledging by the broker of hypothecated client-owned securities in a margin account to secure a loan to the broker from a bank. This common use of the terms hypothecation and re-hypothecation is technically inaccurate, since the pledgee of the securities collateral, in the case of the broker, may be deemed to have possession of it.
While rehypothecation is not permitted in some jurisdictions, it is common practice in the United States, generally under the terms of a written collateral agreement that explicitly permits it. In addition to the re-hypothecation of a securities broker-dealer's collateral by re-lending it or posting it as collateral for one of its own obligations, another means of re-hypothecation is the repurchase agreement (or repo). In a two-party repurchase agreement, one party sells the other a security at a specified price with a commitment to buy the security back at a later date for another specified price. Overnight repurchase agreements, the most commonly used form of this arrangement, comprise a sale which takes place the first day and a repurchase that reverses the transaction the next day. Term repurchase agreements, less commonly used, extend for a fixed period of time that may be as long as several months. Open-ended term repurchase agreements are also possible. A so-called reverse repo is not actually different than a repo; it merely describes the opposite side of the transaction. The seller of the security who later repurchases it is entering into a repurchase agreement; the purchaser who later resells the security enters into a reverse repurchase agreement. Notwithstanding its nominal form as a sale and subsequent repurchase of a security, the economic effect of a repurchase agreement is that of a secured loan.[1]
The possible role of rehypothecation in the Financial crisis of 2007–2010 was largely overlooked by mainstream financial press and commentators, until Dr. Gillian Tett of the Financial Times drew attention in August 2010 to a paper from Manmohan Singh and James Aitken of the International Monetary Fund that examined the question[2].
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