Rehypothecation in the as I understand it is the process of providing shares for use by a third party under an agreement that usually leaves the beneficial interest and voting rights with the original title holder, but the right to sell on market or pledge as collateral for new loans with the borrower of those shares (eg prime broker). The prime broker is acquiring the right to on-sell or encumber to the market of another third party who may do so...
The prime broker is not buying the shares and has no interest in going long the shares because the agreement requires them to return the shares unpon demand. I agree that shuffling collateral does not mean the prime broker will actually sell shares on market (short and/or in lieu of failed margin call by beneficial owner) but it is a step in that direction and not a sign of confidence this new 'sub holder' is going long HAS ore confident of it's value (which was the point in response to posters looking at this as a "credible buy signal"...
Prime brokerage arrangements
Aprime brokerlends its client money to buy assets, and holds those assets incustody, taking security over them assuretyfor repayment of its loan — a “margin loan”. Ascustodian, theprime brokerhas legal title but notbeneficial interestin the asset. Therefore the termrehypothecation, to describe the process whereby theprime brokertakes that asset and sells it to defray the cost of financing it, with acontingent obligationto redeliver something identical back on request, is not an outrageous distortion of the facts of what is happening.
For the specific provision in the2016 NY Law VM CSA, and tart commentary thereon, see:Use of Posted Collateral (VM)
Rehypothecation achieves the chimaerical effect of allowing the recipient ofpledgedcollateral— i.e.,collateralthe holder doesn’town, but simply possesses with asecurity interest— to sell thatcollateraloutright to a third party, on condition that it remains liable the original pledgor to return an identical (“fungible”) asset at the conclusion of thepledge.
Challenging, you would think, because “nemo dat quod non habet” — you can’t give someone else title to something you don’t yourself own. But somehow, underNew York law, one manages it. It is part of theUniform Commercial Code. Once pledgedcollateralhas been rehypothecated, tothis correspondent’sbest guess it is exactly as it would be had thepledgortransferred by outrighttitle transferin the first place: The pledgor has fullcredit riskto thepledgeefor the return of anequivalentcollateral asset.
TheEnglish lawequivalent in aprime brokeragearrangement is to interpose an intermediate step, in which thepledgeemay take title outright title to thepledged assetitself, whencehabet, and accordinglyaliquis datitoutrightto a third person.
The collateral leg of aMaster Securities Lending Agreementis a pledge which generally has a right of rehypothecation, allowing the collateral holder to reuse the collateral in the market. Like the2016 NY Law VM CSAthis entirely defeats the point of creating a pledge structure, but who are we, with our decidedly movable force of namby-pambylogic, to quibble with the quite irresistible force of the US market practice?
(20min delay)