Ann: Becoming a substantial holder from MS, page-6

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"...

Where you DO see a right of rehypothecation

Prime brokerage arrangements

A prime broker lends its client money to buy assets, and holds those assets in custody, taking security over them as surety for repayment of its loan — a “margin loan”. As custodian, the prime broker has legal title but not beneficial interest in the asset. Therefore the term rehypothecation, to describe the process whereby the prime broker takes that asset and sells it to defray the cost of financing it, with a contingent obligation to redeliver something identical back on request, is not an outrageous distortion of the facts of what is happening.

New York law-style credit support arrangements

For the specific provision in the 2016 NY Law VM CSA, and tart commentary thereon, see: Use of Posted Collateral (VM)

Rehypothecation achieves the chimaerical effect of allowing the recipient of pledged collateral — i.e., collateral the holder doesn’t own, but simply possesses with a security interest — to sell that collateral outright to a third party, on condition that it remains liable the original pledgor to return an identical (“fungible”) asset at the conclusion of the pledge.

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, under New York law, one manages it. It is part of the Uniform Commercial Code. Once pledged collateral has been rehypothecated, to this correspondent’s best guess it is exactly as it would be had the pledgor transferred by outright title transfer in the first place: The pledgor has full credit risk to the pledgee for the return of an equivalent collateral asset.

The English law equivalent in a prime brokerage arrangement is to interpose an intermediate step, in which the pledgee may take title outright title to the pledged asset itself, whence habet, and accordingly aliquis dat it outright to a third person.

US market-standard Master Securities Lending Agreement

The collateral leg of a Master Securities Lending Agreement is a pledge which generally has a right of rehypothecation, allowing the collateral holder to reuse the collateral in the market. Like the 2016 NY Law VM CSA this entirely defeats the point of creating a pledge structure, but who are we, with our decidedly movable force of namby-pamby logic, to quibble with the quite irresistible force of the US market practice?