Deleveraging After Lehman--Evidence from Reduced Rehypothecation

Author/Editor: Singh, Manmohan ; Aitken, James
Publication Date: March 01, 2009
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Rehypothecation is the practice that allows collateral posted by, say, a hedge fund to their prime broker to be used again as collateral by that prime broker for its own funding. In the United Kingdom, such use of a customer’s assets by a prime broker can be for an unlimited amount of the customer’s assets. And moreover, there are no customer protection rules (such as in the United States under the Securities Act of 1933). The paper shows evidence that, following Lehman’s bankruptcy, the extent of rehypothecation has declined substantially, in part because investment firms fear losing collateral if their prime broker becomes insolvent. While less rehypothecation reduces counterparty risk in the system, it also reduces market liquidity.
Series: Working Paper No. 09/42
Subject(s): Financial institutions | United States | United Kingdom | Capital markets | Securities markets | Hedge funds | Financial risk | Bankruptcy | Securities regulations

Author's Keyword(s): Rehypothecation | Lehman's bankruptcy | counterparty risk | liquidity risk
Publication Date: March 01, 2009
Format: Paper
Stock No: WPIEA2009042 Pages: 11
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