Deleveraging After Lehman: Evidence From Reduced Rehypothecation
March 1, 2009
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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.
Subject: Brokers and dealers, Collateral, Financial institutions, Financial markets, Hedge funds, Securities
Keywords: broker, Brokers and dealers, Collateral, collateral Received, Counterparty risk, Europe, Global, grade collateral, hedge fund assets, Hedge funds, hypothecation, hypothecation right, Lehman’s bankruptcy, Liquidity risk, Rehypothecation, Securities, securities lending, WP
Pages:
13
Volume:
2009
DOI:
Issue:
042
Series:
Working Paper No. 2009/042
Stock No:
WPIEA2009042
ISBN:
9781451871906
ISSN:
1018-5941
