Deleveraging After Lehman: Evidence From Reduced Rehypothecation
IMF Working Papers, March 1, 2009
Source details
- Canonical URL
- Deleveraging After Lehman: Evidence From Reduced Rehypothecation
Other formats
Bibliographic details
- Authors: James Aitken, Manmohan Singh
- Published: March 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871906.001
Summary and core findings
- 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.
- The United Kingdom lacks customer protection rules analogous to those 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.
- Consequences identified:
- Reduced rehypothecation reduces counterparty risk in the system.
- Reduced rehypothecation also reduces market liquidity.
Subjects and keywords
- Subjects: 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
Implications and considerations
- Legal and regulatory differences across jurisdictions (example: U.K. unlimited rehypothecation vs. U.S. protections under the Securities Act of 1933) affect the exposure of client assets to reuse by prime brokers.
- Behavioral response to counterparty insolvency risk (investment firms reducing rehypothecation) can materially alter market functioning by trading off counterparty risk reduction for lowered liquidity.
- Policymakers and market participants should weigh trade-offs between protecting client assets and maintaining market liquidity when designing or reforming rehypothecation-related regulation.
IMF Working Paper No. 2009/042 — Deleveraging After Lehman: Evidence From Reduced Rehypothecation