{
  "title": "Deleveraging After Lehman: Evidence From Reduced Rehypothecation",
  "publication": "IMF Working Papers, 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.",
  "sections": [
    {
      "heading": "Summary and core findings",
      "content": "- 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.\n- 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.\n- The United Kingdom lacks customer protection rules analogous to those in the United States under the Securities Act of 1933.\n- 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.\n- Consequences identified:\n  - Reduced rehypothecation reduces counterparty risk in the system.\n  - Reduced rehypothecation also reduces market liquidity."
    },
    {
      "heading": "Subjects and keywords",
      "content": "- Subjects: Brokers and dealers; Collateral; Financial institutions; Financial markets; Hedge funds; Securities\n- 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"
    },
    {
      "heading": "Implications and considerations",
      "content": "- 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.\n- Behavioral response to counterparty insolvency risk (investment firms reducing rehypothecation) can materially alter market functioning by trading off counterparty risk reduction for lowered liquidity.\n- Policymakers and market participants should weigh trade-offs between protecting client assets and maintaining market liquidity when designing or reforming rehypothecation-related regulation.\n\nIMF Working Paper No. 2009/042 — Deleveraging After Lehman: Evidence From Reduced Rehypothecation\n\n---\n\n Content in this bundle\n\n- wp0942\n  - wp0942 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp0942 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785"
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    "Authors: James Aitken, Manmohan Singh",
    "Published: March 1, 2009",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451871906.001",
    "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:",
    "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",
    "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.",
    "**_wp0942**"
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