## Deleveraging After Lehman: Evidence From Reduced Rehypothecation

_IMF Working Papers, March 1, 2009_

## Source details

**Canonical URL:** [Deleveraging After Lehman: Evidence From Reduced Rehypothecation](https://www.imf.org/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785)

## Other formats

- [Markdown version](/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785/index.md)
- [Structured JSON version](/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785/index.json)
- [Bundle manifest](/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785/bundle-manifest.json)

## 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*

---

## Content in this bundle

- **_wp0942**
  - [_wp0942 (Markdown version)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp0942.pdf.md){rel="alternate" type="text/markdown"}
  - [_wp0942 (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2009/_wp0942.pdf){rel="external" type="application/pdf"}

---

_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/deleveraging-after-lehman-evidence-from-reduced-rehypothecation-22785_