Prime Brokerage Rehypothecation Explained

April 3, 2025
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Written by Usman Cheema

What is Rehypothecation?

Rehypothecation occurs when a prime broker (PB) reuses or repledges assets that have been posted as collateral by their hedge fund clients. This practice allows the PB to generate additional revenue streams while potentially offering more favourable financing terms to clients.

How Rehypothecation Works

  1. Initial Collateral Posting: A hedge fund client posts securities as collateral against margin loans or to meet trading requirements with their prime broker
  2. Reuse of Assets: The prime broker, with proper legal authorization, uses these same securities as collateral for their own
borrowing activities, such as:
    • Pledging to secure their own funding
    • Lending to other clients.
    • Using in repo transactions
    • Supporting their own trading activities
  3. Legal Framework: This arrangement is governed by the Prime Brokerage Agreement (PBA), which specifically authorizes the PB's right to rehypothecate client assets up to certain limits

Key Business Implications

For Prime Brokers

  • Lower Borrowing Costs: Results in reduced financing rates and fees
  • Trading Capacity: May increase available leverage or lending capacity
  • Operational Considerations: Potential impact on settlement timing for securities being rehypothecated
  • Risk Exposure: Creates counterparty risk if the PB encounters financial difficulties

Regulatory Framework and Limits

United States


  • Limited to 140% of the client's debit balance under SEC Rule 15c3-3
  • Applies only to margin accounts, not fully-paid securities
  • Indebtedness calculation is standardised
  • PB must “Lock-up” assets in excess of 100% of entire rehypo pool


United Kingdom/Europe


  • No statutory cap on rehypothecation percentages
  • Limits typically established contractually in the PBA
  • Often higher limits than in the US (up to 200% or more)
  • Indebtedness calculation can be bespoke



Post-2008 Changes

  • Enhanced disclosure requirements about rehypothecation practices
  • Greater client negotiation power for capping rehypothecation rights
  • Increased segregation options for clients wanting to limit rehypothecation



Risk Considerations

For Prime Brokers

  • Liquidity Risk: Over-reliance on rehypothecation can create vulnerabilities during market stress
  • Operational Complexity: Requires sophisticated tracking systems for rehypothecated assets
  • Client Concerns: Need to balance revenue optimization against client risk preferences

For Hedge Funds

  • Counterparty Risk: Limited ability to recover specific securities if the PB defaults
  • Title Transfer Implications: May affect the legal standing of ownership during insolvency proceedings
  • Operational Friction: Potential delays when recalling securities that have been rehypothecated

Best Practices for Hedge Funds

  1. Multiple PBs: Diversify counterparty exposure across several prime brokers
  2. Asset Segregation: Selectively place certain assets in non-rehypothecation accounts for additional protection
  3. Asset Segregation: Selectively place certain assets in non-rehypothecation accounts for additional protection
  4. Regular Monitoring: Request regular reporting on which assets are being rehypothecated
  5. Clear Documentation: Ensure rehypothecation terms are clearly defined in the PBA

Industry Trends

  • Increasing client demand for transparency around rehypothecation practices
  • Growing use of tri-party arrangements to better manage collateral
  • Development of tiered pricing models based on rehypothecation permissions
  • Emergence of technology solutions for real-time collateral tracking and optimization

Rehypothecation remains a foundational element of prime brokerage 
economics, allowing for market efficiency while requiring thoughtful risk 
management from both prime brokers and their hedge fund clients.

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