Rehypothecation
The Formal Definition
The practice whereby a bank or broker re-uses client collateral (such as securities pledged for a margin loan) to back its own corporate trades or secure its own institutional borrowing.
US Cap: Maximum Rehypothecation = 140% of Client Margin Debit Balance
Cole Barrett's Reality Check
The Unvarnished Bottom Line"Rehypothecation means your broker is using your stocks to get a loan for themselves. If you borrow money on margin, you give the broker legal permission to re-pledge your shares as collateral for their own financing lines. If the broker goes bust, unwinding that collateral can take months in bankruptcy court."
Interactive Simulator: Test the Math
Real-World Example: Scenario Breakdown
Examining the real numbers for: Investor with $100,000 in equities borrowing $20,000 on margin during broker default
| Execution Metric | Cash-Only Account (Zero Rehypothecation) | Active Margin Account |
|---|---|---|
| Fee / Rate | Cash rules apply | Standard margin agreement |
| Spread / Buffer | Assets cannot be pledged or re-used | Broker rehypothecated $28,000 of shares (140% rule) |
| Execution / Status | Shares held in direct segregated custody | Shares pledged to external institutional creditors |
| Total Cost / Result | Zero insolvency entanglement | Months of delays waiting for bankruptcy court asset recovery |
How Brokers Weaponize This Term
Offshore broker-dealers routinely operate in jurisdictions with zero caps on rehypothecation, leveraging customer collateral to speculate on internal proprietary investments.
Broker Evaluation Matrix
Cole Approves
Interactive Brokers: Conservative institutional balance sheet with strict capital adequacy buffers and ring-fenced customer assets.
Read Audit →Cole Flags / Avoids
Unregulated Offshore Brokers: Operates without rehypothecation limits, putting client share collateral at risk.
View Trap Details →Frequently Asked Questions
Can a broker rehypothecate shares in a cash account?
No. Under SEC Rule 15c3-3 and FCA client asset rules, brokers are legally prohibited from rehypothecating fully paid shares held in pure cash accounts.
What is the 140% rehypothecation rule in the US?
Under SEC regulations, a broker may re-pledge customer securities valued up to 140% of the customer's outstanding margin loan balance.