Deleveraging After Lehman
AbstractRehypothecation 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 customerâ€™s assets by a prime broker can be for an unlimited amount of the customerâ€™s assets. And moreover, there are no customer protection rules (such as in the United States under the Securities Act of 1933). The paper shows evidence that, following Lehmanâ€™s bankruptcy, the extent of rehypothecation has declined substantially, in part because investment firms fear losing collateral if their prime broker becomes insolvent. While less rehypothecation reduces counterparty risk in the system, it also reduces market liquidity.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 09/42.
Date of creation: 01 Mar 2009
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