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Rehypothecation

Author

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  • Cyril Monnet

Abstract

How would you feel if even though you were making regular monthly payments, your mortgage bank sold your house? This may seem like an odd question, but this type of situation happens every day in financial markets in a practice known as rehypothecation. Although such practices may be hard for nontraders to understand, rehypothecation is widespread in financial markets. Following the crisis of 2007-2009, the Dodd-Frank Act put restrictions on rehypothecation for derivatives. To understand the scope of these restrictions, we need to understand the role of rehypothecation in financial trades. In this article, Cyril Monnet discusses questions such as: Which party to a financial trade does rehypothecation benefit? Are there limits to its advantages? And how should it be regulated? There are no hard and fast answers to the last question, but the author notes that we can make a more informed decision about the pros and cons of various forms of regulation if we understand the underlying economics.

Suggested Citation

  • Cyril Monnet, 2011. "Rehypothecation," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 18-25.
  • Handle: RePEc:fip:fedpbr:y:2011:i:q4:p:18-25:n:11-12
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    File URL: http://www.philadelphiafed.org/research-and-data/publications/business-review/2011/q4/brq411_Rehypothecation.pdf
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    References listed on IDEAS

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    1. Tobias Adrian & Christopher R. Burke & James J. McAndrews, 2009. "The Federal Reserve's Primary Dealer Credit Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Aug).
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