Rehypothecation

Rehypothecation is the practice where a financial institution, typically a broker-dealer, re-uses or re-pledges a client's collateral, most often securities like U.S. Treasury bonds, that was initially pledged to them for a loan or margin trade, allowing the collateral to be deployed multiple times within the financial system to generate liquidity and facilitate market intermediation. This process is central to the functioning of short-term funding markets, particularly the repurchase agreement (repo) market, but it introduces significant systemic risk by creating complex chains of ownership and amplifying leverage.