Word of the Day: Rehypothecation

Rehypothecation is the practice of using the assets held as collateral for one client in transactions for another. In certain jurisdictions this process may be repeated as many times as desired utilizing the same collateral. In essence, creating an extremely fragile financial situation. For example, you may end up with a situation where a chain of entities are all vying for a single worthless asset.

Here is a very simple application: https://www.youtube.com/watch?v=GTTePQucg68

This will likely be a key term to note as we see more trusts defaulting in China over the coming months. It is almost without question that funds invested within the trusts have been used as collateral within other transactions. There could, in fact, be quite a chain of transactions all linked to a pile of worthless paper. 

"Or would you know," pursued the Ghost, "the weight and length of the strong coil you bear yourself? It was full as heavy and as long as this, seven Christmas Eves ago. You have laboured on it since. It is a ponderous chain!"

- Charles Dickens, A Christmas Carol