"That word "rehypothecated" has a disturbing nebulous ring to it!"
Hypothecation is the lenders right to take possession of and to liquidate the collateral against a loan. The borrower is said to hypothecate the collateral so pledged.
Rehypothecation actually refers to two similar but distinct practices. It can refer to the broker's pledging of securites hypothecated to them within a margin account, against which the broker itself is the hypothecator to another lender. Or, under certain circumstances (U.S.), a broker can hypothecate securities wholly owned by a third party, if consent was received prior to the hypothecation. I suspect that such consents might be buried in the small print in some brokerage documents. I don't think the latter is legal in Canada, under any circumstances.
In any case, if the broker defaults on the rehypothecated securities, the original hypothecator (margin account holder) has no legal claim to ownership of the securities. His claim is only against the broker for the difference between the outstanding debt and the market value of the securities.
IMHO, if credit is sought for the purpose of purchasing securities, a margin account would be close to my last resort. A line of credit, for example, does not carry a risk of rehypothecation, nor of permitting shorting against my own holdings.
Lar
