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FRM Part II · FRM Exam Part II · Margin (Collateral) and Settlement

A clearing member holds client initial margin and is permitted to rehypothecate it under its agreement. The member then defaults after having re-pledged the collateral to another lender. Which outcome best describes the client's position?

The client generally becomes an unsecured creditor for the rehypothecated collateral and may recover only part of its value. Reuse rights transfer effective control to the member, and the lender who received the re-pledged assets keeps them, so the client has no priority claim.

  1. AThe client has an unsecured claim against the defaulted member for the collateral that was rehypothecated, and may recover only a fractionCorrect
  2. BThe client recovers the collateral in full because rehypothecated assets always remain client property
  3. CThe client's claim ranks ahead of all secured creditors of the member
  4. DThe client loses nothing because the other lender must return the collateral to the client

Explanation

When collateral is rehypothecated under a title-transfer or reuse right, the client typically holds only a contractual claim for return, which ranks as unsecured in the member's insolvency. The third-party lender holds the collateral validly and need not return it to the client.

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