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

A prime broker rehypothecates collateral posted by a client under a right-of-use provision, and the broker later becomes insolvent. Which outcome best describes the client's position with respect to the rehypothecated assets?

The client becomes an unsecured creditor for rehypothecated assets that are not returned. Right-of-use rehypothecation transfers title to the broker, leaving the client only a contractual claim for equivalent assets, which ranks alongside other general creditors in insolvency.

  1. AThe client becomes an unsecured creditor for the value of assets that were rehypothecated and not returnedCorrect
  2. BThe client retains full title and recovers the assets immediately
  3. CThe client receives priority over all other creditors of the broker
  4. DThe central bank guarantees return of the assets

Explanation

Rehypothecation under right of use transfers title to the broker, so the client holds only a contractual claim to return of equivalent assets. In insolvency that claim ranks as unsecured for assets that were reused and not recovered.

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