Rehypothecation and risks.

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
jackal
Posts: 191
Joined: Thu Jan 14, 2010 6:24 am

Rehypothecation and risks.

Post by jackal »

For those of us using leverage either in the form of a margin loan or short boxes to accomplish a life cycle investing or mhfea strategy, it appears that the major risks include:
1. PILs: seems like fidelity and Schwab reimburse clients for extra taxes. Any one know if the credits are subject to taxation?
2. Capital gains: if the third party defaults, we lose the share we own and instead receive money. Our security is considered sold and so we realize capital gains- is this more of a black swan event or is it common enough for one to worry about?
3. Brokerage going out of business: might take a while to get the lost securities back.
4. Market volatility: since the same security can be rehypothecated several times, there may be a bullwhip effect at the worst possible time. This compounds the risk of 1,2 and 3 above. Any other risks?
5. Up to 140% of borrowed funds may be rehypothecated. Anyone know if rehypothecation is an issue if one has a portfolio margin account with options level 2 enabled but are not using short boxes or margin?
6. If one “borrows” $100 with a short box, what amount is subject to rehypothecation? (Is it $140 similar to a short box?)

Any other risks or ways to offset the risks?

Thank you!
Post Reply