Capital Markets / Collateral

Collateral Rehypothecation and Tokenization

Rehypothecation lets a broker or bank reuse collateral a client has pledged to it. US rules cap it at 140% of the client's debit balance. Tokenized collateral does not change those limits, but it makes every pledge and reuse a traceable ledger event.

Summary

Rehypothecation is the reuse, by a broker or bank, of collateral a client has pledged to it, typically to secure the firm's own borrowing. In the US, Federal Reserve Regulation T and SEC Rule 15c3-3 limit it to the equivalent of 140% of the client's net liability to the firm, and in many other markets there is no such limit, according to the International Capital Market Association (ICMA).

How it works

ICMA describes rehypothecation as another name for re-pledging; in the derivatives market it is often called re-use. When the collateral-taker exercises that right, title passes to a third party, and the client is left with a contractual claim to the return of the same or equivalent assets. That claim is unsecured. Rule 15c3-3 protects the rest: a broker-dealer must keep physical possession or control of all fully paid and "excess margin" securities, meaning customer securities worth more than 140% of the customer's debit balance.

Reuse lowers a dealer's funding costs. The risk sits with the client. If the firm fails, a client whose assets were re-pledged stands in line as an unsecured creditor for their return. Part of the problem is operational. Collateral moves through custodians and settlement systems on fixed cycles, so it is hard to know at any moment which assets were reused, where they sit and whether a limit has been breached.

Tokenized collateral attacks the movement problem first. In October 2023 BlackRock tokenized shares in one of its money market funds on J.P. Morgan's Tokenized Collateral Network and pledged them to Barclays as collateral for an OTC derivatives trade. Tokenization took minutes through a link to the fund's transfer agent, and the transfer between the two firms was near instant, where posting collateral can otherwise take a day or more.

A Digital Asset pilot with 27 market participants, including Euroclear and the World Gold Council, tokenized UK gilts, Eurobonds and gold on the Canton Network. It completed 500 transactions across 14 nodes and 11 applications, and showed that tokenized assets could meet intraday margin calls outside normal settlement cycles and time zones (October 2024).

Repo, where the buyer owns the collateral from the start and reuse is standard, already runs at scale on a distributed ledger. Broadridge's Distributed Ledger Repo platform processed $8.0 trillion in July 2026, an average of $365 billion a day, according to Broadridge. Broadridge calls it the world's largest institutional platform for settling tokenized real assets.

Tokenization leaves the rules as they are. The 140% cap, segregation and client consent all still apply. What changes is the evidence. Every pledge, reuse and return becomes a ledger event visible to the parties entitled to see it, so a firm can show where client collateral sits at any point and can write limits into the contract that moves it, refusing a transfer that would breach them.

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