Editing Hypothec (section)

==Hypothec in mixed legal systems==
[[Image:30hudson.jpg|thumb|upright=0.7|[[30 Hudson Street|Goldman Sachs Tower]]{{snd}} banks that provide [[prime brokerage]] services are able to expand their trading operations by re-using collateral belonging to their counter-parties.]]
Under a handful of mixed legal systems, the hypothec was imported as a non-possessory real security over movable property (in opposition to the common-law [[chattel mortgage]]). In the mixed legal systems of some other countries (e.g. Scots law, South African law) it may cover any corporeal movables, securities or [[intangible asset]]s. Whereas a pledge operates by [[bailment]] and transfers possession on delivery and a chattel mortgage operates by [[conveyancing|conveyance]] and transfers [[Title (property)|title]], a hypothec operates by hypothecation and transfers neither possession nor title. The name and the principle have passed into [[Scotland]]'s [[Scots law|civil law system]], which distinguishes between conventional hypothecs, as [[bottomry]] and [[respondentia]], and tacit hypothecs established by law. Of the latter the most important is the landlord's hypothec for rent (corresponding to distress in the law of [[England]]), which extends over the produce of the land and the cattle and sheep fed on it, and over stock and horses used in husbandry. In the US, the legal right for the creditor to take ownership of the collateral if the debtor defaults is classified as a lien.<ref name="EB1911"/>

The most common form of hypothecation is a '''repo transaction''': the creditor gives a loan to the debtor and receives in return the possession (not the ownership) of a financial asset until the maturity of the loan.
A '''reverse repo''' is a hypothecation 'in the reverse direction': ''creditor'' and ''debtor'' swap roles. When an investor asks a broker to purchase securities on [[margin account|margin]], hypothecation can occur in two senses.  First, the purchased assets can be hypothecated so that, if the investor fails to keep up [[Credit (finance)|credit]] repayments, the broker can sell some of the [[securities]];<ref name = "dictdef"/> the broker can also sell the securities if they drop in value and the investor fails to respond to a [[margin call]].  The second sense is that the original deposit the investor puts down for the margin account can itself be in the form of securities rather than a cash deposit, and again the securities belong to the investor but can be sold by the creditor in the case of a default. In both cases, unlike with consumer or business finance, the borrower does not typically have possession of the securities as they will be in accounts controlled by the broker, however, the borrower does still retain legal ownership. 

Rehypothecation can also be involved in [[repurchase agreement]]s, commonly called repos.  In a two-party repurchase agreement, one party sells to the other a security at a price with a commitment to buy the security back at a later date for another price. ''Overnight repurchase agreements'', the most commonly used form of this arrangement, comprise a sale which takes place the first day and a repurchase that reverses the transaction the next day. ''Term repurchase agreements'', less commonly used, extend for a fixed period of time that may be as long as three months. ''Open-ended term repurchase agreements'' are also possible. A so-called ''reverse repo'' is not actually any different from a repo; it merely describes the opposite side of the transaction. The seller of the security who later repurchases it is entering into a repurchase agreement; the purchaser who later re-sells the security enters into a reverse repurchase agreement.  Notwithstanding its nominal form as a sale and subsequent repurchase of a security, the economic effect of a repurchase agreement is that of a secured loan. 

Re-hypothecation occurs mainly in the financial markets when the ''creditor'' (a bank or other [[financial institution]]) re-uses the collateral posted by the debtor (a client such as a hedge fund) to back the broker's own trades and borrowing. This mechanism also enables [[leverage (finance)|leverage]] in the securities market.<ref name = "Rehypothecation THEORY" /> In the UK, there is no limit on the amount of a client's assets that can be rehypothecated,{{efn|Though of course a bank can only rehypothecate the assets the client has posted as collateral.}} except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance.{{efn|Hedge funds often have a considerably higher amount of securities pledged as collateral than their current borrowings{{snd}} they continue to receive the normal income stream from the securities and it gives them the flexibility to quickly execute trades if an opportunity arises{{snd}} the 140% limit does in many cases considerably reduce their exposure to rehypothecation.}}<ref name = "IMFpaper">
{{cite web
|url=http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf
|title= The (sizable) Role of Rehypothecation in the Shadow Banking System
|author= Manmohan Singh and James Aitken
|publisher=[[International Monetary Fund]]
|accessdate= 2010-08-31
|date = 2010-07-01
}}
</ref><ref name = "Gill">{{cite web
  |url= http://www.ft.com/cms/s/0/112ff210-a62b-11df-9cb9-00144feabdc0.html
  |title= Web of shadow banking must be unravelled
  |publisher= [[The Financial Times]]
  |author= Gillian Tett
  |date = 2010-08-12
  |accessdate=2010-08-31|author-link= Gillian Tett
 }}
</ref> In 2007, rehypothecation accounted for half the activity in the [[shadow banking system]]. Because the collateral is not cash it does not show up on conventional balance sheet accounting.  Before the [[Bankruptcy of Lehman Brothers|Lehman collapse]], the [[International Monetary Fund]] (IMF) calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statutory limits governing the reuse of a client's collateral.  It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated  several times over, with an estimated churn factor of 4.<ref name = "IMFpaper"/> Following the [[Bankruptcy of Lehman Brothers|Lehman collapse]], large hedge funds in particular became more wary of allowing their collateral to be rehypothecated, and even in the UK they would insist on contracts that limit the amount of their assets that can be reposted, or even prohibit rehypothecation completely.  In 2009 the IMF estimated that the funds available to US banks due to rehypothecation had declined by more than half to $2.1 trillion{{snd}} due to both less original collateral being available for rehypothecation in the first place and a lower churn factor.<ref name = "IMFpaper"/><ref name = "Gill"/> The possible role of rehypothecation in the [[2008 financial crisis]] and in the shadow banking system was largely overlooked by the mainstream financial press, until Dr. [[Gillian Tett]] of the [[Financial Times]] drew attention in August 2010<ref name = "Gill"/> to a paper from Manmohan Singh and James Aitken of the [[International Monetary Fund]] which examined the issue.<ref name = "IMFpaper"/>

===By jurisdiction===
====Scotland{{anchor|Hypothec Amendment (Scotland) Act 1867|Hypothec Abolition (Scotland) Act 1880}}====
{{Infobox UK legislation
| short_title           = Hypothec Amendment (Scotland) Act 1867
| type                  = Act
| parliament            = Parliament of the United Kingdom
| long_title            = An Act to amend the Law relating to the Landlord’s Right of Hypothec in Scotland, in so far as respects Land held for Agricultural or Grazing Purposes.
| year                  = 1867
| citation              = [[30 & 31 Vict.]] c. 42
| introduced_commons    = 
| introduced_lords      = 
| territorial_extent    = Scotland
| royal_assent          = 15 July 1867
| commencement          = 
| expiry_date           = 
| repeal_date           = 
| amends                = 
| replaces              = 
| amendments            = 
| repealing_legislation = {{ubli|[[Bankruptcy and Diligence etc. (Scotland) Act 2007]]}}
| related_legislation   = 
| status                = repealed
| legislation_history   = 
| theyworkforyou        = 
| millbankhansard       = 
| original_text         = 
| revised_text          = 
| use_new_UK-LEG        = 
| UK-LEG_title          = 
| collapsed             = yes
}}
{{Infobox UK legislation
| short_title           = Hypothec Abolition (Scotland) Act 1880
| type                  = Act
| parliament            = Parliament of the United Kingdom
| long_title            = An Act to abolish the Landlord’s Right of Hypothec for Rent in Scotland.
| year                  = 1880
| citation              = [[43 Vict.]] c. 12
| introduced_commons    = 
| introduced_lords      = 
| territorial_extent    = Scotland
| royal_assent          = 24 March 1880
| commencement          = 
| expiry_date           = 
| repeal_date           = 
| amends                = 
| replaces              = 
| amendments            = 
| repealing_legislation = {{ubli|[[Bankruptcy and Diligence etc. (Scotland) Act 2007]]}}
| related_legislation   = 
| status                = repealed
| legislation_history   = 
| theyworkforyou        = 
| millbankhansard       = 
| original_text         = 
| revised_text          = 
| use_new_UK-LEG        = 
| UK-LEG_title          = 
| collapsed             = yes
}}
The law of agricultural hypothec long caused much discontent in Scotland; its operation was restricted by the [[Hypothec Amendment (Scotland) Act 1867]] ([[30 & 31 Vict.]] c. 42),<ref>[http://www.legislation.gov.uk/ukpga/Vict/30-31/42/contents Hypothec Amendment (Scotland) Act 1867]</ref> and by the [[Hypothec Abolition (Scotland) Act 1880]] ([[43 Vict.]] c. 12)<ref>[http://www.legislation.gov.uk/ukpga/Vict/43/12/contents Hypothec Abolition (Scotland) Act 1880]</ref> it was enacted that the landlord's right of hypothec for the rent of land, including the rent of any buildings thereon, exceeding two [[acre]]s (8,000 m{{sup|2}}) in extent, let for agriculture or pasture, shall cease and determine. By the same act and by the [[Agricultural Holdings (Scotland) Act 1883]] ([[46 & 47 Vict.]] c. 62) other rights and remedies for rent, where the right of hypothec had ceased, were given to the landlord.<ref name="EB1911"/>

Under Scots law, landlord's hypothec is a common law right of security enjoyed by landlords over any goods sited on the leased premises, regardless of who owns those goods.  The hypothec does not secure all sums which happen to be due to the landlord, only a portion of the rent. Landlord's hypothec is enforced by court proceedings known as sequestration for rent. The [[Bankruptcy and Diligence etc. (Scotland) Act 2007]] (asp 3)<ref>[http://www.legislation.gov.uk/asp/2007/3/section/208#text%3D%22sequestration%20for%20rent%22 Bankruptcy and Diligence etc. (Scotland) Act 2007, section 208]</ref> abolishes the common law diligence of sequestration for rent.

The [[Scottish Executive]] felt that such a mechanism had no part to play in a modern enforcement system, not least because a landlord is able to use other diligences to recover unpaid rent, such as attachment sequestration for rent can now be used to sell only goods that are secured by a right known as the landlord's hypothec, which arises automatically whenever there is a qualifying lease.

The act makes some changes to the hypothec, even though it is not a diligence.  For example, it completes the process of abolishing the hypothec over goods in dwelling-houses that was initiated by the [[Debt Arrangement and Attachment (Scotland) Act 2002]] (section 208(3) of the 2007 act).  It also abolishes the hypothec over goods owned by a third party (section 208(4)).

The act also states that, notwithstanding the abolition of sequestration for rent, landlord's hypothec does continue as a right in security (section 208(2)(a)).

====Quebec====
In Quebec law, the word is nevertheless used in translations as an equivalent of ''hypothèque'', which has a much broader meaning and encompasses the [[common law]] equivalents of, ''inter alia'', mortgages, non-possessory liens over movables or immovables, and legal or equitable charges. Thus, art. 2660 of the [[Civil Code of Quebec|Quebec Civil Code]] defines ''hypothec'', providing as follows:
: A hypothec is a real right on movable or immovable property made liable for the performance of an obligation. It confers on the creditor the right to follow the property into whomsoever's hands it may come, to take possession of it, to take it in payment, to sell it or to cause it to be sold and thus to have a preference upon the proceeds of the sale, according to the rank as determined in this Code.

The Quebec ''hypothèque'', essentially equivalent to an American non-possessory lien or English legal charge, is an elastic, hypothecatory security interest that has all the rights of recourse (''jus exigendi'') of an American lien-theory mortgage or English mortgage by way of legal charge, may also be taken over movable and/or immovable property alike, and must be perfected (i.e. registered). The types as set forth in the Civil Code are:
* ''hypothèques conventionnelles'' (art. 2681) - mortgage lien or legal charge (acting as a mortgage)
** ''hypothèque immobilière'' - American real estate [[mortgage]] (REM) or English mortgage of land
** ''hypothèque mobilière'' (art. 2702) - Australian personal property security (PPS)
** ''hypothèque mobilière sur une créance'' (art. 2710) - credit mortgage
** ''hypothèque ouverte'' (art. 2715) - American floating lien or English [[floating charge]] (in Europe, ''hypothèque ouverte'' refers to an open-end mortgage)
* ''hypothèques légales'' (art. 2724) - involuntary lien or [[equitable charge]]
** equivalent to the American tax lien, mechanic's or construction lien, home owner's association lien, and judgment lien.

The Qc. Civ. Code also provides for another real security called a ''priorité'', formerly known as a ''privilège'' (as it is still known in France, Louisiana, etc.), defined as follows:
:A preferential right allowing a creditor to rank prior to all other concurrent creditors, even prior secured creditors [...] (art. 2650)
More specifically, a Quebec ''priorité'' is a non-possessory, indivisible, unregistrable (i.e. un-perfectable) real security arising by operation of law alone merely providing a priority right over the security subject. When attaching to movable property, this security interest most closely matches the hypothec as defined at the head of this article. The primary ''priorités'' correspond to the American vendor's lien, lien for court costs, municipal lien, and possessory lien (over movables).

====California====
Under California Civil Code Section §2920 (a), a mortgage is a contract by which specific property, including an estate for years in real property, is hypothecated for the performance of an act, without the necessity of a change of possession.