Rehypothecation in Australia: What Investors Need to Know in 2025

Rehypothecation is a term that rarely makes the headlines, yet it’s a powerful force shaping the financial system—often quietly, sometimes controversially. In 2025, with global market volatility and regulatory shakeups underway, understanding rehypothecation is more important than ever for Australian investors and finance professionals.

What Is Rehypothecation (and Why Does It Matter)?

At its core, rehypothecation refers to the practice where banks and brokers reuse collateral pledged by their clients—usually to secure their own borrowing or to support other trades. For example, if you post shares as collateral for a margin loan, your broker may then use those same shares to back their own obligations elsewhere. This process can repeat, amplifying the amount of credit in the system.

• In Australia, rehypothecation is most common in prime brokerage, derivatives, and securities lending.
• It enables greater liquidity, lowers borrowing costs, and fuels financial innovation—but it also introduces systemic risk.
• During periods of stress, the same collateral can be claimed by multiple parties, potentially leading to a cascade of losses.

2025: Why Rehypothecation Is in the Spotlight

This year, the topic has returned to the fore. Following a turbulent 2024 marked by global banking shocks and the accelerated adoption of digital asset custody, both the Australian Prudential Regulation Authority (APRA) and international bodies like the Financial Stability Board (FSB) have tightened guidelines around the use of client collateral.

• New APRA regulations (2025): Financial institutions must now provide clearer disclosure to clients about the rehypothecation of their assets and limit the total amount of client assets that can be rehypothecated at any one time.
• Global harmonisation: Australia is aligning more closely with EU and UK rules, requiring client consent and regular reporting of rehypothecation activities.
• Crypto and digital assets: The rise of tokenised securities has introduced new platforms where rehypothecation can occur, raising novel legal questions around asset ownership and recourse in the event of default.

These regulatory moves aim to balance the liquidity benefits of rehypothecation with the need to contain systemic risk—a lesson underscored by the high-profile collapse of several hedge funds in late 2024, where rehypothecated collateral played a role in the domino effect.

Risks and Real-World Implications for Australian Investors

For everyday investors and finance professionals, rehypothecation isn’t just an abstract technicality. Here’s why it matters:

• Counterparty Risk: If your broker goes under and has rehypothecated your assets, you could find yourself in a queue of creditors, rather than having your assets returned immediately.
• Transparency Issues: Many investors remain unaware that their assets can be used in this way, despite updated disclosure requirements.
• Market Stability: In a market downturn, rehypothecation can accelerate contagion, as collateral chains unwind and forced selling occurs.

Example: In 2025, a prominent Australian prime brokerage firm faced scrutiny when several high-net-worth clients discovered their shares had been rehypothecated multiple times, complicating recovery after the firm suffered liquidity issues. This prompted renewed calls for tighter controls and improved client education.

What Should You Do? Practical Steps for Australians

• Ask your broker or lender: Do they rehypothecate your assets? If so, what are your rights and protections?
• Review your account agreements: New APRA regulations mandate clearer disclosure, but always check the fine print yourself.
• Diversify custody: If you’re a sophisticated investor, consider spreading assets across multiple brokers or custodians to reduce exposure.
• Stay informed: Keep an eye on regulatory updates, especially as crypto and tokenised assets introduce fresh complexity to the landscape.

The Bottom Line

Rehypothecation is both a lubricant and a lightning rod for the financial system—a way to make markets more efficient, but also a channel for risk to spread. In 2025, as Australia tightens rules and investor awareness grows, understanding how your assets are used behind the scenes is crucial. Transparency, due diligence, and proactive engagement with your financial providers are your best tools for navigating the evolving landscape.