Series 27: Hypothecation Of Customers’ Securities

Hypothecation of Customers’ Securities

When a customer buys securities on margin, the customer generally borrows funds from the broker-dealer for the purchase and pledges the purchased securities as collateral for the loan. The customer is said to hypothecate the loan. This is because the pledged securities become “hypothetically” controlled by the broker-dealer: the customer (the borrower) retains ownership, but the broker-dealer (the creditor) may seize possession if the customer defaults. In a hypothecation agreement, the lender, which is the b