Rehypothecation is a legal practice that enabled MF Global to use clients money to purchase European debt instruments that lost money before clients' money could be returned. Since regulations did not require the corporation to hold enough money to account for deposits, the rehypothecated money essentially did not exist and was used to leverage bad debt purchases per Reuters.
Investors are not always aware of how their brokerage firms utilize their assets. Without clear information into how well a financial institution is performing via comprehensive income statements and detailed evaluation of terms of service, a contractual risk is added to one's financial planning objectives via rehypothecation. This increases overall risk on top of other financial hazards such as inflation, investment risk, opportunity cost etc.
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