Definition of Hypothecation

Hypothecation is the customer’s pledge of securities as collateral for a margin loan.

Applying "Hypothecation" to Securities Exams:

When a customer borrows funds to purchase securities on margin at a broker dealer the customer must pledge or hypothecate the securities as collateral for that loan. All securities purchased on margin will be held in street name so that the broker dealer may liquidate the securities if the value of the securities fall and customer’s equity declines past the minimum level.

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