Hypothecation agreement is the agreement that pledges the customer’s securities that were purchased on margin as collateral for the loan. It also allows the brokerage firm to take the same securities and re-pledge or re-hypothecate them as collateral for a loan at a bank to obtain a loan for the customer.
Applying "Hypothecation Agreement" to Securities Exams:
When a customer opens a margin account the customer must sign a number of agreements agreeing to the terms and conditions under which credit will be extended. By signing the hypothecation agreement the customer pledges their securities as collateral for the loan. The hypothecation agreement also allows the broker dealer to re hypothecate the securities and to pledge the customer’s securities as collateral for a loan at a bank.