Originally published April 8, 2011
Keywords: financial collateral arrangements,
regulations, enforcement, financial collateral, European
directives Changes to the Financial Collateral Arrangements (No. 2)
Regulations 2003 (the "Regulations"),
designed to enhance the efficacy of the taking and enforcement of
financial collateral, came into effect on Wednesday (6 April 2011).
Whilst the key changes outlined below go some way in resolving the
current limitations of the Regulations, uncertainty is likely to
persist in relation to their application to floating charges. The scope of the Regulations had not previously included
"credit claims" (claims arising under loans provided by
deposit-taking institutions (i.e. banks)). The amended Regulations
include "credit claims" within the definition of
"financial collateral", thus increasing the pool of
available collateral which can be used in transactions structured
to take advantage of the Regulations. This change will give market
participants greater flexibility. Financial collateral arrangements often allow for the
substitution of assets. The Regulations use a definition of
"equivalent financial collateral" limited to instruments
of the same issue and nominal amount. Previously this limited
definition applied both to security and title transfer
arrangements, with the result that arrangements with wider
substitution rights did not fall within the Regulations. Now it has
been replaced in the definition of "security financial
collateral arrangement" with "financial collateral of the
same or greater value", thus fixing the problem for security
– but not title transfer – arrangements. The amendments to the Regulations include a widening of the
definition of 'possession' to encompass situations where
financial collateral is provided by way of a credit to an account
in the name of the collateral-taker or its nominee. While this
amendment clarifies how intangible financial collateral may be
'possessed', uncertainty remains as to the extent to which
floating charges fall within the terms of the Regulations. This
point is still under consideration by the UK government and may be
the subject of further consultation and amendment. The self-help remedy of appropriation (which does not require a
Court order under the Regulations) had previously been limited to
legal or equitable mortgages. This excluded pledges, liens and,
most significantly, charges and severely curtailed the ability of
collateral-takers to utilise the self-help remedy of appropriation
for which provision was made in the Regulations. To strengthen the
Regulations in this respect, "security interests" for the
purpose of appropriation now include pledges, liens, certain
floating charges and fixed charges. Visit us at
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Mayer Brown article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Copyright 2011. Mayer Brown LLP, Mayer Brown
International LLP, and/or JSM. All rights reserved.
The Regulations implement European directives which in turn are
designed to promote the use of financial collateral within the
single market, principally by removing the formalities which need
to be complied with on taking and enforcing security over financial
collateral (such as cash, shares and bonds). Accordingly, the
Regulations have relevance to the provision of security, stock
lending, collateralised derivatives and repo arrangements amongst
other things.
The changes are incremental, rather than fundamental. They widen
the scope of the Regulations, clarify the application and operation
of the Regulations in particular circumstances, and remove an
anomaly regarding the availability of appropriation as a means of
enforcement.
Scope of collateral
Equivilence of financial collateral
Possession and control
Enhancing appropriation
Foreign insolvency orders/decisions
A new provision to the Regulations provides that foreign insolvency
orders or acts will not be recognised or given effect to if, in the
same circumstances, that order or action could not be made or done
by the UK courts because of the provisions against the adverse
impact of insolvency law on financial collateral arrangements in
the Regulations. This particular provision provides additional
protection for financial collateral arrangements but perhaps runs
contrary to the current trend of universalism whereby the English
courts will seek to assist foreign insolvency proceedings by
recognising the orders and acts made by a foreign court relevant to
those proceedings.