Elgar Financial Law and Practice series
Chapter 11: THE RIGHT OF USE AND THE LEGAL CONSEQUENCES OF ITS EXERCISE, INCLUDING ISSUES OF PRIORITY
A ‘right of use’ of financial collateral (sometimes called the right to ‘hypothecate’ or ‘rehypothecate’) is defined in regulation 16(1) of the Financial Collateral Arrangements (No. 2) Regulations 2003 (‘FCARs’) in terms of the right of the collateral-taker to use and dispose of the financial collateral ‘as if it were the owner’ of it. A right of use may therefore give the collateral-taker the freedom to sell, repo, lend or create security over the collateral-provider’s financial collateral in favour of a third party. The collateral-taker under a title transfer financial collateral arrangement does not require a right of use. Because under such an arrangement title to the financial collateral is transferred to the collateral-taker, the collateral-taker has ownership of the financial collateral and the rights to use and dispose of the financial collateral are no more than incidents of ownership. The purpose of allowing a right of use is to increase liquidity in the financial markets by allowing securities to be reused. Where the collateral-taker is a prime broker, the right of use will be attractive to both parties as it will allow the collateral-taker to fund its operations while at the same time granting credit to the collateral-provider (often, a hedge fund) at lower cost.
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