Table of Contents

Yeowart and Parsons on the Law of Financial Collateral

Yeowart and Parsons on the Law of Financial Collateral

Elgar Financial Law and Practice series

Geoffrey Yeowart, Robin Parsons, Edward Murray and Hamish Patrick

This book is the first of its kind to offer a systematic examination of the whole law relating to financial collateral. It does so in two parts. First, it explains the law created by the Financial Collateral Arrangements (No 2) Regulations 2003, the Directive it implemented and related legislation. Second, it examines how financial collateral is used in practice in a range of different markets. It will be an essential reference point for all legal practitioners operating in financial markets.

Chapter 11: THE RIGHT OF USE AND THE LEGAL CONSEQUENCES OF ITS EXERCISE, INCLUDING ISSUES OF PRIORITY

Geoffrey Yeowart, Robin Parsons, Edward Murray and Hamish Patrick

Subjects: law -professional, finance and banking law

Extract

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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