Elgar Financial Law and Practice series
Chapter 21: USE OF CONTRACTUAL SET-OFF AND FLAWED ASSET ARRANGEMENTS FOR TAKING CASH COLLATERAL
This chapter looks at the use of alternative techniques for taking cash collateral, based on contractual set-off or flawed asset arrangements (or a combination of both). We do not provide a legal analysis of the law in this area as this is available elsewhere. Instead the chapter focuses on the legal points to consider when evaluating whether it is appropriate to use one of these techniques, including the advantages and disadvantages of each. A cash collateral arrangement based on contractual set-off or a flawed asset device falls outside the scope of the Financial Collateral Arrangements (No. 2) Regulations 2003 (‘FCARs’) and is not protected by them, except to the extent that set-off forms part of a close-out netting provision. There may be cases, however, where such an arrangement is useful or even the only possible course. Set-off also lies at the heart of numerous cash management and netting arrangements provided by banks to corporate customers. Set-off is a fundamental concept of English law, the origin of which may be traced back to medieval law and possibly earlier. In its simplest term, set-off involves permitting (or sometimes requiring) a debtor to discharge his debt by setting it off against a cross-claim owed to the debtor by the creditor so as to produce a net balance owing between them.
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