A financial collateral arrangement is an arrangement that involves the delivery of financial assets as security or “quasi-security” for financial obligations. When used in this way, such financial assets are referred to as “collateral”, “financial collateral” or “margin”. Financial collateral arrangements are used predominantly in the financial markets to secure or support financial obligations. As discussed in more detail towards the end of the chapter, a number of regulatory changes motivated by the recent financial crisis directly or indirectly require greater use of financial collateral by market participants. A proper understanding of the forms, uses and commercial and legal characteristics of financial collateral arrangements has never been more important. The distinctive economic characteristics of financial collateral arrangements and their use predominantly in the financial markets give rise to the question whether and, if so, to what extent those characteristics and/or the financial market context in which they are used justify a distinctive legal treatment of financial collateral arrangements relative to other forms of security or “quasi security” arrangement. The chapter considers how this question has been addressed in the European Union, but also attempts to draw more general conclusions regarding the implementation of a legal framework for financial collateral in the context of the development of a financial market.
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Funds credited to a bank account (cash collateral) are an important component of the collateral package taken by secured creditors. This chapter reviews the key questions in relation to security interests over bank accounts – especially from a law development point of view. Based primarily on the United States Uniform Commercial Code Article 9 (UCC 9) and the relevant case law, but also the United Nations Commission on International Trade Law (UNCITRAL) Legislative Guide on Secured Transactions and other laws, the chapter examines some of the issues that are associated with the use of funds credited to a bank account as collateral, including: (1) the nature of such collateral, whether it is the bank account itself, a balance on the bank account or certain rights of the customer against the bank; (2) the security mechanisms available to creditors if the applicable secured transactions law does not apply to bank accounts as original collateral (that is to say, collateral which is described in the security agreement as a bank account) – in other words, proceeds of the sale of an asset in which a security interest was created; (3) the recognition of bank accounts as original collateral in more recently adopted secured transactions laws; and (4) the perfection mechanisms for security interests in bank accounts.
John Armour, Antonia Menezes, Mahesh Uttamchandani and Kristin van Zwieten
The chapter reviews evidence from a new generation of empirical studies, largely focusing on within-country effects, that seek to measure the impact of reforms to creditor rights on access to credit, both on the recovery of debt and rescue of businesses (ex post), but also on the level of credit made available to business and the terms (ex ante). The studies show that effective reform of creditor rights is associated with a lower cost of credit, increased access to credit, improved creditor recovery, and strengthened job preservation. A country’s creditor rights regime plays an important role in mitigating investor risk, which in turn contributes to the improved access and cost of credit and increased financial stability in a country.
Michael J. T. McMillen
The chapter looks at how to implement Shari’ah-compliant collateral security regimes for securing obligations. The chapter goes through the fundamentals of Shari’ah law and examines how to manage them for secured lending. It then goes on to cover specific issues, such as second and subsequent liens, secured debt, proceeds, types of collateral and remedies. It shows that seeking compatibility between secured lending and Islamic finance is challenging but far from impossible.
Spyridon V. Bazinas
The chapter presents the most salient features of the UNCITRAL Legislative Guide on Secured Transactions and explores the reasons that explain why the Guide is being used as a reference tool for the modernization and harmonization of secured transactions laws. The reasons lie with the fact that it is a text prepared by an authoritative international legislative organ like UNCITRAL and combines flexibility with certainty, transparency and predictability, and coordinates with registration, insolvency, IP and private international law. Equally important is the fact that the Guide, together with texts of other organizations, presents states with a comprehensive, efficient and internally consistent secured transactions regime.
It is a well-known fact that bankers in developing economies are reluctant to lend to small businesses. The chapter argues that, leaving vendor/lessor credit aside, and ignoring the top end of the SME range, a bank’s willingness to grant an SME a credit facility in fact depends to a large extent on the SME owner having “thirty years of bricks and mortar and two cars in the driveway” – in other words, using immovable property as collateral for the loan. If personal guarantees and security rights over residential property are an important factor in access to credit for SMEs, it is important to provide a framework for promoting the titling and land recordation of residential property in developing countries, and an accompanying immovable property mortgage regime. Furthermore, land recordation systems also play a role at a secondary tier level – when rights over immovable property are bundled into a security issued by a rights holder and sold onto the market – and the chapter further emphasises the importance for developing agencies to invest in and facilitate land recordation reform.
In general, it is harder for businesswomen to access finance, and in particular secured finance, than it is for businessmen. The problem is especially acute in developing countries, where women entrepreneurs can have a key role in lifting themselves and their families out of poverty. This chapter: provides an overview of what we know about women’s access to secured finance internationally; considers how the formal law can help or hinder women’s access to secured finance, focusing on family law, land titling law, and secured transactions law; looks at how contrasting family law regimes impact on women’s ability to access credit on the ground in Morocco and the Kyrgyz Republic – countries with very different economies, cultural contexts and legal systems; and ends with some suggestions for policy- and law-makers aiming to improve access to secured finance for women.
The chapter considers the question of how best to reform a fully developed law of secured transactions. A system may have functioned reasonably well over a number of years, but through changing usage, judicial decisions and policy-driven statutory modification may have grown over-complex, contain inconsistencies and become inefficient. There are two approaches to such a state of affairs. One is to identify specific problems and to deal with them in a piecemeal fashion. The other is to undertake a wholesale rethinking of the system. The aim of this chapter is to consider this issue in relation to English law, which so far has been the subject of various attempts at piecemeal reform. The historical development of the English law of secured transactions is considered and the present position assessed. Using three specific examples, it will be argued that this has not worked well and that a wholesale approach is preferable.
The inability of many firms (usually of small and medium size) to secure sufficient working capital to finance regular business cycles often forces them to use their long-term assets (through divestment or collateralization) to bridge the financing gap created between outgoing payments and collections of accounts receivable, with potentially negative effects on business prospects and development since long-term assets are depleted to finance short-term liabilities. Factoring, as a financial service based on the sale of accounts receivable (short-term assets) is a very useful financing tool for efficient (and when done without recourse) off balance sheet access to working capital. The industry has been known for many years in developed economies and has been gaining momentum recently in developing and transition countries. Part of the efforts should be concentrated on the creation of a solid legislative basis for assigning accounts receivable and the introduction of a sound regulatory regime. This chapter presents the legal and regulatory aspects of factoring transactions and analyses different approaches from the perspective of supporting the development of factoring services.