What Should We Do about Financial Collateral?

Abstract

The use of securities and cash as collateral is widespread in all areas of finance. There have always been some differences in treatment of this sort of collateral, for example, fixed charges over shares and debt securities have never been registrable. More recently, however, the Financial Collateral Directive 2002, as enacted in the UK by the Financial Collateral Arrangements (No 2) Regulations 2003, has resulted in a nearly separate regime for the taking and enforcing of financial collateral; an incomplete regime, however, is bolted onto the existing rules by disapplying some and modifying others. This article examines the reasons for the disapplied rules, in particular those relating to registration and enforcement of collateral, and also the reasons for disapplication. It concludes that disapplication is only justified in relation to transactions on the wholesale financial markets, in relation to liquid collateral and, probably, involving public authorities, financial institutions or large companies.