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Part I Introduction, 2 Use of security and quasi-security interests in debt financing

From: The Law of Security and Title-Based Financing (3rd Edition)

Hugh Beale, Michael Bridge, Louise Gullifer, Eva Lomnicka

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 06 June 2023

Assignment of credit — Guarantees and security — Debt

(p. 17) Use of security and quasi-security interests in debt financing

A.  Introduction

Uses of security interests

2.01  Security and quasi-security interests1 can be used wherever a party who is owed an obligation wishes to have a proprietary claim over an asset of the obligor to which it can have recourse if that obligation is not fulfilled. They are used widely in the context of debt financing of businesses, to secure borrowing and other forms of finance extended by banks and other financial institutions. They are also used to secure credit extended to businesses by those contracting with them, in any situation where a business does not have to pay immediately for benefits conferred on it by the counterparty,2 and also where a business may become liable to a counterparty in the future, for example for breach of contract. This chapter gives a general overview of the situations in which security and quasi-security interests are used for these purposes. Its aim is to put into some sort of context the detailed discussion of the law that appears in the subsequent chapters. The discussion is, by its nature, very general and in practice there will be many variations on the typical situations described.

Financing of businesses

2.02  Most companies are financed by a mixture of equity and debt. The mixture between the two will be a function of a number of factors, including the size of the company, the nature of its business and the corporate structure (including whether it is part of a group of companies) and the availability of loan finance and finance in the capital markets. Non-corporate businesses are financed in a similar way, except that equity financing is not represented by share capital but by the interest of the owners or partners in the assets of the business. The nature of the general debt financing of a business will vary according to its size. The first part of this chapter consists of a general map of the financing of businesses categorized by size. The different possible structures of general debt financing, (p. 18) including the role played by security and quasi-security interests, will then be considered. The final part considers particular specialized structures, where secured debt finance plays a crucial part.

Different types of businesses

2.03  As well as varying in size, businesses vary enormously in terms of what they do. To give an idea of the range of corporate businesses, examples include real estate companies, construction companies, manufacturing companies, retail companies, services companies, financial companies, investment companies or special purpose vehicles (SPVs), engaged, for instance, in project finance or in securitization. The type of business carried out by an organization will affect the way in which it borrows, from whom it borrows, the assets that are available to be given as security and the type of interests granted or reserved over those assets. Certain types of business will use a particular type of finance (often in addition to general finance) regardless of the size of the business. For example, a manufacturing business or one involved in retail or wholesale trade would obtain plant and machinery using asset finance (hire-purchase, conditional sale or finance leases) and would acquire stock-in-trade from suppliers on the basis of retention of title sales. Businesses involved in importing or exporting goods will use international trade finance.3 Other types of businesses have very specialist finance needs, for example an investment company. This company’s assets are likely to comprise equity and debt securities issued by other companies, and its operations are likely to include trading in those securities, using its assets as financial collateral for its obligations to its counterparties on the financial markets. Another example is a project finance SPV, which will typically only have one main asset, for example a revenue-generating contract, on the strength of which it will raise loan or bond finance.

Providers of finance

2.04  The sources of finance or credit, and thus also the holders of security and quasi-security interests, are diverse. Loans tend to be provided by banks, who fund them either from deposits or by raising finance themselves. Holders of debt securities are usually those whose business is investment, such as pension funds, insurance companies or hedge funds, but can also be banks or other companies or individuals. Finance for the acquisition of assets is provided by specialist finance companies, as is asset-based finance, although many of these companies are in fact affiliated to the major banks. Credit can be provided by anyone who contracts with a business: typical situations where security or quasi-security would be involved include where goods are sold on credit, where real property is rented to a business and where a business carries out transactions on the financial markets. A new and innovative source of debt financing is via a peer-to-peer online lending platform. The platform connects potential lenders, who could be individuals or corporate lenders, with borrowers, many of whom are micro, small, or medium-sized enterprises.

B.  General map of debt financing

Micro, small, and medium-sized enterprises

2.05  These businesses, usually called MSMEs, make up (in number) 99.9 per cent of all UK businesses.4 Although the definition varies, (p. 19) it is convenient to think of them as each having a turnover of less than £25 million per annum.5 They vary in size from tiny organizations, employing a very few employees, to those with up to about 250 employees.6 Such businesses are often incorporated, but there are also partnerships and individual traders. Not all the forms of financing described in this chapter are available to non-corporate debtors: most notably, except for limited liability partnerships,7 they cannot grant a floating charge over their assets.8 For many decades incorporated MSMEs obtained their debt finance from a bank, usually by means of an overdraft, secured by fixed and floating charges over all the company’s assets. Very often the indebtedness would also be supported by guarantees given by the directors or owners of the business, secured by charges over their houses: this structure is also available to non-corporate debtors. While this pattern of finance is still common,9 there has been a very marked increase over the last ten years in other means of financing. Thus MSMEs have turned to asset-based financing and supply chain financing, both of which include varieties of receivables financing.10 Some use is also made of peer-to-peer lending, and although the proportion is small, it is growing fast.11 In addition MSMEs make extensive use of finance secured by various retention of title devices (equipment finance)12 in order to acquire capital equipment (which is usually leased or obtained on hire purchase terms)13 or stock-in-trade (which is likely to be supplied on retention of title terms).14 Since these devices operate by way of retention of legal title, the assets acquired do not fall within the company’s assets and so do not fall within the bank’s fixed and floating charges: the asset financiers and suppliers therefore have priority over the bank in relation to those assets.15

Mid-sized companies

2.06  These businesses (which are nearly always incorporated) can be defined as having a turnover of between £25 million and £500 million.16 They exhibit a (p. 20) similar picture to SMEs, although they are more likely to have a term loan from a bank rather than just overdraft funding. Bank lending is still likely to be secured, although this will depend on the creditworthiness of the company: the alternative is that the bank is satisfied with protection by a negative pledge clause17 as well as financial covenants in the loan agreement. Mid-sized companies may also use asset-based finance in addition to or as an alternative to bank lending. Some companies of this size are financed by private equity, and have relatively high levels of debt.18 They also may raise money by issuing bonds, by means of a private placement rather than a public offer. These may be secured.19 Mid-sized companies, depending on their function, are likely also to use equipment finance and to obtain credit from suppliers on retention of title terms.

Large companies

2.07  Most large companies (with a turnover of over £500 million) obtain their debt finance from a mixture of syndicated loans and debt securities, often issued on the public markets and usually from international sources. In relation to investment grade companies20 both loans and bonds are likely to be unsecured.21 Loans will contain reasonably stringent negative pledge clauses,22 as well as financial covenants. Bond issues often only prohibit the issuer from issuing secured bonds into the same market, as this would adversely affect the value of the original issue.23 Companies of this size are often involved in taking over or merging with other companies, and borrow money on a secured basis to finance the acquisition.24 Even large companies will use equipment finance: with ‘big ticket’ items this is likely to be in the form of a finance lease. Suppliers of goods to large companies will usually attempt to supply on retention of title terms: whether this is successful may depend on negotiations between the parties since the large companies are likely to have superior bargaining power.

Financial institutions

2.08  Banks and other financial institutions25 provide debt finance to other businesses by making loans. They themselves have to obtain finance, which can be in the form of loans from other banks, but is likely to include an issue of debt securities, often in a securitization or covered bond structure.26 In these structures, discussed below, the debt securities are backed by assets, namely the loans made by the institutions. All kinds of financial institutions, including banks, insurance companies, hedge funds and pension funds, take part in transactions in the wholesale financial markets, such as trading in securities and derivatives, which require them to provide collateral to their counterparty or to a central counterparty for the obligations they undertake.27 They may also borrow (p. 21) money in order to undertake these transactions, and are required to provide security for these loans. Further, banks are required to provide collateral for their obligations between themselves in relation to interbank loans, repos and payment settlements. The particular regime that applies to the use of financial collateral as security or in title transfer arrangements is discussed below in chapter 3.

Special purpose vehicles

2.09  SPVs are companies set up for a single purpose, which could be the building and operation of an item of infrastructure, or the ownership of a very large item, such as a ship or an aircraft, or for the purposes of structured finance, such as securitization. Debt finance to such companies, whether in the form of loans or bonds, is always secured on the assets of the company. These structures are considered below.

C.  Use of security and quasi-security in general debt financing


2.10  This section considers the structures of general debt financing of businesses. The techniques described can be used in combination with each other or separately: this will vary according to the size and function of the business.

Fixed and floating charges28

2.11  Where a bank lends to an SME or a mid-sized company, it is likely to be on the basis of relationship lending. This is a lending technique whereby the bank takes the decision to lend based on its assessment of the future cash flow of the business, and which relies on close and continuing monitoring by the bank.29 The lending is usually on the basis of an overdraft with an agreed limit: this gives the bank a good degree of control over its exposure as it will usually be able to refuse to extend further credit at any time.30 The close relationship between the bank and the business means that the bank has early warning of any potential financial problems, and is able to take swift action, which is designed to enable the business to continue rather than to obtain repayment, which may well force the business into insolvency.31 The role of security interests is therefore one of last resort: if the business were to become insolvent, security gives the bank priority over other creditors and control over the insolvency process. The bank will therefore take security interests over the entire undertaking of the business, consisting of fixed charges (p. 22) over everything it can32 (plus a charge by way of legal mortgage over any land owned by the business), and a floating charge over the rest.33 This combination will give the bank the right to appoint an administrator out of court or to encourage the company itself to do the same, if the business is a company.34 This form of lending has declined in recent years. This has been for a number of reasons, most notably the difficulties for the banks of obtaining fixed charges over receivables after the decisions in Agnew v Commissioner for the Inland Revenue35 and Re Spectrum Plus,36 and the difficulties for the borrowers of obtaining any bank finance at all since the financial crisis. The result is that SMEs and mid-sized companies have turned to other forms of financing, which are discussed in the next two paragraphs.

Asset-based lending37

2.12  In contrast to relationship lending, the decision to lend on the basis of asset-based financing is made largely by assessing the assets available as security, rather than an assessment of the future cash flow of the business. The term ‘asset-based lending’ encompasses receivables financing (both factoring and invoice discounting). The receivables are sold to the financier, usually by an absolute assignment, although the financier will usually also take a floating charge over all the assets of the company.38 Receivables financing is discussed in detail in chapter 8. However, ‘asset-based lending’ also includes a wider type of financing, where the financier makes advances against not only the receivables of a business, but also against other revolving assets (including intellectual property and stock) and some fixed assets, such as plant and machinery. The whole transaction will use different techniques for different assets, so that the financier will usually buy any receivables outright, but will take fixed charges over other assets if possible and if not, floating charges. The asset-based lender is likely to want a floating charge anyway, so that (p. 23) it can appoint an administrator.39 Fixed charges over stock are not uncommon, since the lender may use field warehousing techniques or other information technology mechanisms to achieve the necessary degree of control.40

Supply chain financing

2.13  This is really a variant on receivables financing, but with the difference that the financier deals initially with the account debtor rather than the creditor. A large business with a number of suppliers arranges with a financier to purchase the receivables that the business, as a customer, owes to its suppliers at the point the debt arises. This has a number of advantages. It enables the customer to extend the payment period, thus improving its cash flow. It also often enables the supplier to obtain cheaper financing than it would otherwise be able to do, since the cost takes into account the fact that there is only one customer (thus making the risk easier to assess) and the credit rating of the customer, which is likely to be much better than that of the supplier. Further, a receivable is sold to the financier only when it has been confirmed by the customer, thus reducing the risk of its value being reduced by disputes. Thus a customer can ensure that it deals only with the supplier in the event of a dispute, rather than with a financier with whom it has no commercial relationship. A customer may achieve this by inserting a clause restricting assignment (except to the supply chain financier) into its contract with its suppliers,41 thus locking the supplier into a relationship with the financier chosen by the customer. While useful for larger suppliers, these supply chain agreements are seldom available to small businesses.42

Syndicated loan43

2.14  It is very common for loans made to large companies to be syndicated, so as to spread the risk among a number of lenders. Where general finance is provided to a large creditworthy company by way of a syndicated loan, it may not be secured.44 However, security is usually provided where syndicated loans are used for specialist financing, such as project finance45 or as part of a leveraged buy-out.46 Security will usually be held by a security trustee on behalf of the lenders and any other secured parties, such as the borrower’s interest rate swap provider.47

Issue of debt securities

2.15  Bonds are more likely to be secured if the rating of the issuer is below investment grade (high yield bonds): the interest rate is usually lower than for unsecured bonds to reflect the decrease in risk. Secured bonds are also sometimes used for the financing of acquisition and private equity transactions,48 and in specialist finance such as project finance. Debt securities issued to fund a securitization are usually secured on the securitized assets.49

Security trustee

(p. 24) 2.16  Where security is given for a syndicated loan or bond issue50 it will normally be granted to a security trustee. This means that there is only one security interest,51 and therefore only one registration is required (if the security interest is registrable), thus saving complication and expense. The trustee can hold the security for the lenders or bondholders for the time being, so that the trust has a changing group of beneficiaries. This enables the loans or bonds to be transferred very easily. Further, the trustee can enforce the security on behalf of the lenders or bondholders, and distribute the proceeds pro rata, or in accordance with an agreed payment waterfall.52 In fact, the lenders or bondholders will be precluded from enforcement by a ‘no-action’ clause,53 so the borrower will not have to deal with numerous enforcement actions and the lenders or bondholders are protected from a single creditor enforcing its rights to the detriment of the others.54 However, the powers and duties of a security trustee are otherwise usually very limited, so that it will not be required to monitor the issuer’s compliance with its obligations or to take steps to enforce without express instructions from a specified majority of the lenders or bondholders.55

Private equity56

2.17  Since the 1970s, private equity has developed as an alternative to public ownership as a way of financing mid-sized and large companies. In this structure, equity funding is provided by a private equity fund57 and, to a relatively small but crucial extent, the managers of the company. This provides tight control over the management of the company. There is usually a high level of debt financing (leverage). Because the company financed in this way is likely to either have previously been a public company or a large private company, the initial transfer to private equity ownership is often called a leveraged buy-out. Once the buy-out has taken place, the structure remains until the private equity fund wishes to exit: this can be done by refloating the company (which may then result in a different debt structure) or by sale to a trade buyer or another private equity fund (in which case the debt structure is likely to remain roughly the same).

Leveraged buy-out finance: the structure58

(p. 25) 2.18  The debt finance for a leveraged buy-out is complex, often involving several tiers of lenders. The whole structure will involve a series of new companies, each of which is wholly owned by the one above it. Simplified,59 there will be Newco 1, into which the equity component from the private equity fund and the management is put. The private equity fund will also provide some deeply subordinated loan finance, usually in the form of loan notes (or sometimes redeemable preference shares),60 which is lent to Newco 2 and onlent through intercompany loans down the chain. Newco 1 will own 100 per cent of the shares in Newco 2. Newco 3, to which mezzanine debt (if used) will be lent, is wholly owned by Newco 2 and, in its turn, owns Newco 4, which is the bid company. The senior debt is lent directly to the bid company, and is used both to acquire the target company and as working capital, and to refinance any existing debt. It is likely to include a combination of term loans and revolving credit facilities, and will often be in different tranches, some amortizing and others involving one or more bullet payments. Any subordination of tranches of senior debt will be contractual or by turnover trust.61 Second lien debt, which is often provided by hedge funds or other institutional investors, is subordinated to the senior debt and is usually a single term loan. Mezzanine debt is often structurally subordinated (and thus usually involves a higher interest rate to compensate for the increased risk), and usually consists of a single term loan repayable in one bullet payment, which is onlent by Newco 3 to Newco 4. The various loans, especially senior debt, which is the largest, are often syndicated.

Leveraged buy-out finance: security

2.19  The loans are always secured by fixed and floating charges over all the assets of the target company, and also over the shareholdings of the Newco granting the security. Each Newco will give guarantees to support the borrowing of the other companies, and security over its own assets. As discussed above, the lenders will seek to take fixed charges over whatever assets they can, and floating charges over the rest. If the loans are syndicated, the security will be held by a security trustee. Junior debt (such as second lien or mezzanine debt) can also be provided by high yield bonds, in which case they are less likely to be secured.62

D.  Specialized financing

International trade financing

2.20  An international sale of goods is usually financed by a documentary credit issued by a bank on the application of the buyer (the issuing bank).63 A correspondent bank in the seller’s jurisdiction (the confirming bank) will usually confirm the credit to the seller. The confirming bank will pay the price of the goods to the seller on receipt of the shipping documents, the issuing bank will reimburse the confirming bank (p. 26) and the buyer will reimburse the issuing bank. The goods are used as security first for the issuing bank’s obligation to the confirming bank, and then for the buyer’s obligation to the issuing bank. In each case the security is effected by a pledge of the bill of lading, a document of title to the goods.64 Once the issuing bank has the bill of lading, it may release it to the buyer under a trust receipt so that the buyer can sell the goods in order to raise funds to pay the issuing bank.65

Acquisition finance

2.21  The leveraged buy-out structure described above can also be used for a takeover of a public company, if it is funded by debt. However, if the bidders’ borrowing to acquire the shares of the target company is moved onto the balance sheet of the target or is supported by a security interest over the assets of the target company, care needs to be taken not to breach the rules on financial assistance in section 678 Companies Act 2006.66

Ship finance67

2.22  Ships are usually constructed to order, and title usually remains with the shipbuilder until completion of the contract, although the buyer will pay instalments throughout the construction process. If the buyer borrows money to pay these instalments, the lender will normally require assignment of the benefit of the shipbuilding contract and any refund guarantees. Once a ship is built, finance for its acquisition is usually secured by a mortgage over the ship.68 This mortgage may lose priority to a maritime lien in certain circumstances.69 Thus, the lender will take in addition a mortgage (preferably by way of statutory assignment) over the ship’s insurance and an assignment of the ship’s earnings.

Aircraft finance

2.23  Aircraft may be financed by a loan secured by a mortgage over the aircraft, or by a leasing arrangement, or a combination of both.70 In all types of transactions, the lender will also take assignments of the aircraft insurance and the airframe and engine warranty agreements. A loan secured by a mortgage over the aircraft is the simplest structure, which, if English law applies,71 will be governed by the Mortgaging of Aircraft Order 1972,72 but, if the relevant criteria are met, will be an international interest under the International Interest in Aircraft Equipment (Cape Town Convention) Regulations 2015, and will be able to be registered in the International Registry.73 Alternatively, an operator can enter into a finance lease arrangement with a financier74 or an operating lease75 with a lessor who will probably acquire the aircraft by means of a loan secured by (p. 27) a mortgage. Leases also fall within the International Interest in Aircraft Equipment (Cape Town Convention) Regulations 2015. Another structure is for an SPV to be formed (usually in a tax-friendly jurisdiction), which will acquire the aircraft with a loan secured by a mortgage, and which will lease it to operator under a hire purchase agreement, finance lease or operating lease. The SPV would also assign the lease or hire purchase agreement to the lender.

Structures using special purpose vehicles

Project finance: general

2.24  Project finance is a structure used to finance infrastructure projects, such as roads, pipelines, prisons or hospitals, whereby the lenders are paid out of the income generated by the project. The project is usually carried out by an SPV, the shares of which are held by sponsors. The SPV is usually a party to a concession agreement with the relevant government entitling it to build the infrastructure. The construction work is contracted out and the SPV, when the project is built, receives the revenues from its operation, which may come in the form of tolls or rent (in the case of roads or pipelines) or government payments (in the case of prisons or hospitals). The debt finance to fund the construction is provided by bank loan (often syndicated) and sometimes also a bond issue.76 The SPV, which is set up just to carry out this particular project, will have no or few assets except those connected with the project, and often these consist just of the benefit of the concession agreement, the construction contract and the operating (revenue-generating) contract, plus (depending on the nature of the project) plant and machinery, intellectual property, insurance policies and the SPV’s bank account.77 On the other hand, it will also have no or very few other creditors other than the lenders plus the counterparties to the project contracts. In particular, it often has no or very few employees or other unsecured creditors.78 The assets will have very little break-up value, and so the lender will usually want a security package that will enable it to take control over the whole enterprise in the event of serious default or insolvency of the SPV. The value for the lenders, and the means of repayment, comes from the revenue from the completed project. Thus, if the relevant law is English law,79 the lenders will take fixed charges over everything they can and floating charges over the rest. The revenue-producing contract is likely to contain a ‘waterfall’ clause providing for the scheduled direct payment of the lenders and other expenses out of the revenue, with any surplus going to the SPV. Whether a fixed charge can be taken over the benefit of such a contract is not clear.80

Project finance: administrative receivership

2.25  Before the Enterprise Act 2002 the lenders’ mixture of fixed and floating charges over the whole enterprise gave them the ability to appoint an administrative receiver, who could appoint a new entity to run the project for the benefit of the lenders. This ability was usually enhanced by ‘step-in’ rights, which were agreed between the lenders, the construction company and the counterparty to the concession agreement, and which allowed the lenders to require the construction company (p. 28) to continue to perform if they substituted a solvent entity for the defaulting party (the SPV).81 When the right of a floating charge holder to appoint an administrative receiver was abolished in the Enterprise Act 2002,82 project finance was one of the exceptions. Thus, a floating chargeholder can still appoint an administrative receiver in relation to a project finance company provided that the company incurs a debt of at least £50 million for the purposes of carrying out the project, and the project includes ‘step-in rights’.83


2.26  Securitization is a term used to describe the issue of notes by an SPV that are backed by income-generating assets so that repayment of the obligations on the notes comes from the income on the assets. In a simple structure, the originator transfers receivables to the SPV, in return for cash consideration, which the SPV funds by the issue of notes.85 The structure is largely used to enable financiers to fund the finance they provide for others,86 although it can also be used for corporate funding using trade receivables. One particular feature is that the notes are tranched, using subordination and a waterfall clause that pre-determines the order of payment, including other payments such as tax and administration payments to the originator.87 The fact that the notes are backed by a pool of assets, and the payments are tranched, has led, at least in the past, to the senior notes receiving very high ratings. The obligations in respect of the notes are secured by a security interest over all the assets of the SPV, including but not limited to the receivables, which will be held by a security trustee on behalf of the noteholders. If the structure is governed by English law,88 the assignment of the receivables to the SPV is likely to be an equitable assignment, since in many cases giving notice to the debtors is impractical and undesirable.89 The security interest granted over the receivables by the SPV to the security trustee is therefore likely to be an equitable mortgage or a fixed charge. This is likely to be supplemented by a fixed charge over the SPV’s bank account and any investments it has (p. 29) made with the proceeds of the notes or the receivables, and a floating charge over any other assets of the SPV.90 The floating charge is largely to enable the security trustee to appoint an administrative receiver or an administrator if the SPV defaults. If the notes are rated, listed on the Official List91 or traded on a recognized investment exchange or on a foreign market, then the arrangement will fall within the capital market exception to section 72A Insolvency Act 198692 and so a floating charge holder will still be able to appoint an administrative receiver.93 It is important that the security interest is first ranking, so as to give priority over any other creditors the SPV may have and to discourage them from seeking to enforce their own debts to the detriment of the noteholders.94

Other forms of securitization

2.27  In the years before 2008, securitization transactions became more and more complicated and exotic. They became used far more as a method of originating receivables to distribute than as merely a means of financing the originator of the asset, and eventually contributed to the global financial crisis. While some of the structures (such as structured investment vehicles (commonly known as SIVs) and the layering of securitizations on top of each other) are unlikely to be used again, two basic variants are still popular and will be considered here: whole business securitization and synthetic securitization.

Whole business securitization

2.28  In this structure, which is used in project finance and acquisition finance,95 the SPV makes a loan to the company secured on its assets, and issues securities to fund the loan. The SPV will therefore take a security package consisting of fixed and floating charges over all the assets of the company. Again, as a floating charge holder the SPV is likely to be able to appoint an administrative receiver, since the arrangement is likely to fall within either the capital market exception or the project finance exception to section 72A Insolvency Act 1986.96

Synthetic securitization

2.29  There are many varieties of this structure, and this section merely attempts to describe the simplest and most generic. The structure is used to transfer the credit risk of a bundle of reference obligations, such as loans or debt securities, which may or may not be owned by the buyer of protection, to noteholders. An SPV issues securities, and invests the proceeds in some sort of safe investment (‘the collateral’). It enters into a credit derivative, referenced on the bundle of reference obligations, with the protection buyer as counterparty. Under the swap, the SPV agrees, for a fee, to pay the protection buyer on the occurrence of certain events in relation to the reference obligations.97 The payments that the SPV has to make on the securities are made partly from the returns from (p. 30) the safe investment and partly from the fee. Any payments that the SPV has to make to the protection buyer under the credit default swap are made from the safe investment or its proceeds, thus reducing the amount available to pay the noteholders, who thus take the eventual credit risk on the reference obligations.98 The SPV will grant a security interest (probably an equitable mortgage or a fixed charge, as above99) over the collateral to a security trustee, who holds it on trust for both the noteholders (to secure the SPV’s obligations under the notes) and the buyer of protection (to secure the SPV’s obligations under the credit derivative). The priority between these two secured creditors will be agreed as part of the transaction: commonly the buyer of protection has priority over the noteholders unless there is an event of default in relation to its continuing obligations (such as its own insolvency) in which case the noteholders have priority.100

Covered bonds

2.30  More recently, covered bonds have become popular, particularly because they are closely supervised by the Financial Services Authority and are regarded as having a low risk of default.101 These are asset-backed securities, but instead of being issued by an SPV are bonds issued by the borrowing company (often a bank or a building society) itself. The proceeds of the issue are lent to an SPV, which uses them to purchase assets (typically receivables) from the issuer. The SPV guarantees the payment of the obligations under the securities, usually to a trustee who holds the benefit of the guarantee for the noteholders. The obligation under the guarantee is secured on the asset pool. The SPV is obliged to maintain the asset pool so that there is always enough to meet that obligation. If the issuer defaults on the notes, the noteholders (or rather the security trustee) therefore can enforce against the asset pool. However, unlike in a securitization, the noteholders also have an unsecured claim against the issuer.

Financial collateral


2.31  There are a huge number of uses to which financial collateral102 (securities, cash and credit claims103) is put and this section merely attempts to identify and describe some of the most common. Sometimes a security interest over financial collateral is given to secure a loan or an issue of securities, as described above. This could be part of the general financing of a business, as described above. A more specialized example of the same phenomenon is in the context of securitization. Thus in a securitization of bank loans that are transferred to an SPV,104 the assets charged to the noteholders are likely to be credit claims (p. 31) and so the charge may amount to a security financial collateral arrangement.105 Further, in a synthetic securitization, the safe investment bought by the SPV with the proceeds of the notes, and over which a charge is given to the noteholders and the counterparty to the credit default swap, is likely to be securities and therefore amount to financial collateral. A security interest over financial collateral, particularly cash, could also be given to secure obligations under any sort of commercial agreement. For example, in the case of Gray v G-T-P Group Ltd, Re F2G Realisations Ltd (in liquidation)106 the security interest over cash in a bank account was given to secure obligations to pay for transaction processing services. However, it is in relation to transactions on the financial markets that financial collateral is most used, and an outline of such use will now be given.

Central bank cash advances107

2.32  Central banks (including the Bank of England and, in the Eurozone, the European Central Bank) frequently make short-term loans to financial institutions as part of their control of the money supply and their management of interest rates. These advances are always secured by financial collateral, usually securities such as government securities, or credit claims, which are obligations owed to financial institutions under loan agreements;108 this can either be by the grant of a security interest or by a title transfer arrangement such as a repo.109

Central counterparties in relation to trading on financial markets110

2.33  Many financial markets operate on the basis of a central counterparty clearing house, so that those dealing on the market are exposed only to the credit risk of the central counterparty rather than to each others’ credit risk, and also to enable obligations between dealers on the market to be netted off against each other, so that only the net amount is due to the central counterparty. The central counterparty will require collateral to be posted as security for the market dealers’ obligations to it: this is usually called margin and will be adjusted, maybe daily, to reflect exposure. Many derivative transactions are now required to be centrally cleared, and collateral (both variation and initial margin111) is required to be posted to the clearing house on both sides of the transaction.112

Repos and securities lending

2.34  These title transfer collateral arrangements113 are described in detail below.114 They are used for a variety of purposes. Repos developed as a way for central banks to control the money supply, by buying government bonds in order to increase (p. 32) the money supply and selling them to reduce it.115 Now, however, they are used very extensively by many sorts of market participants: by investment banks and prime brokers to raise cash using the securities they hold116 and by those who are temporarily cash rich, such as retail and wholesale companies as well as financial institutions, to earn interest.117 Repos can also be used for collateral transformation, that is, to turn poor quality collateral such as illiquid securities into high quality collateral, such as cash, to be used for variation margin for derivatives transactions. The main point about repos is that they are generally short term, although they can be rolled over time and time again.118 Securities lending is used to borrow securities, to fulfil delivery obligations under a short sale or similar obligation, particularly in hedging transactions. Upon default, close-out netting will usually apply so that the obligation to return the securities is converted into a money obligation based on market value, which is then set off against the counterparty’s money obligation.119,120

Derivative transactions121

2.35  In any over the counter derivative transaction such as an interest rate swap or a credit default swap (whether or not centrally cleared), each party is exposed to the credit risk of its counterparty, that is the risk that the counterparty would be unable to make payments due if it is out of the money. As a result, parties to a derivative transaction require two types of collateral122 to be posted: variation margin and initial margin (also known as ‘independent amount’). For over the counter (OTC) derivatives falling within its scope, European Market Infrastructure Regulation (EMIR) mandates the posting of both types of collateral.123 Variation margin is posted by the party who is ‘out of the money’ to cover the marked to market exposure. This is calculated regularly (daily or more frequently) based on the value of the net early termination amount, which is the amount payable if the transaction were to be terminated.124 Since counterparties usually have a number of transactions between themselves, the collateral required to be posted is usually the net amount payable, given that all transactions would be netted off on termination by close-out netting.125 Whether collateral is required to be posted depends on the profitability or otherwise of the transactions between the parties (who is ‘in the money’ in (p. 33) relation to each transaction) and also, if the collateral is not cash, on the current value of the collateral. Since the value of collateral may change, especially if it consists of securities, it is usually valued at an amount less than its market value: this known as a ‘haircut’.126 Further, the parties can specify that collateral only needs to be posted if the exposure to the counterparty exceeds a certain amount, known as a ‘threshold’.127 Any other risks, such as losses during delays in calculating and calling for variation margin, losses from a failure of the counterparty to provide variation margin,128 losses after default and before closing out, and losses too small to trigger a call for variation margin, are covered by initial margin, which, where required under the Regulatory Technical Standards made under EMIR, is calculated based on a portfolio of transactions entered into between the parties, and recalculated and posted frequently. Otherwise, it is posted at the commencement of the transaction, unless the parties agree a different arrangement, though more could be called later. Derivatives transactions are frequently entered into using the standard documentation provided by the International Swaps and Derivatives Association Inc. This includes a main agreement (‘the ISDA Master Agreement’). Collateral arrangements are documented under ISDA published credit support documentation. There are two such English law documents: the ISDA Credit Support Annex (English law) and the ISDA Credit Support Deed. Under the former, which is largely used for variation margin, the collateral (which could be securities or cash) is transferred outright to the collateral taker and the contract provides specifically that no security interest is created.129 The obligations between the parties in relation to the collateral are, then, merely personal. If the collateral provider does not default and performs its obligations, the collateral taker is contractually obliged to return collateral equivalent to that originally transferred to it. Upon default, the collateral taker is not obliged to return the collateral: instead its value130 becomes due to the collateral provider. This amount, and the amount due from the collateral provider to the collateral taker, is subject to close-out netting, which produces a single obligation due from the party out of the money to the party in the money.131 The ISDA Credit Support Deed is largely used for initial margin, particularly when required by EMIR.132 Here, the collateral taker is granted a security interest in the collateral. Both title transfer collateral arrangements and security collateral arrangements are discussed in more detail in chapter 3.

Intermediary and prime brokerage services

2.36  Where securities are held through an intermediary,133 the intermediary may take a charge over the securities it holds in order to secure the clients’ obligations to it. A particular type of intermediary arrangement is a prime brokerage agreement. Although there is no real consensus on what constitutes a (p. 34) prime brokerage agreement,134 the Financial Conduct Authority (FCA) has defined ‘prime brokerage services’ for the purposes of the FCA Handbook135 as: the custody or arranging safeguarding and administration of assets, clearing services and financing, the provision of which includes each of the following: capital introduction, margin financing, stock lending, stock borrowing and entering into repurchase or reverse repurchase transactions. As security for the clients’ obligations arising from the provision of these services, the prime broker will take a security interest (usually coupled with the right of use136) over the securities it holds for the client, and will probably also require ‘cash margin’. Any cash transferred to the prime broker, or which is generated from the securities held by it for the client, is transferred absolutely to the broker, and so is held under a title transfer arrangement.

Movement of securities through the system

2.37  When, as is very frequently the case, securities are held through the intermediated system,137 the beneficial owner of the securities and/or the intermediary can make money out of the securities by their ‘use’ as collateral in various types of transactions. This most often occurs when securities are held in an omnibus account by an intermediary,138 and the intermediary has the ‘right of use’ over the securities.139 Once used in the market, securities typically act as collateral for several different transactions. Thus securities owned or held by A may be lent to B under a securities lending arrangement, B may then use them as collateral under a repo arrangement with C, C then posts collateral to D for a loan or for exposure on a derivatives transaction under a security arrangement with a right of use, D is then able to reuse the securities in a repo, and so on. These arrangements play a major part in providing liquidity to the system, and also enable participants to earn profit at each stage of the process, but there are concerns about risks inherent in this structure as well. Some of these have been addressed by regulation in certain circumstances.140


1  These are interests based on title transfer or reservation of title, see paras 1.21–1.26.

2  These could be goods, services, intangible property or other benefits such as insurance or credit protection.

3  See para 2.20.

4  BEIS, Business and Population Estimates for the UK and regions 2016, available at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/559219/bpe_2016_statistical_release.pdf>.

5  This is the definition used in BIS, Financing a private sector recovery (Cm 7923, July 2010).

6  The definition used by the EU is a business with up to 250 employees and either a turnover of less than €50m or a balance sheet total of less than €43m, see Council Recommendation 2003/361/EC. The BEIS Longitudinal Small Business Survey 2016 (‘BEIS SME survey’), which is a large-scale telephone survey of 9,248 owners and managers of MSMEs, categorized a micro-business as one with 1–9 employees, a small business as one with 10–49 employees, and a medium-sized business as one with 49–249 employees (see <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/624580/small-business-survey-2016-sme-employers.pdf>). There is also a similar survey relating to businesses with no employees (‘sole trader survey’), available at <https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/624447/small-business-survey-2016-sme-no-employees.pdf>.

7  See para 10.03.

8  See para 11.50.

9  The BEIS SME survey (see footnote 6), found that 31 per cent of MSMEs used overdraft financing and 17 per cent had a bank loan. While the use of overdraft did not vary greatly according to the size of business (31 per cent of micro-businesses, 33 per cent of small businesses, and 36 per cent of medium-sized businesses had overdrafts), the use of bank loans did (16 per cent of micro-businesses, 22 per cent of small businesses, and 31 per cent of medium-sized businesses used bank loan finance). Among sole traders, 23 per cent had overdrafts and 10 per cent had bank loans.

10  Discussed in ch 7. The BEIS surveys found that 1 per cent of sole traders, 4 per cent micro-businesses, 9 per cent of small businesses, and 13 per cent of medium-sized enterprises used receivables financing.

11  The BEIS survey found that 2 per cent of MSMEs had a peer-to-peer loan, but, of those who sought external finance in 2016, 5 per cent had sought a peer-to-peer loan (around 75 per cent of applications for external finance were successful).

12  Also known as ‘asset finance’.

13  See paras 7.34 et seq and 7.43 et seq.

14  See para 7.07 et seq.

15  See paras 13.29 and 13.30.

16  This is the definition used in BIS, Financing a private sector recovery (Cm 7923, July 2010).

17  See para 8.78 et seq.

18  Debt financing of a company financed by private equity is considered at paras 2.17–2.19.

19  See para 2.16 and G Fuller, Corporate Borrowing: Law and Practice (5th edn, 2016), 3.2, 3.5.

20  These are companies who have a credit rating of BBB or Baa or above.

21  For a discussion of the reasons for this, see P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 2–041.

22  See para 8.79.

23  G Fuller, The Law and Practice of International Capital Markets (3rd edn, 2012), 9.25–9.26; P Wood, International Loans, Bonds, Guarantees, Legal Opinions (2nd edn, 2007), 12–012.

24  See para 2.21.

25  For example, those providing asset based finance or equipment financing.

27  The provision of collateral for derivatives contracts is now also mandated by regulation, see EMIR (European Market Infrastructure Regulation, Regulation 648/2012 on OTC derivatives, central counterparties, and trade repositories).

29  There is considerable literature on relationship lending, see AN Berger and GF Udell, ‘Small business credit availability and relationship lending: The importance of bank organisational structure’ (2002) 112 The Economic Journal F32; Paola Bongini, Maria Luisa Di Battista, and Laura Nieri, ‘Relationship Lending Through the Cycle: What Can We Learn from Three Decades of Research?’ (15 December 2015). Available at SSRN: <https://ssrn.com/abstract=2925893> or <http://dx.doi.org/10.2139/ssrn.2925893>.

30  In the absence of any contrary intention in the document an overdraft is also repayable on demand, Williams & Glyn’s Bank Ltd v Barnes [1981] Com LR 205; Lloyds Bank plc v Lampert [1999] 1 All ER 161, 167–8; Bank of Ireland v AMCD (Property Holdings) Ltd [2001] 2 All ER 894, [15]–[17].

31  Banks have ‘rescue units’ to provide specialized support to failing companies, see J Franks and O Sussmann, ‘The Cycle of Corporate Distress, Rescue and Dissolution: A Study of Small and Medium Size UK Companies’, IFA Working Paper 306 (2000). Also for many years banks in the United Kingdom operated ‘the London approach’, which involves an agreement between the lending banks not to enforce loans while investigations are made into the problem and a restructuring agreed, see J Armour and S Deakin, ‘Norms in Private Insolvency: The “London Approach” to the Resolution of Financial Distress’ [2001] Journal of Corporate Law Studies 21, 34 et seq. This approach has become less used, given the fragmentation of debt structures and the use of administration, especially involving pre-packs, see para 20.49.

32  The question of when, and indeed whether, a fixed charge can be taken over certain assets such as receivables, the benefit of contracts and stock in trade, is complicated and uncertain, see paras 6.99–6.141.

33  Commentators have often taken the view that the fixed charge is for priority and the floating charge for control, see R Mokal, ‘The Floating Charge—An Elegy’, in S Worthington (ed), Commercial Law and Commercial Practice (2003), 479. The weak priority position of the floating charge on insolvency is discussed at paras 20.21–20.45.

34  The floating charge must be a qualifying floating charge. See para 20.51.

35  [2001] UKPC 28, [2001] AC 710.

36  [2005] UKHL 41, [2005] 2 AC 680 (see paras 6.110–6.122).

37  Asset-based finance continues to grow in comparison to traditional bank finance. Figures from the Asset Based Finance Association show that, at any one time, £9.5 billion was lent to SMEs in 2016 (up 2 per cent from the previous year), while outstanding bank overdrafts decreased by 2 per cent to £12.4 billion in the same period (see <http://www.abfa.org.uk/news/142/Asset-based-finance-seizes-market-share-from-bank-overdrafts-as-vital-source-of-funding-for-SMEs>).

38  This is primarily to enable it to appoint an administrator if the company becomes insolvent (see H Beale, L Gullifer, and S Paterson, ‘A case for interfering with freedom of contract? An empirically-informed study of bans on assignment’ [2016] JBL 203), but is also for other reasons. One is to catch any receivables which are not within the sale agreement. Another is to include any receivables that contain an anti-assignment clause: although whether charges over receivables are also prohibited by the anti-assignment clause depends on the construction of the clause, see H Beale, L Gullifer, and S Paterson, ‘A case for interfering with freedom of contract? An empirically-informed study of bans on assignment’ [2016] JBL 203, 214–15, and N Ruddy (ed), Salinger on Factoring (5th edn, 2015), 13.12. Note that secondary legislation to override anti-assignment clauses is shortly to be enacted, see paras 7.82 and 23.180. A charge may also (particularly in the case of factoring) be security for any fees and other charges which may accrue from the borrower to the financier. This is not uncontroversial, see P Walton, ‘Fixed and Floating Charges: the Great British Fund Off?’ (2015) 1 Corporate Recovery and Insolvency 18; A Walters, ‘Statutory Erosion of Secured Creditors’ Rights: Some Insights from the United Kingdom’ [2015] University of Illinois LR 543, 558.

39  See para 20.51.

40  For discussion of the requisite control, see para 6.109 et seq.

41  Such a clause will no longer be enforceable when regulations overriding anti-assignment clauses are passed, see para 7.82.

42  H Beale, L Gullifer, and S Paterson, ‘A case for interfering with freedom of contract? An empirically-informed study of bans on assignment’ [2016] JBL 203, 221–2.

43  See L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015), 8.1, 8.4.

44  P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 2–041.

45  See para 2.24.

46  See para 2.18.

47  See para 2.19.

48  P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 4–021.

49  See para 2.26 et seq.

50  Note that very often in the case of a bond issue, there may well be a bond trustee anyway, who holds the covenant to pay made for it on behalf of the bondholders: see G Fuller, Corporate Borrowing: Law and Practice (5th edn, 2016), ch 12; L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015),; P Ali, ‘Security Trustees’ in P Ali (ed), Secured Finance Transactions: Key Assets and Emerging Market (2007); R Tennekoon, The Law and Regulation of International Finance (1991) 226; P Wood, International Loans, Bonds, Guarantees, Legal Opinions (2nd edn, 2007), 16–013.

51  Sometimes in a syndicated loan a duplicate security interest is granted to each lender separately: this is in case a relevant jurisdiction does not recognize the trust, see P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 4–024.

52  For further discussion of the advantages of a security trustee see P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 4–022.

53  In certain circumstances, they will be permitted to enforce if the trustee refuses to do so.

54  See L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015), 381; P Ali, ‘Security Trustees’ in P Ali (ed), Secured Finance Transactions: Key Assets and Emerging Market (2007), 34.

55  P Ali, ‘Security Trustees’ in P Ali (ed), Secured Finance Transactions: Key Assets and Emerging Market (2007), 34.

56  L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015), ch 16.

57  Private equity funds are financed by a relatively small number of investors (e.g. institutional investors, high net-worth individuals, sovereign wealth funds) who inject significant levels of capital into the fund: often £5–10 million for mid to large cap funds (Financial Services Authority, Private Equity: A Discussion of Risk and Regulatory Engagement, Discussion Paper 06/6, 23 (2006). They are commonly structured as English limited partnerships and are professionally managed by skilled investment professionals. The typical duration of a private equity fund is ten years, and investors will usually have their money locked in for that period. See L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015), 16.3.1.

58  For detailed discussion see, C Morgan, ‘Debt finance’, in C Hale (ed), Private Equity: a transactional analysis (3rd edn, 2015); L Gullifer and J Payne, Corporate Finance Law: Principles and Policy (2nd edn, 2015), 16.4.3.

59  The transaction is often much more complicated owing to tax considerations.

60  This is often called quasi-equity.

61  See para 8.102 et seq.

62  P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 26–013.

63  See generally R Jack, A Malek and D Quest, Documentary Credits (4th edn, 2010); R King, Gutteridge & Megrah’s Law of Bankers’ Commercial Credits (8th edn, 2001) and E McKendrick (ed), Goode on Commercial Law (5th edn, 2016), ch 35.

64  For a detailed discussion see paras 5.36–5.37.

65  For detailed discussion see para 5.38.

66  Financial assistance is defined as including that given ‘by way of guarantee, security or indemnity’ (Companies Act 2006, s 677(1)(b)). See Chaston v SWP Group plc [2002] EWCA Civ 1999; [2003] 1 BCLC 675 and, further, P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 26–011; A Hudson, The Law and Regulation of Finance (2nd edn, 2013), 42–40 et seq.

67  For detailed discussion see J Forrester, ‘Ships’, in P Ali (ed), Secured Finance Transactions: Key Assets and Emerging Market (2007).

68  For discussion of registration and priorities in relation to ship mortgages see para 14.34 et seq.

69  See para 16.11.

70  In practice the engine and the airframe are usually separately financed.

71  See ch 22.

72  See para 14.51 et seq.

73  See para 14.53.

74  See para 7.43 et seq.

75  For an example of an aircraft operating lease, see Celestial Aviation Trading 71 Ltd v Paramount Airways Private Ltd [2010] EWHC 185 (Comm).

76  P Wood, Project Finance, Securitisations, Subordinated Debt (2nd edn, 2007), 4–050.

77  For a more comprehensive list of possible assets, see N Cuthbert, ‘Security for Projects, part 2’ (1998) 16 IBFL 128; P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 26–031.

78  P Wood, Comparative Law of Security Interests and Title Finance (2nd edn, 2007), 2–045.

79  See ch 22. This is very often not the case, and the security package for projects will vary enormously depending on the governing law.

80  See discussion at paras 6.140–6.141.

81  For a clear explanation, see R McCormick, ‘Steppin’ Out With The Rescue Culture Club’ (2006) 3 JIBFL 99.

82  Now s 72A Insolvency Act 1986.

83  Insolvency Act 1986, s 72E. The meaning of ‘step-in rights’ was considered but not conclusively determined by the Court of Appeal in Cabvision Ltd v Feetum [2005] EWCA Civ 1601, [2006] Ch 585. The Court held that the mere right to appoint an administrative receiver did not constitute step-in rights, as this would part of the statutory provision superfluous. See further R McCormick, ‘Steppin’ Out With The Rescue Culture Club’ (2006) 3 JIBFL 99.

84  See para 7.133 et seq, and G Fuller, Corporate Borrowing: Law and Practice (5th edn, 2016), ch 7; G Fuller, The Law and Practice of International Capital Markets (3rd edn, 2012), ch 4; A Hudson, The Law and Regulation of Finance (2nd edn, 2013), ch 47; J Benjamin, Financial Law (2007), 18.10 et seq; P Wood, Project Finance, Securitisations, Subordinated Debt (2nd edn, 2007), part 2; J De Vries Robbe, Securitisation Law and Practice in the Face of the Credit Crunch (2008).

85  The EU is proposing new regulatory rules to facilitate simple securitizations, as part of the move towards a Capital Markets Union, as it is seen as powerful tool for increasing the availability of credit and the reducing the cost of financing (see Action Plan on Building a Capital Markets Union (COM(2015) 468)). An agreement between the EU Commission, the EU Council, and the EU Parliament was reached on 30 May 2017, and the new rules are currently being finalized (see <http://europa.eu/rapid/press-release_IP-17-1480_en.htm>).

86  Thus, for example, mortgage receivables, credit card receivables, receivables due under corporate loans or hire purchase or leasing arrangements.

87  P Wood, Project Finance, Securitisations, Subordinated Debt (2nd edn, 2007), 7–010. There are usually two waterfall clauses: a pre-default one and a post-default one. For details, see J De Vries Robbe, Securitisation Law and Practice in the Face of the Credit Crunch (2008) 49 et seq.

88  See ch 22.

89  See para 7.139.

90  J De Vries Robbe, Securitisation Law and Practice in the Face of the Credit Crunch (2008) 39.

91  This is the Official List of the UK Listing Authority.

92  See para 2.25.

93  Insolvency Act 1986, s 72B, which applies to such arrangements where the debt is at least £50m.

94  G Fuller, The Law and Practice of International Capital Markets (3rd edn, 2012), 8.24–25; P Wood, International Loans, Bonds, Guarantees, Legal Opinions (2nd edn, 2007), 4.58.

95  D Petkovic, ‘New structures: “whole business” securitisations of project cash flows’ [2000] JIBFL 187; M Brailsford, ‘Securitisation-Creating Securities’ (2004) 725 Tax Journal 15. Examples of businesses financed by a whole business securitizations are London City Airport (1999), several pub companies such as Punch Taverns (2007), British Airports Authority (2007), Thames Water (2006) and Electricity North West (2009).

96  Insolvency Act 1986, s 72B or 72E (or 72C or 72D which apply to public–private partnerships or utilities).

97  These are known as credit events, which are events of default, or similar events such as restructuring to avoid an event of default, in relation to the reference obligations.

98  G Fuller, Corporate Borrowing: Law and Practice (5th edn, 2016), 4.75; P Wood, International Loans, Bonds, Guarantees, Legal Opinions (2nd edn, 2007), 28–23; S Henderson, ‘Synthetic Securitisation, Part 1: The Elements’ (2001) 9 JIBFL 402.

99  See para 2.26.

100  This ‘flip’ clause is the subject of the important decision on the anti-deprivation principle, Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2011] UKSC 38, which is discussed at paras 8.100–8.101.

101  See the Regulated Covered Bonds Regulations 2008. New EU rules on covered bonds are proposed for the first quarter of 2018, see the Mid-Term review of the Capital Markets Union Action Plan (COM(2017) 292).

102  Much useful discussion of the uses of financial collateral is contained in J Benjamin, Financial Law (2007), chs 13, 20.1. See also L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), ch 6.

103  The definition in the Financial Collateral Directive 2002 and the Financial Collateral Arrangements (No 2) Regulations 2003 (as amended) is very specific and is discussed at paras 3.18–3.34.

104  See para 2.26.

105  This will only be the case if the relevant criteria are met, see ch 3.

106  [2010] EWHC 1772 (Ch).

107  J Benjamin, Financial Law (2007), 20.08.

108  See para 3.30 et seq.

109  For more details on the type of collateral used, see <www.bankofengland.co.uk/markets/money/eligiblecollateral.htm> (last visited 31 July 2017) (in relation to the Bank of England) and <www.ecb.int/paym/coll/html/index.en.html> (last visited 31 July 2017) (European Central Bank). Charges granted to a central bank by a company are not required to be registered (s 252 Banking Act 2009).

110  J Benjamin, Financial Law (2007), 20.09.

111  See para 2.35 below.

112  See EMIR (European Market Infrastructure Regulation, Regulation 648/2012 on OTC derivatives, central counterparties, and trade repositories) and L Gullifer, ‘Compulsory Central Clearing of OTC Derivatives: The Changing Face of the Provision of Collateral’ in L Gullifer and S Vogenauer (eds), English and European Perspectives in Contract and Commercial Law (2014).

113  For a technical definition of these in relation to the Financial Collateral Directive 2002 and the Financial Collateral Arrangements (No 2) Regulations 2003, see paras 3.15–3.16.

115  For an explanation of how central banks use repos to add or subtract liquidity from the system, see S Valdez and P Molyneux, An Introduction to Global Financial Markets (8th edn, 2016), 188–9.

116  Note that those holding securities as collateral under title transfer collateral arrangements or security arrangements including the right of use will use them extensively to raise short-term cash, see para 6.45 and, for an example, see Re Lehman Brothers International (Europe) (In Administration) [2010] EWHC 2914 (Ch).

117  M Choudhry, The REPO Handbook (2nd edn, 2010), 7.

118  Re Lehman Brothers International (Europe) (In Administration) [2010] EWHC 2914 (Ch).

119  In a repo the counterparty’s money obligation will be the original seller’s obligation to buy back (see para 7.65), and in a securities lending transaction it will be the lender’s obligation to return the cash transferred as collateral for the return of the securities, see para 7.73.

120  Discussed at para 8.74.

121  For a fuller explanation, see S Firth, Derivatives Law and Practice (looseleaf) ch 6; L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), para 6-02.

122  This will typically consist of cash or government securities, as liquidity is very important, but can also consist of corporate bonds, equities, letters of credit or commodities: see the annual ISDA Margin Survey available at <https://www2.isda.org/functional-areas/research/surveys/margin-surveys>.

123  EMIR, the European Market Infrastructure Regulation, Regulation 648/2012 on OTC derivatives, central counterparties, and trade repositories, together with the Regulatory Technical Standards made thereunder (especially the Commission Delegated Regulation EU/2016/2251). In relation to centrally cleared transactions, see Art 4 and Art 41 of EMIR. For non-centrally cleared transactions, see Art 11 EMIR.

124  This amount can be calculated in a number of ways, one of which is the amount that it would cost to buy a replacement transaction in the market.

125  See para 8.74.

126  S Firth, Derivatives Law and Practice (looseleaf) 6.011.

127  S Firth, Derivatives Law and Practice (looseleaf) 6.012. This will be specified in para 11 of the English Credit Support Annex to the ISDA Master Agreement.

128  This would, of course, be a default.

129  English law Credit Support Annex 1995 para 5 or English law Credit Support Annex for Variation Margin 2016 para 5. The latter revision is designed to work with the regulatory regime imposed by EMIR.

130  If a ‘haircut’ applies, the valuation will be at the reduced percentage unless the 2009 ISDA close-out amount protocol applies.

131  English law Credit Support Annex 1995 para 2 or English law Credit Support Annex for Variation Margin 2016 para 2 and s 6(e) ISDA Master Agreement.

132  1995 English law Credit Support Deed or ISDA 2016 Phase One IM Credit Support Deed (the latter is designed to work with the EMIR requirements).

133  See paras 3.27–3.28, and L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017), ch 6.

134  See M Yates, ‘Custody, prime brokerage and right of use: a problematic coalition?’ (2010) 7 JIBFL 397.

135  In particular, for the extra obligations imposed in relation to prime brokerage agreements in CASS Rules 9.2 and 9.3.

136  See para 6.45.

138  See L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security (6th edn, 2017) para 6-09.

139  See para 6.45.

140  See paras 3.12 and 6.51 below.