Security interest

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A word about credit risk mitigation


Legal security: MortgagePledgeLienBailment
Equitable security: Chargefixedfloating | ABWOS | Equitable lien
Credit risk mitigation: Title transfer | Guarantee | Letter of credit | Netting
Friends and relations: Rehypothecation | Equivalent
Documents: 1994 ISDA CSA (NY law) | 1995 ISDA CSA | 1995 ISDA CSD (English law)
Regulation: LPA 1925 | Financial Collateral Regulations | LPMPA 1994

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It is sometimes said that there are only four types of consensual security right known to the law, namely pledge, lien, mortgage and charge. — Briggs J in Re Lehman Brothers International

Security can take many forms, depending on your legal system. We here are principally concerned with the common law. That is, the proper one. The overweening piece of statute here is the Law of Property Act 1925.

Types of security interest

There are:

Legal security interests can (and often do) revert to equitable security interests if they fail for formal or procedural reasons.

Types of legal security interest

Collateral: A Trick for young players

Collateral” can be represented by, but is not the same as, a security interest.

A title transfer collateral arrangement where one party delivers collateral to another as credit support in the hopeful expectation that, at a later time, it will get an equivalent thing back[1], is not a legal security interest. It isn’t a security interest at all, in fact. This is good, because there is none of this tedious mucking around with equity, formalities, registration and the fear and loathing of transactional lawyers that accompanies them. The worst that can do is issue veiled threats about the risk of recharacterisation, but this is poor form and really rather passive aggressive behaviour, in this correspondent’s opinion.

Amending security interests

If you amend a document granting a security interest you risk the argument that you have terminated the old security interest and created a new one, thereby re-starting any voidable preference period, potentially invalidating any previously registered charge at Companies House, and of course relegating your interest behind those of anyone who has registered a security interest over the same assets in the mean time.

Some of these risks have been de-complicated by the financial collateral regulations (insofar as they've done away with registration requirements for financial collateral arrangements altogether), and while this is a bit of a mine-field, basic common sense should avoid anyone but the most headless chicken-licken standing on any landmines.

For one thing, to run any risk you have to actually be amending the security interest itself, rather than other related legal or economic terms. So, if you have — ooh, say a prime brokerage agreement which contains a charge but a lot of other stuff besides — you are (in the humble opinion of this bear of little brain) most likely to be amending other things and not the actual charge provision, which tends to be dull and workpersonlike. You may tweak rehypothecation limits, financing rates, transaction terms and so on — but the security package will remain intact.

In any case, the following magic words should help: “These amendments will not affect the effectiveness, time of original execution or priority of any security interests.”

See also

References

  1. Such as is witnessed under a 1994 ISDA CSA (NY law) or a 2010 GMSLA for example.