A word about credit risk mitigation
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
- legal security interests — which involve transfer of the legal title to the secured property — a good example is a fully registered mortgage, and
- equitable security interests — where legal title is not transferred but the security holder acquires enough of a beneficial interest to take the asset out of the direct insolvency estate of the debtor. Good examples here are charges and assignments by way of security — by their nature are always equitable.
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
- Properly perfected Mortgages
- Liens in all their multifarious manifestations
- Pledges — though under English law a surprisingly rare beast.
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, 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
Security is deep Eagle lore. Even sensible, experienced, senior, inhouse lawyers will get the shivers whenever the topic of taking security comes up. From childhood they have been raised on gruesome stories of what happens to legal eaglets who are careless with security interests.
If you amend a document granting a security interest you risk someone trying to argue that you have terminated the old security interest and created a new one, thereby re-starting any voidable preference period, invalidating any previously registered charge, and of course relegating your interest behind those of anyone who has registered a security interest over the same assets in the mean time — the first security interest in time prevails.
Some of these risks have been de-complicated by the financial collateral regulations (insofar as they’ve done away with registration requirements, slavenburgs and so on for financial collateral arrangements), and while this is still 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 legal or economic terms that just happen to be in the same contract.
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.