Party Autonomy in International Property Law - Peace Palace Library

11.
Financial Collateral Arrangements and
Party Autonomy
Reinout M. Wibier *
11.1. What are financial collateral arrangements?
If the credit crisis has shown anything, it is the interconnectedness of the
various market participants in the financial world. Not only did a fall in
real estate prices in the United States trigger a ripple that developed into
a hurricane tearing through the entire financial system, the fall of one investment
bank, Lehman Brothers, in September 2008 almost brought the
entire financial system to its knees. One of the reasons for this interconnectedness
is the large number of contracts that financial intermediaries,
in particular pension funds, insurance undertakings, credit institutions
(i.e. banks), hedge funds, investment banks and mutual funds, enter into
with each other on a daily basis.
Inevitably, these contracts give rise to payment obligations which, considering
that the parties we are talking about have a tendency to ‘think
big’, may prove quite substantial. As a significant element of these obligations,
the exposures that parties have against each other may therefore
also prove quite large. An important method of reducing the risk of nonpayment
is the provision of financial collateral (e.g. cash, debt or equity
securities) for the obligations that arise out of these types of contracts.
These are arrangements whereby the party that has a payment obligation
to another party provides collateral to that other party, either by way of
an outright transfer of collateral or by way of a charge or pledge or other
security interest over the collateral. Providing collateral in this way enables
the parties to minimize their net exposure to each other because, in a
sense, the payment obligation has already been partially met by the provision
of collateral. 1 If either party does not meet its payment obligations,
the other, non-defaulting party will be able to obtain payment through
1
Alastair Hudson, The Law of Finance, Sweet & Maxwell, 2009 (Hudson 2009),
§§ 45-06 and 45-07.
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