Party Autonomy in International Property Law - Peace Palace Library

D. Assignment; Financial Instruments; Insolvency Law
the collateral that has previously been provided. Collateral usually takes
the form of the most liquid assets, i.e. cash (or cash equivalents such as
United States Treasury bills) or other highly rated debt securities.
This chapter looks at the provision of collateral and at the freedom that
the parties to collateral arrangements have in this regard. The central
issues are the extent to which parties have the freedom to shape these
arrangements and the extent to which the provisions of mandatory law
limit such freedom. Before I address these questions, I would first like to
give a brief overview of the underlying reasons for the provision of collateral
(§ II). Then, in § III I will deal with party autonomy in traditional
financial collateral arrangements, whilst § IV will discuss some novel
ways of providing financial collateral. Here, I will examine whether there
are contractual alternatives available for the provision of collateral that
would work at least as well as traditional solutions based on property law.
Finally, a brief conclusion can be found in § V.
11.2. The reasons for providing financial collateral
Market participants enter into various types of financial contracts and
transactions, with derivatives contracts being particularly common in
the context of financial collateral arrangements. Derivatives contracts
include futures or forwards, swaps and similar contracts. What these have
in common is that their value is determined by some kind of underlying
value, for instance currencies, interest rates or commodities. 2 An example
would be an option to purchase a number of shares in Company X exactly
one year from the date of entering into the option contract at a price
of EUR 10 per share. The value of this contract would then obviously
depend on the price of shares in Company X at the exercise date, a year
from conclusion of the contract. 3 In order to make things less abstract I
will use the specific example that will serve as our point of reference in
this chapter: a credit default swap – which have become infamous as a
result of the credit crisis – in relation to Issuer N.V. (Issuer) entered into
by Alpha Bank N.V. (Alpha Bank) as protection buyer and Rock Solid
2
For a more comprehensive description of the various types of derivatives
please see Hudson 2009, chapter 43, with further references.
3
If each share were worth less than EUR 10 the option would be worthless, but
if the share price were higher, the option would still have value.
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Reinout M. Wibier
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