Party Autonomy in International Property Law - Peace Palace Library

11. Financial Collateral Arrangements and Party Autonomy
Of course the contractual approach discussed here may also have drawbacks.
The most important drawback is that it requires the account bank
to sign up to the security arrangement. This would not be a problem if
the account bank is a party to the underlying contract (the credit default
swap in our example) but if Rock Solid Bank wishes to use a balance held
with an entirely different bank, this other account bank, which would
otherwise be uninvolved in the transaction, may not be keen on getting
involved at least not without being paid a (hefty) fee. 66 If an account
balance is pledged or charged to a third party, the account bank is more
or less an innocent bystander in relation to this pledge. Its involvement
(and its risk of being held liable) would be much greater if, under certain
specific circumstances, it was asked to release the balance held in the
name of Rock Solid Bank to Alpha Bank, a bank with which the account
bank did not have any prior legal relationship. The reason of course is that
the account bank would then have to check whether the requirements
for release of the deposit to either its account-holder, Rock Solid Bank,
or the collateral taker, Alpha Bank, have been fulfilled. However, this
does not take away the fact that the alternative approach suggested here
may be helpful in specific circumstances, particularly if the account bank
itself is the collateral taker. In our example of Rock Solid Bank providing
collateral for the benefit of Alpha Bank to secure its obligations under the
credit default swap, an obvious scenario would be for Rock Solid Bank to
post the relevant cash collateral with Alpha Bank The parties could then
enter into detailed arrangements as to if and when the cash collateral will
be repayable, etc.
The question of whether there are legal reasons under Dutch law why
the contractual approach proposed here would not work was researched
in the author’s doctoral thesis. No legal objections were found and it was
concluded that there are no reasons why this alternative approach would
not work in principle both in relation to security taken by the account
bank and security taken by a third party. Of course, all this remains true
provided that the account bank is willing to cooperate. This is not to
say that there are no limitations to the freedom of contract, which is the
principle that allows the parties to use the contractual approach described
here in the first place. Freedom of contract is only a starting point which
has limitations that would also apply to contractual security arrangements.
For example, an arrangement whereby the account balance needs
to be paid to a subsidiary of the account-holder upon the account-holder’s
66
See Wood 2007a, § 14-020.
Reinout M. Wibier
255
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