New Business Law Section Book Reveals Richness and Complexity of Commercial Law Globally through the Lens of Financial Collateral

10 Min Read By: Penelope L. Christophorou, Celeste Boeri Pozo, Tracy Pecher

The American Bar Association Business Law Section has published a book entitled Global Financial Collateral: A Guide to Security Interests in Securities, Securities Accounts, and Deposit Accounts in International Transactions, which covers 40 countries, focusing on the choice-of-law and substantive rules applicable to pledges of certificated and uncertificated securities, securities accounts, and deposit accounts, key collateral often used in international secured transactions. Dedicating a chapter to each covered jurisdiction, the book provides general guidance to a lawyer negotiating a secured transaction involving that jurisdiction. Each chapter is based on a common questionnaire that provides a consistent framework through which the law of each jurisdiction, and variations among jurisdictions, can be readily identified and understood, thus facilitating cross-border analysis.

To focus the analysis, the book examines which law would apply to the enforceability of the secured party’s rights against a pledgor and the enforceability and priority of the secured party’s rights against third-party creditors of the pledgor in, inter alia, the following circumstances: (i) a pledgor is organized outside the jurisdiction being surveyed, (ii) collateral is located inside or outside that jurisdiction or is stated to be governed by the laws of that jurisdiction or another jurisdiction, and (iii) an issuer, an intermediary, or a bank is located inside or outside that jurisdiction. In each circumstance, it is assumed that the security agreement is governed by the law of a U.S. state, unless local law requires otherwise, and is entered into in the context of a regular corporate financing transaction and not in a bankruptcy or insolvency. At the end of each chapter, variations on this fact pattern are considered, including a situation in which the pledgor is located in the surveyed jurisdiction.

Several themes emerge through this cross-border analysis. First, what constitutes collateral in the form of a “security” differs from jurisdiction to jurisdiction. Whereas under the Uniform Commercial Code (the “UCC”)[1] applicable to all 50 U.S. states, the term “security” has a single, specific definition under commercial law,[2] this is not the case in all jurisdictions.

  • Under Mexican law, there is no particular definition of “security” for purposes of creating and perfecting a security interest in a security; rather, Mexican courts are likely to use the definition of “security” contained in the Mexican Securities Market Law (Ley del Mercado de Valores) for general commercial law purposes.[3] Accordingly, under Mexican law, interests in business trusts, partnerships, and loan participations may be considered to be “securities” as long as they meet this securities law definition.
  • Under Peruvian law, there are different types of regulated securities. In determining which type of security is involved, practitioners in Peru would look to what the interest represents economically and the market for such security.[4] Interests in other forms of business organizations, such as limited liability partnerships, among others, are not considered securities and would qualify only as personal property under Peruvian law.
  • Instead of having a definition of a “security” for purposes of creating perfected security interests in a security, Indonesian law sets out general principles of and methods for establishing security interests in different forms of “assets” and then lists the types of assets capable of being subject to security interests by such principles or methods.[5] No security interest arises under Indonesian law if an instrument or asset is not capable of being covered by one of these general principles or methods.

Additionally, unlike in the U.S., some jurisdictions either no longer permit the issuance of certificated securities or do not treat the certificate as embodying the rights associated with the security. For example, in the Netherlands, directly held certificated securities and bonds have become very uncommon as securities transactions have been increasingly dematerialized. In fact, bearer shares and share certificates made out to bearer were abolished by Dutch law for public limited liability companies in 2020. In the Cayman Islands, securities generally take a registered, uncertificated form, and so the security certificate itself does not constitute the asset but merely evidences the existence of the asset.

As another example, jurisdictions vary as to whether securities accounts are a category of collateral separate from the securities credited to those accounts. In the U.S., a securities account to which securities and other financial assets are credited constitutes a separate category of collateral, whereas in China and Colombia, securities accounts are not treated as a separate category of collateral. Where securities accounts are a separate category of collateral, determining the location of the securities account maintained by the pledgor for choice-of-law purposes may be made by reference to the pledgor’s own direct securities intermediary, consistent with the approach taken in the UCC in U.S. States and by the Hague Securities Convention.[6] In Belgium, there is a rebuttable assumption that a securities account is located at the place where it is maintained. The law chosen by the parties to govern the account agreement is the most important factor in determining the location of the securities account, but the choice will only be upheld if it is corroborated by other factors[7] and most of the other factors do not all point to another law. In the United Arab Emirates (the “UAE”), in addition to federal and local courts, there are also 40 separate “free zone” jurisdictions, which the UAE has decreed can, notwithstanding the influence of Shari’a,[8] enact their own civil and commercial laws to govern their UAE free-zone companies. While in the UAE it is rare for a creditor to seek a security interest in a securities account when they could directly take a security interest in the securities credited thereto, if a creditor were to do so, the rules for determining the location of the securities account may vary depending on the relevant court in which an action is brought. Courts in the Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”), two of the UAE free zone jurisdictions, give the parties flexibility to designate where that account is to be viewed as located.

Another recurring pattern in a number of the jurisdictions surveyed is that the steps required for rendering a security interest in a deposit account enforceable against third parties are the same or similar to the steps required generally for a pledge of receivables in those jurisdictions.[9] In such jurisdictions, funds credited to deposit accounts are treated as a claim against the applicable bank and thereby a receivable. This is distinct from the approach in the U.S., where a security interest in a deposit account as original collateral may only be perfected by control.[10] Under the UCC, a secured party has control of a deposit account if (1) the secured party is the bank with which the deposit account is maintained; (2) the pledgor, secured party and bank have agreed in an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent by the pledgor; or (3) the secured party becomes the bank’s customer with respect to the deposit account.

The above highlights represent only a few examples of themes that emerge throughout the book. In its entirety, the book reveals the richness and complexity of commercial law in respect of security interests in financial collateral for international transactions. The book is available for purchase from the American Bar Association Business Law Section at the following link:

[1] UCC (Am. L. Inst. & Unif. L. Comm’n amended 2012).

[2] Under UCC Section 8–102, a “security” is “an obligation of an issuer or a share, participation, or other interest in an issuer or in property or an enterprise of an issuer: (i) which is represented by a security certificate in bearer or registered form, or the transfer of which may be registered upon books maintained for that purpose by or on behalf of the issuer; (ii) which is one of a class or series or by its terms is divisible into a class or series of shares, participations, interest, or obligations; and (iii) which: (A) is, or is of a type, dealt in or traded on securities exchanges or securities markets; or (B) is a medium for investment and by its terms expressly provides that it is a security governed by [Article 8 of the UCC].” Under UCC Section 8–103, “an interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, its terms expressly provide that it is a security governed by [Article 8 of the UCC], or it is an investment company security. However, an interest in a partnership or limited liability company is a financial asset if it is held in a securities account.”

[3] Mexican Securities Market Law defines “securities” (valores) as shares, equity interests, debentures, bonds, options, certificates, promissory notes, bills of exchange, and any other negotiable instruments (títulos de crédito), nominative or nonnominative, registered or not in the National Securities Registry (Registro Nacional de Valores), suitable for circulation in the securities markets, issued in series or in mass, and that represent the corporate capital of an entity, an undivided interest in an asset, or a participation in a collective loan or any individual credit right, in terms of the applicable Mexican or non-Mexican laws.

[4] In Peru, generally, securities would include instruments representing economic rights relating to credit, property, or the participation in a company’s equity. Market securities are a subtype of general securities that are massively issued and freely negotiable. Shares are equity participations issued by corporations and limited partnerships, and may be either market securities (if they are massively issued and freely negotiable) or otherwise general securities.

[5] The form of in rem security interests under Indonesian law (i.e., security interests that create preferential rights for the holder of the security interest, even in bankruptcy) are (i) mortgage (applicable to land and “objects related to land”), (ii) fiduciary assignment (applicable to “movable” assets [both tangible or intangible] and certain immovable assets), (iii) pledge (usually applicable to bank accounts and shares), and (iv) hypothec (applicable to registered sea vessels and registered aircraft).

[6] The Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, July 5, 2006, 17 U.S.T. 401, 46 I.L.M. 649 (entered into force April 1, 2017). To date, there are three signatories to the Hague Securities Convention: the United States, Switzerland, and Mauritius.

[7] Other factors that Belgian courts consider in determining the location of a securities account include the office where the account was opened, the office handling the relationship with the account holder, the office responsible for making or monitoring entries in the securities account, the office responsible for administering payments or corporate actions, and the account number, bank code, or other specific means of identification.

[8] Shari’a is a legal framework rooted in Islamic law. The UAE constitution provides that Islamic Shari’a is a main source of legislation in the UAE. See The Constitution of the United Arab Emirates Art. 6, July 18, 1971, as amended.

[9] For example, under French law, cash held in a bank account constitutes a receivable held by the owner of the account against the account custodian. This receivable may be pledged under a bank account pledge. Pledging a bank account is subject to the regime covering pledges of receivables. As another example, under Korean law, an account holder is not deemed to “own” cash in his or her securities account but only is deemed to have a “claim” against the securities intermediary to collect the same cash amount credited to the securities account. As a result, the pledge over the cash in a securities account is established in the same manner as the pledge over “claim” or “receivable” under Korean law.

[10] Security interests granted in deposit accounts in consumer transactions are not covered by the UCC and have different applicable rules under U.S. commercial law.


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