Determining the Situs of Interests in Immobilised Securities

Abstract

In the wholesale financial markets, enormous exposures are collateralised by interests in immobilised securities. Such collateral may be provided under a security interest, or by way of outright transfer.1 The collateral taker is always concerned to ensure that its interest in the collateral assets will be enforceable, not just against the collateral giver but also against third parties such as other creditors of the collateral giver. This is particularly important in the insolvency of the collateral giver, in order to ensure that the collateral taker ranks above ordinary creditors. Rights in assets which bind third parties are generally characterised as property rights, and the general approach in conflict of laws is to refer questions concerning the acquisition of property rights to the law of the place where the asset in question is located, or lex situs. In relation to interests in immobilised securities, this simple rule presents a challenge in practice, as the location of interests in immobilised securities may not be immediately obvious. This article suggests that the legal location of such interests is the office of the clearing system where the account recording such interests is maintained. This accords with the provisions of Article 9(2) of the Finality Directive, which has yet to be implemented in the United Kingdom.