Regulation of financial collateral

The ubiquity of financial collateral, its importance in the well-functioning of the financial market infrastructures, and its potential to create systemic risk have placed the regulation of financial collateral under the limelight of any public policy efforts that aim to preserve the robustness of the financial system. This chapter studies financial collateral from a functional comparative law perspective. In doing so, it briefly sketches the regulation of financial collateral across the Atlantic by investigating its contractual framework, its private law underpinnings, and its regulatory treatment. It highlights three most important legal and economic issues of financial collateral; namely, the transatlantic divergences in the legal construction and applicable law, the special bankruptcy treatment for financial collateral, and the right of reuse or rehypothecation of collateral. The study finds that despite the existence of differences in the private law underpinnings of financial collateral - the hard edges of which have been taken out by the industry-driven initiatives to reduce transaction costs by means of harmonization - there has been considerable convergence in the regulatory treatment of financial collateral.