Appropriation and relief from forfeiture

The Financial Collateral Arrangements (No.2) Regulations introduced a new means for a security holder to enforce its security in respect of financial collateral (meaning, very broadly, cash, shares and other financial instruments and credit claims). Provided the parties agree in the security document the remedy of appropriation will be available, the collateral taker may ‘appropriate’ the financial collateral without the need for a court order or foreclosure.

If exercised, the collateral taker must ‘value the financial collateral in accordance with the terms of the arrangement an in any event in a commercially reasonable manner’. Once valued, the collateral taker or provider, as applicable, must account for any difference in value between the secured liabilities and the financial collateral.

‘Appropriation’ is not defined in the regulations. In a Privy Council decision in 2009, Lord Walker described the remedy as ‘much closer to sale than it is to foreclosure’. The effectiveness — or otherwise — of the remedy has not been apparent, although a Privy Council decision from earlier this year suggests the answer may be ‘not very’…

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