7 Title Transfer and Recharacterization

This chapter explores another main category of collateral transactions: transactions under which ownership or title in the assets provided as collateral is transferred to the collateral taker. These transactions are called title transfer collateral transactions or title transfer financial collateral arrangements in the EU context (title transfer FCAs or TTFCAs). More specifically, the EU Collateral Directive has defined a title transfer FCA as an arrangement under which a collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations. Most legal standard documentation for title transfer collateral transactions, such as the General Master Repurchase Agreement, the General Master Securities Lending Agreement, and most ISDA Credit Support Documents provide for an outright transfer of collateral especially in as far as these agreements are English law governed. While title transfer collateral transactions are widely used, they are not without (legal) risks. The chapter focuses particularly on the so-called recharacterisation risk, which may jeopardise title transfer collateral transactions both under EU laws and US law.