6 Security Interest and Right of Use

This chapter assesses the important elements of collateral transactions under which the collateral taker receives a security interest in the collateral while the collateral provider retains some form of proprietary interest in the collateral. In the EU context, the 'right of use' that is commonly agreed under a security collateral transaction is one of, if not the most, important issue in this regard. The right of use has its origins in prime brokerage agreements and the ISDA Credit Support Documents governed by New York law. The chapter then discusses the risks associated with what is also called 'reuse' and 'rehypothecation'. It also considers the right of use before and after the implementation of the Collateral Directive. Moreover, the chapter addresses the legal consequences of the collateral taker's exercise of the right of use. Finally, it examines US law. In particular, because the right of use has limited recognition under the Uniform Commercial Code, more focus will be on how it is employed pursuant to contract and subjected to extensive regulation intended to protect customers.