IFI Update London, August/October 2008 - Part 2

Extract

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IFI Update London, August/October 2008 - Part 2

Securities lending transactions

A judge in the Federal Court of Australia has considered whether

a securities lending transaction might constitute the giving of

security by the party which "lent" the securities or,

alternatively, whether the recipient of the securities might be

taken to have charged them for performance of its obligation to

transfer back to the lender equivalent securities. The case is

relevant in England, and should be regarded as persuasive

authority, because the Australian judge applied a classic analysis

of English law in finding the answers to those questions. He also

decided that the same result would have followed under the law in

the USA.

The transaction between the parties took place under a

Securities Lending and Borrowing Agreement that they had entered

into, which largely followed the form of standard documentation

that had been prepared by industry bodies, including the

International Stock Lenders Association and its Australian

counterpart. Under the transaction, the provider or lender of the

securities (Party A) agreed to transfer the securities to the

recipient or borrower of the securities (Party B) on the basis that

Party B was under an obligation, at the date when required under

the agreement (the retransfer date), to transfer to Party A

equivalent securities to those originally transferred by Party A

under the agreement (ie. equivalent as to type, nominal value,

description and amount, with adjustments to take account of

dividends, redemptions and such like that occurred in the meantime

in relation to the securities). In consideration of the transfer of

the original securities, and at the same time, Party B was to pay

cash collateral to Party A, calculated by reference to the value of

the original securities at the time they were transferred (although

the cash collateral wou...

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