The transfer of rights in securitisations: A law and economics analysis

Securitisation is a funding mechanism which typically involves the transfer of multiple loan receivables and related security rights. A common feature in the assignment laws of countries is a requirement that the transfer should be made public in order to be fully effective against third parties. The principle underlying that requirement is that assignments affect third parties, and because of that, they should only arise when they are visible to third parties.

The publicity act traditionally required for transferring loan receivables is that the debtors should be notified of the transfer. Notification to debtors makes the assignment visible in the sense that third parties can ascertain the true “owner” of the loan receivable by enquiring from the relevant debtor. Some transfer methods, such as the English equitable assignment and the Scottish trust, do not require debtor notification or any other true form of publicity for their validity. However, notification may be used to give increased protection against third parties and the debtor. One extreme exception to the publicity principle is an assignment under arts 1321 to 1326 of the French Civil Code 2016. That assignment does not require notification or any publicity for it to be fully effective against third parties. But notification is required for the assignment to be enforceable against the debtor.

Regarding the transfer of security rights, the publicity required usually depends on the type of property and the legal system involved. In some cases, registration in a public register is required. Registration makes the transfer visible in the sense that third parties can ascertain the actual “owner” of the security right by checking the relevant asset register.

Given the large number of debtors and security rights in securitisation, notifying each debtor and registering each security right can be prohibitively costly. The requirement of publicity also makes transfers of future receivables impracticable, as there will be no debtor to notify, or security right to register, at the time of the transaction. Moreover, the transaction parties may prefer to keep the transfer secret for genuine commercial reasons.

Countries are liberalising their assignment laws in a bid to facilitate securitisation in their jurisdictions. Businesses have also devised workarounds that circumvent the publicity requirements when structuring securitisation transactions. These laws and workarounds (“the solutions”) differ in their approaches and proprietary effects. The differences, in turn, affect the development of securitisation in various jurisdictions. This book compares the solutions available in a selection of civil law, common law and mixed law systems for transferring money claims and related security rights in securitisations, using France, England and Scotland as focus jurisdictions. It aims to determine the solution, or a model solution, that is most efficient for securitisation, using a law and economics approach.

The book is organised into two parts. Part one considers the role securitisation played in the 2007/08 financial crisis, and why securitisation still appeals to businesses and regulators despite the crisis. It contends that securitisation amplified the losses resulting from the crisis, but it was not the primary cause of the crisis. It demonstrates that the credit events that followed the crisis stimulated global efforts to revive the securitisation market. The analysis in this part lays the background for the attempt in part two to offer solutions that will further the revival effort.

Part two focuses on the comparative analysis. It establishes that the preferred solutions in the focus regimes are the Scottish trust, the English equitable assignment and the French bordereau. The assignation by registration approach recently adopted in the Moveable Transactions (Scotland) Act 2023 (hereafter “the registration solution”) is also considered in the comparative analysis. It is contended that although the registration solution is the most efficient of the different approaches examined, it is not Pareto optimal. The book proposes a model solution that improves the registration solution and achieves an outcome closest to Pareto optimality. It argues that the model solution is transplantable to French law but will require some refinements for it to be transplantable to English law.