It is important to ensure that the collateral rights are enforceable under the relevant law and that the agreements provide for keeping collaterals out of the bankruptcy provisions – in case of bankruptcy, the bankruptcy administrator has the discretion to decide which obligations to enforce and which ones to write off after close out netting – if collaterals are part of the closeout netting, then there may be a possibility of write offs as part of bankruptcy proceedings.
The crisis has also underlined the risks inherent in re-hypothecating assets. Where assets are re-hypothecated, they are at best difficult to identify and extract in the event of bankruptcy. At worst, the assets may never be located, leaving clients to stand in line with other creditors to try and get their assets.