‘Full ownership’ and ‘full entitlement’ of financial collateral in the Collateral Directive: A Gaian or flexible approach?

Published on: Author: Ruth O'Donnell Leave a comment

Obiora Ezike, a doctoral student at the School of Law, presented at the Glasgow Forum for Scots Law on 6 December 2017. The following is a summary of his presentation.

You can watch a recording of the talk and subsequent discussion at: https://youtu.be/sRhezGNyNyw

There is usually a functional theory behind EU directives which means that they (directives) ought to be system-neutral and without doctrinal commitments. The question is whether this is the case with specific reference to the definition of a title transfer in the Financial Collateral Directive. The Financial Collateral Arrangement Directive defines a title transfer financial collateral arrangement as an arrangement under which full ownership of, or full entitlement to, financial collateral is transferred from a collateral provider to a collateral taker. This provision will seem to endorse a scheme set out by Gaius, the Roman Jurist, in his Institutes. The scheme divides things into corporeal and incorporeal things. The former refers to things that are physical or tangible, while the latter refers to things which are intangible, i.e. rights (financial collateral is an example of a right). However, the scheme does not refer to ownership which is a real right in many Civil law systems. Accordingly, the absence of ownership has led to several responses to the scheme which also has consequences for the provisions of the Collateral Directive.

The first response to the scheme, by the Pandectist, maintain that the Gaian scheme is about a classification of patrimonial rights. The Pandectist differentiate between patrimonial rights that have material existence (i.e. corporeal things) and other patrimonial rights that exists only as rights (i.e. incorporeal things). The Pandectist maintain that ownership merges with the physical thing (corporeal things) so that while the Gaian scheme refers to both corporeal and incorporeal things, only corporeal things can be the valid object of ownership; incorporeal things cannot be owned. This view of the Pandectist is further refined by Professor George Gretton who argues that ownership ought to be distinguished from titularity, and that the relationship between a person and his personal right (for example, financial collateral) is not one of owing but ‘having’ (i.e titularity). He argues that ownership is one type of primary right, and that in the same way that ownership, as one type of primary right, may be had in a corporeal thing, it is also possible to have a primary right in a personal right. The distinction is that while the primary right over a corporeal thing is real (i.e. primary real right), the primary right in a personal right is itself personal (i.e. primary personal right).

The second response to the scheme, by Shalev Ginossar, endorses ownership of both corporeal and incorporeal things. Ginossar does not define ownership as a real right or as a right at all, but as a relationship which links a person with the elements of his patrimony (corporeal and incorporeal things). According to this view, ownership is not a real right because, unlike other real rights (e.g. a security right), it does not impose any positive obligation.

The third response, by Professor Kenneth Reid, also endorses the Gaian scheme. According to Professor Reid, in the same way that a person can have a real right in a tangible thing (e.g. a car), so also the person can have the real right of ownership in a personal right (e.g. financial collateral). This is to say that a person can have a right in a right. However, one notable difficulty with this view is that it leads to the problem of infinite regression: that is, because ownership is a right and a right is an incorporeal thing, it is possible to own the right of ownership and to own successive right of ownership in a right of ownership, and so on. Thus, the chain of ownership of ownership continues insofar as the right of ownership is thing which can itself be an object of a right of ownership.

Obiora, in summary, argued that these three conceptual responses have different significance for the Collateral Directive which appears to endorse the Gaian Scheme as an analytic truth. First, it is possible that the Gaian scheme is correct, and that financial collateral can be the object of ownership. This will accord with the formulation in the Directive. In this regard, it is the responsibility of the systems which have different doctrinal structures, such as Germany or Netherland, to accommodate that conclusion into their various systems. However, this view will suggest that the directive endorses one doctrinal structure by the directive at the expense of another: is it system-neutral? Secondly, it is also possible that the Gaian Scheme is not the answer. In this case, a problem arises as to whether the answer endorsed by the Directive is wrong, because financial collateral cannot be owned. This essentially also suggests that there are other available conceptual or doctrinal structures aside that endorsed by the directive. Thirdly, it may be a matter of convention how systems choose to characterise the issue of ownership of collateral, in which case there is no single answer to the question: the German system may have solutions different from Scots law. Lastly, it is also possible that the Directive is not committed to the Gaian scheme. In this regard, the term ‘full entitlement’ may be treated as an alternative for systems which do not recognise the ownership of personal rights. However, if that term is an alternative to full ownership, it is difficult to see why the directive still uses the term ‘full ownership’ and does not simply use the term ‘full entitlement’ to embrace the different doctrinal structures.

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