Transfer Of Possession Or Control As A Prerequisite To Establish Valid Financial Collateral

The practice adopted by some banks in EU member states to structure financial collateral pledges as floating charges may result in invalidation of the pledges.

A major requirement for establishing valid collateral under the EU Financial Collateral Directive 2002/47/EC (the Directive) is to transfer "possession or control" over the collateral to the collateral taker. This requirement is often overlooked in practice, partly because the Directive provides no express guidance on the meaning of "possession or control".

In Bulgaria in particular, until recently, this requirement was entirely omitted from the local act transposing the Directive, and introduced for the first time in August 2013. Meanwhile in a large number of local banking transactions the financial collateral regime was extensively used without any measure being taken to secure that the collateral taker is always in a position to assess the financial obligations (secured by the pledge) against the value of