Cedel Bank, the Luxembourg-based clearing organization, has unveiled the Global Credit Support Service (GCSS), a new legal structure for holding and transferring collateral interests in securities. Designed to cover all credit exposures, GCSS will be particularly useful for counterparties to swaps who may wish to have their transactions collateralized on a regular mark-to-market basis.
Neither English nor New York law provides a completely fail-safe system for holding or transferring a security interest across international borders. If, in a derivatives transaction, party A goes bust, counterparty B cannot be certain that A's receivers will give B's security interest in the collateral provided by A (in another jurisdiction) priority over A's other creditors. However, Luxembourg law recognizes the concept of the fiduciaire (fiduciary). A fiduciary has legal title to the collateral which it holds. If collateral provided by A for B's benefit were held by a fiduciary, then A's receivers would be powerless to stop the fiduciary, as legal owner of the collateral, from transferring it to B. It is this feature of Luxembourg law which Cedel Bank is exploiting, in addition to sophisticated law on book-entry securities custody and settlement. To understand the significance of this, it is worth examining the way on-exchange derivatives trading occurs.