Lender Beware: The custody assets you are lending against may not actually be held in custody.
Lenders to funds and other borrowers often extend credit based on a security interest over assets that are held in custody. The lender is granted a security interest in the relevant custody account and all of the cash, securities and other assets therein, and then perfects the security interest by entering into a “control agreement” with the custodian. The lender may have made two big assumptions: (1) the custodian has “custody” of the assets, and (2) upon receipt of instructions from the lender after default, the custodian can readily transfer or otherwise dispose of the relevant assets. Upon closer examination, however, these assumptions may prove to be incorrect.
There are two broad categories of assetsRead More