Regarding “movable” physical collateral (e.g. cars, ships, airplanes, etc.), the EMF-ECBC considers the requirements to: (i) identify, in a “legal opinion”, “the set of jurisdictions where the collateral could move during the lifetime of the loan according to the collateral agreement”, and (ii) ensure that the collateral agreement is legally effective and enforceable in all of them, to be extremely burdensome.
As a general rule, it is not market practice to require assets to be operated or located within a limited number of jurisdictions. Furthermore, by their intrinsic nature, “movable” physical collaterals cannot be under the strict control of lenders and at the same time lenders cannot limit ex-ante the jurisdiction to which they could move. Rather it is more common to specify in which jurisdictions the asset may not be operated. As such, this requirement appears very difficult to fulfil, with the consequences that this kind of CRM technique will not be recognised. Uncertainty in the scope of application of the regulation could result in a general and significant penalisation of entire sectors, such as those related to shipping, aviation or automotive, with negative impacts in terms of conditions and access to credit for the firms operating in this market, regardless of the intrinsic risk profile of that firm or operation. Furthermore, the risk linked to jurisdiction to which the property could be moved is usually embedded within LGD models through the geographical drivers, and the haircut internal estimations are more prescriptive for this type collateral.
We therefore propose to delete the requirement in Article 20(d) or, alternatively, to identify a set of prohibited jurisdictions.