3.3. The use of repos
There is no special legislation regulating repos under Swedish law, so an interpretation of the agreements has to be made by applying general rules and principles <1>. As previously mentioned, the common purpose of a repo is to use underlying assets as security. Often the repo is structured as an outright transfer of the collateral from the collateral-giver to the collateral-taker together with an option for the collateral-giver to re-acquire similar assets <2>. As the obligation to return the collateral is not restricted to the original assets, the collateral-taker has an unlimited right of disposal of the collateral.
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<1> Cf.: Millqvist G. Swedish Credit Security Law: A Case for Law Reform, (2004) EBLR. P. 865 - 866.
<2> Cf.: Prop. 2004/05:30. P. 31 and the discussion on genuine and false repos. It is stated that the latter form does not always require that a retransfer takes place.
Under
Art. 6(1) of the Financial Collateral Directive, Member States must
ensure that a title transfer financial collateral arrangement can
take effect in accordance with its terms. Recital 13 states that the
aim of this provision is to protect the validity of financial
collateral arrangements which are based on the transfer of full
ownership of the financial collateral by eliminating the risk of
repos being re-characterised as security interests. In the Swedish
version of the Directive the translation of "title transfer
financial collateral arrangement" specifically refers to
mortgages (Sw.:
).
The English version states that a "title transfer financial
collateral arrangement" means an arrangement, including
repurchase agreements, under which a collateral-provider transfers
full ownership of financial collateral to a collateral-taker for the
purpose of securing or otherwise covering the performance of relevant
financial obligations. It should be noted that both the English and
the Swedish versions specifically refers to repurchase agreements
<1>. Furthermore, in the Swedish preparatory works repos are
characterised as mortgages. It is, however, emphasised that the
interpretation of each agreement shall be made based on its contents
and not the label, and that repos under Swedish law do not belong to
any special legal category or type of agreement. N evertheless, in
both Prop. 2004/05:30 and Ds 2003:38 the assumption is that repos
should be classified as mortgages, i.e. contrary to the intention of
Art. 6 <2>. It is, moreover, presumed that the rules on
transfer of title under the Financial Collateral Directive are
compatible with Swedish law on mortgages <3>.
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<1> See also Recitals 3 and 13 Directive.
<2> Prop. 2004/05:30. P. 30 - 31; Ds 2003:38. P. 43 - 44.
<3> Prop. 2004/05:30. P. 28 ff.; Ds 2003:38. P. 40 ff.
Irrespective of these statements, it can be questioned whether a repo where the collateral-taker has a right to use the collateral as the owner should be characterised as a mortgage. The answer to this question depends, as already indicated, on the interpretation of the agreement <1>. If B has an unlimited right of disposal and the requirement for identity of the collateral is not upheld, it is difficult to claim that the transaction is a mortgage <2>. Instead, it would be more appropriate to interpret the arrangement as an outright transfer. Consequently, the only form of security involved would be the possibility to set off the value of the collateral against the underlying obligation.
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<1> Cf.: Myrdal S. . P. 50 - 51.
<2>
Cf. Karlgren's definition of a mortgage as an outright transfer which
aims to serve as security over a performance and where it is agreed
that the transferor shall have a right to repurchase respectively
retain the transferred upon fulfilment of the performance (H.
Karlgren,
och
av
egendom, SvJT, 1936. P. 165; idem.,
(Norstedt &
,
1952, 1958). P. 11 - 13, 17.
The characterisation of the agreement has important consequences. Should the agreement be interpreted as a mortgage, A is deemed to have a protected right to repurchase the collateral even if B is bankrupt <1>. Another effect is the applicability of § 37 of the Contracts Act and the prohibition against forfeiture of collateral, which applies to security arrangements <2>. The characterisation may also affect the application of voidance preference rules under the Bankruptcy Act <3>.
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<1> Cf.: . P. 443; Karlgren H. och . P. 116 - 117; idem, . P. 183 ff.; Hessler H. . P. 450 - 451; Rodhe K. Handbok. P. 196.
<2>
Helander B.
i
egendom (Fritzes AB, Stockholm, 1984). P. 704; cf.: NJA, 1949. P.
744; NJA, 1952. P. 256.
<3> Cf.: Helander B. . P. 704.
It seems that upon interpretation of repos it is insufficient to look only at the economic rationale and the intention of the parties when determining whether the transaction is a mortgage or not. Even if A has a right to reacquire the equivalent collateral, and the intention is to secure the underlying obligation, it is also intended that B shall have the right to use the collateral as the owner. One possibility would be to interpret such agreement as a security agreement with an option for the collateral-taker to acquire the collateral.
Other possible factors that could be relevant when interpreting the agreement would be to evaluate B's right of disposal, A's right to repurchase the collateral, and which party bears the risk for the collateral. If A bears the risk, B has a right to require A to pay the difference between the price received upon sale of the collateral and the required value of the collateral under the agreement should there be a deficit. In this case the agreement should be interpreted as a security agreement. If B bears the risk, the agreement is an outright transfer. In this case, B will bear any loss that may arise as a result of the sale. B also takes the risk that the price of the collateral will go up after the disposal and that it will make a loss upon repurchase of the equivalent collateral <1>.
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<1> Rodhe K. Handbok. P. 148; cf.: Karlgren H. och . P. 25 - 26.
In conclusion, the legal characterisation and thereby the legal effects of the repos discussed in this Section are unclear <1>.
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<1> Walin G. . P. 20 - 21, 34; cf.: Statement by the Law Faculty Committee, Stockholm University (2003 - 09-08) on the implementation of the Financial Collateral Directive and the Report Ds 2003:38.