Cash collateral consists in earmarking a sum of money as security for an obligation. Rather than relying on a personal undertaking, the beneficiary holds a security made up of cash that is genuinely blocked and can be called upon immediately in the event of default.
A cash security
The funds are ring-fenced and earmarked for the security: they cannot be used for any other purpose, by either the debtor or the beneficiary, for as long as the secured obligation lasts. Legally, the earmarking may take the form of a pledge over an account or a receivable; economically, it gives the beneficiary the certainty that the security is real and available.
Difference with the autonomous guarantee
The autonomous on-demand guarantee is a personal security: it is a guarantor's undertaking to pay. Cash collateral is a security over real funds. The two can in fact be combined, an autonomous guarantee sometimes being backed by cash collateral to reinforce its strength.
In which transactions is cash collateral used?
Cash collateral is found in a variety of contexts, whenever an obligation must be secured by real funds rather than by a mere undertaking:
- Securing a rent or an ongoing contractual obligation;
- Counter-guaranteeing an autonomous guarantee issued by an institution;
- Covering a representations and warranties undertaking in a sale;
- A security backing a financing arrangement or a commercial transaction.
The role of the escrow
The escrow agent is the natural instrument for cash collateral. It holds the earmarked funds on a dedicated account, prohibits any use contrary to the agreement, and arranges their release — to the beneficiary in the event of a call, or to the provider once the obligation is discharged — only on the agreed conditions.
Are you setting up cash collateral? Fidens holds the funds earmarked for the security on a dedicated CARPA account.
Frequently asked questions
What is cash collateral?+
It is a security made up of a sum of money that is blocked and earmarked to secure an obligation. Unlike a personal guarantee, it rests on real cash that can be called upon immediately in the event of default.
What is the difference between cash collateral and an autonomous guarantee?+
The autonomous guarantee is a personal security: a guarantor's undertaking to pay. Cash collateral is a security over real funds earmarked for the obligation. The two can be combined, an autonomous guarantee sometimes being counter-guaranteed by cash collateral.
Who holds the funds of cash collateral?+
A trusted third party, such as an escrow lawyer. They hold the funds on a dedicated CARPA sub-account, prohibit any use contrary to the agreement and arrange their release only on the agreed conditions.
A transaction to secure?
Fidens sets up the escrow of the price on a CARPA account, under the responsibility of a lawyer.