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ISSUES ARISING IN PRECIOUS METALS LEASING
LUGANO COMMODITY FORUM
Sarah Taylor, Partner
T: +44 207 264 8102
sarah.taylor@hfw.com
Holman Fenwick Willan world office map
Why are precious metals leased?
 Leasing is an integral part of the precious metals market
 Industry can borrow metal rather than buy – relevant if metal is
intended for a process and manufacturer will not obtain purchase
price for his goods until the process is complete
 Increases cash flow to Owner
 Turn a liability into an asset by earning money on it
Essential Ingredients of a Lease - Parties
 Lessor
 Lessee
 Custodian (if different to the Lessor – many banks are not clearing
banks)
Essential Ingredients of a Lease - Accounts
 Most common form of lease is unallocated
 Both parties are account holders in the same clearing bank
 Accounts can be maintained in different jurisdictions – two of the
most common being London and Zurich
 Different locations can become relevant if the metal is converted to
an allocated account
Essential Ingredients of a Lease - Transfer
 Unallocated = no physical transfer
 Book entry between accounts with the same clearing bank
 Accounts do not have to be in the same physical location so:
 Bank A leases unallocated gold to Lessor B
 Bank A maintains unallocated gold account in London
 Bank A makes a transfer loco Zurich
 Lessor B receives gold into its unallocated account loco Zurich
 Lessor B transfers the gold to an allocated account loco Zurich
Essential Ingredients of a Lease: Title
 Where leasing unallocated metals:
 The lease does not involve the transfer of title – this remains with the
lessor
 The account holder has a contractual claim against the depositary and
will be an unsecured creditor
 The account holder can transfer the metal to another account or convert
to an allocated metal account
 The unallocated lease will provide for the transfer of metal back to the
lessor – because the metal is unallocated, it is not identified by bar and
therefore the lessee can convert the unallocated metal to allocated metal
and use it / transfer it / dispose of it, provided that at the end of the lease
period it has sufficient unallocated metal in its account to transfer back to
the lessor
Essential Ingredients of a Lease: Title
 Where the metal is allocated, the issue of title is more difficult
 In a true lease, where title does not transfer, the lessee must either
transfer back to the lessor
 the same metal (precluding use in any process); or
 equivalent metal (permitting use in any process)
Issues Arising - The Lex Situs
 It is important to consider the law of the place where the metal is
physically located ("lex situs"),
 This will determine whether a proprietary interest is effectively
created.
 The general rule is that title to the precious metals will be governed
by the law of the place where the precious metals are situated at
the time of the event said to confer title.
 It is important to take relevant due diligence advice so that rights
can be properly ascertained
Inherent Risk: Title
 Where a lessor seeks to retain title to unallocated precious metal
under a lease, under English law, notwithstanding a retention of title
clause, title will pass where the precious metal is "converted" – i.e.
where its nature is changed by a chemical process.
 In such circumstances the lessor may have a charge over the
material produced by any conversion process but it is necessary
under English law (and commonly a requirement in other
jurisdictions) for such a charge to be registered in order to be
"perfected".
 It may be possible to mitigate this risk by registering the precious
metals lease at the time each confirmation is entered into and the
lessor should ensure that its local jurisdiction due diligence covers
this issue
Inherent Risk: Insolvency (1)
 Under English law, where title of precious metals under a lease is
transferred to the lessor, in an insolvency of the lessee the lessor
ranks as an unsecured creditor.
 Under English law, where title is retained under the lease the lessor
will rank as a "super priority" creditor.
 An unallocated lessor has rights as a "tenant in common" over
precious metal in the lessee's unallocated account, and so it would
rank in accordance with the proportion of its contribution: i.e. If the
lessor contributed 50% of the metal into the account, it will be
entitled to receive 50% of the metal remaining in the account. Due
to the immediate and frequent nature of unallocated transfers, it
may be difficult in practice to prove whose metal remains in the
account at the date of insolvency and in what proportions.
Inherent Risk: Insolvency (2)
 A lessor can to an extent mitigate the risk by providing that the
master agreement and all leases thereunder automatically
terminate on insolvency.
 Under English law, the precious metal would be returnable to the
lessor upon the lessee's insolvency. Again, practically speaking
where there is no or insufficient precious metal in the lessee's
unallocated account, there may remain a risk to the lessor, but
where there is sufficient precious metal this would protect the
lessor's proprietary interest.
 The location of the lessee is relevant in terms of the applicable
insolvency regime that will apply in the event of the lessee's
insolvency, and so this is an issue that should also be explored in
the local jurisdiction due diligence exercise.
Inherent Risk: REACH
 ECHA Regulation on hazardous chemicals
 Only relevant for allocated metal
 Unallocated metal is akin to a financial transaction
 Allocated metal currently comes within REACH
 Relevant for transfer of allocated metal into the EU
 The importer must be registered to import the metal within the EU:
 If the lessor remains the owner of the metal, then this is an important
consideration for terms of the underlying lease.
Is there a need for credit support?
 As with any commercial transaction, the bank will consider whether
credit support is required
 This can take many forms, but the most common are:
 Parent company guarantees, payable on demand in the event of the
default of the subsidiary;
 Margin Agreements
Lease or Loan?
 The essential difference between a lease and a loan is that with the
former title is not transferred to the lessee. With a loan, title to the
metal is transferred.
 The consequences for transferring title are many, but the main ones
are:
 Balance sheet treatment
 Taxation Issues
 Regulation
Lease or Repo?
 Repo or "sale and repurchase" agreements are common,
particularly for bullion
 The metal is sold to the bank with complete transfer of title, and
either a forward sale back to the counterparty is entered into on the
same date; alternatively a put option is sold to the bank
 Repos are usually the subject of "True Sale Agreements" –
important because otherwise there is a risk of recharacterisation:
i.e. the sale and repurchase is recharacterised as a financing.
 This can have serious consequences including:
 Balance sheet consequences for the counterparty (breach of covenants);
 Balance sheet consequences for the bank;
 Regulatory consequences for both parties
Summary
 Precious Metals leases are a common, effective commercial
transaction;
 Drafting is key: particularly with regard to title and delivery basis;
 Other options are available where retaining title is either too risky or
has potential reputational consequences for the bank
 Repos must be carefully structured to avoid the risk of
recharacterisation
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