Intermediary Risk in a Global Economy

Abstract

Worldwide financial markets increasingly depend on structures that reduce risk by interposing intermediaries between investors and the companies obligated to pay them. If the intermediary holds assets solely in a custodial capacity, this risk traditionally is addressed by agency and trust law. Increasingly, however, intermediaries in a wide range of national and international transactions - including securitization, the trading of investment securities, and the sale of loan participations - hold assets in which they, as well as investors, share beneficial rights. The sharing of these rights creates a risk (intermediary risk) that, if an intermediary fails, its creditors can claim against assets that the intermediary holds for its investors. This type of risk has not been widely studied. Yet its systemic nature makes it potentially virulent: the failure of an intermediary may trigger a chain reaction of failures of investing institutions. For this reason, among others, the Hague Conference on Private International Law recently placed the issue of intermediary risk on its priority agenda for 2001-02. My article analyzes how legal systems should respond to this type of risk.