Pledging a securities account: a complete guide to securing your financial assets

The pledge of a securities account is a major financial guarantee in the economic landscape, offering an effective means of securing a debt using a portfolio of assets. While its mechanism is recognised for its power, its technical implementation, clarified by an abundance of case law, may seem complex to the uninitiated. The purpose of this article is to provide you with a clear and structured overview of this modern security, whose regime is currently defined in article L. 211-20 of the French Monetary and Financial Code. We will cover its fundamental principles, from its creation to its realisation, each aspect being explored in greater depth in dedicated articles that explore the relevant case law. Mastery of its workings is an undeniable asset for any manager or investor. For tailor-made analysis and advice, our firm offers support from a lawyer with expertise in security interests and financial guarantees.

What is a securities account pledge?

The pledge of a securities account is a security interest in a set of intangible financial assets, rather than in tangible property. This distinguishes it from a pledge, which relates to tangible movable property. In practical terms, a debtor, the settlor, assigns a portfolio of financial securities as security for the payment of a debt to a creditor. Because of its flexibility and effectiveness, this technique has become a pillar of security law, the contours of which are constantly being refined by the courts.

A security interest in cashless assets

The assets concerned by this type of pledge are by nature dematerialised, or 'cashless'. They are mainly financial securities such as shares or bonds, but also sums in any currency (such as dividends or interest) held in the account. The very existence of these assets is evidenced by an entry in an account or, more recently, in a shared electronic recording device (DEEP), often likened to a blockchain. This concept has been refined by case law.

A legal framework defined by the Monetary and Financial Code

Originally introduced by a law of 1996, published in the Journal Officiel on that date, the securities account pledge system has undergone major changes. Successive reforms, notably by ordinance in 2006 (followed by a major implementing decree in October 2009), 2017 and 2021, have replaced the old term "pledge" with "pledge", extended its application to securities registered in a DEEP and clarified its regime, notably through case law in the event of insolvency proceedings. These texts, the current version of which is incorporated in article L. 211-20 of the Monetary and Financial Code, which bring French law partly into line with European Union practice, have forged a modern and attractive security.

What assets form the basis of pledge?

The basis for pledging securities accounts is precisely defined by law. It covers a wide range of financial securities and, unless otherwise agreed, extends to the income they generate. It is therefore essential to clearly define the scope of the guarantee by identifying the eligible assets, a point that administrative case law has sometimes had to clarify.

Financial securities concerned

The rule is that all financial securities that can be book-entry securities can be included in the pledge. This includes equity securities issued by a company (shares, warrants), debt securities (bonds, negotiable debt securities) and units in undertakings for collective investment (UCIs), such as traditional securities. The sine qua non condition is that these securities are actually registered in a securities account or identified in a DEEP. On the other hand, certain securities, such as SCPI units, are subject to a separate pledge regime under civil law and cannot be included. Case law has gradually refined the definition of eligible assets.

The inclusion of fruit and produce

Unless otherwise agreed, the guarantee automatically extends to income generated by the securities. Dividends paid on shares or interest on bonds, known as "fruits and proceeds", are therefore included in the pledge. These sums are generally paid into a dedicated cash account, the 'fruits and proceeds' account, which then forms an integral part of the collateral, unless otherwise agreed, and increases the overall amount pledged. This provision increases the security of the creditor, whose guarantee can be assessed over time, a practice that has been validated by case law.

How is a securities account pledged?

The pledging of a securities account is subject to specific formalities designed to ensure that it is valid and enforceable against third parties. The creation of this security interest is based on a formal declaration and the isolation of the pledged assets. For a full analysis of these steps, our dedicated article details formalities and obligations for pledging a securities account.

The pledge declaration: essential formalities

The founding act of the pledge is a written declaration. This official document, which must be a declaration signed by the account holder, contains compulsory information: identification of the parties, description of the secured claim and inventory of the securities initially pledged. The case law of the Court of Cassation is consistent on this point: without this formality, the pledge is unenforceable. The date of the pledge declaration is decisive, as it determines the creditor's ranking number in the event of successive pledges on the same account.

The special account or identification by computer process

For the pledge to be effective, the securities securing the debt must be clearly identified. This is done by recording them in a "special account" opened in the name of the holder, but which has a specific allocation for the collateral. For securities on blockchain, this separation is ensured by identification via an IT process. The account keeper or DEEP manager is responsible for ensuring that this identification is properly implemented, an obligation whose importance has been emphasised by case law.

The operation and dynamic development of the pledge account

Far from being a fixed guarantee, the pledge of a securities account is a living guarantee, the flexibility of which has been confirmed by case law. The content of the pledged account can change throughout its term, either automatically or at the discretion of the parties. This flexibility, encouraged by the European Union, is one of its major assets. To find out more, see our guide on management and dynamic development of the pledged securities account.

Universality evolving through real subrogation

The pledged account is a "universality". The security relates to the account as a whole and not to each security individually. If a security is sold, the proceeds of the sale are automatically substituted for the security sold in the pledge by subrogation in rem. Similarly, the parties may enter into an agreement whereby the pledgor adds new securities to supplement the collateral, particularly if the financial markets fall. This flexibility, confirmed by a large body of case law, is a major advantage.

The possibility of successive pledges

The law expressly provides for the creation of several pledges on the same securities account. The owner of a securities portfolio may therefore offer it as collateral to several creditors. The ranking of each pledged creditor is then determined by the chronological order of the pledge declarations (the registration number being taken as proof). The first-ranking creditor will be paid first, a rule that case law rigorously applies, followed by the second-ranking creditor, and so on.

Enforcement of pledges in the event of non-payment

What happens when the debtor can no longer honour his debt? The creditor can then realise the pledge, i.e. use the pledged assets to obtain payment. This realisation procedure, the details of which were specified by the decree of 24 December 2018, is renowned for its speed, but remains subject to strict conditions and extensive case law. You can find all the information on procedures for enforcing securities account pledges in the event of payment default in our dedicated article.

Terms and conditions of the guarantee

To trigger realisation of the pledge, the claim must be certain, liquid in a defined amount and due. The creditor must send formal notice to the debtor. If payment is not made within eight days, or within any other period provided for in the agreement and validated by case law, the pledgee may proceed to realise the assets. If necessary, the opinion of an expert may be required.

The different methods of production

The creditor has several options. They can take direct ownership of the sums of money available in the account. In the case of securities admitted to trading on a trading platform (such as a regulated market), the creditor has the choice of selling them on the market or taking full ownership of them. Case law strictly regulates these procedures in order to protect the debtor. In the case of unlisted securities, realisation is generally achieved through a public sale or a court-ordered allotment, unless a commissory agreement has been entered into, allowing direct appropriation after appraisal of the value of the securities.

Collateral in bankruptcy proceedings

The effectiveness of a security is fully appreciated when the debtor is facing difficulties, such as a safeguard, reorganisation or judicial liquidation procedure. The pledge of a securities account offers creditors particularly robust protection in this context, as demonstrated by consistent case law since a key order in October 2006. We analyse this point in detail in our article on specific features of securities account pledges in insolvency proceedings.

The secured creditor's legal right of retention

The French Monetary and Financial Code gives the pledgee a right of retention over the account assets. This right of retention enables the pledgee to retain the collateral and to avoid the competition of other creditors, even preferential creditors, by virtue of a rule specific to the Monetary and Financial Code that derogates from the general law of the Commercial Code. In the event of the liquidation of the constituent company, the creditor will be able to realise its pledge and be paid from the proceeds of the sale of the securities before virtually all other creditors, ensuring a high probability of recovery of its claim, as confirmed by established case law.

Securities account pledging is an effective and adaptable guarantee tool. Its correct implementation and management require precise legal expertise to secure credit transactions and anticipate difficulties. Our team of lawyers can provide invaluable assistance in securing your financial transactions.

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