We do not believe it is possible for the bank to perfect the customer’s interest in the securities purchased under the repurchase agreements because federal regulations governing sales of securities by financial institutions restrict banks from perfecting security interests over such securities under Illinois law.

Federal Regulations Governing Repurchase Agreements

Financial institutions selling government securities pursuant to repurchase agreements are exempt from most federal regulations governing government securities dealer activities. 17 CFR 401.4(a)(2). However, Section 403.5(d) still applies, and that requires a financial institution that “retains custody of securities that are the subject of a repurchase agreement” to “[m]aintain possession and control of securities . . . in accordance with § 450.4(a) of this chapter . . . .” 17 CFR 403.5(d)(1)(vi). Section 450.4 states that the institution must maintain such possession and control “by segregating such securities from the assets of the depositary institution and keeping them free of any lien, charge or claim of any third party granted or created by such depositary institution.” 17 CFR 450.4(a)(1).

Illinois Law Governing Perfection

The Illinois Uniform Commercial Code (UCC) governs. In order to perfect the customer’s security interest in the securities, the customer must establish “control” over the securities. UCC, 810 ILCS 9-314(c). “Control” over an uncertificated security is established if: (1) the bank delivers the uncertificated security to the purchaser; (2) the issuer agrees to comply with the purchaser’s instructions without the bank’s consent; or (3) a third party has control of the security on behalf of the purchaser. UCC, 810 ILCS 8-106(c)(1)–(3)9-106(a).