Transcript The Collateral Directive as part of the Financial Services

Deutsche
Bundesbank
The Financial Services Action Plan and
Financial Markets Legislation on
Collateral
A presentation by Olaf Christmann
Legal Counsel
Deutsche Bundesbank
Delivered on the occasion of the Annual Meeting of
the Deutsch-Nordische Juristenvereinigung on 13
September 2002 on the premises of the ECB
Deutsche
Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Overview
A. The Financial Services Action Plan
B. Financial Markets Legislation on Collateral
I. Settlement Finality Directive
II. Collateral Directive
III. Comparison
C. Outlook
D. Excursus - The Hague Convention
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Deutsche
Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
A. Adoption of Financial Services Action Plan in 1999 (COM
(1999) 232); based on the findings of the FSPG
(www.europa.eu.int/comm/internal_market/en/finances/general/
actionen.pdf); last progress report dated 22 July 2002
I. 5 main goals:
1. conceive a legislative apparatus capable of dealing with new
legislative challenges (comitology procedure)
2. eliminate remaining capital market fragmentation
3. exploit the commercial opportunities offered by a single
financial market
4. encourage closer co-operation of supervisory authorities
5. develop integrated EU infrastructure to underpin retail and
wholesale financial transactions
Overall goal: minimise cost for capital and intermediation
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
II. The Action Plan contained new priorities for a single financial
market:
1. Wholesale Market
• Common rules for an integrated securities and derivatives
market (ISD)
• Raising capital on a EU wide basis (Prospectus Directive)
• Harmonise Financial Reporting
• A single market framework for supplementary pensions
funds
• Collateral - our topic - SFD/CD
• Secure and transparent environment for cross-border
restructuring (failed Take Over Directive)
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
2. Retail Markets:
• Provide Information and transparency (e.g. in Directive on
cross border credit transfers)
• Redress procedures in extrajudicial bodies
(Schlichtungsstelle)
• A balanced application of consumer protection rules
• Paving the way for e-commerce based retail financial business
(e.g. the Directive on e-money institutions, Directive on ecommerce 2000/31)
• Regulation of Insurance Intermediaries
• Cross-border retail payments (Reg. on cross border
payments; now implemented in Sweden as well)
3. Sound supervisory structures: Corporate Governance and
Tax
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
Bundesbank
III. Legal means to achieve a single financial market
1. By means of Regulations - directly applicable in all
Member States
pros: faster entry into force, no transposition - “full
harmonisation”
cons: centralist in nature, no amalgamation with
national laws
2. By means of Directive - transposition necessary
pros: respects the principle of subsidiarity, Art. 5
Treaty, involvement of the national legislator,
incorporation/adaption into national law
cons: frictional loss due to transposition (in time
and content)
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Deutsche
Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
IV. Important Legal Acts in the field
1. EU Regulation on Insolvency proceedings
(1346/2000/EC)
2. EU Directive on the reorganisation and winding up of
credit institutions (24/2001/EC) - mutual recognition only!
3. EU Directive on cross border credit transfer in Euro
(5/1997/EC)
4. EU Regulation on cross border payments in Euro
(2560/2001/EC)
5. EU Directive on settlement finality in payment and
securities settlement systems (1998/26/EC) - predecessor
of the CD
6. EU Directive on financial collateral arrangements
(2002/47/EC)
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
Bundesbank
B. Financial Markets Legislation on Collateral
Mutual interest of the ECB and Deutsche
Bundesbank
– as a counterparty in monetary policy
operations and secured intra-day credit
operations in payments systems
– and due to their statutory objective (Art. 105
Treaty) to promote the smooth functioning of
payment systems
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
Bundesbank
I. Directive of the European Parliament and of the Council on
settlement finality in payment and securities settlement
systems (98/26/EC; “SFD”)
1. Aims
» Reduction of systemic risk linked to payment and
securities settlement systems
» Protection against the effects of insolvency
proceedings opened against a system participant
» Certainty as to the applicable law for dispositions of
securities as collateral in connection with systems or
central banks
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Deutsche
Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
2. Content
» Transfer orders and netting arrangements shall be
binding and legally enforceable, Art. 3 (3)
» Introduces concept “irrevocability” of a payment
order for systems, Art. 5, 3 (3)
» Abolition of the “zero hour” rule
» Determination of applicable law in case of
insolvency of a system participant, Art. 8
» Enforceability of collateral agreements with a
system or a central bank in case of an insolvency of
a participant, Art. 7
» rights of the collateral taker in respect of the
securities are determined by the law of the State in
which the account is maintained to which securities
are legally recorded, Art. 9(2)
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
II. Directive of the European Parliament and the Council on
financial collateral arrangements (2002/47/EC; “CD”)
1. Timeframe
• Initiation of the FSAP in May 1999
• Preparation of the Forum Group on Collateral (October 1999
- May 2000)
• Preparation of the Commission Proposal (June 2000 - March
2001)
• Publication of the Commission proposal for a Directive on 27
March 2001
• Establishment of a Council Working Group and start of the
Parliamentary debates in May 2001
• Finalisation of the Common Position in March 2002
• Adoption of the Directive on 6 June 2002
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
2. Preparatory work
• Installation of a Forum Group composed of experts from the
banking sector and from securities settlement systems under
the lead of the Commission
• Analytical Reports
– ISDA Report “Collateral Arrangements in the European
Financial Markets” of 2000
(www.isda.org/press/pdf/eur_coll_law_reform.pdf)
– EFMLG report “Proposal for an EU Directive on
Collateralisation” of 2000
• Final report of the Forum Group of June 2000, recommending a
Directive on collateral
• Proposal by the Commission of the EU of 27 March 2001,
including an Explanatory memorandum
(www.europa.eu.int/comm/internal_market/de/finances/banks/c
ollateral.htm)
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
3. The Collateral Directive Itself
• Problems of the current legal environment within the EU
– Different collateral techniques (e.g. pledges,
repurchase transactions, title transfer transactions)
– Variety of formalities and administrative requirements for
the creation, validity, enforcement etc. of collateral
– Problems with the legal recognition of top-up collateral,
the substitution of assets and close-out netting
– Harmful effects of insolvency proceedings
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
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• Goals
– Removal of the major obstacles for the cross-border
use of collateral
– Limitation of administrative burdens, formal acts and
cumbersome procedures
– Creation of a clear legal framework and thereby
promoting legal certainty
• Content
– Substantive collateral law (Art. 3 - 6)
– Substantive insolvency rules (Art. 7 and 8)
– Conflict of laws rule (Art. 9)
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
4. Content of the CD
a. Material scope of application
• “financial collateral”
– cash (if credited to an account)
– financial instruments - bonds, shares, other negotiable
debt instruments, units in collective investment
undertakings, money market instruments etc. (Art. 2.
para. 1 (d) and (e))
– the provision of which has to be evidenced in writing or
legally equivalent manner, whereby it is sufficient that a
book entry security has been credited to an account (Art.
1(5))
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
Bundesbank
• Collateralisation techniques
– security financial collateral arrangements - ie provision
of collateral by way of security w/o the full transfer of
ownership, e.g. pledges, charges, liens (Art. 2. para. 1
(c))
– title transfer financial collateral arrangements, e.g.
repurchase transactions or transfer of title (Art. 2. para.
1 (b))
– to the extent that the collateral taker (or someone acting
on his behalf) acquires possession of the financial
collateral (Art. 2 para. 2)
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Deutsche
Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
b. Personal scope of application (Art. 1 para. 2 (c))
• Public sector bodies and central banks
• Supervised financial institutions (credit institutions,
investment firms, insurance undertakings etc.)
• central counterparties, settlement agents, clearing houses
• a person other than a natural person, including
unincorporated firms and partnerships, provided that the
other party of the collateral arrangement is an entity defined
above
Last bp. was controversial until the end; therefore: opt-out
possibility; other considerations have been to look at the base
capital of the entity (but that can change) or use the zebra
approach (mandatory, but only partial application)
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
c. Material securities law
• abolishment of further formalities (Art. 3), such as
– notary deed
– registration
– notification
– public announcement
• in case of an enforcement event (irrespective of insolvency
proceedings, as agreed between the parties, Art. 4), realisation is
possible
– by sale or appropriation (if so agreed), w/o
» prior notice
» court authorisation
» public auction
» waiting period
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
• or set off (close out netting), Art. 4 para. 1 and 2
Opt-out clause for member states for appropriation (para. 3)
• right of use (Art. 5) if agreed bestows on the collateral taker
to use financial collateral provided under a security financial
collateral agreement as if he were the full owner (French
against, since it blurs nature of rights)
– if exercised, the collateral taker is obliged to transfer
back equivalent collateral, which will be treated (e.g. for
avoidance periods) as the original collateral
– the obligation may be subject to a close-out netting
provision
• Recognition of title transfer arrangement - no re16.07.2015
characterisation (Art. 6)
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
d. Insolvency provisions (Art. 8)
– protection of close-out netting provisions (also against
judicial attachments et al.)
– no retroactive effect of winding-up or reorganisation
proceedings on financial collateral (= abolishment of the
“zero hour” rule)
– no invalidation, avoidance or reversal of collateral
provided
» due to an obligation to provide additional financial
collateral (“top-up collateral”) in order to take
account of changes in value of the original collateral
» to exchange financial collateral against financial
collateral of the same value (“substitution”)
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
e. Conflict of Laws
Art. 9 CD expands the applicability of Art. 9 (2) of the SFD:
certain matters regarding book-entry securities will be
governed by the law of the country where the account is
maintained, like
– the legal nature of the right and the proprietary effects of
the credit to the account
– questions of priority
– perfection requirements (if any)
– realisation
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
Deutsche
Bundesbank
III. Comparison between the SFD and the CD
SFD: limited in personal scope - only where collateral
security is provided in connection with the participation
in a system or operations of the central banks of the
Member States
but: broad scope of collateral and collateral techniques
were covered
CD: broad personal scope (with opt out for transactions
between financial and non-financial institutions), most
kinds of securities transactions covered
but: limited scope of financial assets covered: only cash
and securities; transfer of possession necessary
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
C. Outlook
• new projects are becoming tangible
– draft Hague Convention on the law applicable to certain
rights in respect of securities held with an intermediary
– UNIDROIT is considering a Convention that mirrors the CD
on a world wide basis
– given the strong interest of commercial players, so. will
sooner or later tackle the issue of a uniform securities code
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
• What will it look like - what are the chances
– so far, most legal acts in the field concerned themselves
only with choice of law questions and mutual recognition
aspects
– the SFD and CD could be seen as a first step towards a
(partial or full) material harmonisation of European
securities law
– it will be difficult to achieve: although wanted by
practitioners, securities law in its civil law aspect forms part
of the whole body of law of a country - they interact with
each other and creating something new might cause that
interaction to cease; result: loss of a homogeneous body of
law, creation of many special fields
» law also forms part of the culture of a country - it’s not
like throwing away an old tie and wearing a nicer one
» lastly, operating in a accustomed legal environment
presents an asset, that has economic value
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
• Proposal of the Lamfalussy Report of February 2002
(europa.eu.int/comm/internal_market/en/finances/general/la
mfalussyen.pdf) - 4 level approach for legislation related to
financial markets
– framework principles according to normal EU procedure,
preferably by means of Regulations
– implementation by Commission assisted by two new
Committees (Committee of European Securities
Regulators CESR and European Securities Committee,
ESC)
– enhanced co-operation between securities regulators to
achieve EU-consistent transposition and/or application
– strengthened enforcement of the Commission
– criticism in this weeks paper
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Bundesbank
The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
D. Excursus: The Hague Convention on the Law applicable to
certain rights in respect of securities held with an intermediary
– purely a choice of law Convention
– follows the so-called “PRIMA”-principle = Place of the
Relevant Intermediary
– while the principle is easy, the concrete content is not: who
is the relevant intermediary??
– basically PRIMA as a principle is an empty shell to be filled
with sense and meaning - depending on how it is filled out,
it will lead to different results
» European approach: relevant intermediary is the one
that maintains the account to which the securities in
question are credited
» Anglo-American approach: relevant intermediary is the
one that the parties have agreed upon, whether he
actually maintains the account to which the securities in
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question are credited or not
Deutsche
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The Financial Services Action Plan
and Financial Markets Legislation
on Collateral
– Status quo: The last draft will form the basis for the
Diplomatic Session this December (www. hcch.net)
– Problems that still need to be solved:
» very broad definition of securities - “other financial
assets”
» therefore “lex specialis” for more traditional means of
determining the applicable law (e.g. Art. 12 of the
Rome Convention)?
» a single economic transaction is broken down into
numerous single elements, emphasising a certain
legal concept of entitlement towards securities
» determination of applicable law w/o objective factors incompatibility with EU legislation
» “reality test” is concerned with the general business
of maintaining securities accounts - not necessarily
the one where the securities are maintained
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