COMMON POSITION (EC) No 43/97 adopted by the Council on 13 October 1997 with a view to adopting Directive 97/. . ./EC of the European Parliament and of the Council on settlement finality in payment and securities settlement systems (97/C 375/03)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 100a thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the European Monetary Institute,

Having regard to the Opinion of the Economic and Social Committee (2),

Acting in accordance with the procedure laid down in Article 189b of the Treaty (3),

(1) Whereas the Lamfalussy report of 1990 to the Governors of the central banks of the Group of Ten countries demonstrated the important systemic risk inherent in payment systems which operate on the basis of several legal types of payment netting, in particular multilateral netting; whereas the reduction of legal risks associated with participation in real time gross settlement systems is of paramount importance, given the increasing development of these systems;

(2) Whereas it is also of the utmost importance to reduce the risk associated with participation in securities settlement systems, in particular where there is a close connection between such systems and payment systems;

(3) Whereas this Directive aims at contributing to the efficient and cost effective operation of cross-border payment and securities settlement arrangements in the Community, which reinforces the freedom of movement of capital in the internal market; whereas this Directive thereby follows up the progress made towards completion of the internal market, in particular towards the freedom to provide services and liberalization of capital movements, with a view to the realization of Economic and Monetary Union;

(4) Whereas it is desirable that the laws of the Member States should aim to minimize the disruption to a system caused by insolvency proceedings against a participant in that system;

(5) Whereas a proposal for a Directive on the reorganization and winding-up of credit institutions submitted in 1985 and amended on 8 February 1988 is still pending before the Council; whereas the Convention on Insolvency Proceedings drawn up on 23 November 1995 by the Member States meeting within the Council explicitly excludes insurance undertakings, credit institutions and investment firms;

(6) Whereas this Directive is intended to cover payment and securities settlement systems of a domestic as well as of a cross-border nature; whereas the Directive is applicable to Community systems and to collateral security constituted by their participants, be they Community or third country participants, in connection with participation in these systems;

(7) Whereas Member States may apply the provisions of this Directive to their domestic institutions which participate directly in third country systems and to collateral security provided in connection with participation in such systems;

(8) Whereas Member States should be allowed to designate as a system covered by this Directive a system whose main activity is the settlement of securities even if the system to a limited extent also deals with commodity derivatives;

(9) Whereas the reduction of systemic risk requires in particular the finality of settlement and the enforceability of collateral security; whereas collateral security is meant to comprise all means provided by a participant to the other participants in the payment and/or securities settlement systems to secure rights and obligations in connection with that system, including repurchase agreements, statutory liens and fiduciary transfers; whereas regulation in national law of the kind of collateral security which can be used should not be affected by the definition of collateral security in this Directive.

(10) Whereas this Directive, by covering collateral security provided in connection with operations of the central banks of the Member States functioning as central banks, including monetary policy operations, assists the European Monetary Institute in its task of promoting the efficiency of cross-border payments with a view to the preparation of the third stage of Economic and Monetary Union and thereby contributes to developing the necessary legal framework in which the future European central bank may develop its policy;

(11) Whereas transfer orders and their netting should be legally enforceable under all Member States' jurisdictions and binding on third parties;

(12) Whereas rules on finality of netting should not prevent systems testing, before the netting takes place, whether orders that have entered the system comply with the rules of that system and allow the settlement of that system to take place;

(13) Whereas nothing in this Directive should prevent a participant or a third party from exercising any right or claim resulting from the underlying transaction which they may have in law to recovery or restitution in respect of a transfer order which has entered a system, e.g. in case of fraud or technical error, as long as this leads neither to the unwinding of netting nor to the revocation of the transfer order in the system;

(14) Whereas it is necessary to ensure that transfer orders cannot be revoked after a moment defined by the rules of the system;

(15) Whereas it is necessary that a Member State should immediately notify other Member States of the opening of insolvency proceedings against a participant in the system;

(16) Whereas insolvency proceedings should not have a retroactive effect on the rights and obligations of participants in a system;

(17) Whereas, in the event of insolvency proceedings against a participant in a system, this Directive furthermore aims at determining which insolvency law is applicable to the rights and obligations of that participant in connection with its participation in a system;

(18) Whereas collateral security should be insulated from the effects of the insolvency law applicable to the insolvent participant;

(19) Whereas the provisions of Article 9 (2) should only apply to a register, account or centralized deposit system which evidences the existence of proprietary rights in or for the delivery or transfer of the securities concerned;

(20) Whereas the provisions of Article 9 (2) are intended to ensure that if the participant, the central bank of a Member State or the future European central bank has a valid and effective collateral security as determined under the law of the Member State where the relevant register, account or centralized deposit system is located, then the validity and enforceability of that collateral security as against that system (and the operator thereof) and against any other person claiming directly or indirectly through it, should be determined solely under the law of that Member State;

(21) Whereas the provisions of Article 9 (2) are not intended to prejudice the operation and effect of the law of the Member State under which the securities are constituted or of the law of the Member State where the securities may otherwise be located (including, without limitation, the law concerning the creation, ownership or transfer of such securities or of rights in such securities) and should not be interpreted to mean that any such collateral security will be directly enforceable or be capable of being recognized in any such Member State otherwise than in accordance with the law of that Member State;

(22) Whereas it is desirable that Member States endeavour to establish sufficient links between all the securities settlement systems covered by this Directive with a view towards promoting maximum transparency and legal certainty of transactions relating to securities;

(23) Whereas the adoption of this Directive constitutes the most appropriate way of realizing the abovementioned objectives and does not go beyond what is necessary to achieve them,

HAVE ADOPTED THIS DIRECTIVE:

SECTION I SCOPE AND DEFINITIONS

Article 1

The provisions of this Directive shall apply to:

(a) any system as defined in Article 2 (a), governed by the law of a Member State and operating in any currency, the ecu or in various currencies which the system converts one against another;

(b) any participant in such a system;

(c) collateral security provided in connection with:

- participation in a system, or

- operations of the central banks of the Member States in their functions as central banks.

Article 2

For the purpose of this Directive:

(a) 'system` shall mean a formal arrangement:

- between three or more participants, without counting a possible settlement agent, a possible central counterparty, a possible clearing house or a possible indirect participant, with common rules and standardized arrangements for the execution of transfer orders between the participants,

- governed by the law of a Member State chosen by the participants; the participants may, however, only choose the law of a Member State in which at least one of them has its head office, and

- designated, without prejudice to other more stringent conditions of general application laid down by national law, as a system and notified to the Commission by the Member State whose law is applicable, after that Member State is satisfied as to the adequacy of the rules of the system.

Subject to the conditions in the first subparagraph, a Member State may designate as a system such a formal arrangement whose business consists of the execution of transfer orders as defined in the second indent of (i) below and which to a limited extent executes orders relating to other financial instruments, when that Member State considers that such a designation is warranted on grounds of systemic risk.

A Member State may also on a case-by-case basis designate as a system such a formal arrangement between two participants, without counting a possible settlement agent, a possible central counterparty, a possible clearing house or a possible indirect participant, when that Member State considers that such a designation is warranted on grounds of systemic risk.

(b) 'institution` shall mean:

- a credit institution as defined in the first indent of Article 1 of Directive 77/780/EEC (4) including the institutions set out in the list in Article 2 (2) thereof, or

- an investment firm as defined in point 2 of Article 1 of Directive 93/22/EEC (5) excluding the institutions set out in the list in Article 2 (2) (a) to (k) thereof, or

- public authorities and publicly guaranteed undertakings, or

- any undertaking whose head office is outside the Community and whose functions correspond to those of the Community credit institutions or investment firms as defined in the first and second indent,

which participates in a system and which is responsible for discharging the financial obligations arising from transfer orders within that system.

If a system is supervised in accordance with national legislation and only executes transfer orders as defined in the second indent of (i) below, as well as payments resulting from such orders, a Member State may decide that undertakings which participate in such a system and which have responsibility for discharging the financial obligations arising from transfer orders within this system, can be considered institutions, provided that at least three participants of this system are covered by the categories referred to in the first subparagraph and that such a decision is warranted on grounds of systemic risk;

(c) 'central counterparty` shall mean an entity which is interposed between the institutions in a system and which acts as the exclusive counterparty of these institutions with regard to their transfer orders;

(d) 'settlement agent` shall mean an entity providing to institutions and/or a central counterparty participating in systems, settlement accounts through which transfer orders within such systems are settled and, as the case may be, extending credit to those institutions and/or central counterparties for settlement purposes;

(e) 'clearing house` shall mean an entity responsible for the calculation of the net positions of institutions, a possible central counterparty and/or a possible settlement agent;

(f) 'participant` shall mean an institution, a central counterparty, a settlement agent or a clearing house.

According to the rules of the system, the same participant may act as a central counterparty, a settlement agent or a clearing house or carry out part or all of these tasks.

A Member State may decide that for the purposes of this Directive an indirect participant may be considered a participant if it is warranted on the grounds of systemic risk and on condition that the indirect participant is known to the system;

(g) 'indirect participant` shall mean a credit institution as defined in the first indent of (b) above with a contractual relationship with an institution participating in a system executing transfer orders as defined in the first indent of (i) below which enables the abovementioned credit institution to pass transfer orders through the system;

(h) 'securities` shall mean all instruments referred to in section B of the Annex to Directive 93/22/EEC;

(i) 'transfer order` shall mean:

- any instruction by a participant to place at the disposal of a recipient an amount of money by means of a book entry on the accounts of a credit institution, a central bank or a settlement agent, or any instruction which results in the assumption or discharge of a payment obligation as defined by the rules of the system, or

- an instruction by a participant to transfer the title to, or interest in, a security or securities by means of a book entry on a register, or otherwise;

(j) 'insolvency proceedings` shall mean any collective measure provided for in the law of a Member State, or a third country, either to wind up the participant or to reorganize it, where such measure involves the suspending of, or imposing limitations on, transfers or payments;

(k) 'netting` shall mean the conversion into one net claim or one net obligation of claims and obligations resulting from transfer orders which a participant or participants either issue to, or receive from, one or more other participants with the result that only a net claim can be demanded or a net obligation be owed;

(l) 'settlement account` shall mean an account at a central bank, a settlement agent or a central counterparty used to hold funds and securities and to settle transactions between participants in a system;

(m) 'collateral security` shall mean all realizable assets provided under a pledge (including money provided under a pledge), a repurchase or similar agreement, or otherwise, for the purpose of securing rights and obligations potentially arising in connection with a system, or provided to central banks of the Member States or to the future European central bank.

SECTION II NETTING AND TRANSFER ORDERS

Article 3

1. Transfer orders and netting shall be legally enforceable and, even in the event of insolvency proceedings against a participant, shall be binding on third parties, provided that transfer orders were entered into a system before the moment of opening of such insolvency proceedings as defined in Article 6 (1) or if they were carried out on the day of opening of the insolvency proceedings unless the system was aware or should have been aware of the opening of such proceedings.

2. No law, regulation, rule or practice on the setting aside of contracts and transactions concluded before the moment of opening of insolvency proceedings, as defined in Article 6 (1) shall lead to the unwinding of a netting.

3. The moment of entry of a transfer order into a system shall be defined by the rules of that system. If there are conditions laid down in the national law governing the system as to the moment of entry, the rules of that system must be in accordance with such conditions.

Article 4

Member States may provide that the opening of insolvency proceedings against a participant shall not prevent funds or securities available on the settlement account of that participant from being used to fulfil that participant's obligations in the system on the day of the opening of the insolvency proceedings. Furthermore, Member States, may also provide that such a participant's credit facility connected to the system be used against available, existing collateral security to fulfil that participant's obligations in the system.

Article 5

A transfer order may not be revoked by a participant in a system, nor by a third party, from the moment defined by the rules of that system.

SECTION III PROVISIONS CONCERNING INSOLVENCY PROCEEDINGS

Article 6

1. For the purpose of this Directive, the moment of opening of insolvency proceedings shall be the moment when the relevant judicial or administrative authority handed down its decision.

2. When a decision has been taken in accordance with paragraph 1, the relevant judicial or administrative authority shall immediately notify that decision to the appropriate authority chosen by its Member State.

3. The Member State referred to in paragraph 2 shall immediately notify other Member States.

Article 7

Insolvency proceedings shall not have retroactive effects on the rights and obligations of a participant arising from, or in connection with, its participation in a system earlier than the moment of opening of such proceedings as defined in Article 6 (1).

Article 8

In the event of insolvency proceeding being opened against a participant in a system, the rights and obligations arising from, or in connection with, the participation of that participant shall be determined by the law governing that system.

SECTION IV INSULATION OF THE RIGHTS OF HOLDERS OF COLLATERAL SECURITY FROM THE EFFECTS OF THE INSOLVENCY OF THE PROVIDER

Article 9

1. The rights of:

- a participant to collateral security provided to it in connection with a system, and

- central banks of the Member States or the furure European central bank to collateral security provided to them,

shall not be affected by insolvency proceedings against the participant or counterparty to central banks of the Member States or the furture European central bank which provided the collateral security. Such collateral security may be realized for the satisfaction of these rights.

2. Where securities (including rights in securities) are provided as collateral security to participants and/or central banks of the Member States or the future European central bank as described in paragraph 1, and their right (or that of any nominee, agent or third party action on their behalf) with respect to the securities is legally recorded on a register, account or centralized deposit system located in a Member State, the determination of the rights of such entities as holders of collateral security in relation to those securities shall be governed by the law of that Member State.

SECTION V FINAL PROVISIONS

Article 10

Member States shall specify the systems which are to be included in the scope of this Directive and shall notify them to the Commission and inform the Commission of the authorities they have chosen in accordance with Article 6 (2).

The system shall indicate to the Member State whose law is applicable the participants in the system, including any possible indirect participants, as well as any change in them.

Article 11

In order to protect systems, each Member State may impose more stringent conditions on systems than those laid down by this Directive.

Article 12

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive before . . . (6*). They shall forthwirth inform the Commission thereof.

When Member States adopt these measures, they shall contain a reference to this Directive or shall be accompanied by such reference on the occasion of their official publication. The methods of making such a reference shall be laid down by the Member States.

2. Member States shall communicate to the Commission the text of the provisions of domestic law which they adopt in the field governed by this Directive. In this Communication, Member States shall provide a table of correspondence showing the national provisions which exist or are introduced in respect of each Article of this Directive.

Article 13

No later than three years after the date mentioned in Article 12 (1), the Commission shall present a report to the European Parliament and the Council on the application of this Directive, accompanied where appropriate by proposals for its revision.

Article 14

This Directive shall enter into force on the day of its publication in the Official Journal of the European Communities.

Article 15

This Directive is addressed to the Member States.

Done at . . .

For the European Parliament

The President

For the Council

The President

(1) OJ C 207, 18. 7. 1996, p. 13.

(2) OJ C 56, 24. 2. 1997, p. 1.

(3) Opinion of the European Parliament of 9 April 1997 (OJ C 132, 28. 4. 1997, p. 79), Council Common Position of 13 October 1997 and Decision of the European Parliament of . . . (not yet published in the Official Journal).

(4) First Council Directive 77/780/EEC of 12 December 1977 on the coordination of the laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (OJ L 322, 17. 12. 1977, p. 30). Directive as last amended by Directive 96/13/EG (OJ L 66, 16. 3. 1996, p. 15).

(5) Council Directive 93/22/EWG of 10 Mai 1993 on investment services in the securities field (OJ L 141, 11. 6. 1993, p. 27). Directive as last amended by Directive 97/9/EC (OJ L 84, 26. 3. 1997, p. 22).

(6*) 18 months after the publication of this Directive in the Official Journal of the European Communities.

STATEMENT OF THE COUNCIL'S REASONS

I. INTRODUCTION

1. On 30 May 1996 the Commission forwarded to the Council a proposal for a Directive on settlement finality and collateral security, based on Article 100a of the EC Treaty.

The Economic and Social Committee and the European Parliament delivered their Opinions on 31 October 1996 and 9 April 1997 respectively. The European Monetary Institute gave its opinion on 21 November 1996.

Following these Opinions, the Commission submitted an amended proposal on 4 July 1997.

2. On 13 October 1997, the Council adopted its common position pursuant to Article 189b of the Treaty.

II. OBJECTIVE

The aim of the Directive is to reduce systemic risk in payment and securities settlement systems and to minimize the disruption to a system caused by insolvency proceedings against a participant in a system, by stipulating

- that transfer orders and netting are legally enforceable and binding on third parties in the event of insolvency proceedings against a participant in a system,

- that collateral security provided in connection with participation in a system shall not be affected by insolvency proceedings against the participant which provided the collateral security.

The Directive in addition covers collateral security provided in connection with operations of the central banks of the Member States and the future European Central Bank.

The Directive thus contributes towards improving the efficiency of payment and securities settlement systems in the European Union and the development of the necessary legal framework for the third stage of Economic and Monetary Union.

III. ANALYSIS OF THE COMMON POSITION

A. Title of the Directive

The title of the Directive has been amended to read 'Directive of the European Parliament and of the Council on settlement finality in payment and securities settlement systems`. The new title combines elements from the original Commission proposal: 'settlement finality`, with elements from the proposal of the European Parliament: the reference to 'payment and securities settlement systems` and the omission of an explicit reference to collateral security. The common position thus partially incorporates the spirit of amendment No 1 proposed by the European Parliament.

B. Section I - Scope and definitions (Articles 1-2)

(a) Scope (Article 1)

In accordance with the amended Commission proposal the common position

- has added securities settlement systems to the scope of this Directive by laying down that a system can mean either a payment system and/or a securities settlement system. Here the common position includes the principle of amendments 1, 4 (partially), 7, 8, 9, 11 (partially), 14, 15, 16, 17 (partially) and 20 (partially) proposed by the European Parliament,

- makes it clear that systems which operate in various currencies which the system converts one against another are also covered by this Directive. An explicit reference to the euro is not included for the same reasons which led the Commission not to include the reference in its amended proposal, namely, that it is superfluous and that mention of the ecu and the euro in the same text could give the impression that the two could co-exist. Here the common position partially includes amendment No 4 proposed by the European Parliament.

Compared to the Commission proposal the common position

- does not cover the participation of Community institutions in third-country systems but limits the scope to systems governed by the law of a Member State. However, it is made clear in Recital 7 that Member States may apply the provisions of the Directive to their domestic institutions which participate in third-country systems and to collateral security provided in connection with participation in such systems. For this reason the common position does not include amendment No 5 proposed by the European Parliament,

- does not make a specific reference to monetary policy operations, in defining the scope for collateral security, but refers to central bank operations where the bank operates in its function as a central bank.

(b) Definitions (Article 2)

1. The definitions of the Directive delimit the scope of the Directive in a more precise manner.

The common position differs on a number of points from the Commission proposal. The differences, which are explained below, concern mainly:

- the extension of the definitions to take account of the inclusion of securities settlement systems in the scope of the Directive.

As the provisions of the Directive apply essentially in the same manner to securities settlement systems as to payment systems no distinction is made between the two types of system in the definitions,

- the fact that third-country payment systems are not included in the scope,

- the conditions relating to the constitution of a system and its participants.

2. The conditions which have to be fulfilled before an arrangement can be considered a system for the purposes of the Directive are set out in the definition of a 'system`, Article 2 (a). The common position is based on the definitions of 'payment system` and 'EC payment system` set out in the Commission proposal, but amends these definitions and adds a number of legal safeguards. In particular

- a system must be a formal arrangement with common rules and standardized arrangements for the execution of transfer orders between the participants. The common position thus partly takes account of the spirit of amendment No 10 proposed by the European Parliament, which requires rules for the execution of payment orders,

- the minimum number of participants is set at three institutions rather than two as proposed by the Commission. Member States may, however, in certain cases designate a system in which only two institutions participate,

- the law which governs the system is defined as the law chosen by the participants, as was the case in the Commission proposal. The Commission proposal further stipulated that if no law was chosen, a payment system should be deemed to be located in the Member State where the settlement takes place. In many cases it can be difficult to determine exactly where a settlement or book entry takes place, and in order to avoid legal uncertainty the common position does not include such a provision. The common position accordingly does not incorporate the part of amendments No 11 of the European Parliament which relates to the location of a settlement or book entry,

- a designation as a system by the Member State whose law is applicable is required,

- the Member State which designates a system must be satisfied as to the adequacy of the rules of that system,

- only systems which execute orders concerning money or securities as defined by the Directive are covered. Member States may, however, in certain cases designate systems which execute orders relating to other financial instruments, in particular commodities.

Amendment No 6 proposed by the European Parliament has not been included since the approach of the common position concerning the requirements as to what constitutes a 'system` differs from that set out in the Commission proposal as well as from that proposed by the European Parliament. In introducing specific requirements as to what constitutes a system, the common position nevertheless takes account of the underlying concerns of the European Parliament.

3. In order to enhance the stability of the systems covered by the Directive the common position introduces certain criteria determining which undertakings can participate in a system.

A new term 'participant` is introduced in Article 2 (f) to cover all entities which participate in a system while at the same time making it possible to distinguish, where necessary, between them. The entities covered are: an institution, defined in Article 2 (b), a central counterparty, defined in Article 2 (c), a settlement agent, defined in Article 2 (d), and/or a clearing house, defined in Article 2 (e). Member States may also in certain cases consider an indirect participant, defined in Article 2 (g), a participant, see point 4 below.

The definition of the term 'institution`, Article 2 (b), sets out the conditions which must be met if an undertaking is to be considerad an institution for the purposes of the Direcitve. The definition which is based on the definition of the terms 'institution` and 'direct participation` (Articles 2 (a) and (b) of the Commission proposal) stipulates that an undertaking in order to be covered must

- belong to one of the four core groups of undertakings: credit institutions, investment firms, public authorities or publicly guaranteed undertakings, or third-country undertakings which carry out corresponding functions, and

- participate in a system with responsibility for discharging the financial obligations arising from transfer orders with that system.

However, Member States may decide that undertakings which are not institutions as defined in the Directive can be considered an institution if they participate in a securities settlement system and if at least three of the other participants belong to the 'core` group of institutions set out above. In order to secure a certain degree of control on behalf of the authorities, systems with 'non-core` participants have to be supervised in accordance with national law. The common position takes account of the situation in certain Member States where payments relating to transfers of securities are made separately by stipulating that such systems are covered.

The terms 'central counterparty`, Article 2 (c), 'settlement agent`, Article 2 (d) and 'clearing house`, Article 2 (e), are defined with reference to the specific functions which they carry out in relation to the system.

4. Compared to the Commission proposal the common position adds a new element by granting Member States the option of covering indirect participants in their systems provided the following conditions are met:

(i) the indirect participant is a credit institution;

(ii) only payment systems can have indirect participants;

(iii) the indirect participant must have a contractual relationship with a participant;

(These 3 conditions are set out in the new definition of 'indirect participant` in Article 2 (g).)

(iv) an indirect participant can ce considered a participant only if it is waaranted on the grounds of systemic risk;

(v) the indirect participant must be known to the system in which it participates indirectly.

(These conditions are set out in Article 2 (f), the definition of 'participant`.)

(vi) the indirect participant must also be indicated together with the other particpants to the Member State whose law is applicable;

(This condition is stipulated in Article 10 second sub-paragraph.)

5. Following the introduction of securities settlement systems, as proposed by the Commission in its amended proposal, the definition of 'payment order` in the Commission proposal has been amended and the term has been replaced by the term 'transfer order`, Article 2 (i), which now includes transfers of money and securities. The common position thus incorporates, albeit in a slightly different wording, amendment No 9 proposed by the European Parliament. The term 'securities` has been separately defined in Article 2 (h) by a reference to Directive 93/22/EEC on investment services in the securities field. The part of the definition of 'transfer order` which refers to transfer of an amount of money has been extended to cover all existing arrangements for processing a transfer order through a system.

6. This definitions of 'insolvency proceedings`, 'netting` and 'collateral security` have been amended compared to the Commission proposal:

- the definition of 'insolvency proceedings`, article 2 (j), has been made more flexible and concentrates now on the feature which is the essence of this Directive, namely the suspension of, or limitations on, payments or transfers of securities,

- the definition of 'netting`, Article 2 (k), is based on the definition of 'payment netting` but takes account of the inclusion of securities in the scope,

- the definition of 'collateral security`, Article 2 (m), has been amended compared to the Commission proposal and drafted in a more precise manner. It is made clear in recital 9 that the definition does not, however, affect the regulation in national law of the kind of collateral which can be used. As a consequence of the deletion of the reference to monetary policy operations in the scope of the Directive, the definition of collateral security now refers to all assets provided to Central Banks of the Member States or the future European Central Bank.

A new definition of 'settlement account`, Article 2 (l), has been added following the introduction of the new Article 4.

7. Following the modifications of the scope of the Directive compared to the Commission proposal, the definitions of 'EC institution`, 'third-country institution`, 'third-country payment system` and 'monetary policy operation` have been deleted as unnecessary, and the common position accordingly does not include amendments Nos 12 and 13 proposed by the European Parliament.

C. Section II - Netting and transfer orders (Articles 3 to 5)

1. In Article 3 (Article 3 of the Commission proposal) the common position sets out the key element of the Directive, that netting and transfer orders shall be legally enforceable and binding on third parties even in the event of insolvency proceedings against a participant. Without changing the fundamental features of the provisions the wording of Article 3 (1) and (2) has been modified compared to the Commission proposal and now takes into account that the term 'participant` has been defined in Article 2 and that the moment of opening of insolvency proceedings has been defined in Article 6 (see below).

In order to avoid doubt concerning transactions made in good faith, either by the defaulting institution or by another participant after the opening of insolvency proceedings, the common position introduces a new provision in Article 3 (1). It stipulates that transfer orders carried out after the opening of insolvency proceedings are treated as transfer orders entered before the opening of insolvency procedures, if the system was unaware of the opening of such proceedings. How the system is informed of the opening is left to national law.

It is made clear in recital 12 that rules on finality of netting shall not prevent systems testing whether orders that have entered the system comply with the rules of that system and allow the settlement of that system to take place. In recital 13 it is likewise made clear that nothing in this Directive shall prevent a participant or a third party from exercising any right or claim resulting from the underlying transaction which they may have in law to recovery or restitution in respect of a transfer order which has entered a system, e.g. in case of fraud or technical error, as long as this does not lead to the unwinding of netting nor to the revocation of the transfer order in the system.

2. In Article 3 (3), which is based on the last sentence of Article 3 (1) of the Commission proposal, the common position lays down specific rules relating to the definition of the moment of entry of a transfer order into a system.

3. In order not to preclude the current practice in some Member States, Article 4 of the common position sets out an option for Member States to allow that funds or securities held on the account of the defaulting participant with a settlement agent or an existing credit facility can be used to settle a possible negative balance of the defaulting participant towards the system on the day of opening of insolvency proceedings.

4. Article 5 of the common position maintains the flexibility of the Commission proposal for Article 4, which lets the system define the rules concerning the revocation of a transfer order. This prohibition applies to other participants in a system as well as to third parties. The part of amendment No 17 proposed by the European Parliament which relates to the revocation of a transfer order has thus not been included in the common position.

D. Section III - Provisions concerning insolvency proceedings (Articles 6 to 8)

1. As proposed by the European Parliament in amendment no 21, the common position introduces a provision, Article 6 (1), defining the moment of opening of insolvency proceedings. In order to avoid any 'grey area` between the moment when a decision opening insolvency proceedings has been taken and the moment when this decision is deemed to have been taken, the common position defines the moment of opening of insolvency proceedings as the moment when the relevant judicial or administrative authority handed down its decision.

This decision would presumably be known to the market, through the electronic media or otherwise, very soon after it has been handed down, and the common position therefore contains no requirements concerning notification to the public. To ensure, however, that the authorities are always informed immediately of such a decision, Article 6 (2) of the common position requires each Member State to choose an authority which must be informed of the decision by the judicial or administrative authority which took the decision. It is left to Member States to decide which authority is to receive the information and which information procedures, if any, should be introduced at national level.

At the moment the national authority receives such information it will seldom know if the defaulting institution is a member of one or more systems and if so, where. Article 6 (3) of the common position therefore requires the Member State in which the insolvency proceedings have been opened to notify all other Member States. To allow Member States a certain degree of flexibility, the common position leaves open which institutions must undertake the notification and which are to receive it. The Commission has undertaken to assemble a list based on the information provided by the Member States in order to facilitate the notification.

In order to arrive at legal clarity the common position thus approaches the question of how to determine the moment of opening of insolvency proceedings in a way different from that proposed by the European Parliament in amendment No 21, and this amendment is not included in the common position.

2. In order to protect the system from the effects of provisions which enable the opening of insolvency proceedings to have effect from midnight before the actual opening of the proceedings, Article 7 of the common position follows the approach set out in Article 5 of the Commission proposal and stipulates that insolvency proceedings against a participant of a system do not have retroactive effects on the rights and obligations of a participant arising from its participation in a system. The wording has been amended compared to the Commission proposal with a view to greater precision, and the common position thus takes account of the spirit of amendment No 18 proposed by the European Parliament.

3. Article 8 of the common position which follows Article 6 of the Commission proposal is considered important to avoid doubt concerning the applicable law in the event of insolvency proceedings being opened against a participant in a system. The Commission proposal makes reference to the law of the country where the system is located, but since the common position does not determine where a system is physically located, the applicable law is defined as the law governing that system, which is, according to Article 2 (a) of the common position, the law chosen by the participants.

Hence the common position does not include amendment No 19 proposed by the European Parliament.

E. Section IV - Collateral security (Article 9)

Article 9 (1) of the common position (Article 7 of the Commission proposal) concerning the rights to collateral security essentially incorporates amendment No 20 proposed by the European Parliament with only certain modifications in the wording, following the introduction of the definition of a 'participant` and the change in the scope of the Directive which omits the reference to 'monetary policy`.

Article 7 (2) of the Commission proposal has been deleted as proposed by the European Parliament. Instead the common position introduces in Article 9 (2) a new provision defining the applicable law in cases where securities are pledged as collateral and the right of the holder of the collateral is recorded on a register, account or centralized deposit system which evidences the existence of proprietary rights in or for the delivery or transfer of the securities concerned.

F. Section V - Final provisions (Articles 10 to 15)

Article 10 of the common position concerns certain notification procedures which are to be seen as the necessary complement to the definition of the terms 'system` and 'indirect participant` in Article 2, and to the notification requirement in Article 6 (3).

Article 11 of the common position makes clear that the present Directive is a minimum directive, and that Member States may, in order to protect the systems, impose more stringent conditions than those laid down by this Directive.

Compared to the Commission proposal, Article 12 of the common position fixes the date of implementation by reference to the date of publication of the Directive, in light of the uncertainty as to the exact date on which the Directive will be finally adopted.

To ensure the monitoring of the Directive, Article 13 of the common position follows Article 9 of the Commission proposal, which places an obligation on the Commission to present a report on the application of the Directive to the European Parliament and the Council, accompanied where appropriate by proposals for its revision.

G. The recitals

The recitals have been adapted following the changes made to the Commission proposal. The common position largely includes amendment No 2 proposed by the European Parliament as recital 5, albeit in a slightly different wording. The Convention on Insolvency Proceedings as well as the proposed Directive on the reorganization and winding up of credit institutions rest on the principle of mutual recognition, not harmonization, of bankruptcy law. The first sentence of amendment No 2 has therefore not been included in the common position in order not to forestall future community legislation. The common position does not include amendment No 3 proposed by the European Parliament since the European Community is not obliged to take account of the recommendations of the Bank for International Settlements.

H. Conclusion

The Council considers that all amendments to the Commission proposal are in accordance with the aims of the Directive, namely to reduce systemic risk in payment and securities settlement systems and to minimize the disruption to a system caused by insolvency proceedings against a participant. The changes to the text of the Commission proposal aim at striking a balance between the need to introduce certain legal safeguards to ensure the rights of all participants and third parties and the need to allow sufficient flexibility in the functioning of the systems covered by the Directive.