OPINION OF THE EUROPEAN CENTRAL BANK
at the request of the Swedish Ministry of Fi nance concerning a legisl ative proposal for the
implementation in Sweden of  Directive 98/26/EC of the European Parliament and of the
Council of 19 May 1998 on settlement finality in  payment and securities settlement systems
(CON/99/09)
1. On 19 July 1999 the European Central Bank (ECB) received a request from the Swedish
Ministry of Finance for comments from the ECB concerning a legislative proposal entitled
Promemoria om Finalitydirektivets införlivande med svensk rätt (the legislative proposal).
The intention in respect of the legislative propos al is to implement in the Swedish legal system
Directive 98/26/EC of the European Par liament and of the Council of 19 May 1998 on
settlement finality in payment and securities settle ment systems (the Finality Directive or the
Directive). The legislative proposal contains a proposed new draft law on settlement systems
(the draft law) and certain proposed ame ndments to existing Swedish legislation (the
legislative amendments), as well as an explanatory memorandum concerning the FinalityDirective and the suggested additions and am endments to Swedish law (the explanatory
memorandum).
2. Since the purpose of the legislative proposal is th e implementation of the Finality Directive, the
Swedish authorities were not legally obliged to consult the ECB under Article 1.2 of CouncilDecision 98/415/EC of 29 June 1998. The ECB, however, seeks to promote proactively a
harmonised EU-wide implementation of the Finality Directive in the legislation of the MemberStates in order to foster maximum transparen cy and legal certainty for the closely connected
payment and securities settlement systems and to  ensure a level playing-field throughout the
2European Union. Therefore, the ECB very much  welcomes the opportunity to give its opinion
with regard to the legislative proposal, consider ing that it addresses matters pertaining directly
to the core fields of competence of the Eu ropean System of Central Banks (ESCB). In
particular, the draft law is closely related to th e basic task of the ESCB to promote the smooth
operation of payment systems, as set out in Article 105 (2), fourth indent, of the Treaty
establishing the European Community, as am ended (the Treaty), and Article 3.1, fourth
indent, of the Statute of the Eu ropean System of Central Bank s and of the European Central
Bank (the Statute of the ESCB or the Statut e). In view thereof, and as a general remark, it
may be useful for the consulting authority to consider the implications of the legislative
proposal from the perspective of future Swedis h participation in the third stage of Economic
and Monetary Union (EMU). A ccordingly, the Governing Counc il of the ECB has adopted this
ECB Opinion in accordance with Article 17.5, first sentence, of the Rules of Procedure of the
European Central Bank.
3. The legislative proposal indicates the Swedish systems which will fall within the scope of
application of the draft law pursuant to Article s 2 (a) and 10 of the Finality Directive (Sections
1-7 of the draft law and Part 5.2 of the explanatory memorandum).
3.1 The explanatory memorandum contains an anal ysis and general description of the settlement
systems that would be eligible for designation as systems and a notification to the European
Commission under the draft law. In this respect, th e ECB notes the references to the stability of
the financial system (in Section 4, second para graph, and Section 5, second paragraph, of the
draft law and in the explanatory memorandum) and to systemic risk (in the explanatory
memorandum). The ECB welcomes the general intention to cover all systems that can be said tobe of importance for the stability of the financial system and the attention paid to systemic risk.
3.2 In addition, Section 2 of the draft law makes e xplicit reference to the national real-time gross
settlement (RTGS) system operated by Sveriges Riksbank (RIX). Accordingly, this Section
clarifies that RIX will be notified to the European Commission as a system, as defined inArticle 1 of the Finality Directive, and benefit from the provisions of the draft law and thelegislative amendments. The explanatory memorandum also refers to the RTGS paymentarrangement of the ESCB for EU-wide fund transfers (TARGET). In this connection, it may be
noted that the separate Swedish arrangement w ithin RIX for the settlement of fund transfers in
euro (euro-RIX) is linked with the other na tional RTGS systems of TARGET outside Sweden
(through the Interlinking component). Fund tran sfers effectuated to and from Sweden through
euro-RIX and the Interlinking should also fall w ithin the scope of the provisions of the draft
3law. Accordingly, the Swedish authorities are encour aged in this respect to clarify the fact that
euro-RIX forms an integral part of TARGET , which may be explaine d when notification of
RIX, including euro-RIX, is given to the European Commission.
4. The ECB notes the proposed role of the Financial Supervisory Authority
(Finansinspektionen) under the draft law, and would like to make some comments. In this
connection, Swedens present status as a Memb er State with a derogation under the Treaty is
duly recognised (cf. Article 122 (ex Article 109k ) of the Treaty). The exclusion of such a
Member State and its national central bank (NCB) from rights and obligations within the ESCBis laid down in Chapter IX of the Statute of  the ESCB. The exclusion covers, among other
provisions, Article 105 (2) of the Treaty and Article 3 of the Stat ute of the ESCB and,
therefore, the basic ESCB task to promote th e smooth operation of payment systems (Article
105 (2), fourth indent, and Article  3.1, fourth indent). With reference to the general remark (in
item 2 above) concerning the future participa tion of Sweden in EMU, however, the following
observations are intended to clarify certain gene ral concepts in relation to the ESCBs conduct
of this basic task. Whereas prudential supervisi on has as its subject financial institutions (which
may participate in settlement systems as indicated in Section 7 of the draft law), the subject for
payment systems oversight is the settlement systems themselves. There are several sharedobjectives between the supervisory activity in resp ect of individual financial institutions and the
oversight of payment systems. For instance, an institution subject to supervision may act as the
operator of a payment system, and supervision and oversight activities will have certain sharedobjectives in relation to such an institution, t hus calling for co-operation between the authorities
involved. As reflected in the explanatory memorandum, the general focus of payment systemsoversight is the avoidance of system ic risk within or between systems.
4.1 It is true, as noted in the explanatory memo randum (in Part 5.2.4 on page 56), that the Finality
Directive does not regulate the manner in which the Member States may arrange theirrespective oversight regimes in relation to domestic settlement systems. On the other hand, theexplanatory memorandum refers to the many re ports concerning the oversight of settlement
systems, notably the reports by central banks prepared under the auspices of the Bank for
International Settlements (BIS). In particular, the adoption of the so-called Lamfalussystandards for oversight contained in the Report of the Committee on Interbank Netting Schemesof the Central Bank of the Group of Ten Countri es, Basel (1990), provided a framework for the
traditional central bank function of over sight in relation to payment systems.
44.2 In addition to the stipulation in the Treaty and th e Statute of the ESCB th at the promotion of the
smooth operation of payment systems shall be one of  the basic tasks to be carried out through
the ESCB (item 4 above), and the central bank reports concerning oversight (item 4.1 above),
Article 22 of the Statute may be noted. Accord ing to the latter provision, the ECB may make
regulations, to ensure efficient and sound clear ing and payment systems within the Community
and with other countries.
4.3 In Sweden, Section 2 of Chapter 1 of the amended Act on Sveriges Riksbank (lagen
(1988:1385) om Sveriges Riksbank ) which, in its revised version, entered into effect on
1 January 1999 (the Riksbank Act), stipulates that Sveriges Riksbank shall [] promote a
safe and efficient payment system. Prior to 1 January 1999 this task was laid down in Section
4 of the previous version of the Riksbank Act,  as well as in Article 12 of Chapter 9 of the
Constitution Act (regeringsformen). The gove rnmental report of 2 October 1997 concerning
the proposal for the new Riksbank Act (Lagråd sremiss  Riksbankens ställning) states (on
page 69) that the promotion of a safe and ef ficient payment system is a basic duty of the
Riksbank and that an equivalent task applies fo r the ESCB. This equivalent ESCB task is the
oversight function.
4.4 In view of the above, the ECB suggests that the legislative proposal should identify and refer
explicitly to the specific nature of the oversi ght of payment systems, on the one hand, and the
supervision of financial institutions, on the other hand. The Swedish Financial SupervisoryAuthority should maintain responsibility for th e prudential supervision of the financial
institutions involved as system operators or pa rticipants in relation to systems under the draft
law. Furthermore, the ECB recommends that the role of Sveriges Riksbank as regards oversight(addressing the settlement systems as opposed to the entities involved) should be explicitly
referred to in the draft law, whereby any oversi ght activity should be allocated to the Riksbank.
Hence, the arrangements for oversight should make reference to the basic task of SverigesRiksbank to promote the safety and efficiency  of payment systems (which corresponds to the
ESCBs equivalent task as determined by Artic le 105 (2) of the Treaty and Article 3 of the
Statute of the ESCB). As  a consequence, and although the Financial Supervisory Authority may
be assigned the task of giving notificati on of systems to the European Commission, the
envisaged approval of systems before notifica tion should, in the ECBs view, be undertaken by
the Riksbank in co-ordination and co-operati on with the Financial Supervisory Authority.
5. The definitions of participants and indirect pa rticipants in Article 2 (f)-(g) of the Finality
Directive allow the Member States to accommodate  the participation of indirect participants
5in systems. While the exclusion of indirect par ticipants is also possible under the Directive, the
inclusion of indirect participants (as defined in  the Directive) is an option which, to the extent
that it is followed, would contribute to the objectiv e of avoiding systemic risk in the integrated
financial markets of Europe. However, the legislative proposal does not include indirect
participants and the ECB notes that it is stat ed in the explanatory memorandum (on page 55)
that there is no such need in Sweden at the moment.
6. Articles 3 and 5 of the Finality Directive concern the legal enforceability, binding effect and
irrevocability of transfer orders. In this conn ection, it is possible to distinguish between the
legal situation between contractual parties, on the one hand, and in relation to any third party,
including a liquidator in the case of insolv ency, on the other hand (cf. Part 5.3.2 of the
explanatory memorandum).
6.1 Between the parties, and from the perspectiv e of a sending (or receiving) participant,
irrevocability means that a sending participant cannot revoke a transfer order, at least not
beyond the time foreseen in the operating rule s of a payment system. The ECB notes the
conclusions of the explanatory memorandum in this respect (on page 64) and agrees that,
between the parties in relation to a system, Sw edish law already complies with the requirements
of Article 3.1, first paragraph, and Article 5 of the Directive.
6.2 From the perspective of the receiving particip ant, irrevocability between the parties would not
be sufficient, however, as a means to address syst emic risk. The transfer of funds or securities,
or the interest in securities, covered by a tran sfer order, should be settled through the system to
the benefit of the receiving participant without the possibility for any third party, including in
particular a liquidator, to hinder such settlement. Recital 9 of the Directive states, inter alia, that
the reduction of systemic risk requires in par ticular the finality of settlement. Such finality
vis-à-vis third parties shall be ensured by the respective legal system in each Member State and,in particular, in relation to any disruption to  a system that could otherwise be caused by
insolvency proceedings against a participant. Moreover, Article 5 concerning irrevocability also
addresses third parties, including any liquidator.  In this respect, the conclusion of the analysis
of the explanatory memorandum (on page 65) that there is no need for specific rules in order to
implement the Directive, may be further cons idered. Unless it is already clear under existing
Swedish law, a statutory provisi on should be added, clarifying th at transfer orders are legally
enforceable and binding (Article 3 of the Dir ective), as well as irrevocable (in accordance with
Article 5 of the Directive), also vis-à- vis a liquidator or any other third party.
66.3 In addition, Article 7 of the Directive stipulat es that insolvency proceedings shall not have
retroactive effect and the ECB notes that Swed ish law does not provide for retroactive effects
of insolvency proceedings through any so-ca lled zero-hour rule. The ECB also notes the
reference in the explanatory memorandum to Rec ital 13 and the interpretation of this provision
(on pages 38-39 of the explanatory memorandum) concerning the possibility of recovery or
restitution of any transfer order outside the system. The ECB would favour an approach in
this respect (as indicated by the reference to fraud or technical error in Recital 13) which
upholds the objective of avoiding any revocati on of a transfer order (or any unwinding of
netting) in the system.
7. The ECB notes and appreciates the very thorough Swedish analysis in relation to
netting and welcomes the legislative amendment proposed for Section 1 of Chapter 5of the Act on trading with financial instruments (lagen (1991:980) om handel medfinansiella instrument). In particular, the ECB welcomes the stipulation concerning thevalidity and effectiveness of multilateral netting, and notes the coverage also of close-out netting, within systems.
8. The ECB notes the proposed Section 12 of the draf t law concerning applicable law for systems
and welcomes the clarification that the law govern ing the system shall also be binding vis-à-vis
a bankruptcy estate (and, it is assumed, its li quidator) and the creditors in any insolvency
proceedings. The ECB also notes the reflecti on in the explanatory memorandum (on page 56)
concerning the risk of forum shopping by syst em operators with a view to applying the most
favourable legal regime to its system, which again highlights the oversight aspect in relation tosystems of which notification has been given under the Directive.
9. The ECB also welcomes the legislative amendment to Section 10 of Chapter 8 of the
Swedish Bankruptcy Code (konkurslagen (1987:672)) in order to allow for the
immediate realisation of certain collateral security by the security holder.
10. The ECB shares the view (expressed on pa ge 93 of the explanatory memorandum) that
Article 9.2 of the Directive concerning the app licable law in relation to dematerialised or
immobilised securities ought to be given a gene ral application. Accordingly, the ECB welcomes
the corresponding proposed legislative amendment of Section 1 of Chapter 6 of the Act on
trading with financial instruments .
711. The ECB confirms that it has no objection to this ECB Opinion being made public by the
competent national authorities at their discre tion. In the light of the importance to the
international financial markets of a harmonised implementation of Community law in this field,
the ECB is arranging for this Opinion to be c opied to the competent national authorities of the
Member States responsible for implementing the Finality Directive.
Done at Frankfurt am Main on 26 August 1999.
The Vice-President of the ECB
[signed]
Christian Noyer