EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 14 November 2006 
at the request of Latvijas Banka 
on a draft regulation on Latvijas Banka’s securities settlement system 
(CON/2006/52) 
 
Introduction and legal basis  
On 28 September 2006 the European Central Bank (E CB) received a request from Latvijas Banka for an 
opinion on a draft regulation on Latvijas Banka’s secu rities settlement system (hereinafter the ‘draft 
regulation’). 
The ECB’s competence to deliver an opinion is based on the third and fifth indents of Article 2(1) of 
Council Decision 98/415/EC of 29 June 1998 on the consultation of the European Central Bank by 
national authorities regarding draft national provisions1, as the draft regulation relates to a national central 
bank and payment and settlement systems. In accordan ce with the first sentence of Article 17.5 of the 
Rules of Procedure of the European Central Bank,  the Governing Council has adopted this opinion. 
 1.  Purpose of the draft regulation 
As explained by Latvijas Banka, the main objective of the draft regulation is to optimise the operation of 
the securities settlement system operated by Latvijas Ba nka (hereinafter the ‘VNS’). The draft regulation 
will replace an existing regulation on the VNS. The E CB also understands that the draft regulation would 
come into force simultaneously with the Regulati on on the use of Latvijas Banka’s monetary policy 
instruments since the draft regulation chiefly con cerns the settlement of securities transactions for 
Latvijas Banka’s monetary policy and intraday credit operations in the VNS. 
 2. General observations  2.1 ECB notes that, on adoption of the euro in Latv ia, and provided that the VNS will be selected to 
provide securities settlement of central bank credit operations, the VNS will be assessed against the 
Eurosystem standards for the use of EU securities settlement systems in ESCB credit operations
2. 
                                                 
1  OJ L 189, 3.7.1998, p. 42.  
2  The standards are av ailable on the ECB’s website at www.ecb.int. 
2 For that reason, this opinion is  without prejudice to a future ECB assessment of the VNS against 
the abovementioned standards.  
2.2 The ECB expects Latvijas Banka to ensure that the VNS complies with the Latvian Law on 
settlement finality in payment and security settleme nt systems (hereinafter the ‘SFD Law’).  
 3. Specific comments 3.1 According to the explanatory memorandum submitte d to the ECB, the main purpose of the VNS is 
securities settlement for Latvijas Banka’s monetary  policy and intraday credit operations. Although 
it can be derived from Article 2.7 of the draft regulation, the clarity and transparency provided through the draft regulation could be enhanced by  explicitly specifying this main purpose already 
in the provision defining the VNS (Article 1.1), es pecially in view of the existence of another 
securities settlement system operated by the Latvian Central Depository (LCD). 
3.2 According to Article 1.2 of the draft regula tion, a VNS participant is defined as a bank, the 
Financial and Capital Market Commission (herei nafter the ‘Commission’) and Latvijas Banka. 
Furthermore, Article 1.3 of the draft regulation de fines a bank as a ‘bank or a branch of a foreign 
bank registered in the Republic of Latvia, as well as a bank and a branch of a bank of another Member State, entitled to deliver financial service s in the Republic of Latvia and having a cash 
account for settlements in lati with Latvijas Banka’. Th is is in line also with Article 3 of the Law on 
credit institutions which provides that in Latvia, cred it institutions registered in Latvia, branches of 
credit institutions of a foreign State, credit institu tions registered in another Member State or the 
branches of credit institutions registered in Memb er States may perform credit institution activities. 
However, Article 1 of the SFD Law provides that a credit institution registered in Latvia or a 
Member State of the European Union or the European Economic Area, and a commercial company 
whose head office is located outside the Europ ean Economic Area and whose tasks correspond to 
those of credit institutions in Latvia and Member  States of the European Union and the European 
Economic Area are eligible to par ticipate in the system. The ECB notes that, according to the SFD 
Law, only entities covered by Article 1(2) may participate in a settlement system. The ECB further notes that, although a branch of a foreign bank doe s not have the legal entity status in Latvia, a 
number of provisions on credit institution insolvency in the Law on credit institutions apply also to 
branches of foreign banks in accordance with Arti cle 6 of the Law on credit institutions. Thus, in 
the absence of an express reference to the foreign bank branches in Article 1(2) of the SFD Law, 
and considering the different insolvency proceed ings applicable to foreign bank branches and 
banks established in Latvia, respectively, th e ECB advises Latvijas Banka to carry out an 
assessment as to whether foreign bank branches fa ll within the scope of application of the SFD 
Law. If that is not the case, foreign bank branches should be excluded from the scope of Article 1.3 
of the draft regulation.  
3 3.3 Article 2.5 of the draft regulation foresees three different types of accounts: (1) a bank’s securities 
account where Latvijas Banka record s securities that are held and used by the bank as collateral in 
transactions with Latvijas Banka; and (2) th e Commission’s securities account where Latvijas 
Banka records securities of a fund managed by th e Commission that are tran sferred from the LCD; 
and (3) Latvijas Banka’s securities account where La tvijas Banka records securities held by itself. 
The draft regulation on the use of Latvijas Banka’s  monetary policy instruments, however, also 
refers to a collateral account which is defined as a securities account opened fo r the counterparty in 
the VNS in accordance with the draft regulation where securities are posted as collateral. The ECB 
understands that another Latvijas Banka’s Regula tion provides that all securities registered on a 
bank’s securities account are posted as collateral for monetary policy operations. However, the 
ECB invites Latvijas Banka to consider clarifyi ng this also in the draft regulation now under 
preparation. The ECB also notes that Article 17(9) of the SFD Law requires the system rules to include the procedure for creating and managing collateral security.   
3.4 The wording of Article 2.13 of the draft re gulation on Latvijas Bank’s acceptance of security 
transfers and their VNS entry point needs clarifica tion. In particular, it provides that (i) ‘Latvijas 
Banka shall transfer securities in the sequence of re ceiving securities transfer orders’; and (ii) ‘after 
receiving and examining each securities transfer orde r, Latvijas Banka shall accept it by conducting 
the respective securities transfer’; and (iii) ‘a securities transfer order shall be deemed entered in 
the VNS from the moment it is accepted, i.e. when  Latvijas Banka debits the deliverer’s securities 
account’. The concepts of receipt and acceptance of tr ansfer orders needs further clarification. The 
ECB understands that this aspect of the draft regul ation is still under consider ation and that Latvijas 
Banka envisages clarifying that reservation of secu rities in the respective securities account equals 
the entry of transfer orders in the VNS. 
3.5 The ECB notes that Article 2.1 of the draft regulation provides that the VNS will operate in 
accordance with Latvian laws and regulations. The ECB also notes that Article 15 of the SFD Law provides that if insolvency pro ceedings are initiated against a system participant, the rights and 
obligations arising from, or in c onnection with, that participant’s pa rticipation in the system will be 
determined in accordance with the law of the country where th at system operates. Although 
Article 15 of the SFD Law in conjunction with Ar ticle 2.1 of the draft regulation in principle 
should ensure that the rights and obligations arising from, or in connection with, participation in the 
VNS will be governed by Latvian law also in the event of opening insolven cy proceedings against 
a participant, in the interests of  transparency and legal certainty, and given that Article 8 of the 
Settlement Finality Directive
3 (implemented by Article 15 of the SFD Law) is one of the 
Directive’s most important provisions, the ECB s uggests clarifying in the draft regulation that all 
rights and obligations arising from participation in the VNS are governed by Latvian law also in the 
event of opening insolvency proceedings against a par ticipant. Furthermore, in view of the need for 
                                                 
3  Directive 98/26/EC of the European Parliament and of th e Council of 19 May 1998 on settlement finality in payment and 
securities settlement systems (OJ L 166, 11.6.1998, p. 45). 
4 such transparency and legal certainty, the ECB sugg ests further clarifying paragraphs 10 to 12 of 
Annex 1, which currently appear to designate onl y the law applicable to the dispute settlement ( lex 
fori), without designating the substantive law governi ng the rights and obligations of parties arising 
from their contractual relationship ( lex contractus ).   
3.6 On Latvia’s adoption of the euro, and provided that the VNS will be selected to provide securities 
settlement for central bank credit operations, the VNS  will need to comply with the operating days 
and hours of the successor to the TARGET system. The ECB understands that Latvijas Banka intends to introduce such amendments to the draf t regulation in a timely manner, thereby ensuring 
compliance with these rules. 
3.7 With regard to the VNS operation in the even t of technical problems or other contingencies, 
disaster procedures for critical functions should be in place in the event of a total failure of the 
telecommunication networks. The business continu ity arrangements should also provide for a 
second processing site which should not depend on the same critical infrastructure components 
used by the primary site, such as telecommunicati ons and electric power. In this regard, the ECB 
has been informed that Latvijas Banka has adopt ed the requisite regulations and procedures to 
ensure all necessary business continuity arrangeme nts for Latvijas Banka’s payment and settlement 
systems, including a second processing site, although  these regulations and procedures do not form 
part of the draft regulation submitted to  the ECB in the present consultation.  
 
This opinion will be published on the ECB’s website. 
  Done at Frankfurt am Main, 14 November 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET