OPINION OF THE EUROPEAN CENTRAL BANK
of 20 January 2000
at the request of the Luxembourg Ministry for th e Treasury and the Budget on a draft legislative
proposal implementing Directive 98/26/EC on settlement finality in payment and securities
settlement systems in the law of 5 April 1993, as amended, relating to the financial sector and
completing the law of 23 December 1998 creating a commission in charge of the prudential
supervision of the financial sector
(CON/99/19)
1. On 19 November 1999 the European Central Bank (ECB) received a request from the
Luxembourg Ministry for the Treasury and the Budget for an ECB Opinion on  a draft legislative
proposal implementing Directive 98/26/EC on settlement finality in payment and securitiessettlement systems (hereinafter referred to as the Directive) in the law of 5 April 1993, asamended, relating to the financial sector and completing the law of 23 December 1998 creating acommission in charge of the prudential supervision of the financial sector (hereinafter referred toas the Draft Law).
2. To the extent that the Draft Law represents the implementation of the Directive in the Luxembourg
legal system, the Luxembourg authorities were not, strictly speaking, legally obliged to consult the
ECB under Article 1 (2) of Council Decision (EC) 98/415 of 29 June 1998 on the consultation ofthe European Central Bank by national authorities regarding draft legislative provisions. The ECBis seeking to promote proactively a harmonised EU-wide implementation of the Directive in thelegislation of the Member States, in order to foster maximum transparency and legal certainty forthe closely connected payment and securities settlement systems, and to ensure a level playing-field throughout the European Union. In view thereof, the ECB very much welcomes theopportunity to give its opinion on the Draft Law. 
3. In addition, the Draft Law addresses matters pertaining directly to the core fields of competence of
the European System of Central Banks (ESCB) and introduces elements which go beyond thescope of the Directive. In this respect, the ECBs competence to deliver an opinion is based onArticle 105 (4) of the Treaty establishing the European Community (hereinafter referred to as theTreaty) and Article 2 (1) of Council Decision (EC) No. 98/415 of 29 June 1998, as the DraftLaw deals with clearing and payment systems. In accordance with Article 17.5, first sentence, of
2
the Rules of Procedure of the European Central Bank, this Opinion has been adopted by the
Governing Council of the ECB. 
A. General observations on the competence of the Eurosystem in the field of oversight
and on the concept of central bank oversight of clearing and payment systems as
distinct from the prudential supervision of financial institutions
4. The Draft Law proposes entrusting the national prudential supervisory authority (the Commission
de surveillance du secteur financier  CSSF) with the oversight (including the prior
authorisation) of payment and securities settlement systems to the exclusion of the Banque centrale
du Luxembourg (the BcL). Indeed, the Draft Law strictly confines the role of the BcL to theprovision of settlement facilities to some systems, and excludes it from the oversight function.Moreover, the Draft Law intends to entrust the CSSF with the prudential supervision of paymentand settlement systems, with the prudential supervision of systems as envisaged in the DraftLaw corresponding to the usual oversight tasks performed by central banks. 
5. First, this proposal would directly infringe the payment system oversight competence of the ECB
and the national central banks of the Member States participating in Monetary Union (the
Eurosystem), which is one of the core competences attributed to it by the Treaty. Second, if not
reconsidered, the Draft Law would create a situa tion of conflict between the BcL and the CSSF in
relation to the oversight function, since the BcL would continue to conduct oversight within the
framework of the Eurosystem. Third, the Draft Law would fail to make an adequate distinctionbetween the functions of prudential supervision, on the one hand, and those of payment systemsoversight, on the other.
6. Prior to the adoption of the Treaty, the oversight of payment systems had already been recognised
as one of the main functions of the national central banks, although this was not always based on a
specific and clearly formulated legal basis. Th e framework for this function, although informal,
was effective and successful, since it was based on the technical experience and on the moralauthority of the national central banks. Moreover, international consistency and effectiveness wereensured through co-ordinated action among central banks on the basis of principles establishedeither at the G-10 or at the EU level. 
7. Article 105 (2)1 of the Treaty and Article 3.12 of the Statute of the European System of Central
Banks and of the European Central Bank (hereinafter referred to as the Statute) now provide the
                                                     
1 The basic tasks to be carried out through the ESCB shall be: [] to promote the smooth operation of payment systems.
3
legal basis for the oversight activities of the Eurosystem. In addition, the competence of the
Eurosystem for systems oversight results from Article 22 of the Statute, which reads: the ECB
and national central banks may provide facilities, and the ECB may make regulations3, to ensure
efficient and sound clearing and payment systems within the Community and with othercountries . Within the Eurosystem oversight activities are generally performed at the level of the
national central banks, in line with the common oversight policy stance defined for the Eurosystemby the Governing Council of the ECB. The aim of  the oversight of clearing and payment systems
is the maintenance of systemic stability, the promotion of efficiency and the safeguarding of the
transmission channel for monetary policy
. In particular, payment arrangements are of crucial
importance for the conduct of monetary policy in both the strategic and the operational sense. The
above excludes the interference in the field of the Eurosystems oversight competence by any
Community or national body other than a central  bank acting within the framework of the
ESCB/Eurosystem. Article 254 of the Luxembourg law of 23 December 1998 concerning the
monetary status and the BcL is the national reflection of the framework created at the European
level.
8. On the basis of the Articles of the Treaty and of the Statute referred to above, read together with
Article 12.1, first indent,5 of the Statute, the Governing Council of the ECB is the decision-making
body responsible for the performance of the tasks of the Eurosystem in the field of oversight.
According to Article 12.1, third indent,6 of the Statute, within the Eurosystem, the national central
banks shall be available, and the ECB shall have recourse to them to the extent deemed possible
and appropriate, for the implementation of the oversight policy stance. Against this background,the Draft Law cannot entrust the oversight function to any authority other than the BcL, as part ofthe Eurosystem. 
9. The payment system put in place by the Eurosystem and through which the Eurosystems
operations are carried out is the TARGET system , the Luxembourg component of which is LIPS-
Gross. The Governing Council is responsible for the direction, management and control of
                                                                                                                                                                         
2 In accordance with Article 105 (2) of the Treaty, the basic tasks to be carried out through the ESCB shall be: [] to
promote the smooth operation of payment systems.
3 See Article 34.2 of the Statute: A regulation shall have genera l application. It shall be binding in its entirety and directly
applicable in all Member States.
4 The Central Bank may provide facilities to ensure efficient and sound clearing and payment systems.
5 The Governing Council shall adopt the guidelines and take the decisions n ecessary to ensure the performance of the tasks
entrusted to the ESCB under this Treaty and this Statute.
6 To the extent deemed possible and appropriate and without prej udice to the provisions of th is Article, the ECB shall have
recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.
4
TARGET. The basic principle of independence, as enshrined in Article 7 of the Statute, would be
hindered if the Governing Council were subject, in this capacity, to the authority of the CSSF. 
10. The prudential supervision of systems, as defined in the Exposé des motifs (the Explanatory
Memorandum) and in the Draft Law itself, with regard to the CSSF in fact encompasses activitieswhich are traditional oversight tasks, and refers to some of the principles defined by the centralbanks for the conduct of their oversight activities as indicated under point 6 above.  Moreover, the
notion of prudential supervision of systems (as such) is unknown in the developed world, whereit is standard practice that payment systems are overseen by central banks. Should the CSSFnonetheless be entrusted with competence for the prudential supervision of clearing and
payment systems under Luxembourg law, the Eurosystem will, for its part, remain entrusted with,
and will have to perform, these oversight functions as prescribed by the Treaty and the Statute. InLuxembourg this would result, in practice, in an unusual, complex and potentially conflictingsituation in which the oversight of clearing and payment systems would be carried out by both the
BcL and the CSSF at the same time. 
11. The Explanatory Memorandum reasons that the CSSF would be in an appropriate position to
assume prudential functions in relation to Luxembourgs payment systems because it does notitself operate systems and therefore cannot be subject to a conflict of interest between its
operational and prudential functions. It should be noted that Article 22 of the Statute itself states
that national central banks and the ECB may operate systems while at the same time beingentrusted with oversight functions within the framework of the Eurosystem. This possibilityexpressly afforded by the very legal basis of the Eurosystem should be seen as an indication ofconfidence in the ability of the Eurosystem to avoid a possible conflict of interest between theoperational and oversight activities of central banks. 
12. In the same vein, and more specifically in relation to securities settlement systems (SSSs), the
ECB notes that the Draft Law does not mention any need for collaboration between the CSSF and
the BcL in the oversight of SSSs in Luxembourg, despite the international tendency to consider
that the oversight of SSSs also requires the expertise of central banks. At least, whenever part ofthe service provided by the SSSs in Luxembourg has a direct impact on the smooth functioning ofTARGET, the CSSF cannot be granted exclusive oversight competence. Indeed, Cedelbankprovides services for the delivery of collateral securing intraday liquidity credit in TARGET andwill soon provide facilities to settle in central bank money. With regard to these two aspects atleast, the BcL should be directly involved in the oversight of that SSS. In addition, thepartnership of the German SSS  Deutsche Börse Clearing AG  with Cedelbank leaves atpresent two national SSSs held by the same Luxembourg holding company, New Cedel
5
International. Therefore, the attribution of oversight competence by the Draft Law can initially
relate only to the system operated by Cedelbank and not address the oversight of any other system
operated outside Luxembourg or of any system that would have a multi-country dimension. 
13. As indicated under point 5 above, the Draft Law does not make an adequate distinction between
supervisory and oversight functions. Although drawing the dividing line between prudentialsupervision and payment systems oversight may be complex, a basic element of the distinction liesin the different subjects of the respective activities, which can clearly be separated. Prudentialsupervision aims to promote the stability of financial institutions (which may participate in and/oroperate clearing and payment systems), while oversight pursues the promotion of the smooth
operation of clearing and payment systems themselves. Both functions thus certainly have partially
shared objectives, the clearest one of these being the stability of the financial system as a whole.The main focus of prudential supervision is, however, upon the safety and soundness of individualfinancial institutions, whereas the primary focus of oversight is the clearing and payment systemsthemselves in order to ensure their smooth operation, to avoid systemic risk within or betweensuch systems and to ensure the efficient and sound transmission of monetary policy impulses.Hence, the objectives of prudential supervision and of oversight are conceptually distinct and arepursued with different viewpoints and tools. They  need not therefore be combined and entrusted to
a single authority. When the central bank is not also the banking supervisory authority, the shared
objectives, the links between the systems and their participants, and the impact of failures in one
area on the other call for close and extensive co- operation between the two functions in order to
achieve the shared objectives in an optimal manner.  With regard to this last point, the ECB would
welcome the inclusion in the Draft Law of a specific provision governing the co-operation andexchange of information between the CSSF and the BcL.
14. In this respect, the ECB also notes that the consulting authority is not required to combine the
implementation of the Directive with the modifi cation of the Luxembourg law on the organisation
of the prudential supervision of the financial sector. If, however, such is the preferred choice, then
it will be important for the respective competence in the areas of prudential supervision and
oversight to be clearly defined. 
6
B. Comments on the arti cles of the Draft Law
- With regard to Article I of the Draft Law : 
15.  (A), (C), (G), (H), (I), (J): The ECB notes the proposed role of the CSSF under the Draft Law and
would like, in addition to the observations made under Part A above, to make a number of
comments in this regard. 
The ECB suggests that the Draft Law  including the Explanatory Memorandum  should identify
and refer explicitly to the specific nature of th e oversight of clearing and payment systems, on the
one hand, and the prudential supervision of financial institutions, on the other. In this regard, theCSSF should maintain responsibility for the prudential supervision of the financial institutionsinvolved in systems under the Draft Law, while the ECB recommends that the role of BcL, as partof the Eurosystem, as regards oversight (addressing clearing and payment systems as opposed tothe entities involved) should be explicitly referred to in the Draft Law. 
16. (A): Article 28-2: Les opérateurs de systèmes de paiement ou de systèmes de règlement des
opérations sur titres
(1) As also indicated below with reference to other articles, in Article 28-2 (1) the reference to the
CSSF should be replaced by a reference to the BcL.
(2) The ECB would favour clarification that this paragraph does not apply to the BcL. 
17. (C): Article 34-2: Définitions provides a variety of definitions, including the following:
a) système: Again, the arrangements for oversight should make reference to the basic task of the
BcL, which is to promote the safety and efficiency of payment systems (which corresponds to theequivalent task of the ESCB as determined by Article 105 (2) of the Treaty and Article 3 of theStatute). It should be noted that the Directive does not, as such, require that Member Statesestablish a systems authorisation procedure. Should several Member States participating in theeuro area find it necessary to implement such a procedure in a formal manner, the Eurosystem mayat some point have to ensure that the level pl aying-field is maintained among the systems within
the euro area. At a local level, this will involve the participation of the BcL. As a consequence, and
although the CSSF may be assigned the task of formally designating the systems (as systems)
and giving notification of such systems to the Commission of the European Communities, theverification (e.g. checking against principles which belong to the oversight activities) and approvalof systems (as systems) should, in the ECBs vi ew, be undertaken by the BcL, possibly in co-
7
ordination and co-operation with the CSSF for all payment systems; with regard to SSSs, this
should at least be the case for all aspects relating to the settlement of Eurosystem credit operations
and settlement in central bank money. Finally, the ECB would welcome an acknowledgement inthe Draft Law that all payment systems for which the BcL acts as settlement agent areautomatically designated as systems to be notified to the Commission of the EuropeanCommunities.
l) moment douverture dune procédure dinsolvabilité. In this respect, the Draft Law hasinserted an addition to the definition provided in Article 6.1. of the Directive, this addition readingor any other moment defined by the national law applicable to the insolvency of a participant as
being the moment of opening of an insolvency procedure . This addition should be deleted. The
Directive does not provide for this alternative, but determines, in an imperative manner, themoment of opening of the insolvency proceeding s as the moment at which a competent authority
hands down its decision. This second part of the definition poses material risks and uncertaintywhich should be avoided. In the Draft Law it is important that the terms chosen for the definitionin question be clear in relation to the Luxembourg legal system and that they do not depart fromthe definition stated in the Directive, since this is the point at which significant legal consequencesarising from other parts of the Directive would be entailed.
18. 34-3: Champ dapplication: The ECB notes that the new Chapter 5 on the authorisation of
payment systems and securities settlement systems shall apply to all payment systems and/or allsecurities settlement systems authorised in Luxembourg. The ECB notes the intention to cover allpayment and securities settlement systems authorised under the Draft Law, and considers that suchauthorisation should be processed along the lines indicated under point 17 above. As for LuxClear, to which reference is made in the Explanatory Memorandum as a system in itself, it is theECBs understanding that Lux Clear refers only to certain services of another existing system and
not to a system or legally separate entity as such. 
19. Article 34-4: La demande dagrément: 
(1) The ECB notes that the Draft Law implements th e possibility to cover a formal arrangement
between two participants, which is allowed under Article 2 (a), final paragraph, of the Directive,provided that such a designation is warranted on the grounds of systemic risk. The ECB wouldwelcome an express reference to systemic risk in the Draft Law, to be evaluated within theframework of the ESCB (including BcL). 
8
(2) The ECB would like to propose that the sent ence La Commission est lautorité compétente
pour accorder lagrément aux systèmes be amended along the lines indicated under point 17
above.
20. Article 34-5: La procédure dagrément: The Draft Law subjects any amendment to the
agreement, which forms the basis for the system, to prior authorisation. If it is the case that anamendment is also to be understood as the event of a new member joining, this request wouldappear to be too restrictive for the operation of the system. Moreover, the time-limits for a decisionto be taken would appear to be unduly long.
21. (H): Article 47-1: La surveillance prudentielle des systèmes de paiement et des systèmes de
règlement des opérations sur titres agréés au Luxembourg: The ECB proposes that the
reference to prudentielle in the title of Chapter 2bis and Article 47-1 be deleted. It also proposesreplacing the reference to La Commission with a reference to La Banque centrale duLuxembourg and deleting the references to prudentielle and to the systèmes de règlement desopérations sur titres in the sentence La Commission est lautorité compétente pour lasurveillance prudentielle des systèmes de paiement et des systèmes de règlement des opérationssur titres quelle a agréés. The ECB also pr oposes replacing La Commission with La Banque
centrale du Luxembourg in the sentence A ce titre, la Commission veille à lapplication des
règles de fonctionnement dont sont dotés les systèmes quelle a agréés. 
Paragraph (G) of the Draft Law would also need to be adapted along these lines.
22. (I): Again, the ECB proposes that the reference to La Commission be replaced with a reference
to La Banque centrale du Luxembourg in the sentence La Commission tient en outre le tableauofficiel des systèmes de paiement et des systèmes de règlement des opérations sur titres agréés auLuxembourg. 
23. (J)  Article 61-2: Les dispositions spécifiques au caractère définitif du règlement dans les
systèmes de paiement et de règlement des opérations sur titres agréés au Luxembourg.  
(1): The Draft Law does not incorporate the text of Article 3 (2) of the Directive concerning the
rules relating to the suspect period. Given the general nature of the wording used in Article 61-2(1), these provisions would not call into questio n the operations performed, at least not within the
system. Nevertheless, legal certainty would be reinforced if the text of Article 61-2 explicitlyreferred to the rules concerning fraudulent operations. 
9
(2): Paragraph 2 of Article 61-2 to a very large extent incorporates the wording of Article 3 (1) of
the Directive. The following major differences should be noted and given further consideration: 1)
the Draft Law inserts between parties after the words shall be legally enforceable; 2) the DraftLaw adds the operator of the system to the list of persons who should not have been aware of the
insolvency; 3) the text uses the conjunctive and instead of the disjunctive or in the list ofpersons mentioned. 
(3): The ECB notes that, according to the Explanatory Memorandum (pages 12 and 20), theabolition of the zero-hour rule in Luxembourg is confirmed by the first indent of Article 61-2 (2)of the Draft Law. In this respect, the position adopted in the Explanatory Memorandum, namely
that the above provision in the Draft Law is sufficient, should be further considered since Article 7
of the Directive, which relates to the disqualification of any zero-hour rule, is a key provision.Unless the abolition of the zero-hour rule is already clear and extensive enough under existingprovisions of Luxembourg law as further specified by the Draft Law, an explicit statutoryprovision should be added to the Draft Law in order to reflect Article 7. Moreover, as was pointedout above, under the current wording of Article 34-2 (l) of the Draft Law, and contrary to Article6.1. of the Directive, the moment of opening of th e insolvency proceedings (which leaves it up to
the national law applicable to the insolvency of the participant to determine otherwise) is notnecessarily the moment at which the relevant authority hands down its decision, but could, for
instance, be before. In the context of Article 7 of the Directive, this could lead to an indirect re-
introduction of a retroactive effect of insolvency in spite of the provision contained in Article 61-2(2) of the Draft Law. 
(4): This provision is not part of the implementatio n of the Directive. It provides for the exemption
from attachment of settlement accounts in respect of the operator of the system or the settlementagent. The provision seems to have been inspired by Article 9 of the Belgian law of 28 April 1999.The ECB notes, however, that this provision applies to any settlement account, whereas thecorresponding Belgian provision is limited to cash settlement accounts. The ECB is pleased with
the introduction of this rule, which would enhance the safeguarding of the systems, thus
eliminating the danger that untimely attachments,  or even improper attachments, could completely
paralyse the settlement of a payment or securities settlement system.
24. Article 61-3: Les dispositions spécifiques  à la préservation des droits du titulaire de
garanties constituées dans le cadre de  systèmes communautaires de paiement ou de
règlement des opérations sur titres ou dans le cadre dopérations des banques centrales desEtats Membres ou de la Banque centrale européenne contre les effets de linsolvabilité de la
partie ayant constitué les garanties.  This provision implements Article 9 of the Directive. The
10
ECB is of the view that the protection provided for by Article 61-3 (2) of the Draft Law should be
interpreted in general terms as covering any form of security interest in favour of participants,
irrespective of the purpose underlying the creation of such security interest (i.e. it should not belimited to securing the obligations of participants vis-à-vis the operator or other participants in asystem, these obligations arising from participation in such a system). It is worth mentioning that
the conflict of law rules in the Directive are consiste nt with (i) the rule contained in Article 8 of the
US Uniform Commercial Code, (ii) the national laws already in place in several Member States,and (iii) the current trend of academic authority on the complex matter of the cross-border tradingof securities.
25. Article 61-4 (2) and (3): The ECB proposes that the reference to la Commission be replaced by
la Banque centrale du Luxembourg in this Article.
- With regard to Article II of the Draft Law:
26. The ECB refers to the developments contained in Part A of this Opinion and proposes that the
envisaged addition of a new paragraph 3 to Article 2 of la loi du 23 décembre 1998 portantcréation dune commission de surveillance du secteur financier be deleted.
27. The ECB confirms that it has no objection to this ECB Opinion being made public by the
competent national authorities at their discretion. In the light of the general application of the
observations made, and the importance to the international financial markets of a uniformapplication of Community law in this field, the ECB will arrange for this Opinion to be copied tothe competent national authorities of Member States responsible for implementing the Directive. 
Done at Frankfurt am Main on 20 January 2000.
The President of the ECB
[signed]
Willem F. Duisenberg