COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 04.07.1997 
COM(97) 345 final 
96/0126 (COD) 
Amended proposal for a 
EUROPEAN PARLIAMENT AND COUNCIL DIRECTIVE 
ON SETTLEMENT FINALITY AND COLLATERAL SECURITY 
(TO BE RENAMED: "ON THE LIMITATION OF SYSTEMIC RISK 
IN PAYMENT AND SECURITIES SETTLEMENT SYSTEMS") 
(presented by the Commission pursuant to Article 189 a (2) 
of the EC-Treaty) 

!, STAGE REACHED IN THE PROCEDURE 
1. On 30 May 1996, the Commission adopted a proposal for a Directive on Settlement 
finality and Collateral Security. 
2. The Council forwarded this text to the Parliament, the Economic and Social Committee 
and the European Monetary Institute, and began to examine the proposal on 20 September 
1996. 
3. The Economic and Social Committee unanimously adopted an opinion on the Commission 
proposal on 31 October 1996, in which it recommended that securities settlement systems 
be included in the scope of the proposal. 
4 The European Monetary Institute delivered its opinion on 21 November 1996. It welcomed 
the proposal and stressed its crucial importance to the efficient and smooth functioning of 
payment systems; it also recommended that securities settlement systems should be 
included in the scope. 
5 The European Parliament welcomed this proposal and adopted the legislative resolution 
embodying iîs opinion on the Commission proposal during its plenary meeting of 9 April 
1997. 
6 The amended proposal which is attached herewith has been drafted to take account of the 
outcome of the consultation of these institutions. 
2. COMMENTS ON THE AMENDMENTS 
The European Parliament proposed 21 amendments to the text of the Commission Proposal. 
1. Accepted Amendments 
The Commission will include amendments 2, 3, 5, 7, 8, 9, 13, 14, 15, 18, 20 in its 
amended proposal. 
® Amendments 2 and 3 add a recital. These recitals are useful in view of a better 
understanding of the background against which this proposal was made. 
Amendments 5. 7. 8. 9. 14 and 15 can all be accepted, as they aim at bringing 
securities settlement systems within the scope of this Directive. This inclusion 
is in line with the recommendations made both by the EMI and by the 
ECOSOC. 
• The European Parliament wishes securities settlement systems to be covered by 
the directive. In order be consistent with that wish, not only should the words 
"or a securities settlement system" be added at the end of Amendment 7. but 
"investment firms as defined in point 2 of Article 1 of Directive 93/22/EEC 
excluding the institutions set out in the list in Article 2(2) points a)-k) thereof1 
should also be included in the definition of "institution", as securities 
settlement systems typically have investment firms as their participants. 
The Directive covers collateral security provided in connection with monetary 
policy operations. Amendment 13 introduces derivatives within the definition 
of monetary policy operations. Inasfar as central banks carry out operations 
concerning such instruments, they should indeed be included in this Directive. 
As "securities institutions" are not defined in the European Parliament's 
amendments, and as the definition of "institution" in the Commission amended 
proposal also covers "investment firms", which is probably what the European 
Parliament means by "securities institution" in Amendment IS. the 
Commission amended proposal simply refers to "institution" instead of to 
"securities institution". It also replaces "participant" which is defined nowhere, 
with "institution". 
Amendment 18 changes the wording of the original Commission proposal, but 
expresses the same idea and seems therefore acceptable. 
Amendment 20 clarifies the text of paragraph 1. Paragraph 2 of the original 
Commission proposal explicitated a subhypothesis covered by paragraph 1. Its 
deletion can therefore be accepted. 
Furthermore, the Commission could include amendments 1, 4, 10 and 12 
subject to minor modifications. 
In Amendment 1. a new title of the Directive is proposed: "Proposal for a 
European Parliament and Council directive on the treatment of payment 
systems and securities settlement systems in the context of insolvency 
proceedings concerning credit or securities institutions". Although a change in 
title is acceptable, the suggested one implies that the Proposal only aims at 
solving problems relating to insolvency. Therefore, a new title, "Directive on 
the Limitation of Systemic Risk in Payment and Securities Settlement 
Systems", shall be included. 
Amendment 4 is acceptable, except for the mention "and the Euro" besides 
"Ecu". Firstly, the separate mention of "Euro" after the words "operating in any 
currency", suggests the Euro is not a currency. Where it is true that the Ecu is a 
basket and not a currency, this is not true for the Euro. Secondly and more 
importantly, the fact that Ecu and Euro are mentioned in the same legal text, 
suggests that the Ecu and the Euro will co-exist. However, the Ecu will be 
replaced by the Euro, so both will never exist at the same time. 
Amendment 12 aims at including securities settlement systems within the 
Directive. It amends the definition of "third country payment system" by 
deleting the word "payment" so as to read "third country system". However, 
Parliament seems to have overlooked that the definition of "third country 
system" onlr. refers to "payment systems" without mentioning "securities 
seulement systems", which is inconsistent with the Parliaments concern to 
include these securities settlement systems. . The Commission therefore 
completes this amendment -in its amended proposal- in order to include 
securities settlement systems. 
Rejected Amendments 
Amendments 6, 10,11, 16 and 21, and especially 17 and 19 cannot be included in 
tne amended proposal. 
Amendment 6(1) describes in a general way that Member States will have to 
amend their insolvency laws in accordance with this Directive in order to avoid 
disruptions in the case of insolvency of a system participant. Amendment 6 (2) 
contains the obligation for systems to deposit the system agreement with the 
authorities responsible for supervising the institutions which participate in the 
system. Amendment 6 (3) provides for the publication of a notice that an 
agreement has been deposited, that it is open for inspection; it must also indicate 
the participating institutions. 
AUiicugh the idea of a notification procedure expressed in this amendment is in 
line with the current approach taken by the Council, the proposed procedure seems 
unnecessarily cumbersome and bureaucratic. Moreover, in a number of Member 
States, the authority responsible for supervising institutions participating in a 
system is different from the authority which supervises the system, so that the 
authority at which the system agreement should be deposited, should be better 
identified. Therefore, this amendment cannot be included in the amended proposal. 
In Amendment 10. an addition is made to the definition of "payment system". The 
meaning of that addition needs clarifying. It can therefore not be accepted. 
Parliament, in its Amendment 11 , changes the criterion of location (to determine 
whether a system is an EU system covered by the Directive) from the choice of 
lav/ made by the system participants (system located in the Member State the law 
of which the system participants have chosen to govern their agreement) to the 
place of settlement or book entry. Since the place of settlement can be different 
from the place where the correspondent book entry takes place, this amendment 
does not seem consistent. Moreover, several book entries can be made for one 
same transfer order (e.g. at the clearing house and at the settlement agent), so that 
it would be necessary to define which book entry is meant. This amendment can 
therefore not be taken up in the Commission amended proposal. However, the text 
of the article in the original Commission proposal has been altered in order to take 
into account the inclusion of securities settlement systems into the scope of this 
Directive, as requested by the European Parliament. 
Article 3 states that netting of transfer orders is enforceable if entered into the 
system before the opening of insolvency proceedings. The Commission proposal 
stated that the moment of entry into the system was to be determined in the system 
agreement. Amendment 16 (1) deletes that statement. The question then arises 
when a transfer order can be considered to have entered a system. Parliament does 
not provide an answer to that question anywhere, so that this amendment cannot be 
included in the Commission's amended proposal. However, the text of the article 
in the original Commission proposal has been altered in order to take into account 
the inclusion of securities settlement systems into the scope of this Directive, as 
requested by the European Parliament. 
Article 3(2) refers to rules on the setting aside of fraudulent contracts which have 
been concludedbefore the opening of insolvency proceedings. The wording in the 
Commission proposal "to enter into a contract" is synonymous of "to conclude a 
contract". It does not refer to the entering cf transfer orders into the system, as 
Parliament's amendment 16(2) stipulates. Moreover, it is unclear what is meant by 
unwinding of "settlement or securities transactions" referred to in the Parliament's 
amendment. This wording seems to imply that it should not be possible to unwind 
payments or securities transactions once they are settled. However, the Directive 
aims at protecting transfer orders against unwinding while they are within the 
system, which is when systemic risk can occur. After settlement, no problem of 
systemic risk exists any more. Therefore, Amendment 16 cannot be included in 
the Commission's amended proposal. 
Amendment 21. which replaces the previous amendment 16 (3). determines the 
moment of opening of insolvency proceedings, which are deemed to be the 
moment when the competent authority notifies the national supervising 
authorities, after which these have to notify the system participants. This 
procedure has been examined in depth in the past (Commission Working Group) 
and has not been retained for reasons of excessive heaviness of the procedure. 
While the Commission proposal contains a prohibition to revoke a transfer order 
after the moment defined by the rules of the system, Parliament's Amendment 17 
prohibits revocation after the moment when insolvency proceedings are opened. 
While the aim of this provision in the Commission's proposal was to protect a 
transfer when it went through the system, which is the situation where systemic 
risk can occur, the provision has a completely different meaning in the 
Parliament's Amendment. It does not seem necessary, to repeat -as it is done in 
Parliament's Amendment- that in case of insolvency, a participants' assets aie 
frozen and that therefore revocation is not possible. Moreover, in Amendment 17. 
the reference to the third party (in particular the client), which was mentioned in 
the Commission proposal, has been deleted. The deletion of the reference to the 
third party (e.g. the client, originator of a transfer order), could mean that -in a 
cross-border system- an institution could be prohibited from revoking its client's 
transfer order once it has entered into a system (under the system agreement or 
under the other Member States' law), whereas the client could validly revoke that 
transfer order as against its institution (under the own Member State's law), \i is 
clear that if this were to happen with a significantly large amount, it could trigger 
systemic risk. Therefore the reference to third parties should be maintained. 
This amendment can therefore not be taken up in the Commission amended 
proposal. However, the text of the article in the original Commission proposal has 
been altered in order to take into account the inclusion of securities settlement 
systems into the scope of this Directive, as requested by the European Parliament. 
Amendment 19 aims at deleting Article 6 on the applicable insolvency law in the 
event of a participant's insolvency. The deletion of this article runs counter the aim 
of this Directive which is to avoid systemic risk, and this for two reasons: a) legal 
certainty and b) avoidance of conflicts of law. 
a) Legal certainty: In the event insolvency of a system participant, it is essential to 
guarantee legal certainty as to the status of funds or securities in the system. 
The longer there is uncertainty, the longer these funds or securities will be 
unavailable for the other participants in the system. This can erode the liquidity 
base of these participants and hence lead to systemic risk. In order to achieve 
legal certainty, it is vital to know which insolvency law applies in the event of 
the insolvency of a system participant. 
b) Avoidance of conflicts of law: It is possible that the insolvency law of one 
Member State conflicts with the contract law of another Member State (as far 
as the exam of the validity of the claim is concerned). Therefore it is essential 
that the insolvency of a system participant be governed by the insolvency law 
of the Member State whose contract law governs the system agreement. 
This amendment can therefore not be taken up in the Commission amended 
proposal. However, the text of the article in the original Commission proposal has 
been altered in order to take into account the inclusion of securities settlement 
systems into the scope of this Directive, as requested by the European Parliament. 
AMENDED PROPOSAL FOR A EUROPEAN PARLIAMENT AND COUNCIL 
DIRECTIVE ON THE LIMITATION OF SYSTEMIC RISK IN PAYMENT AND SECURITIES 
SETTLEMENT SYSTEMS 
Original Commission Proposal Amended Commission Proposal 
(Amendment 1) 
Title 
Proposal for a European Parliament and Council Proposal for a European Parliament and 
Directive on settlement finality and collateral Council Directive on the Limitation of 
security Systemic Risk in Payment and Securities 
Settlement Systems 
(Amendment 2) 
Recital 1 
\ Whereas laws on the bankruptcy of credit and 
securities institutions have not yet been 
harmonised; whereas a proposal dating back to 
credit institutions (OJ C 356. 31.12.1985. p. 55 
et seq. amended on 8 February 1988) is still 
pending before the Council: whereas the 
agEeemfinl..pf..23 November 1995 of the 
Member States meeting within the Council 
concerning insolvency proceedings explicitly 
exçiufe insurance undertakings. credit 
institutions and investment companies: 
(Amendment 3) 
Recitai 7a 
Whereas the "Report of the committee on 
interbank netting schemes of the Central Banks 
of the Group of Ten countries" by the Bank for 
International ..Settlements m Basle of 
November 1990. makes the following 
recommendations, inter alia: "Netting schemes 
should, have a well-founded legal basis under 
all relevant jurisdictions and netting scheme 
participants should have a clear understanding 
of the impact of the particular scheme on each 
of the financial risks affected by the netting 
process": 
Amendment 4 
Article 1(1) 
The provisions of this directive shall apply to: 
( 1 ) any Community payment system operating in 
any currency and the ECU and to collateral 
security provided in connection with participation 
in such a system. The provisions of this directive shall apply to: 
(1) any Community payment system or 
securities settlement system operating in any 
currency, the ECU or in various currencies 
which the system converts one against another 
and to collateral security provided in 
connection with participation in such a system. 
Amendment 5 
Article 1(2) 
(2) any Community institution which participates 
directly in a third country payment system and to 
collateral security provided in connection with 
participation in such a system. (2) any Community institution which 
participates directly in a third country payment 
system or securities settlement system and to 
collateral security provided in connection with 
participation in such a system. 
(Amendment 6) 
Article la 
Rejected 
(Amendment 7) 
Article 2a 
(a) "institution " means any undertaking as defined 
in Article 1 of Council Directive 77/780/EEC 
including the institutions set out in the list in 
Article 2(2) thereof, which participates directly in 
a payment system, and any other undertaking 
which participates directly in a payment system. (a) "institution" means any undertaking as 
defined in Article 1 of Council Directive 
77/780/EEC including the institutions set oui 
in the list in Article 2(2) thereof, or any 
investment firm as defined in point 2 of Article 
1 of Directive 93/22/EEC excluding the 
institutions set out in the list in Article 2(2) 
points aVk) thereof, which participates directly 
in a payment system or a securities settlement 
system, and any other undertaking which 
participates directly in a payment or a 
securities settlement system 
(Amendment 8) 
Article 2b 
t (b) "direct " participation means participation in a 
payment system entailing responsibility for 
settlement. (b) "direct" participation means participation 
in a payment system or a securities settlement 
system entailing responsibility for settlement. 
(Amendment 9) 
Article 2e 
(e) "payment order" means any instruction to 
place at the disposal of a final recipient an amount 
of money by means of a book entry on the 
accounts of a credit institution or a central bank; (e) "payment order" means any instruction to 
place at the disposal of a final recipient an 
amount of money by means of a book entry on 
the accounts of a credit institution or a central 
bankr and in the case of securities settlement 
systems, an instruction to an institution to 
transfer the claim to one or more securities by 
means of a book entry in a register or in 
another form: 
(Amendment 10) 
Article 2h 
(h) "payment system " means any written (h) Unchanged 
agreement between two or more institutions for 
executing payment orders; 
(Amendment 11) 
Article 2i 
(i) "Community payment system" means a 
payment system located in a Member State. A 
payment system shall be deemed to be located in 
the Member State the law of which has been 
chosen by the institutions which participate 
directly in that payment system. In the absence of 
choice, the payment system shall be deemed to be 
located in the Member State where the settlement 
takes place; (i) "Community payment or securities 
settlement system " means a payment system or 
a securities settlement system located in a 
Member State. A Community payment or 
securities settlement system shall be deemed to 
be located in the Member State the law of 
which has been chosen by the institutions 
which-participate directly in that system. In the 
absence of choice, the Community' payment ox 
securities settlement system shall be deemed to 
be located in the Member State where the 
settlement takes place; 
(Amendment 12) 
Article 2j 
(j) "third country payment system" means any 
payment system which is not a Community 
payment system. (j) "third country system " means any payment 
or securities settlement system which is not a 
Community payment or securities settlement 
system. 
(Amendment 13) 
Article 2k 
(k) "monetary policy operation" means an outright 
(spot and forward) buying and selling operation in 
the financial markets or such an operation under a 
repurchase agreement, or lending or borrowing of 
claims and marketable instruments, whether in 
Community or in non-Community currencies or in 
precious metals, by a Member State Central Bank 
or by the future European Central Bank; it also 
means the conduct of credit operations, by a 
Member State Central Bank or by the future 
European Central Bank, with credit institutions or 
other market participants, with lending being 
based on adequate collateral; (k) "monetary policy operation" means an 
outright (spot and forward) buying and selling 
operation in the financial markets or such an 
operation under a repurchase agreement, or 
lending or borrowing of claims and marketable 
instruments, or derivatives from such claims or 
instruments, whether in Community or in non-
Community currencies or in precious metals, 
by a Member State Central Bank or by the 
future European Central Bank; it also means 
the conduct of credit operations, by a Member 
State Central Bank or by the future European 
Central Bank, with credit institutions or other 
market participants, with lending being based 
on adequate collateral; 
(Amendment 14) 
Article 21 
(1) "collateral security" means all assets, provided 
for the purpose of securing rights and obligations 
potentially arising in a payment system or 
provided to Member State Central Banks or to the 
future European Central Bank in connection with 
monetary policy operations. (1) "collateral security" means all assets. 
provided for the purpose of securing rights and 
obligations potentially arising in a payment 
system or a securities settlement system or 
provided to Member State Central Banks or to 
the future European Central Bank in 
connection with monetary policy operations. 
(Amendment 15) 
Article 2(la) 
(lal "securities settlement system" means a 
written agreement between institutions with 
rules for the transmission and execution ol 
securities transactions between these 
institutions. 
(Amendments 16 and 21) 
Article 3 
(1) Payment netting is legally enforceable and 
shall, even in the event of insolvency proceedings 
against any institution which participates directly 
in a payment system, be binding on third parties, 
provided that the payment order was entered into 
the payment system before the opening of 
insolvency proceedings. The moment of entrance 
shall be defined by the rules of that payment 
system. (1) Netting is legally enforceable and shall, 
even in the event of insolvency proceedings 
against any institution which participates 
directly in a payment or securities settlement 
system, be binding on third parties, provided 
that the order was entered into the payment or 
securities settlement system before the opening 
of insolvency proceedings. The moment of 
entrance shall be defined by the rules of that 
payment or securities settlement system. 
(2) Any rule on the setting aside of contracts and (2) Unchanged 
transactions entered into before the opening of 
insolvency proceedings, shall not lead to the 
unwinding of the netting. 
(2a) Rejected 
(Amendment 17) 
Article 4 
(1) A payment order may not be revoked either by 
an institution which participates directly in a 
payment system or a third party as against the 
other direct participants in that payment system 
after the moment defined by the rules of that 
payment system. This rule applies notwithstanding 
the opening of insolvency proceedings. (1) A payment order or an order for a securities 
transaction may not be revoked either by an 
institution, which participates directly in a 
payment or a securities settlement system, or 
by a third party as against the other institutions 
directly participating in that system after the 
moment defined by the rules of that system. 
This rule applies notwithstanding the opening 
of insolvency proceedings. 
10 
(Amendment 13) 
Article 5 
insolvency proceedings shall not have retroactive Insolvency proceedings shall not have 
effects on the rights and obligations of an retroactive effects on the rights and obligations 
institution in connection with direct participation of an institution in connection with direct 
in a Community payment system. Any other rule participation in a Community payment or 
or practice which has a retroactive effect shall be securities settlement system. Rules which have 
.superseded. a retroactive effect shall not apply to 
institutions involved in insolvency 
proceedings-
(Amendment 19) 
Article 6 
In the event of insolvency proceedings against an 
institution which participates directly in a payment 
system, the rights and obligations arising from or 
in connection with direct participation in that 
payment system, shall be determined by the 
insolvency law of the country where the payment 
system is located. In the event of insolvency proceedings against 
an institution which participates directly in a 
payment system or a securities settlement 
system, the rights and obligations arising from 
or in connection with direct participation in 
that system, shall be determined by the 
insolvency law of the country where the system 
is located. 
11 
(Amendment 20) 
Article 7 
lie rights of a pledgee in connection with 
participant to one or more other 
in a payment system QL the rights of 
monetary authorities to whom collateral security 
has been pledged in connection with monetary 
policy operations, shall not be affected by the 
opening of insolvency proceedings against the 
pledger. The collateral security shall be realised 
for the satisfaction of rights in connection with 
participation in a payment system or with 
monetary policy operations with priority over all 
other creditors. an institution or of a settlement agent to 
collateral security provided to it in connection 
with the system and 
monetary authorities of the EC to collateral 
security provided to them in connection with 
monetary policy operations 
shall not be affected by insolvency proceedings 
against the institution which provided the 
collateral security. Such collateral security may 
be realised for the satisfaction of these rights. 
F Where a third-country institution constitutes 
collateral security in a Member State in 
connection with participation in a Community 
payment system or in connection with monetary 
policy operations, the rights of the pledgee shall 
not be affected by the opening of insolvency 
proceedings against that third-country institution. 
Articles 8 to 10 
Unchanged. 
12 

ISSN 0254-1475 
COM(97) 345 final 
DOCUMENTS 
EN 09 10 08 
Catalogue number : CB-CO-97-335-EN-C 
ISBN 92-78-21938-X 
Office for Official Publications of the European Communities 
L-2985 Luxembourg