EN
OPINION OF THE EUROPEAN CENTRAL BANK
of 26 June 2003
at the request of the Austrian Federal Ministry of Justice
on a draft Federal law
implementing Directive 2002/47/EC of the European Parliament and of the Council
of 6 June 2002 on financial collateral arrangements
(CON/2003/11 )
1. On 6 May 2003 the European Central Bank (ECB) received a request from the Austrian Ministry of
Justice for an opinion on a draft Federal law (the draft law) implementing Directive 2002/47/EC ofthe European Parliament and of the Council of 6 June 2002 on financial collateral arrangements
1
(the Directive).
2. The purpose of the draft law is to implement the Directive in Austria. Consequently, the Austrian
authorities were not legally obliged to consult the ECB under Article 1(2) of CouncilDecision 98/415/EC of 29 June 1998 on the consulta tion of the European Central Bank by national
authorities regarding draft legislative provisions
2. However, the ECB has an interest in the
harmonised implementation of the Directive in respect of the draft of which the Council of theEuropean Union consulted the ECB and the ECB delivered its opinion on 13 June 2001(CON/2001/13)
3. In the light of the latter opinion, the ECB strongly welcomes the opportunity to
give its opinion on the draft law as it addresses matters directly relevant to the Eurosystems corefields of competence and as it has an impact on the efficient and safe use of financial collateralarrangements in European Union financial markets as well as on the Eurosystems collateralisedoperations. 
3. The draft law introduces a new Federal law concerning financial collateral arrangements in
financial markets (Bundesgesetz über Sicherheiten auf den Finanzmärkten) intended to implementthe Directive. According to the explanatory notes, the draft law will (as provided in the Directive)
only apply to professional financial market participants. The draft law implements the Directivesuniform rules for the provision of securities and cash deposits as collateral and facilitates therealisation of such collateral. Furthermore, the draft law is intended to contribute to (i) improvedintegration of the European financial markets and (ii) the stability of financial systems. The ECB
                                                     
1 OJ L 168, 27.6.2002, p. 43.
2 OJ L 189, 3.7.1998, p. 42.
3 OJ C 196, 12.7.2001, p. 10.
2notes that the draft law is particularly relevant to  the Eurosystem as it also applies, in accordance
with the Directive, to the Eurosystem national central banks and to the ECB.
4. In a general context, the ECB refers back to its view that the Directive represents a significant and
important effort to advance the efficient and safe use of financial collateral, both at a domestic andcross-border level. The promotion of simple and reliable methods of collateralisation is offundamental interest to the ECB, as well as to the national central banks, as it will help to ensurethe smooth functioning of the Eurosystems single monetary policy. This will go beyond what has
already been achieved by the implementation of Directive 98/26/EC of the European Parliamentand of the Council of 19 May 1998 on settlement finality in payment and securities settlementsystems
4 (the Settlement Finality Directive) to establish a sound legal framework for payment and
security settlement systems as well as for the central banks operations. The Eurosystemsinvolvement derives from the second indent of Article 18.1 of the Protocol on the Statute of theEuropean System of Central Banks (ESCB) and of the ECB, which provides that in order toachieve the objectives of the ESCB and to carry out its tasks, the ECB and the national centralbanks may conduct credit operations with credit institutions and other market participants, withlending being based only on adequate collateral. In this context, the ECB strongly welcomes thefact that the Austrian authorities have prepared the draft law far in advance of the time limit for
implementation laid down in the Directive.
5. The ECB notes that according to Section I, § 2(1) of  the draft law, it covers (i) public sector bodies,
(ii) financial market authorities including, inter alia , the national central banks and the ECB,
(iii) financial institutions subject to prudential supervision, (iv) central counterparties, settlementagents or clearing houses, and (v) legal entities acting in a trust or representative capacity. This isin line with the Directive. Furthermore, Section I, § 2(2) of the draft law states that it shall apply tothe provision and realisation of financial collateral involving on the one hand, another incorporatedcompany, a partnership with limited liability or an unincorporated company, where no firm with
unlimited liability is a natural person, and on the other hand a financial market participant, asdefined in Section I, § 2(1) of the draft law. Limiting the application of the draft law to the entitieslisted in Section I, § 2(2) of the draft law constitute a partial opt-out in the context of Article 1(3) ofthe Directive. The ECB would like to stress in this context that it should be ensured that an opt-out,
and in particular a partial opt-out, does not create uncertainty regarding the application of theDirective and of the draft law. The ECB has always acknowledged the need to assess carefully theextent of any limitations to general insolvency regimes, whereby it is necessary to take into accountvarious considerations ranging from legal certainty, the efficiency of cross-border collateraltransactions and the ease of collateral management to, in certain cases, supervisory interests,especially potential reorganisation measures. The ECB suggests considering whether thoseprovisions in the Directive that do not deal with protection against the effects of insolvency, butinstead cover substantive law or conflict of law rules, could be made applicable without limitation
                                                     
4OJ L 166, 11.6.1998, p. 45.
3to all entities. Establishing different regimes for the creation and use of the same kind of collateral,
depending on the type of parties involved, implies evaluating the status of the parties to anarrangement and tends to disrupt collateralised transactions. In addition, from the ECBs point ofview, all systems and their participants protected by the Settlement Finality Directive as well ascentral counterparties (which are of crucial importance for the efficient functioning of payment andsettlement systems) and all entities with access to the Eurosystems credit operations must be ableto benefit from the Directive by its implementation in the Member States. 
6. The ECB notes that the draft law adopts the definition of financial instruments set out in
Article 2(1)(e) of the Directive. However, the ECB suggests considering whether the draft lawcould be extended to cover all types of assets eligible for Eurosystem credit operations, including,inter alia,  credit claims in the form of bank loans. This approach would safeguard and promote the
efficient cross-border use of all assets eligible for Eurosystem credit operations and would advanceimplementation of the Eurosystems single monetary policy. Moreover, the ECB would like tostress that using undefined legal concepts, such as cla ims relating to or rights in or relating to, as
set out in Section I, § 3 No. 5 of the draft law, should not create uncertainty regarding theapplication of the draft law to the various proprietary and contractual instruments used in modernfinancial markets, e.g. derivatives or sub-participation rights. 
7. The ECB welcomes the abolition of formal requirements for financial collateral arrangements. The
ECB notes that Section I, § 4(1) of the draft law, is fully consistent with Article 3(2) of theDirective. The latter allows financial collateral arrangements to be evidenced in writing or in alegally equivalent manner. In the opinion of the ECB, it is important that national lawsimplementing the Directive should not exclude transactions under general terms and conditions,which are not normally signed by the parties, or other current market practices. The only reasonrequirements of form should continue to exist is  to provide the necessary evidence in insolvency
situations.
8. Moreover, the ECB notes that Section I, § 4(3) of the draft law provides for proprietary rights to be
transferred by way of book-entry. Whilst going beyond what the Directive requires (according toArticle 2(1)(g) of the Directive, a proprietary right only needs to be evidenced by book-entry), theECB acknowledges that a provision of this kind prov ides a high degree of certainty as to the exact
point in time when rights are transferred.
9. The ECB notes that Section I, § 5 of the draft law permits the realisation of collateral by way of
sale or appropriation, provided that the financial collateral arrangement expressly allows suchmethods of realisation. This wording is more restrictive than the Directive. In the ECBs opinion,Article 4(1) of the Directive is drafted to establish the free realisation of collateral by sale as therule, but allowing the parties to limit or exclude such rule. 
410. The ECB notes that Section I, § 7 of the draft law grants the right to reuse collateral provided under
a pledge arrangement ( Verfügungsrecht ), following closely the wording of Article 5 of the
Directive. Combining elements of pledges and full transfers of ownership could thereforepotentially improve the liquidity of pledges and make them more efficient. The ECB notes that thedraft law does not seek to amend the Austrian law on pledges and, consequently, the right of reuseas set out in Section I, § 7 of the draft law appears to create a right sui generis , distinct from both a
pledge and a full transfer of title. In order to avoid any uncertainty in this context, the ECBsuggests considering whether the distinction between a pledge and a right of reuse is sufficientlyclear, in particular whether a pledge is transformed into a right of reuse when a collateral takerexercises the option to reuse the assets, or whether the assets would be provided under a right sui
generis , which would not constitute a pledge in the first place. 
11. The ECB welcomes Section I, § 9 of the draft law, which recognises close-out netting provisions in
accordance with Article 7 of the Directive. 
12. Because sound and efficient risk management practices commonly used in the financial markets,
including the Eurosystems risk control framework, rely on the ability to manage and reduce creditexposures arising from all kinds of financial transactions on a net basis, limiting market agents tousing particular risk mitigation techniques (e.g. only close-out netting) could impair financialstability. As a consequence, Article 8 of the Directive protects the validity of both substitution ofassets and the provision of top-up collateral from any adverse impact arising after parties concludean original agreement on top-up collateral arrangements and an initial security interest is created ortransfer of title takes place. The ECB understands that no limitation on the availability of such riskmitigation techniques is effective in Austria.
13. Finally, the ECB notes that under Section II of the draft law, implementing Article 9 of the
Directive, the law applying to cross-border use of collateral in book-entry securities shall be thelaw of the country in which the securities collateral account is maintained. The ECB would like topoint out in this context that the draft law might be affected by the Hague Convention on the lawapplicable to certain rights in relation to securities held with an intermediary (the Convention), theratification of which is currently being considered by the Community and the Member States.Article 9 of the Directive, and consequently Section II of the draft law are not compatible with theConvention in so far as the Convention adopts a choice of law approach. The ECB wishes to stressthat all parties involved in the legislative pr ocess should investigate closely the Conventions
potential impact on systemic stability and on the treatment of collateral transactions to avoidundermining the current level of protection. This might include, inter alia , limiting the choice of
law applying to proprietary rights in respect of securities held on accounts with a systemicallyimportant system (in particular securities settlement systems evaluated and used by theEurosystem) to the law governing that system, as well as other measures designed to safeguardsystemic finality, certainty and transparency.
514. The ECB confirms that it has no objections to the competent national authorities making this
opinion publicly available at their discretion. This  opinion will be published on the ECBs website
six months after the date of its adoption.
Done at Frankfurt am Main on 26 June 2003.
The President of the ECB
[signed]
Willem F. DUISENBERG