EN 
 
 
OPINION OF THE EUROPEAN CENTRAL BANK 
of 16 February 2006  
at the request of Lietuvos bankas 
on a draft law amending the Law on settlemen t finality in payment and securities settlement 
systems 
(CON/2006/5) 
 
On 16 November 2005 the European Central Bank (ECB) received a request from Lietuvos bankas for an 
opinion on a draft law amending the Law on settlement  finality in payment and securities settlement 
systems (hereinafter the ‘draft law’).  
The ECB’s competence to de liver an opinion is based on the fifth indent of Article 2(1) of Council 
Decision 98/415/EC of 29 June 1998 on the consu ltation of the European Central Bank by national 
authorities regarding draft legislative provisions1, as the draft law relates to payment and settlement 
systems. Although national authorities are not obliged to consult the ECB on draft legislation transposing 
Community directives into national law, under Article 25 of the Statute the ECB may offer advice to and 
be consulted by the competent authorities of the Member States on the scope and implementation of Community legislation relating to the stability of the financial system. This legislation includes 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
2 (hereinafter the ‘Settlement Finality Directive’). In 
accordance 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  General remarks  
1.1 The ECB understands that the main objective of th e draft law is to extend the scope of the Law on 
settlement finality in payment and securities settle ment systems (hereinafter the ‘SFD Law’) in 
order to ensure that bankruptcy and/or suspensi on of operations of an institution registered in 
Lithuania do not affect the operation and soundness of a payment or securities settlement system 
governed by the law of a Member State other th an Lithuania. The ECB welcomes the initiative of 
Lietuvos bankas in addressing this issue, since it is interested in promoting a harmonised EU-wide 
implementation of the Settlement Finality Directive in Member States, in order to ensure legal 
                                                     
 
1  OJ L 189, 3.7.1998, p. 42. 
2  OJ L 166, 11.6.1998, p. 45. 
 
2 certainty for payment and securities settlement syst ems and a level playing field throughout the 
Community. 
1.2 As a preliminary remark, the ECB suggests that the SFD Law should refer to ‘systems’ in general 
terms rather than to specific types of systems, to reflect the fact that it aims to protect as wide a 
range of systems as possible and to minimise systemic risk. More detailed comments regarding this issue are set out in paragraph 2.2.1 of this opinion. 
 2 Definitions 2.1 Insolvency proceedings  
 The ECB notes that Article 2(13) of the SFD Law defines the suspension of operations as a 
‘decision by a court or other authorised institution of the Republic of Lithuania or a Member State relating to the prohibition on a system participan t disposing of funds or securities held in a 
settlement account or the application of tempor ary judicial protective measures or enforcement 
measures by the supervisory authority to a syst em participant resulting in the suspension or 
limitation of securities transfer orders and/or paym ent instructions’. The ECB understands that this 
definition would capture most of the measures re sulting in the suspension or limitation of securities 
transfer orders and/or payment instructions a nd would be in line with the Settlement Finality 
Directive. However, Lietuvos bankas may cons ider using this opportunity to go beyond the 
minimum scope of protection provided in the Settlement Finality Directive and to expressly 
provide in the draft law that voluntary winding-ups are also covered by the SFD Law.  
2.2 Systems protected by the SFD Law  
2.2.1 Article 2(17) of the SFD Law, including the pr oposed amendments set out in  the draft law, limits 
the definition of systems protected by the SFD Law to payment and securities settlement systems. 
Although not strictly required by the Settlement Finality Directive, Lietuvos bankas may consider 
referring to ‘systems’ in the SFD Law in more general terms, i.e. without specifying various types 
of existing or future systems
3. In some instances, Member Stat es may see the need to designate a 
clearing system4.  
2.2.2 Article 1 of the draft law amends the definition of ‘system’ and provides, inter alia , that Lithuanian 
law may be chosen as the law governing a system if at  least one of the system’s participants has its 
head office in Lithuania. Article 2(17) of th e existing SFD Law only refers to an ‘office’ ( buveinė) 
of a participant in Lithuania. The new wording to be introduced by the draft law is welcome since it 
more appropriately reflects the wording of the Se ttlement Finality Directive, which requires that 
the participants may only choose the law of a Member  State in which at least one of them has its 
‘head office’.  
                                                      
3  See the definition of ‘system’ in Article 2(a) of the Settlement Finality Directive.   
4  See the current list of designated and notified systems at http://www.europa .eu.int/comm/internal _market/financial-
markets/settlement/dir-98-26-art10-national_en.htm 
 
3 2.3 Institutions  
Article 1 of the draft law proposes to include, in  the definition of an ‘institution’, legal entities 
which provide funds transfer services. The ECB notes that Article 2(f) of the Settlement Finality Directive defines a participant as ‘an institution, a central counterparty, a settlement agent or a 
clearing house’. Moreover, Article 2(b) of the Di rective refers to undertakings which can be 
regarded as institutions, including undertakings whic h participate in a supervised system executing 
securities transfers and payments resulting from such orders. The ECB therefore notes that 
Article 1 of the draft law may be considered as going beyond the provisions of the Settlement 
Finality Directive and therefore suggests aligning the draft law with Article 2(b) of the Directive. 
2.4 Securities  
The ECB notes that the SFD Law defines ‘securitie s’ by reference to the Law on the securities 
market. It is also noted that Article 2(h) of th e Settlement Finality Direc tive defines ‘securities’ as 
all instruments referred to in Section B of th e Annex to the Investment Services Directive
5. The 
Investment Services Directive will be repealed by  the Markets in Financial Instruments Directive6, 
with effect from 30 April 2006. If the current pr oposal regarding the deadlines for transposition and 
application of the Markets in Financial Instru ments Directive is adopted, this date will be 
postponed7. Under Article 69 of the Markets in Financia l Instruments Directive, references to terms 
defined in the Investment Services Directive will he nceforth have to be construed as references to 
equivalent terms defined in the Ma rkets in Financial Instruments Directive. Section C of Annex I to 
the Markets in Financial Instruments Directive cont ains a more detailed list of financial instruments 
than Section B of the Annex to the Investment  Services Directive. The ECB therefore draws 
Lietuvos bankas’s attention to the fact that the re ference to the definition of securities in the SFD 
Law will have to be reviewed in the light of the Markets in Financial Instruments Directive. 
 3 Law governing the rights and obligations of a participant 
Article 4 of the draft law expressly states that in the event that operations are suspended against a 
participant in a system governed by the law of anot her Member State, the law of that Member State 
governs the participant’s rights and obligations ar ising from participation in that system. This 
provision remedies the situation under the existing SFD Law whereby only bankruptcy proceedings 
are mentioned with respect to participation in a system governed by law of another Member State. 
The ECB welcomes this amendment.  
                                                     
 
5  Council Directive 93/22/EEC of 10 May 1993 on investment se rvices in the securities field (OJ L 141, 11.6.1993, p. 27). 
6  Article 69 of Directive 2004/39/EC of the European Pa rliament and of the Council of 21 April 2004 on markets in 
financial instruments amending Counc il Directives 85/611/EEC and 93/6/E EC and Directive 2000/12/EC of the 
European Parliament and of the Counc il and repealing Council Directive 93/22/EEC (OJ L 145, 30.4.2004, p. 1).  
7  See Commission of the European Communities, ‘Proposal for a Directive of the European Parliament and of the Council 
amending Directive 2004/39/EC on markets in financial instruments, as rega rds certain deadlines’ (COM(2005) 253 
final, 14.6.2005).  
 
4  
4 No unwinding of netting or revocation of transfer orders 4.1 Under Article 3(2) of the Settlement Finality Dir ective, actions relating to underlying transactions 
may in no way lead to the ‘unwinding of netting’ . Furthermore, recital 13 to the Settlement Finality 
Directive states that, for example, in the event of  fraud or technical error, the Directive does not 
prevent a participant or a third party from ex ercising any right or claim resulting from the 
underlying transaction as long as this leads ‘nei ther to the unwinding of netting nor to the 
revocation of the transfer order in the system’. In a number of Member States, the laws implementing the Settlement Finality Directive expressly confirm that although the underlying 
transaction could potentially be challenged in the context of proceedings such as the avoidance of 
transactions, this would only have an impact on th e bilateral relationship between the payer and the 
payee, not on the system. 
4.2 Article 7(5) of the SFD Law states that ne tting may not be unwound if  a transaction concluded 
before the initiation of bankruptcy proceedings is  recognised as void on the grounds defined by the 
laws regulating the bankruptcy of a system partic ipant. The ECB notes that transactions may also 
be declared void not only under the laws regulating th e bankruptcy of a system participant, but also 
under other Lithuanian laws, such as the Law on ente rprise restructuring or the Civil Code (which 
refers to actio Pauliana ). In addition, transfer orders, incl uding payment orders, should also not be 
subject to revocation. The ECB suggests clarif ying in the SFD Law that, if an underlying 
transaction is void: (i) netting may not be unwound; (ii) transfer orders, including payment orders, 
may not be revoked; and (iii) this  would only affect the bilateral relationship between the payer and 
the payee, not the system. 
 5 Bankruptcy and restructuring laws 5.1 As already mentioned, Article 7 of the Settle ment Finality Directive prohibits any insolvency 
proceedings initiated against a participant fro m having retroactive effect on the rights and 
obligations of the participants in a system. The prerogatives in insolvency proceedings of courts, 
liquidators, administrators and other officials, such as the power to limit the disposition of an 
insolvent participant’s property, must therefore be limited in order to ensure the enforceability of 
transfer orders and netting in the system.  
5.2 The ECB notes that certain Lithuanian laws, su ch as the Law on enterprise bankruptcy and the Law 
on enterprise restructuring, impose certain restric tions on the disposition of an insolvent entity’s 
property and entitle the administrators to terminat e contracts entered into before proceedings are 
inititated. The ECB notes that the Law on ente rprise bankruptcy and the Law on enterprise 
restructuring are generally regarded as taking priority over other laws. Although the Law on 
enterprise bankruptcy already provides for exempti ons from some of its provisions in cases covered 
by the SFD Law, the ECB recommends inserting a general provision in both the Law on enterprise 
 
5 bankruptcy and the Law on enterprise restructuring providing that the SFD Law takes priority as 
far as rights and obligations arising from participation in a system are concerned. 
 This opinion will be published on the ECB’s website.   Done at Frankfurt am Main, 16 February 2006. 
 
[signed] 
 
The President of the ECB 
Jean-Claude TRICHET