Opinion of the European Monetary Institute on a consultation received from the Bank of England, under Article 109f (6) of the Treaty establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI (the “Statute”), in relation to regulations to be made under the UK Companies Act 1989 (the “Act”) (specifically under Part VII thereof), being regulations made jointly by the Secretary of State for Trade and Industry and HM Treasury in accordance with powers granted to such authorities under the terms of Part VII of the Act, such regulations being referred to as The Financial Markets and Insolvency (Money Market) Regulations 1995 (the “Regulations”) (CON/95/10)
Date: 1995-07-21
Institutions: European Monetary Institute
Subjects: United Kingdom, exchange transaction, foreign currency, national law, payment system

OPINION OF THE EUROPEAN MONETARY INSTITUTE

On a consultation received from the Bank of England, under Article 109f (6) of the Treaty establishing

the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI (the “Statute”), in

relation to regulations to be made under the UK Companies Act 1989 (the “Act”) (specifically under

Part VII thereof), being regulations made jointly by the Secretary of State for Trade and Industry and

HM Treasury in accordance with powers granted to such authorities under the terms of Part VII of the

Act,  such  regulations  being  referred  to  as  The  Financial  Markets  and  Insolvency  (Money  Market)

Regulations 1995 (the “Regulations”).

CON 95/10

1.

The present consultation was initiated on 3rd July 1995 by the Bank of  England  which,  for  this

purpose, transmitted to the EMI the relevant documents concerning the Regulations, requesting

receipt of an opinion by 21st July 1995 and referring, in support of this timetable, to Article 4 of

the  Council  Decision  of  22nd  November  1993  on  consultation  of  the  EMI  (93/717/EC)  (the

“Council  Decision”).    This  timetable  being  requested  on  the  basis  that  the  scheduled  start  date

for  the  ECHO  foreign  exchange  clearing  system  is  set  for  early  August  1995  (see  paragraph

numbered 2 below).

2.

The  purpose  of  the  Regulations  is  to  improve  the  security  and  stability  of  the  UK  financial

markets.    This  is  to  be  achieved  by  ensuring  that,  in  the  event  of  the  default  of  a  member  of

certain key clearing houses and exchanges (specifically where such default is occasioned by the

insolvency  of  such  a  member),  the  rules  of  the  relevant  clearing  house  or  exchange  covering

default  will  take  precedence  over  certain  of  the  normal  provisions  of  UK  insolvency  law.

Initially, the Regulations will only have effect in relation to the ECHO foreign exchange clearing

system,  which  is  expected  to  become  operational  in  early  August  1995.    However,  it  is

anticipated  that  other  clearing  houses  and  exchanges  will  become  subject  to  the  Regulations  in

due course.  All entities which are subject to the Regulations will be bodies in relation to which

the  Bank  of  England  will  exercise  certain  relevant  supervisory  powers  (e.g.  ensuring  the

adequacy and acceptability of the rules of any system applying to be subject to the Regulations).

It is noted that similar modifications to UK insolvency law are already operational in relation to

the Central Gilts Office and the London Clearing House (over which the Bank of England does

not exercise relevant supervisory authority).

3.

The  EMI’s  competence  to  deliver  an  opinion  in  this  consultation  is  based  on  Article  109f  (2),

fourth indent, and (6), second paragraph, (as elaborated by the Council Decision) on the grounds

that the Regulations have the potential to affect the stability of the financial markets, both in the

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UK  and,  as  some  of  the  clearing  houses  and  exchanges  which  are  likely  to  be  impacted

(including  ECHO)  have  memberships  drawn  from  many  jurisdictions,  indirectly  in  other  EU

Member States also.

4.

The EMI notes that the Regulations  are  similar  in  their  scope  to  provisions  being  brought  into

effect in several other EU Member States and that the move to adopt such rules results from a

general recognition of the need to disapply certain insolvency provisions which might otherwise

frustrate  the  default  rules  of  clearing  houses  and  exchanges  and  thereby  prevent  the  orderly

winding  up  of  a  defaulter’s  position.    Such  insolvency  provisions  might  otherwise  prevent  the

effective  settlement  of  positions  in  the  relevant  market  system  and  might  therefore  lead  to

consequent  systemic  difficulties.    The  EMI  therefore  welcomes  these  Regulations  in  principle

and considers that they are likely to have a positive effect in enhancing the stability of relevant

exchanges  and  clearing  houses  and,  consequently,  in  contributing  to  the  stability  of  certain  key

financial markets based in London and overseen by the Bank of England.

5.

The  EMI  also  notes  that  the  Bank  of  England,  in  fulfilling  its  role  of  administering  the

Regulations, has wide-ranging powers to determine which clearing houses and exchanges should

be added to the list of those organisations which will be subject to the Regulations.  The Bank

also  has  very  wide  ranging  powers  and  discretions  in  administering  the  Regulations.    The  EMI

recognises  that  such  powers  constitute  a  powerful  tool  to  ensure  the  suitable  and  effective

operation of the Regulations and, therefore, in turn may have a significant, positive effect upon

financial stability.

6

The EMI notes that the drafting of the Regulations  and  the  detail  of  their  mechanics  is  highly

complex and does not readily lend itself to immediate comprehension.  The EMI acknowledges,

however, that the subject matter with which the Regulations deal is highly complex and, indeed,

that  Part  VII  of  the  Act,  on  which  they  are  based,  is  a  highly  complex  piece  of  legislative

drafting.  The EMI therefore attributes the degree of complexity encountered in the Regulations

to these factors.

7

In more general terms, the EMI notes that attempts are currently being made, in various fora, to

harmonise  European  rules  on  insolvency,  particularly  as  they  relate  to  financial  markets  and

participants  on  those  markets.    Whilst  the  EMI  appreciates  that  all  Member  States  retain  the

freedom  to  adapt  their  laws  on  insolvency  related  issues  as  they  see  fit,  in  particular  to  allow

them  to  deal  with  issues  which  have  specific  relevance  to  their  jurisdiction  and  markets  within

their jurisdiction, sufficient flexibility should exist to allow for subsequent, concrete harmonisation

measures  in  this  field  to  be  catered  for.    Equally,  where  appropriate,  in  adopting  insolvency

regulations which are relevant to participants in financial markets, Member States may wish to

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consider  the  impact  of  such  measures  upon  the  orderly  winding-up  and  speedy  settlement  of

positions on markets which are established in other jurisdictions.

8

The  EMI  agrees  that  this  opinion  may  be  made  public  by  the  competent  United  Kingdom

authorities at their discretion.

21st July 1995