Opinion of the European Monetary Institute on a consultation from the Finnish Ministry of Justice under Article 109f(6) of the Treaty establishing the European Community and Article 5.3 of the Statute of the EMI as elaborated in Council Decision of 22nd November 1993 (93/717/EC) on a draft proposal for an Act on certain terms in securities and foreign exchange transactions (CON/97/06)
Date: 1997-04-30
Institutions: European Monetary Institute
Subjects: Finland, bankruptcy, exchange transaction, financial derivative, financial institution, financial stability, payment system, securities

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  from  the  Finnish  Ministry  of  Justice  under  Article  109f(6)  of  the  Treaty

establishing  the  European  Community  and  Article  5.3  of  the  Statute  of  the  EMI  as

elaborated in Council Decision of 22nd November 1993 (93/717/EC) on a draft proposal for

an Act on certain terms in securities and foreign exchange transactions.

CON/97/06

1.

The present consultation was initiated on 26 March 1997 by the Finnish Ministry of Justice which

requested an opinion by 7 May 1997.

2.

The  EMI’s  competence  to  deliver  an  opinion  is  based  on  Article  1,  section  1,  fourth  and  fifth

indents, of Council Decision of 22 November 1993 (93/717/EC) as the draft legislation concerns

clearing  and  settlement  operations,  particularly  netting  in  relation  to  securities,  derivatives  and

foreign exchange transactions, and includes provisions aiming to enhance the stability of financial

institutions and markets.

3.

At the moment there is no specific law in Finland concerning netting in financial transactions. As

a  general  rule,  netting  can  be  considered  valid  and  binding  under  the  law  and  legal  doctrine  of

set-off.  The  proposed  legislation  is  intended  to  secure  legal  certainty  as  regards  netting  in

securities  and  foreign  exchange  transactions  and  to  regulate  certain  special  situations  in  an

effective manner. The proposed Act would apply to securities, derivatives and foreign exchange

transactions.  Netting  would  be  binding  bilaterally  between  two  parties  or  in  a  clearing

organization  on  a  multilateral  basis  provided  the  contractual  netting  terms  are  considered

customary. So-called “close-out netting” or “default netting” would also fall within the scope of

application. The proposed Act would not apply to payment transactions, but it is explained by the

Finnish  Ministry  of  Justice  in  a  memorandum  accompanying  the  draft  Act  that  also  netting  in

relation to payment systems could be included later.

4.

Section  3  of  the  proposed  Act  provides  that  bankruptcy  would  not  prevent  the  netting  of

obligations  which  have  arisen  prior  to  the  initiation  of  bankruptcy  proceedings.  A  clearing

organization  would  be  able  to  net  the  obligations  which  are  entered  into  settlement  before  the

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institution  received  information  of  the  bankruptcy.  Moreover,  the  proposed  legislation  includes

provisions which would address the effectiveness of netting in relation to recovery in the event

of  bankruptcy  and  stay  on  payments  to  facilitate  reorganisation  of  insolvent  enterprises.  The

proposed Act also includes provisions to ensure inter alia the validity of netting in different types

of insolvency proceedings of a credit institution.

5.

The  EMI  welcomes  the  draft  legislation  as  it  enhances  the  soundness  and  effectiveness  of

clearing and settlement through netting in relation to securities, derivatives and foreign exchange

transactions  under  Finnish  law.  The  implementation  of  the  proposed  legislation  would  improve

the  legal  situation  as  regards  netting  within  the  scope  of  application  of  the  proposed  Act  and,

thus, enhance the stability of financial markets and institutions.

6.

The  EMI  notes  that  the  scope  of  the  proposed  legislation  does  not  extend  to  netting  (or

collateral) in relation to payment transactions, and it is assumed that this limitation of the scope of

application will not create any legal uncertainty concerning existing rules on netting for areas not

covered  by  the  proposed  Act.  With  reference  to  the  current  work  in  respect  of  the  draft

Directive  of  the  European  Parliament  and  of  the  Council  on  settlement  finality  and  collateral

security, the EMI notes, and would like to emphasise, the possibility to extend the application of

the  proposed  Act  to  payment  systems,  which  would  provide  an  important  enhancement  of  the

efficient  and  smooth  functioning  of  national  and  cross-border  payment  systems.  Hence,  an

extended  application  of  the  proposed  legislation  in  line  with  the  draft  Directive  on  settlement

finality and collateral security will be welcome before the start of Stage Three of EMU.

7.

The EMI agrees that this opinion may  be  made  public  by  the  competent  Finnish  authorities  at

their discretion.

30 April 1997