Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities settlement systems
Date: 1998-05-19
Institutions: Council of the European Union, European Parliament
Subjects: EU Member State, banking, bond, credit transfer, financial solvency, intra-EU payment

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Official Journal of the European Communities

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DIRECTIVE 98/26/EC OF THE EUROPEAN PARLIAMENT AND OF THE
COUNCIL

on settlement finality in payment and securities settlement systems

of 19 May 1998

THE EUROPEAN PARLIAMENT AND THE COUNCIL
OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European
Community, and in particular Article 100a thereof,

Having regard to the proposal from the Commission (1),

Having regard to the opinion of the European Monetary
Institute (2),

Having regard to the opinion of the Economic and Social
Committee (3),

Acting in accordance with the procedure laid down in
Article 189b of the Treaty (4),

(1) Whereas the Lamfalussy report of 1990 to the
Governors of the central banks of the Group of Ten
Countries demonstrated the important systemic
risk inherent in payment systems which operate on
the basis of several legal types of payment netting,
the
in particular multilateral netting; whereas
reduction of legal risks associated with participa-
tion in real time gross settlement systems is of
paramount importance, given the increasing devel-
opment of these systems;

(2) Whereas it is also of the utmost importance to
reduce the risk associated with participation in
securities settlement systems, in particular where
there is a close connection between such systems
and payment systems;

(3) Whereas this Directive aims at contributing to the
efficient and cost effective operation of cross-
border payment and securities settlement arrange-
ments in the Community, which reinforces the
freedom of movement of capital in the internal
market; whereas this Directive thereby follows up
the
the progress made towards completion of
internal market, in particular towards the freedom
to provide services and liberalisation of capital
movements, with a view to the realisation of
Economic and Monetary Union;

(1) OJ C 207, 18. 7. 1996, p. 13, and OJ C 259, 26. 8. 1997, p.

6.

(2) Opinion delivered on 21 November 1996.
(3) OJ C 56, 24. 2. 1997, p. 1.
(4) Opinion of the European Parliament of 9 April 1997 (OJ C
132, 28. 4. 1997, p. 74), Council Common Position of 13
October 1997 (OJ C 375, 10. 12. 1997, p. 34) and Decision of
the European Parliament of 29 January 1998 (OJ C 56, 23. 2.
1998). Council Decision of 27 April 1998.

(4) Whereas it is desirable that the laws of the Member
States should aim to minimise the disruption to a
system caused by insolvency proceedings against a
participant in that system;

credit

(5) Whereas a proposal for a Directive on the reorgan-
isation and winding-up of
institutions
submitted in 1985 and amended on 8 February
1988 is still pending before the Council; whereas
the Convention on Insolvency Proceedings drawn
up on 23 November 1995 by the Member States
meeting within the Council explicitly excludes
insurance undertakings, credit
institutions and
investment firms;

(6) Whereas

this Directive is

intended to cover
payment and securities settlement systems of a
domestic as well as of a cross-border nature;
whereas the Directive is applicable to Community
systems and to collateral security constituted by
their participants, be they Community or third
country participants, in connection with participa-
tion in these systems;

(7) Whereas Member States may apply the provisions
this Directive to their domestic institutions
of
which participate directly in third country systems
and to collateral security provided in connection
with participation in such systems;

(8) Whereas Member States

should be allowed to
designate as a system covered by this Directive a
system whose main activity is the settlement of
securities even if the system to a limited extent also
deals with commodity derivatives;

(9) Whereas the reduction of systemic risk requires in
particular the finality of settlement and the enfor-
ceability of collateral security; whereas collateral
security is meant to comprise all means provided
by a participant to the other participants in the
payment and/or securities settlement systems to
secure rights and obligations in connection with
that
including repurchase agreements,
statutory liens and fiduciary transfers; whereas regu-
the kind of collateral
lation in national
security which can be used should not be affected
by the definition of collateral security in this
Directive;

system,

law of

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(10) Whereas

this Directive, by covering collateral
security provided in connection with operations of
the central banks of the Member States functioning
as central banks, including monetary policy opera-
tions, assists the European Monetary Institute in its
task of promoting the efficiency of cross-border
payments with a view to the preparation of the
third stage of Economic and Monetary Union and
thereby contributes to developing the necessary
framework in which the future European
legal
central bank may develop its policy;

(11) Whereas transfer orders and their netting should be
legally enforceable under all Member States’ juris-
dictions and binding on third parties;

(12) Whereas rules on finality of netting should not
prevent systems testing, before the netting takes
place, whether orders that have entered the system
comply with the rules of that system and allow the
settlement of that system to take place;

(13) Whereas nothing in this Directive should prevent a
participant or a third party from exercising any
right or claim resulting from the underlying trans-
action which they may have in law to recovery or
restitution in respect of a transfer order which has
entered a system, e.g. in case of fraud or technical
error, as long as this leads neither to the unwinding
of netting nor to the revocation of the transfer
order in the system;

(14) Whereas it

is necessary to ensure that

transfer
orders cannot be revoked after a moment defined
by the rules of the system;

etary rights in or for the delivery or transfer of the
securities concerned;

(20) Whereas the provisions of Article 9(2) are intended
to ensure that if the participant, the central bank of
a Member State or the future European central
bank has a valid and effective collateral security as
determined under the law of the Member State
where the relevant register, account or centralized
deposit system is located, then the validity and
enforceability of that collateral security as against
that system (and the operator thereof) and against
any other person claiming directly or indirectly
through it, should be determined solely under the
law of that Member State;

the law of

(21) Whereas the provisions of Article 9(2) are not
intended to prejudice the operation and effect of
the Member State under which the
the law of
securities are constituted or of
the
Member State where the securities may otherwise
be located (including, without limitation, the law
concerning the creation, ownership or transfer of
such securities or of rights in such securities) and
should not be interpreted to mean that any such
collateral security will be directly enforceable or be
capable of being recognised in any such Member
State otherwise than in accordance with the law of
that Member State;

(22) Whereas

it

is desirable

that Member States
endeavour to establish sufficient links between all
the securities settlement systems covered by this
Directive with a view towards promoting maximum
transparency and legal certainty of
transactions
relating to securities;

(15) Whereas it is necessary that a Member State should
immediately notify other Member States of
the
opening of insolvency proceedings against a partic-
ipant in the system;

(23) Whereas the adoption of this Directive constitutes
the most appropriate way of realising the above-
mentioned objectives and does not go beyond what
is necessary to achieve them,

(16) Whereas insolvency proceedings should not have a
retroactive effect on the rights and obligations of
participants in a system;

HAVE ADOPTED THIS DIRECTIVE:

(17) Whereas, in the event of insolvency proceedings
against a participant in a system, this Directive
furthermore aims at determining which insolvency
law is applicable to the rights and obligations of
that participant in connection with its participation
in a system;

(18) Whereas collateral security should be insulated
from the effects of the insolvency law applicable to
the insolvent participant;

(19) Whereas the provisions of Article 9(2) should only
apply to a register, account or centralized deposit
system which evidences the existence of propri-

SECTION I

SCOPE AND DEFINITIONS

Article 1

The provisions of this Directive shall apply to:

(a) any system as defined in Article 2(a), governed by the
law of a Member State and operating in any currency,
the ecu or in various currencies which the system
converts one against another;

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(b) any participant in such a system;

(c) collateral security provided in connection with:

(cid:190) participation in a system, or

(cid:190) operations of the central banks of the Member

States in their functions as central banks.

Article 2

For the purpose of this Directive:

(a)

‘system' shall mean a formal arrangement:

(cid:190) between three or more participants, without
counting a possible settlement agent, a possible
central counterparty, a possible clearing house or
a possible indirect participant, with common
rules and standardised arrangements
the
execution of transfer orders between the parti-
cipants,

for

(cid:190) governed by the law of a Member State chosen by
the participants; the participants may, however,
only choose the law of a Member State in which
at least one of them has its head office, and

(cid:190) designated, without prejudice to other more strin-
gent conditions of general application laid down
by national law, as a system and notified to the
Commission by the Member State whose law is
applicable, after that Member State is satisfied as
to the adequacy of the rules of the system.

Subject to the conditions in the first subparagraph, a
Member State may designate as a system such a
formal arrangement whose business consists of the
execution of transfer orders as defined in the second
indent of (i) and which to a limited extent executes
orders relating to other financial instruments, when
that Member State considers that such a designation
is warranted on grounds of systemic risk.

A Member State may also on a case-by-case basis
designate as a system such a formal arrangement
between two participants, without counting a possible
settlement agent, a possible central counterparty, a
possible clearing house or a possible indirect partici-
pant, when that Member State considers that such a
designation is warranted on grounds of systemic risk;

(b)

‘institution' shall mean:

(cid:190) a credit institution as defined in the first indent
of Article 1 of Directive 77/780/EEC (1) including
the institutions set out in the list in Article 2(2)
thereof, or

(1) First Council Directive 77/780/EEC of 12 December 1977 on
the laws, regulations and administrative
the coordination of
provisions relating to the taking up and pursuit of the busi-
ness of credit institutions (OJ L 322, 17. 12. 1977, p. 30). Dir-
ective as last amended by Directive 96/13/EC (OJ L 66, 16. 3.
1996, p. 15).

(cid:190) an investment

firm as defined in point 2 of
Article 1 of Directive 93/22/EEC (2) excluding the
institutions set out in the list in Article 2(2)(a) to
(k) thereof, or

(cid:190) public authorities and publicly guaranteed under-

takings, or

(cid:190) any undertaking whose head office is outside the
Community and whose functions correspond to
those of the Community credit institutions or
investment
firms as defined in the first and
second indent,

which participates in a system and which is respon-
sible for discharging the financial obligations arising
from transfer orders within that system.

If a system is supervised in accordance with national
transfer orders as
legislation and only executes
defined in the second indent of
(i), as well as
payments resulting from such orders, a Member State
may decide that undertakings which participate in
such a system and which have responsibility for
discharging the financial obligations arising from
transfer orders within this system, can be considered
institutions, provided that at least three participants
of this system are covered by the categories referred
to in the first subparagraph and that such a decision
is warranted on grounds of systemic risk;

(c)

(d)

‘central counterparty' shall mean an entity which is
interposed between the institutions in a system and
which acts as the exclusive counterparty of these
institutions with regard to their transfer orders;

‘settlement agent' shall mean an entity providing to
institutions and/or a central counterparty partici-
pating in systems, settlement accounts through which
transfer orders within such systems are settled and, as
the case may be, extending credit to those institu-
tions and/or central counterparties for settlement
purposes;

(e)

‘clearing house' shall mean an entity responsible for
the calculation of the net positions of institutions, a
possible central counterparty and/or a possible settle-
ment agent;

(f)

‘participant' shall mean an institution, a central coun-
terparty, a settlement agent or a clearing house.

According to the rules of the system, the same parti-
cipant may act as a central counterparty, a settlement
agent or a clearing house or carry out part or all of
these tasks.

(2) Council Directive 93/22/EEC of 10 May 1993 on investment
services in the securities field (OJ L 141, 11. 6. 1993, p. 27).
Directive as last amended by Directive 97/9/EC (OJ L 84, 26.
3. 1997, p. 22).

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A Member State may decide that for the purposes of
this Directive an indirect participant may be consid-
ered a participant if it is warranted on the grounds of
systemic risk and on condition that
the indirect
participant is known to the system;

(g)

‘indirect participant' shall mean a credit institution as
defined in the first indent of (b) with a contractual
relationship with an institution participating in a
system executing transfer orders as defined in the
first indent of (i) which enables the abovementioned
credit institution to pass transfer orders through the
system;

system, or provided to central banks of the Member
States or to the future European central bank.

SECTION II

NETTING AND TRANSFER ORDERS

(h)

‘securities' shall mean all instruments referred to in
section B of the Annex to Directive 93/22/EEC;

Article 3

(i)

‘transfer order' shall mean:

(cid:190) any instruction by a participant to place at the
disposal of a recipient an amount of money by
means of a book entry on the accounts of a credit
institution, a central bank or a settlement agent,
or any instruction which results in the assump-
tion or discharge of a payment obligation as
defined by the rules of the system, or

(cid:190) an instruction by a participant to transfer the title
to, or interest in, a security or securities by means
of a book entry on a register, or otherwise;

‘insolvency proceedings' shall mean any collective
measure provided for in the law of a Member State, or
a third country, either to wind up the participant or
to reorganise it, where such measure involves the
suspending of, or imposing limitations on, transfers
or payments;

‘netting' shall mean the conversion into one net
claim or one net obligation of claims and obligations
resulting from transfer orders which a participant or
participants either issue to, or receive from, one or
more other participants with the result that only a net
claim can be demanded or a net obligation be owed;

(j)

(k)

(l)

‘settlement account' shall mean an account at a
central bank, a settlement agent or a central counter-
party used to hold funds and securities and to settle
transactions between participants in a system;

(m)

‘collateral security' shall mean all realisable assets
provided under a pledge (including money provided
under a pledge), a repurchase or similar agreement, or
otherwise, for the purpose of securing rights and ob-
ligations potentially arising in connection with a

Transfer orders and netting shall be legally enforce-
1.
able and, even in the event of insolvency proceedings
against a participant, shall be binding on third parties,
provided that transfer orders were entered into a system
before the moment of opening of
such insolvency
proceedings as defined in Article 6(1).

Where, exceptionally, transfer orders are entered into a
system after
insolvency
the moment of opening of
proceedings and are carried out on the day of opening of
such proceedings, they shall be legally enforceable and
binding on third parties only if, after the time of settle-
ment, the settlement agent, the central counterparty or
the clearing house can prove that they were not aware,
nor should have been aware, of the opening of such
proceedings.

2. No law, regulation, rule or practice on the setting
aside of contracts and transactions concluded before the
moment of opening of insolvency proceedings, as defined
in Article 6(1) shall lead to the unwinding of a netting.

3.
The moment of entry of a transfer order into a
system shall be defined by the rules of that system. If
there are conditions laid down in the national
law
governing the system as to the moment of entry, the rules
of that system must be in accordance with such condi-
tions.

Article 4

Member States may provide that the opening of insol-
vency proceedings against a participant shall not prevent
funds or securities available on the settlement account of
that participant from being used to fulfil that participant’s
obligations in the system on the day of the opening of the
insolvency proceedings. Furthermore, Member States may
facility
also provide that
connected to the system be used against available, existing
collateral security to fulfil that participant’s obligations in
the system.

such a participant’s credit

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Article 5

A transfer order may not be revoked by a participant in a
system, nor by a third party, from the moment defined by
the rules of that system.

SECTION III

PROVISIONS CONCERNING INSOLVENCY PRO-
CEEDINGS

Article 6

1.
For the purpose of this Directive, the moment of
opening of insolvency proceedings shall be the moment
judicial or administrative authority
when the relevant
handed down its decision.

2. When a decision has been taken in accordance with
paragraph 1,
judicial or administrative
authority shall immediately notify that decision to the
appropriate authority chosen by its Member State.

the relevant

The Member State referred to in paragraph 2 shall

3.
immediately notify other Member States.

Article 7

Insolvency proceedings shall not have retroactive effects
on the rights and obligations of a participant arising from,
or in connection with, its participation in a system earlier
than the moment of opening of such proceedings as
defined in Article 6(1).

Article 8

In the event of insolvency proceedings being opened
against a participant in a system, the rights and obliga-
tions arising from, or in connection with, the participa-
tion of that participant shall be determined by the law
governing that system.

SECTION IV

shall not be affected by insolvency proceedings against
the participant or counterparty to central banks of the
Member States or the future European central bank which
provided the collateral security. Such collateral security
may be realised for the satisfaction of these rights.

2. Where securities (including rights in securities) are
provided as collateral
security to participants and/or
central banks of the Member States or the future Euro-
pean central bank as described in paragraph 1, and their
right (or that of any nominee, agent or third party acting
on their behalf) with respect to the securities is legally
recorded on a register, account or centralised deposit
system located in a Member State, the determination of
the rights of such entities as holders of collateral security
in relation to those securities shall be governed by the law
of that Member State.

SECTION V

FINAL PROVISIONS

Article 10

Member States shall specify the systems which are to be
included in the scope of this Directive and shall notify
them to the Commission and inform the Commission of
the authorities they have chosen in accordance with
Article 6(2).

The system shall indicate to the Member State whose law
is applicable the participants in the system, including any
possible indirect participants, as well as any change in
them.

In addition to the indication provided for in the second
subparagraph, Member States may impose supervision or
authorisation requirements on systems which fall under
their jurisdiction.

Anyone with a legitimate interest may require an institu-
tion to inform him of the systems in which it participates
and to provide information about
the main rules
governing the functioning of those systems.

INSULATION OF THE RIGHTS OF HOLDERS OF
COLLATERAL SECURITY FROM THE EFFECTS OF
THE INSOLVENCY OF THE PROVIDER

Article 11

Article 9

1.

The rights of:

1. Member States shall bring into force the laws, regula-
tions and administrative provisions necessary to comply
with this Directive before 11 December 1999. They shall
forthwith inform the Commission thereof.

(cid:190) a participant to collateral security provided to it in

connection with a system, and

(cid:190) central banks of

the Member States or the future
European central bank to collateral security provided
to them,

When Member States adopt these measures, they shall
contain a reference to this Directive or shall be accompa-
nied by such reference on the occasion of their official
publication. The methods of making such a reference
shall be laid down by the Member States.

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2. Member States shall communicate to the Commis-
sion the text of the provisions of domestic law which they
adopt in the field governed by this Directive. In this
Communication, Member States shall provide a table of
correspondence showing the national provisions which
exist or are introduced in respect of each Article of this
Directive.

Article 13

This Directive shall enter into force on the day of its
publication in the Official Journal of the European
Communities.

Article 14

This Directive is addressed to the Member States.

Article 12

No later than three years after the date mentioned in
Article 11(1), the Commission shall present a report to the
European Parliament and the Council on the application
this Directive, accompanied where appropriate by
of
proposals for its revision.

Done at Brussels, 19 May 1998.

For the European Parliament

For the Council

The President

J.M. GIL-ROBLES

The President

G. BROWN