Opinion of the European Central Bank at the request of the Dutch Ministry of Finance under Articles 109l (2) and 109f (6) of the Treaty establishing the European Community and Article 5.3 of the Statute of the European Monetary Institute on a draft Act on the replacement of contractual reference rates of interest (CON/98/42)
Date: 1998-10-16
Institutions: European Central Bank
Subjects: Euribor, Netherlands, financial stability, interest, issue of securities, money, national law

OPINION OF THE EUROPEAN CENTRAL BANK

at the request of the Dutch Ministry of Finance under Articles 109l (2) and 109f (6) of the

Treaty establishing the European Community and Article 5.3 of the Statute of the European

Monetary Institute on a draft Act on the replacement of contractual reference rates of interest

1. 

On  21  August  1998  the  European  Central  Bank  (ECB)  received  a  request  from  the  Dutch

Ministry  of  Finance  for  an  ECB  Opinion  on  a  draft  Act  (hereinafter  referred  to  as  the  “draft

Act”) providing for:

(cid:1) 

(cid:1) 

regulations  regarding  the  replacement  of  contractual  references  to  the  Amsterdam

Interbank Offered Rate (AIBOR) and to other reference rates of interest; and

an amendment to the Act on the Supervision of Securities Trade 1995 

in connection with the participation of the Netherlands in Economic and Monetary Union.

2.

In  accordance  with  Article  1091  (2)  of  the  Treaty  establishing  the  European  Community

(hereinafter referred to as the “Treaty”), the ECB has taken over the advisory functions of the

European Monetary Institute (EMI), which went into liquidation upon the establishment of the

ECB on 1 June 1998. The ECB’s competence to deliver an opinion is based on Article 1.1, fifth

indent, of the Council Decision (93/717/EC) of 22 November 1993 on the consultation of the

EMI  by  the  authorities  of  the  Member  States  on  draft  legislative  provisions,  as  the  draft  Act

contains provisions concerning the stability of financial markets and institutions. In accordance

with Article 17.5, first sentence, of the Rules of Procedure of the ECB, this ECB Opinion has

been adopted by the Governing Council of the ECB.

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3. 

The aims of the draft Act are twofold:

(cid:1) 

First,  with  a  view  to  ensuring  the  continuity  of  contracts  under  Dutch  law,  it

accommodates  the  need  for  replacement  rates  for  those  contracts  which  refer  to  rates

which will disappear as a result of the start of Stage Three of Economic and Monetary

Union  (the  Amsterdam  Interbank  Offered  Rate  (AIBOR),  the  fixed  advance  rate  of  De

Nederlandsche Bank and the discount on promissory notes). The ECB takes note that the

Dutch Government intends  to  replace  AIBOR  by  EURIBOR,  the  future  euro  area-wide

indicator  of  interbank  rates  (provided  that  the  levels  of  the  two  rates  are  very  similar).

The ECB also takes note that the Dutch Government intends to replace references to the

fixed advance rate of De Nederlandsche Bank and the discount on promissory notes by a

reference  to  the  most  relevant  ECB  rate,  with  corrections  for  differences.  The

determination of reference rates is not binding; parties may agree between themselves to

use other reference rates. Whatever the case, reference rates replacing the fixed advance

rate  and  the  discount  on  promissory  notes  will  cease  to  exist  on  1 January  2002  when

parties to contracts are expected to have the conditions of those contracts adjusted to the

new  circumstances.  Finally,  the  determination  of  reference  rates  by  the  Dutch

Government does not constitute a ground for the termination or amendment  of contracts

(with the exception of the previous reference rates).

(cid:1) 

Second, by amending the Act on the Supervision of Securities Trade 1995, the draft Act

removes  any  uncertainty  about  the  legal  validity/enforceability  under  Dutch  law  of

repurchase  agreements  relating  to  securities.  Such  uncertainty  stems  from  fears  among

financial  market  operators  that  repurchase  agreements  may  not  constitute  a  valid  legal

basis for the transfer of ownership in the light of the prohibition on the fiduciary transfer

of property as laid down in Article 84(3) of Book 3 of the Dutch Civil Code. This is an

obstacle to the development of a market of repurchase agreements which may be affected

by Dutch law and, as far as the European System of Central Banks is concerned, to the

application of repurchase agreements in the execution of monetary policy operations and

within the framework of the TARGET system if they may be affected by Dutch law.

4.

The  ECB  welcomes  the  draft  Act  since  it  enhances  the  stability  of  financial  markets  and

institutions and will serve to smooth the transition of the Netherlands from Stage Two to Stage

Three of Economic and Monetary Union. The manner in which it is envisaged that the above

aims will be achieved is consistent with existing Community legislation and practices adopted

in  Member  States.  The  principle  of  the  continuity  of  contracts  was  laid  down  in  Article  3  of

Council  Regulation  (EC) No. 1103/97  of  17  June  1997  on  certain  provisions  relating  to  the

introduction  of  the  euro,  and  measures  similar  to  those  which  are  currently  contained  in  the

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draft Act have already been taken in other Member States. The ECB supports in particular that

AIBOR  will  be  replaced  by  EURIBOR  which  conforms  with  the  ECB’s  previous

recommendations in this respect.

As far as the removal of uncertainties about the legal validity/enforceability under Dutch law of

repurchase  agreements  relating  to  securities  is  concerned,  this  in  general  reflects  the

widespread use of this instrument in the financial markets. In particular, the draft Act removes

an obstacle faced by Dutch counterparties in, and for the mobilisation of Dutch collateral for,

ESCB operations to the extent that they will be executed through repurchase agreements. In this

connection, it is noted that Article 18.1 of the Statute of the European System of Central Banks

and  of  the  European  Central  Bank  requires  the  ECB  and  the  national  central  banks  to  obtain

“adequate” collateral from counterparties, a requirement which cannot be fulfilled if the legal

instrument  through  which  collateral  is  to  be  provided  would  be  invalid/unenforceable.  In

addition, Article 9.1 of Directive 98/26/EC of the European Parliament and of the Council of 10

May 1998 on settlement finality in payment and securities settlement systems makes provision

for the insulation of rights of holders of collateral security and, in particular, protects the ECB

and the national central banks from the effects of the insolvency of the provider, irrespective of

the  legal  method  used  to  establish  such  collateral.  If  the  provision  of  collateral  security  as

referred 

to 

in 

that  Directive 

through 

repurchase  agreements  were 

to  be 

legally

invalid/unenforceable  under  Dutch  law,  this  would  undermine  the  spirit  of  Article  9.1  of  the

Settlement Finality Directive.

5.

The  ECB  confirms  that  it  has  no  objection  to  this  ECB  Opinion  being  made  public  by  the

competent national authorities at their discretion.

Done at Frankfurt am Main on 16 October 1998.

The President of the ECB

[signed]

Willem F. Duisenberg